INSPECTING ASSISTANT COMMISSIONER v. DORR OLIVER (INDIA) LTD
[Citation -1985-LL-0119-1]

Citation 1985-LL-0119-1
Appellant Name INSPECTING ASSISTANT COMMISSIONER
Respondent Name DORR OLIVER (INDIA) LTD.
Court ITAT
Relevant Act Income-tax
Date of Order 19/01/1985
Assessment Year 1967-68
Judgment View Judgment
Keyword Tags computation of income • non-resident company • accrual of income • foreign exchange • rate of exchange • income returned • purchase price • ad hoc basis • sale price
Bot Summary: The question at issue is whether the income earned by the assessee-company upto 5th June, 1966 in dollars should be converted into rupees as for the exchange rate on that date and the income earned from 6th June, 1966 upto the end of the accounting year 30th Sep., 1966 should be similarly converted into rupees at the post-devaluation rate. The ITO observed that the assessee before him was a non-resident company and in its Branch, the entire income of the assessee-company-whether received in India or abroad was subject to Indian IT Act because the income flowed entirely out of the activities of the company s branch at Bombay and the assessee-company had no income other than what accrued and arose in India. The ITO did not accept the assessee s contention that while converting the income of the Home Office receipts upto 5th June, 1966, it should be taken separately and after allocating the expenses on a pro-rata basis, they are to be converted into rupees at the pre-devaluation rate resulting in income of Rs. 70,979 upto 5th June, 1966. The CIT(A) accepted the contention that income accrued prior to the receipt and since out of the income returned by the company 14905 had actually been received before 5th June, 1966, prior to devaluation, such income accrued to the company and it should be assessed at the rate of exchange as on 5th June, 1966. The question to be decided by us here is whether in case of income of the non- resident company, which his maintaining its accounts in dollars and which has not made its accounts on 5th June, 1966 on account of devaluation of Indian rupee on 5th June, 1966 such income should be, pro-rata, taken upto 6th June, 1966 and converted into Indian rupees at the then prevailing a rate of exchange of the rupee 4.762 per dollar and only the income earned after 6th June, 1966 is to be converted at the rate of exchange of Rs. 7.5 per dollar. We find really no warrant for the proposition advanced on behalf of the assessee and accepted by the CIT(A) that merely because the devaluation of Indian rupee took place on 6th June, 1966, the assessee got a right to an ad hoc computation of income of a pro rata basis upto 5th June, 1966 and to conversion of that income in foreign exchange in to Indian rupees at the lower rate of exchange. A non-resident earned only in dollars and not in rupees and the real income should be the dollars actually earned by it converted into Indian rupees at the rate at exchange on the last day of accounting period.


B. S. AHUJA, J.M.: Department is in appeal against order of CIT(A) pertaining to asst. yr. 1967-68. question at issue is whether income earned by assessee-company upto 5th June, 1966 in dollars should be converted into rupees as for exchange rate on that date and income earned from 6th June, 1966 upto end of accounting year 30th Sep., 1966 should be similarly converted into rupees at post-devaluation rate. assessee is non-resident company incorporated in USA. It is fully-owned subsidiary of another company Dorr-Oliver Inc. which is also non- resident company incorporated in USA. operations of assessee- company are confined to India only, carried on through its only branch at Bombay. Till asst. yr. 196-67, company filed its statement of final accounts in dollars. For purpose of assessment under appeal for first time company filed one set of statement of final accounts from 1st Oct., 1965 to 30th Sep., 1966 in rupee currency in respect of Bombay Branch, and another set of statement and final accounts for same period in dollars in respect of Stamford (USA) Office. ITO observed that assessee before him was non-resident company and in its Branch, entire income of assessee-company-whether received in India or abroad was subject to Indian IT Act because income flowed entirely out of activities of company s branch at Bombay and assessee-company had no income other than what accrued and arose in India. parent company, viz., Dorr-Olive Inc. is also assessed to Indian Income-tax 'company through its agents, i.e., its branch office in Bombay, with whom it has its business connections. both assessee and parent company are engaged in business of manufacture and marketing of specialised equipment and processes useful for utilisation etc. ITO did not accept assessee s contention that while converting income of Home Office receipts upto 5th June, 1966, it should be taken separately and after allocating expenses on pro-rata basis, they are to be converted into rupees at pre-devaluation rate resulting in income of Rs. 70,979 upto 5th June, 1966. receipts after that date were to be converted into rupees at post-devaluation rate. ITO observed that home office books of account were not closed on 5th June, 1966, profits of business did not accrue from day-to-day transactions but were ascertained at end of stated interval when accounts were closed and adjusted. ITO relied on Supreme Court decision in CIT vs. Ashokbhai Chimanbhai (1965) 56 ITR 42 (SC). he, therefore, computed net income as per accounts and converted it into rupees at post-devaluation rate as on 30th Sept., 1966. This action of ITO was challenged before CIT(A) and it was urged that Supreme Court decision actually supports assessee s case. It was urged that actual receipt of engineering fee and commission of $29450 was income received prior to 6th June, 1966. It was urged that accrual of income preceded receipt of income. Thus, it was urged that income on receipts upto 5th June, 1966 had accrued already on that date. CIT(A) accepted contention that income accrued prior to receipt and since out of income returned by company $14905 had actually been received before 5th June, 1966, prior to devaluation, such income accrued to company and, therefore, it should be assessed at rate of exchange as on 5th June, 1966. There was no dispute about pro rata allocation of expenses. CIT(A), hence, allowed appeal. Department is in appeal before us. We have heard ld. Departmental Representative as also ld. counsel for assessee. contention of Department is that income did not accrue or arise to assessee from day-to-day or from transaction to transaction, but only at end of year. assessee being non-resident company, it receive its income abroad dollars and, therefore, dollars earned by it would have to be converted into Indian rupees on last day of accounting period. contention of ld. counsel for assessee is same as found favour with CIT(A) that for sales which were completed before 5th June, 1966, right to received income had arisen by that date and to that extent profits accrued before 6th June, 1966, date of devaluation of Indian rupee. It is however, not disputed that accounts were not made by company on 5th June, 1966 and expenses had been allocated on pro-rata basis. We have considered rival contentions. We find that Supreme Court s ruling (supra) is not really decisive on point at issue. That was case of partnership and right to receive share of profits of firm arose only on settlement of accounts, i.e., end of accounting year. question to be decided by us here is whether in case of income of non- resident company, which his maintaining its accounts in dollars and which has not made its accounts on 5th June, 1966 on account of devaluation of Indian rupee on 5th June, 1966 such income should be, pro-rata, taken upto 6th June, 1966 and converted into Indian rupees at then prevailing rate of exchange of rupee 4.762 per dollar and only income earned after 6th June, 1966 is to be converted at rate of exchange of Rs. 7.5 per dollar. It is to be borne in mind that although profit or loss of business is embedded in each transaction which firm, company or individual carries in, it can be ascertained only at end of year when accounts are made and all transactions entered into by company during year are aggregated. I t is really not possible to work out actual profit or loss embedded in each transaction and that, too, on ad hoc basis on date in middle of accounting year. Therefore, it is impossible to say that assessee-company had earned certain amounts in which profit was embedded. In our opinion, it is not permissible to deduct expenses on pro rata basis, which would basically be on ad hoc basis only, to arrive at income upto 5th June, 1966. We must remember that assessee-company maintains accounts in home office in dollars. Nothing happened in its books as on 5th June, 1966 because so far as income of assessee in dollars is concerned, it stayed same. We find really no warrant for proposition advanced on behalf of assessee and accepted by CIT(A) that merely because devaluation of Indian rupee took place on 6th June, 1966, assessee got right to ad hoc computation of income of pro rata basis upto 5th June, 1966 and to conversion of that income in foreign exchange in to Indian rupees at lower rate of exchange. effort is to get lesser income assessed though it is not disputed that dollars earned by company have correctly been computed by I T O and correct rate of exchange has been applied. We may point out that various cases have arisen before Tribunal in which capital gains had to be taxed in hands of non-residents on sales of India shares. stock argument advanced, and which found acceptance with Tribunal in those cases, was that assessee was non-resident and kept its accounts in dollars; it paid price of shares in dollars and received sale price in dollars so that its profit on date of sale should be computed in dollars and then converted into Indian rupees. result is that if both purchase price and sale price had been taken in rupees, capital gains tax would have been in lakhs of rupees but same were reduced to nominal figure as result of devaluation of Indian rupees because it was accepted that what assessee earned was dollars and only dollars earned by it should be converted into Indian rupees. argument also advanced and accepted was Theory of Real Income. After all, non-resident earned only in dollars and not in rupees and, therefore, real income should be dollars actually earned by it converted into Indian rupees at rate at exchange on last day of accounting period. arguments advanced before us in instant case are, more or less, converse. Here, assessee seeks to convert dollars into rupees on date of devaluation because that would be beneficial to it since it would result into lesser rupees than if it is converted on 30th Sep., 1966. As we have already noticed above, assessee company maintains accounts in home office in dollars and dollars actual earned by it had to be converted into Indian rupees. In our opinion they cannot be converted into Indian rupees partially as on 5th June, 1966 at old lower rate of exchange and partly on 30th Sept., 1966 at new higher rate of exchange. income finally came to be ascertained only when accounts were made on 30th Sept., 1966. accounts could not be treated as artificially made on 5th June, 1966 merely because that would be beneficial to assessee. In our opinion, r. 115 of IT Rules does not really indicate, one way or other, as to how such assessment should be made except that it lays down rate of exchange prior to and after 6th June, 1966. We, therefore, hold that CIT(A) was in error in to and after 6th June, 1966. We, therefore, hold that CIT(A) was in error in accepting assessee s contention that income said to have been earned by assessee-company upto 5th June, 1966 should be converted from dollars into Indian rupees at rate of exchange of Rs. 4.762 and income earned thereafter at rate of exchange of Rs. 7.5 per dollar. We hold that ITO rightly converted entire income from dollars into rupees at prevailing rate of exchanges or on last day of accounting period. Department s appeal is, accordingly, allowed. *** INSPECTING ASSISTANT COMMISSIONER v. DORR OLIVER (INDIA) LTD.
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