1. The department is in appeal against the order of the Commissioner (Appeals) pertaining to the assessment year 1967-68. The question at issue is whether the income earned by the assessee-company up to 5-6-1966 in dollars should be converted into rupees as per the exchange rate on that date and the income earned from 6-6-1966 up to the end of the accounting year 30-9-1966 should be similarly converted into rupees at the post-devaluation rate.
2. The assessee is a non-resident company incorporated in the USA. It is a fully owned subsidiary of another company Dorr-Oliver Inc., which is also a non-resident company incorporated in the USA. The operations of the assessee-company are confined to India only, carried on through its only branch at Bombay. Till the assessment year 1966-67, the company filed its statements of final accounts in dollars. For the purposes of the assessment under appeal, for the first time, the company filed one set of statement of final accounts from 1-10-1965 to 30-9-1966 in rupee currency in respect of the Bombay branch and another set of statement and final accounts for the same period in dollars in respect of Stanford (USA) office. 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 the Indian Income-tax 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.
3. The parent company, viz., the Dorr-Oliver Inc., is also assessed to the Indian Income-tax as a 'company' through its agents, i.e., its branch office at Bombay, with whom it has business connections. Both the assessee and the parent company are engaged in the business of manufacture and marketing of specialised equipment and processes useful for filtration, etc. The ITO did not accept the assessee's contention that while converting the income of the home office receipts up to 5-6-1966, 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 up to 5-6-1966. The receipts after that date were to be converted into rupees at the post-devaluation rate. The ITO observed that the home office's books of account were not closed on 5-6-1966, the profits of the business did not accrue from day to day transactions, but were ascertained at the end of the stated interval when the accounts were closed and adjusted. The ITO relied on the Supreme Court decision in CIT v. Ashokbhai Chimanbhai  56 ITR 42. He, therefore, computed the net income as per the accounts and converted it into rupees at the post-devaluation rate as on 30-9-1966.
4. This action of the ITO was challenged before the Commissioner (Appeals) and it was urged that the Supreme Court's decision actually supports the assessee's case. It was urged that the actual receipt of the engineering fee and commission of $ 29,450 was the income received prior to 6-6-1966. It was urged that the accrual of income preceded the receipt of income. Thus, it was urged that income on the receipts up to 5-6-1966 had accrued already on that date. The Commissioner (Appeals) accepted the contention that income accrued prior to the receipt and since out of the income returned by the company $ 14,905 had actually been received before 5-6-1966, prior to devaluation, such income accrued to the company and, therefore, it should be assessed at the rate of exchange as on 5-6-1966. There was no dispute about the pro rata allocation of expenses. The Commissioner (Appeals), hence, allowed the appeal.
5. The department is in appeal before us. We have heard the learned departmental representative as also the learned Counsel for the assessee. The contention of the department is that the income did not accrue or arise to the assessee from day-to-day or from transaction to transaction, but only at the end of the year. The assessee being a non-resident company, it received its income abroad in dollars and, therefore, the dollars earned by it would have to be converted into Indian rupees on the last day of the accounting period.
The contention of the learned Counsel for the assessee is the same as found favour with the Commissioner (Appeals) that for the sales, which were completed before 5-6-1966, the right to receive income had arisen by that date and to that extent the profits accrued before 5-6-1966, the date of devaluation of the Indian rupee. It is, however, not disputed that the accounts were not made by the company on 5-6-1966 and the expenses had been allocated on a pro rata basis.
6. We have considered the rival contentions. We find that the Supreme Court's ruling in Ashokbhai Chimanbhai's case (supra) is not really decisive on the point at issue. That was a case of a partnership and the right to receive the share of profits of the firm arose only on the settlement of accounts, i.e., at the end of the accounting year. The question to be decided by us here is whether in case of income of the non-resident company, which is maintaining its accounts in dollars and which has not made its accounts on 5-6-1966 on account of devaluation of Indian rupee on 5-6-1966, such income should be, pro rata, taken up to 6-6-1966 and converted into Indian rupees at the then prevailing rate of exchange of Rs. 4.762 per dollar and only the income earned after 6-6-1966 is to be converted at the rate of exchange of Rs. 7.5 per dollar.
7. It is to be borne in mind that although profit or loss of business is embedded in each transaction, which a firm, company or an individual carries on, it can be ascertained only at the end of the year when the accounts are made and all the transactions entered into by the company during the year are aggregated. It is really not possible to work out the actual profit or loss embedded in each transaction and that too, on an ad hoc basis on a date in the middle of the accounting year.
Therefore, it is impossible to say that the assessee-company had earned certain amounts in which the profit was embedded. In our opinion, it not permissible to deduct expenses on a pro rata basis, which would basically be on ad hoc basis only, to arrive at the income up to 5-6-1966. We must remember that the assessee-company maintains accounts in the home office in dollars. Nothing happened in its books as on 5-6-1966, because so far as the income of the assessee in dollars is concerned, it stayed the same. We find really no warrant for the proposition advanced on behalf of the assessee and accented by the Commissioner (Appeals) that merely because the devaluation of Indian rupee took place on 6-6-1966, the assessee got a right to an ad hoc computation of income on a pro rata basis up to 5-6-1966 and to conversion of that income from foreign exchange into Indian rupees at the lower rate of exchange. The effort is to get lesser income assessed though it is not disputed that the dollars earned by the company have correctly been computed by the ITO and the correct rate of exchange has been applied. We may point out that various cases have arisen before the Tribunal, in which capital gains had to be taxed in the hands of the non-residents on the sale of Indian shares. The stock argument advanced and which found acceptance with the Tribunal in those cases, was that the assessee was a non-resident and kept its accounts in dollars, it paid the price of shares in dollars and received the sale price in dollars so that its profit on the date of sale should be computed in dollars and then converted into Indian rupees. The result is that if both the purchase price and the sale price had been taken in rupees, the capital gains tax would have been in lakhs of rupees, but the same were reduced to a nominal figure as a result of devaluation of the Indian rupees, because it was accepted that what the assessee earned was dollars and only dollars earned by it should be converted into Indian rupees.
The argument also advanced and accepted was the theory of the real income. After all, a non-resident earned only in dollars and not in rupees and, therefore, the real income should be the dollars actually earned by it and converted into Indian rupees, at the rate of exchange on the last day of accounting period.
8. The arguments advanced before us in the instant case are, more or less, the converse. Here, the assessee seeks to convert the dollars into rupees on the date of devaluation, because that would be beneficial to it since it would result into lesser rupees than if it is converted on 30-9-1966. As we have already noticed above, the assessee-company maintains accounts in the home office in dollars and the dollars actually earned by it had to be converted into Indian rupees. In our opinion, they cannot be converted into Indian rupees partially as on 5-6-1966 at the old low rate of exchange and partly on 30-9-1966 at the new higher rate of exchange. The income finally came to be ascertained only when the accounts were made on 30-9-1966. The accounts could not be treated as artificially made on 5-6-1966 merely because that would be beneficial to the assessee. In our opinion, Rule 115 of the Income-tax Rules, 1962 does not really indicate, one way or the other, as to how such an assessment should be made except that it lays down the rate of exchange prior to and after 6-6-1966. We, therefore, hold that the Commissioner (Appeals) was in error in accepting the assessee's contention that the income said to have been earned by the assessee-company up to 5-6-1966 should be converted from dollars into Indian rupees at the rate of exchange of Rs. 4.762 and the income earned thereafter at the rate of exchange of Rs. 7.5 per dollar.
We hold that the ITO rightly converted the entire income from dollars into rupees at the prevailing rate of exchange as on the last day of the accounting period.