1. This is an appeal by the assessee against the appellate order of the CIT (Appeals)-VI dated 14-1-1986 for the assessment year 1983-84.
2. The appellant herein is a foreign non-resident company. We are concerned with its appeal for the assessment year 1983-84, for which the accounting period shown is the year ended 31-12-1982. During this previous year, the appellant sold 58,776 shares of Ceat Tyres of India (hereinafter referred as "the Indian company") to Indian residents Mr.
H.V. Goenka and Mr. S. Goenka. These shares were sold at the rate of Rs. 204 per share for a total consideration of Rs. 1,19,90,304. The assessee was allotted 68,850 shares of the lndian company at Rs. 100 per share in full and final satisfaction of the cost of machinery supplied by the appellant company to the Indian company. The appellant company was also allotted 96,390 shares at the rate of Rs. 125 per share on right basis. Thus, in the year 1961 itself, the appellant, namely, the foreign company, was in possession of 1,65,240 shares of the Indian company. Although the appellant company was also allotted substantial bonus shares in subsequent years, i.e., 1969, 1971, 1973,1 976 and 1980, we are not concerned with these shares because in the year under appeal what was sold by the appellant were shares of the Indian company received by it out of the original allotment. The short question for consideration is what is the profit or loss earned by the assessee on sale of these shares or, in other words, in what form should such profit be computed. It was the case of the appellant before the assessing officer as well as the first appellate authority that the cost of acquisition of the shares should be determined first in foreign currency and then converted into Indian rupees as the original shares were allotted in satisfaction of the cost price of machinery supplied which was in foreign currency. It was also the stand of the assessee that since the shares were acquired prior to 1-1-1964, T.T. buying rate as prevalent on 1-1-1964 should be adopted for working out the cost of acquisition of the original shares into Indian rupees. The IAC did not accept these arguments and worked out long-term capital gains on sale of shares on the following basis :-per share Rs. 1,19,90,304Cost Price: Add: Stamp Duty Rs. 59,952 Rs. 77,00,832 ----------- ----------- Long-term capital gain Rs. 42,89,472 ------------ 3. When the matter went in appeal, it was argued on behalf of the appellant company that it maintained its account in Swiss Francs, that the shares in the Indian company when acquired were paid for in foreign currency; that the sale proceeds of the shares were also accounted for by the appellant in foreign currency and that, therefore, the capital gain/loss should be computed first in foreign currency and thereafter converted into Indian rupees at the prevailing market rate. This contention was not accepted by the CIT(A) on the ground that there was no provision in the Act which would justify such conversion. The CIT(A) also held that the provisions of Rule 115 were not attracted, that the income had accrued to the appellant in Indian rupees and not in foreign currency and, that therefore, the computation as done by the IAC was correct. It is against such finding of the CIT(A) that the present appeal is filed.
4. Shri Bansi Mehta, the learned Representative for the assessee, argued that the appellant, which was a foreign company, had, in effect, sustained loss on the sale of shares. The appellant had computed the results of purchases and sales of the shares in Swiss Francs and had converted the net results into Indian rupees at the appropriate rate of the foreign exchange. Since the appellant was a foreign company, it based its computation on the basis of the dealings in foreign currency.
Shri Bansi Mehta argued that the real income of the appellant had to be brought to tax and not the notional income except where the law specifically provides for taxation of such notional income. He relied on a decision of the Bombay High Court in H.M. Kashiparekh & Co. Ltd. v. CIT  39 ITR 706 and of the Supreme Court in CIT v. Birla Gwalior (P.) Ltd.  89 ITR 266. He also referred to the decision of the Supreme Court in CIT v. Shoorji Vallabhdas & Co.  46 ITR 144 as well as thedecision of the Supreme Court in CIT v. Sitaldas Tirathdas  41 ITR 367. In support of the proposition that the incidence of capital gains is on actual capital gains and not fictional capital gains, Shri Mehta relied on a decision of the Bombay High Court in the case of Babubhai M. Sanghvi v. CIT  97 ITR 213.
4.1 The next argument of Shri Mehta was that the principles of commercial accounting should be applied. He relied on a decision of the Supreme Court in Miss Dhun Dadabhoy Kapadia v. CIT  63 ITR 651.
Shri Mehta then relied on several decisions of the Tribunal and, in particular, the decision of A-Bench of the Tribunal in the case of Blundell Permoglass Holding Ltd. [IT Appeal Nos. 1626, 1627, 1933 and 1934 (Bom.) of 1980, dated 3-2-1983] and another decision of the Tribunal (Bombay Bench-B) in Ferrington Data Processing Ltd. [IT Appeal No. 3096 (Bom.) of 1977-78, dated 13-1-1979]. Shri Mehta then argued that the decision of the Karnataka High Court in Stumpp & Schuele GmbH v. CIT  160 ITR 581/26 Taxman 505 was distinguishable on facts inasmuch as the question whether the amount was receivable in foreign currency or not was kept open. He also relied on a decision of Delhi Bench 'C' of Tribunal in Shri XYZ Co. (reported in Taxes & Planning - July 1,1980, Vol. 16, Part I).
4.2 Referring to the specific transaction itself, Shri Mehta argued that the purchase of the shares was effected in foreign currency. In this context, he referred to a letter dated 1-4-1958 issued by Ceat Tyres of India Ltd. to the Chief Secretary, Ministry of Finance, New Delhi, in which, inter alia, the following was stated :- We have now to request you to be so good as to allow us to retain in Italy the capital subscribed by CEAT S.P.A. and its associated as and when called. This amount will be utilised for the purchase of capital equipment as and when necessary. In this connection, an account will be opened in a recognised Bank in Italy in the name of the Company and it will be operated on by this Company or its representative.
He also referred to yet another letter from the Under Secretary to the Government of India dated 12-4-1958 addressed to Ceat Tyres of India Ltd., in which the Government of India conveyed its no objection to the retention in Italy of the capital subscribed by CEAT S.P.A. and its associates for the purchase of capital equipments from Italy which establishes the fact that the foreign company subscribed to 69,000 shares of Ceat Tyres of India Ltd. and the payment was made in Swiss Francs out of the purchase price of capital equipment from Italy which was payable by the Indian company to the foreign company. Shri Mehta referred to the prospectus of Ceat Tyres of India Ltd., in which, inter alia it was provided that CEAT S.P.A. are the principal promoters and will with their associates subscribe 60% of the initial capital of the company. The capital to be subscribed by Ceat will be provided in foreign currency and will wholly be utilised for purchase of plants and machineries and for other capital expenditure abroad. These papers were relied upon to establish that the investment in shares of the foreign company was effected by the appellant company in foreign currency because the appellant was a foreign company and was in effect the promoter of the Indian company. Shri Bansi Mehta then referred to certain observations on International Accounting Standard from out of a book called 'Compendium of Statements & Standard' published by the Institute of Chartered Accountants of India (First Edition 1986) and particularly the following observations in para 11 : 11. When an exchange difference has occurred as a result of a severe devaluation or of depreciation of a currency against which there is no practical means of hedging and which affects liabilities arising directly on the recent acquisition of assets invoiced in a foreign currency, the difference is sometimes regarded as an adjustment of cost and included in the carrying amount of the related assets, provided that in each case the adjusted carrying amount does not exceed the lower of replacement cost and the amount recoverable from the use or sale of the asset.
5. Shri Makhija, the learned departmental representative on the other hand, argued that the shares held by the appellant company were sold in India, the moneys were received in Indian currency, the prospectus of the Indian company was issued in 1958, the capital of the Indian company was authorised in rupees and the share value of the initial subscription was considered in rupees and not in foreign currency. It is because the Indian company was required to pay substantial amount towards the purchase of capital equipment that the amount so paid was adjusted towards the initial subscription of shares to be effected by the foreign company. Shri Makhija argued that the decision of the Karnataka High Court in Stumpp & Schuele GmbH's case (supra) squarely covered the case in favour of the revenue. He also relied on a decision of the Supreme Court in Sundarjas Kanyalal Bhatija v. Collector  183 ITR 130 and of the Bombay High Court in CIT v. Smt. Nirmalabai K.Darekar  186 ITR 242. He argued that where there is a single decision of a High Court which decides an issue like the decision in the Karnataka High Court (supra) and there was no contrary decision, the Tribunal was bound to follow it in view of the principles laid down by the Bombay High Court in the case of CIT v. Smt. Godavaridevi Saraf  113 ITR 589.
6. We have given our anxious consideration to the arguments on both the sides. We have also gone through the various authorities cited. We are here concerned with determining capital gains or losses on sale of shares by the appellant. These shares were acquired by the appellant when it promoted the Indian company called Ceat Tyres of India Ltd. The cost of the shares was determined in terms of Indian currency though it was convenient for the appellant to pay for it in Swiss Francs. A substantial lot of these shares were sold in rupees in India to parties in India. The computation of capital gains made by the IAC (Asst.) and confirmed by the CIT(A) is in accordance with the provisions of law and there appears to be nothing in the Act which would appear to support the stand taken by the learned Representative for the appellant company. We will presently deal with the various arguments advanced by Shri Mehta in support of his case.
7. The first and foremost is the doctrine of real income. Whereas it is true that deemed income or notional income cannot be brought to tax unless provided under the Act, what is brought to tax in the present case is not notional income but capital gains earned by the foreign company calculated in terms of rupees because the shares were purchased by that company in India in terms of Indian currency and sold in India to Indian parties in terms of Indian currency. Therefore, apparently, there is nothing wrong in the stand of the revenue in determining capital gains in Indian currency in respect of assets which were acquired in India in terms of rupees and which were sold in India in terms of rupees. The profit is not a fictional profit and the authorities cited by Shri Mehta in respect of real income theory would not really advance the case of the appellant if we examine the context in which the various judgments relied upon by Shri Mehta were rendered.
7.1 We will first take up Ratilal B. Daftari v. CIT  36 ITR 18 (Bom.). Here, what had happened was that the assessee had contributed Rs. 25,000 out of the capital of the partnership ofRs. 3,45,000. He was a partner in a firm consisting of 16 partners and there was an agreement between himself and four others who had contributed diverse amounts to make up the amount of Rs. 25,000 contributed in his name to the partnership firm to share the profit or loss in proportion to their individual contribution. On these facts, the Bombay High Court held that even in the case of the assessment of a partner of a registered firm what was to be considered was not the income allocated but his real income. The real income was what remained after deducting the amounts which might be said to have been diverted and never constituted his real income. This decision was given in view of the agreement between the assessee and four others who had agreed to contribute capital and there was evidence of a diversion of income before it reached the assessee. In H.M. Kashiparekh & Co. Ltd.'s case (supra), the assessee was the managing agent of a paper mill and under the managing agency agreement it was under a duty to forgo up to1/3rd of the commission where the profits of the managed company were not sufficient to pay a dividend of, 6%. On these facts, the Bombay High Court held that it was the real income of the assessee which was liable to tax and that the real income could not be arrived at without taking into account the amount forgone by the assessee. In the present case, there is no question of any amount being forgone by the appellant nor is the question similar to the one decided by the Supreme Court in Sitaldas Tirathdas' case (supra) where the issue was application of the rule of diversion of income by an overriding charge. No doubt, income-tax is a levy on income and if the income does not result at all, there cannot be a tax as decided by the Supreme Court in Shoorji Vallabhdas & Co.'s case (supra). However, income or, as in the present case, capital gain has to be worked out in accordance with the provisions of law. What the appellant, is in effect, claiming is that the loss that it may have sustained as a result of foreign exchange fluctuations on the transaction of sale of shares held by it in the Indian company should be allowed to it in the computation of capital gains on sale of such shares although there is nothing in the Income-tax Act to support such a proposition. Even in Birla Gwalior (P.) Ltd.'s case (supra), the assessee, which was the managing agent of two companies, had given up managing agency commission from both the managed companies. The High Court came to the conclusion that the commission forgone by the assessee was not its real income. The Supreme Court held that the managing agency commission receivable could have been ascertained only after the managed company had made up its accounts. The commission given up by the respondent (assessee) could not be considered to be its real income. In the present case, there is no question of the assessee giving up any income. Effectively, the assessee is claiming determination of loss in foreign currency only because, the purchase price of the shares was adjusted from out of the foreign currency payment due to it from the Indian company on sale of capital equipment by it to the Indian company. The payment of shares in Swiss Francs was a matter of convenience and expediency and not an agreement of a binding nature. The purchase price of shares was basically determined in terms of rupees. The subscribed capital as indicated in the prospectus, which was issued with the consent of Central Government, was in terms of rupees. Along with the appellant company which was described as one of the promoters of the company and which subscribed 69,000 shares, the Investment Corporation of India Ltd., subscribed 6,000 other shares and 40,000 were offered for public subscription. All these transactions took place in India. The purchase price was determined in terms of rupees and it was only to facilitate the Indian company that on a request made by it the Government of India allowed that company to retain in Italy the capital subscribed by the foreign company so that it could utilise the amount so paid for the purchase of capital equipment as and when necessary. So far as the sale of shares is concerned, it was also effected in India and in terms of Indian rupees and the Representative for the appellant has argued that the exchange value of the sale consideration on the day of the sale should be taken into account for working out the capital gain or loss.
This is an argument of convenience because the remittances of the sale proceeds took place at a much later date and if real income theory is to be really pursued, the exchange rate at the point of time the sale proceeds were remitted would have to be taken into account which would be a wholly unreal picture of the entire transaction.
8. The case law on the subject cited by the learned Departmental Representative would appear to support the case of the revenue, to which we will presently refer. The Karnataka High Court in Stumpp & Schuele GmbH's case (supra) was dealing with an issue similar to the one before us. In that case, the assessee was a non-resident company.
It supplied machinery to an Indian company as a part of collaboration agreement and in lieu of the price of machinery supplied, it was allotted 7,500 shares of Indian company of the face value of Rs. 100 per share in 1962. Subsequently, the assessee was allotted bonus shares and in January 1974 the assessee sold 7,000 shares out of the total holdings of 17,500 shares. The assessee worked out capital gains on the above sale in DM., on the basis of the provisional exchange rate, whereas the ITO had worked out long-term capital gains by computing it in terms of Indian currency of which computation was upheld by the AAC and the Tribunal. The High Court held that the acquisition of the shares of Indian company was in India and in Indian currency. The profit accruing from these transactions had, therefore, to be computed in Indian currency. The Court further held that the loss incurred by transferring the income to Germany and conversion into DMs., was an event after the computation of capital gains and was not taxable under the Act. In our opinion, this decision would appear to cover the issue squarely in favour of the revenue and against the assessee since it is given on almost exactly identical set of facts. There is no other decision holding a contrary view on similar facts brought to our notice and we are, therefore, bound to follow this decision in view of the decision of the Bombay High Court in Smt. Godavaridevi Sarafs case (supra). That is also the principle broadly laid down by the Supreme Court in a recent decision in Sundarjas Kanyalal Bhatija's case (supra) and the principle laid down by the Bombay High Court was reiterated by it in a more recent decision in Smt. Nirmalabai K. Darekar' s case (supra) where the Bombay High Court observed that the Appellate Tribunal, acting anywhere in the country, is obliged to respect the law laid down by the High Court, though of a different State, so long as there is no contrary decision of any other High Court on that question.
Therefore, for this reason alone, namely, that the issue stands squarely covered by a decision of the Karnataka High Court, the appellant is not entitled to succeed. The point of distinction made by Shri Mehta that the issue about whether the amount was receivable in foreign currency was left open by the Karnataka High Court is a distinction without difference and does not essentially distinguish in substance the principle laid down by the Karnataka High Court in their judgment.
8.1 The authorities relied upon by Shri Mehta, which are mainly the decisions of the Tribunal, we find on perusal, are clearly distinguishable on facts. In Farrington Data Processing Ltd' s case (supra), the assessee had sold its holdings of 11,000 shares of M/s.
Bradma of India Ltd., to another foreign non-resident company, namely, M/s. Impaco Ltd., Switzerland. Thus, this was a non-resident selling its shares to a non-resident. The consideration for the sale of shares was the Sterling equivalent of Rs. 147 per share. The transaction was accounted for in the currency in which it took place and the sale was also made to a non-resident company. The fact that the sale of the shares was made to a person outside India, M/s. Impaco Ltd., was the main distinguishing feature and this was the fact which weighed with the Tribunal in arriving at their decision. The Tribunal accepted the argument that the transaction was agreed to be carried out in terms of Pound Sterling. Here, the transaction was not carried out in foreign currency and the question of there being any such agreement does not arise. So far as the decision of the Delhi Bench of the Tribunal is concerned in Shri XYZ Co.'s case (supra), the shares were purchased by a non-resident company in terms of Dollars and the sale price was conveyed to the assessee in U.S. currency. Similarly, in International Computers Ltd. [IT Appeal No. 325 (Bom.) of 1972-73, dated 31-12-1973], the computers were purchased in Sterling in U.K. and sold to the Indian company in Sterling. Another decision of the Tribunal relied by Shri Mehta was the case of Blundell Permoglass Holdings Ltd. (supra). A Perusal of this order only shows that it had largely followed the decision of earlier Benches of the Tribunal in International Computers Ltd.'s case (supra) and Farrington Data Processing Ltd.'s case (supra) to which we have made reference.
9. In conclusion, we hold that the capital gains on sale of these shares were rightly calculated in Indian currency by the revenue authorities. The issued capital of the Indian company was in terms of rupees. The Indian company in its letter dated 1-4-1958 to the Chief Secretary, Ministry of Finance, specifically stated that 60% of the issued capital, i.e., Rs. 69 lakhs out of the total issue of Rs. 1,15,00,000 will be subscribed by CEAT S.P.A. It is Indian company which requested the Government to allot them to retain in Italy the Capital subscribed by CEAT S.P.A. and its associates as and when called. This was because the Indian company wanted to utilise this foreign currency for the purchase of capital equipment from time to time and for that purpose the Indian company had agreed to open an account in a recognized Bank in Italy in the name of the Indian company and it was to be operated by that company or its representative. Thus, the payment in foreign currency towards the subscription of 60% of the issued capital was to benefit the Indian company and was a part of the collaboration agreement. The Government of India in a letter addressed to the Indian company on 12-4-1958 conveyed its no-objection to the retention in Italy of the capital subscribed by CEAT S.P.A. namely, the foreign company and its associates, provided the Indian company opened an account with a recognised bank in India in the name of the Indian company and agreed that the amount will not be kept abroad for any period longer than is absolutely necessary. The prospectus was issued in India and the prospectus specifically provided, inter alia, that the capital to be subscribed by CEAT S.P.A. will be provided in foreign currency and will wholly be utilised for purchase of plants and machineries. Further, the consideration on sale of 58,776 equity shares amounting to Rs. 1,19,30,352 was received in Indian rupees. Now, the assessee's case that these sale proceeds should be converted at the exchange rate of 20.50 Swiss Francs for Rs. 100 on the date of the sale is not acceptable for two reasons. Firstly, the date of remittance of this amount was a later date. The conversion on the date of the sale into Swiss Francs is only theoretical inasmuch as this is not the amount shown in the books by the foreign company as it could not have remitted the sale proceeds in rupees immediately on the date of sale which took place in India and, secondly, the exchange fluctuations which have reduced the value of the sale price in terms of Swiss Francs cannot be treated as cost of acquisition nor can it be allowed as an expenditure incurred as no such deduction is provided under Section 48 of the Act while computing capital gains. That is the finding given by the Kerala High Court in Stumpp & Schuele GmbH's case (supra). For these reasons, we are of the view that the computation of capital gains made by the I AC and confirmed by the CIT(A) is correct and does not call for any modification.