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Dalmia Dairy Industries Ltd. Vs. Union of India and ors. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtDelhi High Court
Decided On
Case NumberCivil Writ Petition No. 1278 of 1978
Judge
Reported inILR1980Delhi1286
ActsIncome Tax Act, 1961 - Sections 4; Income Tax Rules, 1962 - Rule 115
AppellantDalmia Dairy Industries Ltd.
RespondentUnion of India and ors.
Advocates: A.B. Divan,; P.V. Kapur,; A.P. Patra,;
Excerpt:
.....1-11-1977. allowing the writ petition, ; rule 1115 which equates rigidly & 1 sterling--rs. 18 prior to its amendment in 1977, was ultra virus section 5 of the income-tax act and the income-tax authorities are not entitled to rely upon it in assessing the income of the petitioner expressed in foreign currency for the purpose of converting it into indian currency. - - justice kerr of the high court of judicature in london on 14-4-1976. that judgment granted this rtlief to the petitioner on the ground that the respondent in that case was liable to pay interest by way of damages to the petitioner for having failed to comply with the award given by the international chambers of commerce, arbitrator between those parties in favor of the petitioner......proposes to tax the said income on accrual basis and also that he would value the said income in indian currency by applying rule 115 of the income-tax rules, 1962, as it then stood, equating 1 to rs. 18.00. since these facts have not been traversed, the intention of the respondents to assess the alleged income of petitioner by recourse to rule 115 of the income-tax rules cannot be doubted. (3) the assessment relates to the interest granted to the petitioner by the judgment of mr. justice kerr of the high court of judicature in london on 14-4-1976. that judgment granted this rtlief to the petitioner on the ground that the respondent in that case was liable to pay interest by way of damages to the petitioner for having failed to comply with the award given by the international chambers.....
Judgment:

V.S. Deshpande, J.

(1) The question fur decision is whether an order in the nature of writ of prohibition can and should be issued by us in favor of the assessed-petitioner against the Income-tax Authorities respondents, restraining them from acting upon rule 115 of the Income-tax Rules, 1962, as it stood prior to its amendment made on 1-11-1977, in the assessment proceedings which are pending with the respondents against the petitioner.

(2) The pendency of the assessment proceedings has been alleged by the petitioner for the assessment-year 1977-78 and has not been I denied by the respondents. The petitioner has also subsequently produced belore us the notice under section 143(3) of the Income-tax Act, 1961, dated 9th August, 1979, addressed to the petitioner by the Income-tax Officer informing the petitioner that the said Officer proposes to tax the interest income accrued in the accounting year ending 30-9-1976 and that he proposes to tax the said income on accrual basis and also that he would value the said income in Indian currency by applying rule 115 of the Income-tax Rules, 1962, as it then stood, equating 1 to Rs. 18.00. Since these facts have not been traversed, the intention of the respondents to assess the alleged income of petitioner by recourse to rule 115 of the Income-tax Rules cannot be doubted.

(3) The assessment relates to the interest granted to the petitioner by the judgment of Mr. Justice Kerr of the High Court of Judicature in London on 14-4-1976. That judgment granted this rtlief to the petitioner on the ground that the respondent in that case was liable to pay interest by way of damages to the petitioner for having failed to comply with the award given by the International Chambers of Commerce, arbitrator between those parties in favor of the petitioner. The possible causes of action for the accrual of interest arise from the year 1964-65 onwards and the view could be taken that interest was accruing from year to year since then till the satisfaction of petitioner by the receipt of the whole amount including interest.

(4) Normally, this court respects the jurisdiction of ihe Income- tax Authorities in respect of assessment proceedings pending before them and would leave the assessed to his own remedies under the Income-tax Act and the Rules. This rule of prudence in acting under Article 226 of the Constitution is, however, subject to one clear exception. The petitioner has challenged the virus of rule 115 of the Income-tax Rules, 1962. That challenge can neither be made by the petitioner before the Income-tax Authorities, nor can those Authorities decide on the virus of rule 115. The only question for consideration before us is whether interests of justice to the petitioner and public interest require us to entertain the writ petition to consider the challenge to the validity of rule 115 and decide upon the same.

(5) If we were to follow the usual rule of the petitioner having his remedies under the Income-tax Act. a great deal of avoidable litigation would have to be carried through, even if the Income-tax Authorities themselves were convinced of the soundness of the contention of the petitioner as to the validity of rule 115. A whole series of assessments of the interests received by the petitioner during all these years would have to be made by the respondents mechanically relying upon rule 115. In fact, if the writ petition is not entertained the petitioner would be totally deprived of its only remady which is to approach this court under Article 226 of the Constitution. For, even if it were to come later by way of reference from the order of the Income-tax Appellate Tribunal against an assessment made against it for any of these years, the scope of the power of this court in deciding the reference would not include the consideration of the challenge to the validity of rule 115. It is thus inevitable that we must consider this challenge raised in this writ petition under Article 226 of the Constitution.

(6) Rule 115 occurs in Part Xv of the Income-tax Rules, 1962, entitled 'Miscellaneous'. It read as follows :

'RATEof exchange for conversion into rupees of income expressed in foreign currency. The rates of exchange for the calculation of the value in rupees of any income shall be as follows : (a) in respect of income accruing or arising or deemed to accrue or arise to the assessed or received or deemed to be received by him or on his behalf before the 6th day of June, 1966 (i) V sh. 6 d.=Rs. 1/=, (ii) U. S. $ 1 =Rs. 4.762. (b) in respect of income accruing or arising or deemed to accrue or arise to the assessed or received or deemed to be received by him or on his behalf on or after the 6th day of June, 1966 (1) where such income accrues or arises or is deemed to accrue or arise to the assessed or is received or deemed to be received by him or on his behalf (i) before the 19th day of November, 1967, Sterling=Rs. 21.00; (ii) after the 18th day of November, 1967. 1 Sterling= Rs. 18.00. (2) U. S. $ 1 =Rs. 7.50.'

(7) It is to be noted that the object of this rule is simply to enable the taxing authorities to convert income of the assessed which is expressed in foreign currency in terms of Indian currency for the obvious reason that the assessment is made in India under the Income-tax Act and can, thereforee, be made only by expressing the income in terms of Indian currency and the tax assessed on it can also be ex- pressed in terms of Indian currency. The rule has no larger scope or significance. The actual assessment of the income of the petitioner has to be made under the charging sections, which 'are sections 4 and 5 of the Income-tax Act. The relevant part of section 5(1) reads as follows :

'(1)subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year; or (c) accrnes or arises to him outside India during such year : x x x'

(8) It is seen that the income of the petitioner may be assessed either on the basis of accrual or receipt and either of these events occurring in India or outside India. The occasion for summoning the aid of rule 115 arises only when the income is expressed in foreign currency and is sought to be assessed when i.t is so expressed. This would happen when the income is being assessed on the basis of its accrual or receipt in a foreign currency. The fact on which the assessment is based under section 5 is the accrual or receipt of the income. As soon as the assessable event takes place the income becomes assessable. The assessment does not have to await the transfer of the income to India. It is only because the income sought to be assessed is expressed in a foreign currency that it becomes necessary for the taxing authorities to express the amount of income which is being assessed and the amount of tax which is to be assessed on 'it. Rule 115 is then applied.

(9) Why is it that rule 115 fixes the rate of exchange for conversion of income expressed in foreign currency in terms of rupees by a rigid formula such as 1 Sterling = Rs. 18.00 It is wellknown that exchange rates of Indian currency in terms of foreign currency vary according to balance of trade and other conditions of international trade and monetary market. The question then arises as to whether the authority making the rules under section 295 of the Income-tax Act is empowered to so fix the conversion value of a foreign currency into Indian currency. We do not find any specific authority in section 295 authorising the Board under the control of the Central Government to do so. As stated above, the only purpose of the rule is to convert what the actual income is as expressed in the foreign currency into Indian currency. It follows that the authority making the rule does not have any power to change the actual amount of the income of the petitioner by the application of rule 115. The authority to assess given by sections 4 and 5 is restricted to the actual income which is accrued to the petitioner or which has been received by the petitioner. No rule can authorise the assessing authority to change the amount of the income and yet if the impugned rule 115 is applied to the conversion of the income expressed in foreign currency into Indian currency it would inevitably have the effect of altering the amount of the income of the petitioner either adversely to the petitioner or favorably to the petitioner depending on whether the formula embodied in the rule fixes the exchange rateat a higher or a lower rate than what the actual exchange rate in the international market is.

(10) It is to be made clear that the assessment of the income of the petitioner is being made on the basis of the actual income and not on the basis of any deemed income. Further, the basis of the assessment is the actual accrual and not any deemed accrual. Even if the assessment were to be made under any such deeming provision, rule 115 has nothing to do with any such fiction. The object is not to authorise the taxing authorities to assess the income of the petitioner as amounting to some figure which is different from the figure of the actual income of the petitioner.

(11) Reference was made by the learned counsel for the petitioner to section 8(2) of the Foreign Exchange Regulation Act which prohibits dealings in foreign exchange except at the rate for the time being authorised by the Reserve Bank. This would, however, apply when the transfer of the foreign currency is made into Indian currency. But, here we are concerned with the income of the petitioner even before it has been transferred from the foreign currency into India. The conversion under rule 115 from foreign currency into Indian currency is only for the purpose of calculation of the income expressed in foreign currency in terms of the Indian currency and not for the purpose of transfer of the money from a foreign country to India. Apart from that, however, the power of the Income-tax .autho- rities under sections 4 and 5 does not extend to vary in any way the income which is accrued to the petitioner or which is received by the petitioner. The petitioner has shown that the rates of exchange over these years have been fluctuating. One reason why ihe raie of exchange was pegged to a certain formula by rule 115 may be that the taxing authorities should not be left uncertain as to which of the fluctuating rates of exchange they should adopt for the purpose of assessment. But that difficulty has been solved now by the amendment of rule 115 made in 1977 whereby the rate of exchange for the calculation of the value in rupees of any income accruing or arising to the assessed in foreign currency shall be the telegraphic transfer buying rate of such currency as on the specified date. The specified date fur the purpose of our case would be the last day of the previous year of the assessed, i.e. of the relevant previous year in respect of the assessment year in respect of the particular assessed. The very fact that rule 115 has been amended in 1977 seems to show the awareness of the Government that the unamended rule was open to challenge.

(12) The petitioner has filed a copy of the order of provisional attachment issued by the respondent under section 281B of the Income- tax Act in which the respondent had- stated their intention to apply rule 115, that is the rate of 1 Sterlings Rs. 18.00 to the conversion of the foreign exchange income to the petitioner into Indian currency. At the time the writ petition was filed this document was of importance as creating an apprehension in the mind of the petitioner that the respondents intended to commit an illegality in assessing its income by recourse to rule 115. The learned counsel for the revenue has, however, pointed out that for the purpose of an attachment under section 281B it was totally unnecessary for the notice of attachment to contain any averment as to the intention of the respondents to apply rule 115 in assessing the income of the petitioner. We agree with this contention and are of the view that had the notice under section 281B stood alone by itself it could have been argued that an irrelevant averment in it would not give the petitioner a cause of action to file the present writ petition. But {he cause of action is given to the petitioner not by this document but by the averment made by the petitioner that 'in respect of the regular assessment of the petitioner fur the assessment year 1977-78 which is pending at present', respondent No. 4 intends to apply the rate of exchange embodied in rule 115 as it stood before the amendment of 1977.

(13) The learned counsel for the revenue further argued that the assessed has been disputing with the income-tax authorities the very assessability of the interest received by the petitioner, since the petitioner contends that the said interest was not income at all but only a capital receipt. Certainly that contention has to be decided by the income-tax authorities and not by us. But, merely because the petitioner has raised such a contention in the assessment proceedings, it cannot be said that the assessing authorities would not be required to apply rule 115 in any of the assessment proceedings for any of the year concerned. In fact, we are informed that the Income-tax Appellate Tribunal has already decided in the assessment of the petitioner's income including this interest for the year 1973-74 that the said interest received by the petitioner is assessable. Notice of the decision of the Income-tax Appellate Tribunal is taken note because we have nothing to do with the merits of the contention of the petitioner, but only because it sustains the contention of the petitioner that it has a reasonable apprehension that the respondents would act upon rule 115 and thereby illegally vary the actual amount of income of the petitioner which is not allowed to be done under sections 4 and 5 of the Income-tax Act and no rule can be framed under section 295 which is contrary to the plain intendment of sections 4 and 5.

(14) We are of the view, thereforee, that rule 115 which equates rigidly 1 Sterling=18.00 prior to its amendment in 1977 ws ultra virus section 5 of the Income-tax Act and the income-tax authorities are not entitled to rely upon it in assessing the income of the petitioner expressed in foreign currency for the purposes of converting it into Indian currency. We do hope that the respondents would in the absence of unamended rule 115 which is held by us to be ultra virus would be guided by the principle which is now embodied in the amended rule 115, but we do not give any specific direction to them on this matter because the authorities have to convert the foreign currency income of the petitioner into Indian currency at the actual rate of exchange current on the date of accrual of the income and not according to any arbitrary one. The respondents are thus prohibited from applying rule 115 to the assessment of the income of the petitioner for the assessment year 1977-78 in respect of the income of the petitioner expressed in foreign currency and to be converted into Indian currency.

(15) The writ petition is allowed in the above terms without any order as to costs.


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