1. This is an appeal filed by the assessee against the order of the CIT(A). Hyderabad dt. 3rd March, 1994, for the asst. yr. 1987-88.
2. The assessment was completed under Section 143(3) of the IT Act. The grounds that have been raised by the assessee are as follows: 1. The learned CIT(A) erred in passing an ex parte order without giving adequate opportunity of hearing.
2. On the facts and in the circumstances of the case, the learned CIT(A) ought to have looked into the fact whether the foreign company had in fact made any gain chargeable to tax under the provisions of the IT Act, 1961.
3. The learned CIT(A) ened in holding that the working of capital gains chargeable to tax made by the appellant is incorrect.
4. The learned CIT(A) erred in holding that the cost of acquisition as well as the sale consideration has to be considered in 'Rupee' equivalent only. Since the assets are in India and that transfer is of shares held in Indian company.
5. The learned CIT(A) erred in holding that the appellant's valuation based on US dollars has to be rejected.
6. The appellant contends that the learned CIT(A) erred in not appreciating the fact that the shares were transferred for a consideration of 8 1,00,000 US dollars during the previous year under consideration and is not justified in upholding the action of the AO in computing notional capital gains based on lower value of 'Rupee' in relation to US dollar in the year of transfer.
7. The learned CIT(A) erred in not giving direction for deletion of interest of Rs. 28,180 charged under Section 139(8) of the IT Act, 1961. Though the assessee has raised so many grounds of appeal, the effective ground of appeal is against computation of capital gains in rupee equivalent. The assessee is a foreign company having its registered office at Boston, USA. The said company filed return of income on 28th Feb., 1990, declaring capital loss of Rs. 2,56,354.
The facts of the case are as follows. M/s Abex Corpn. USA was holding shares of Denison Hdraulics (India) Ltd. as 26 per cent equity share capital. The total holdings of the corporation is to the tune of 1,17,000 shares of Rs. 10 valued at Rs. 11,70,000. The above shares are acquired in the following manner: Thus, M/s Abex Corporation, USA has acquired 1,17,000 shares and the cost of the above shares in Indian rupees is working out to Rs. 11,70,000.
As a part of purchase agreement between Asea Inc. & Abex Corporation regarding the sale of shares of Abex Corporation vide agreement dt.
12th Dec., 1986, the shares in Indian company to the tune of 1,17,000 were transferred to another multi-national company Haggunds & Soner A.B. of Sweden as a package deal along with various other interest abroad for a consideration not exceeding $ 1,00,000 US dollars. While effecting the transfer of shares, the RBI insisted an ITCC. The assessee vide letter dt. 5th Jan., 1990 requested for an ITCC. Subsequently also vide letter dt. 25th Jan., 1990, while enclosing the agreement between the above companies, the assessee's representative explained that there was no capital gain on transfer of the above shares. However, the Dy. CIT(Asst.), Special Range I, Hyderabad, who had jurisdiction at the relevant point of time issued a letter that the transfer of 1,17,000 shares results in capital gains and accordingly the company has to pay capital gains tax. The working is as follows: The assessee filed return of income subsequent to the above letter disclosing a loss of Rs. 2,56,354. While arriving at the above figure the cost of acquisition is arrived at in US dollars thereby arriving at a loss.
3. After hearing the above said representation, the AO negatived the contention of the assessee and computed the income at Rs. 1,41,475. In the assessment order, the AO has stated that since the assets are in India and the transfer is held in Indian company, the cost of acquisition as well as the sale consideration is to be considered in rupee equivalent only. It has also been discussed by the AO that the original acquisition is in rupee equivalent as can be seen from remittance of monies of dollars on various dates to the tune of Rs. 6,70,000 and by adjustment of technical know-how fee of Rs. 5 lakhs in Indian rupees. The AO did not accept the contention of the assessee's valuation based on US dollars and he arrived at the capital gains as mentioned in the assessment proceedings. Against the said order, the assessee filed appeal before the learned CIT(A) stating that the capital gains must be valued only on the basis of US dollars.
4. We find from the records that despite so many adjournments before the first appellate authority, the assessee failed to represent his case. Hence the first appellate authority decided the case on merits.
After a perusal of the records, the CIT(A) upheld the assessment proceedings of the AO. It was argued before us by the assessee's counsel that in the light of the mandatory provisions enunciated in Rule 115A of the IT Rules, 1962 corresponding to Section 48 of the IT Act, capital gains exigible to tax must be valued only in US dollars.
But on the contrary, the learned Departmental Representative, Shri C.P.Ramaswamy has argued that the above said Rule 115A r/w Section 48 of the IT Act is applicable only from asst. yr. 1990-91 onwards. He has also further argued that the abovesaid rule is not retrospective and it is only prospective. The present case on hand relates to asst. yr.
1987-88. So he vehemently argued that the arguments of the learned counsel for the assessee do not hold good to attract the above said provisions. He has also further argued that the working given by the assessee is not correct since the assets are in India and the transfer of the shares held in Indian company, the cost of acquisition as well as the sale consideration is to be considered in rupee equivalent only.
Moreover the original acquisition is in rupee equivalent. First we are inclined to discuss whether Rule 115A r/w Section 48 of the IT Act is retrospective or prospective in nature. With regard to the said issue, the Supreme Court has rendered a judgment CIT v. Podar Cement (P) Ltd. and Ors. (1997) 226 ITR 625 (SC) wherein it has been held that: "The presumption against retrospective operation is not applicable to declaratory statutes. A declaratory Act may be defined as an Act to remove doubts existing as to the common law, or the meaning or effect of any statute. Such Acts are usually held to be retrospective. The usual reason for passing a declaratory Act is to set aside what Parliament deems to have been a judicial error, whether in the statement of the common law or in the interpretation of statutes. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act. It is well settled that (if a statute is curative or merely declaratory of the previous law, retrospective operation is generally intended)" As far as the present case on hand is concerned, Rule 115A of the IT Rules is also a declaratory Act which stands on par with the above Supreme Court ruling. In the interest of justice after taking into consideration all the abovesaid judgment, we are here to hold that operation of Rule 115A r/w Section 48 of the IT Act can be taken as retrospective in nature in the light of the abovesaid Supreme Court judgment. Though the assessee has not drawn the attention of the Bench to the abovesaid ruling, we have taken judicial notice of the abovesaid judgment to arrive at a correct conclusion. Hence the argument of the Revenue that the said Rule 115A r/w Section 48 of the IT Act is not applicable for the relevant assessment year is not tenable. Here the assessee is a non-resident company. The shares in question were acquired by paying in US dollars as seen from the statement of facts, The NRI Company has remitted 81,422 US dollars which came to Rs. 6,70,000 as part purchase consideration for acquiring Rs. 1,17,000 equity shares. The N.R.I, company was allotted shares in lieu of payment of technology transfer fee of Rs. 5,00,000 on 19th June, 1975.
This amount of Rs. 5 lakhs when converted comes to 1,750 US dollars. It the shares were not allotted to the N.R.I. company, the company was to pay US dollars equivalent to Rs. 5,00,000. So the consideration for allotment of shares to the N.R.I. company was in US dollars and sale consideration was also received by the company in US dollars. In these circumstances, we are of the view that capital gains, if any, have to be worked out in terms of US dollars taking the purchase consideration of 1,23,222 US dollars and sale consideration of 1,00,000 US dollars.
Such computation would result in capital loss and not capital gain.
Taking into consideration, the entire circumstances we are of the view that there is no capital gain liable to be assessed in the hands of the assessee. In this view of the matter, the orders of the lower authorities have to be set aside and the appeal filed by the assessee has to be allowed.
6. While agreeing with the reasons discussed in the preceding paragraphs, I would like to support our finding with the following further reasons: 1. The main thrust of the AO in converting the purchase consideration as well as sales consideration into rupee-terms for working out the capital gains is that the asset, viz., the shares are of an Indian company. This is not a correct approach. It is only because of the subject-matter being shares of an Indian company, that the question of assessing the capital gains in India has arisen.
2. The allotment of shares in lieu of payment of technology transfer fee of Rs. 1 lakh amounts to constructive payment of technology transfer fee of Rs. 5 lakhs in US dollars equivalent thereto. If that is so, the entire payment for acquisition of shares in question was made by the NRI company in US dollars. The sale consideration also was received in US dollars. The sale was made outside India.
That being so, there is no reason to covert both cost of acquisition and sale consideration from US dollars into Indian rupees. Instead, capital gains if any should be first worked out on the basis of US dollars only and thereafter, such capital gains worked out in US dollars be converted into rupee-terms for levying capital gains tax.
In this case, the acquisition cost being 1,23,172 US dollars and sale consideration being 1,00,000 US dollars, obviously there is no capital gains in terms of US dollars, so as to be converted into rupee-terms. Instead, there is loss, as properly worked out by the NRI-company.
3. In the method of computation adopted by the AO, in effect what is being attempted to be taxed is the local effect of the devaluation of Indian rupee against US dollar over a period of time. It is because of that diminution in the conversion value of Indian rupee against US dollar that the sale-consideration of 1,00,000 US dollars of 1986 has become quite larger than the acquisition cost of 1,23,172 US dollars paid between 1975 and 1977. When compared in terms of US dollars as above, of course, the acquisition cost of 1,23,172 US dollars is higher than the sale consideration of 1,00,000 US dollars, and obviously therefore, there is no capital gain. The reverse happens only when the capital gain is computed after first converting both acquisition cost and sale consideration into rupee-terms at the conversion rates existing on the respective dates of acquisition and sale. The sale consideration becomes more than the purchase cost in terms of rupee, only because the acquisition cost is watered down by the diminution in the conversion value of Indian rupee against US dollar. Otherwise, there is no capital gains in real terms.
4. The acquisition cost of 1,23,172 US dollars is definitely more than the sale consideration of 1,00,000 US dollars and their is no capital gains. The piquant situation of positive capital gains made out by the AO is only because of the involvement of conversion rate of US dollar into Indian rupee varying from time to time.
7. For the above reasons as well, the orders of the lower authorities cannot be sustained and the appeal of the assessee has to be allowed.
It is ccordingly allowed and the impugned assessment is cancelled.