RAJAGOPALAN, J. - The question referred to this court under section 66 (1) of the Income-tax Act arose out of the proceedings for the assessment year 1952-53. The assessee, a Hindu undivided family, carried on money-lending business. It had its head office at Karaikudi in India and a branch at Keddah in the Federated Malay States. On July 18, 1943, when Malaya was under enemy occupation, the assessee purchased two items of properties known as Jalan Baru. Though immoveable properties were acquired by purchase, it was common ground that they constituted part of the stock-in-trade of the assessee. The purchase price of 49,370 dollars was paid in Japanese currency which was in circulation then. Subsequent to that, the assessee spent in 1943 and 1944 two sums of 1,300 and 1,000 dollars for effecting improvements to the property. That expenditure also was in Japanese currency. Thus the total cost of acquisition was shown as 51,670 dollars in the books of the assessee.
On September 29, 1951, a portion of these properties was sold for 24,500 dollars. That was in Malayan currency, which alone was in use after the Japanese occupation of Malaya had ended in 1945.
To appreciate the contentions of the assessee, it is necessary to set out some details of what happened during the period between the purchase and sale of the properties, a matter of history. The Japanese were in occupation of Malaya between February, 1942, and September, 1945. During that period both the British currency that had been issued before the enemy occupation and the Japanese currency which the Japanese introduced were in circulation side by side. It was, however, common ground that after a time there ceased to be any parity between the dollar of the Malayan currency and the dollar of the Japanese currency. Parity was maintained up to the end of December, 1942. Thereafter, the Japanese currency steadily depreciated in relation to the Malayan currency, the depreciation being more marked from about January, 1944. By the middle of August, 1945, the Japanese currency ceased to have any value at all. The transactions that businessmen among others carried on during the occupation period raised problems after the Japanese occupation ceased, which had to be faced and solved by the Malayan Government.
The first step that was taken by the Malayan Government was to declare a moratorium immediately after the termination of the occupation of the territories by the Japanese. Legislation was undertaken after an elaborate enquiry and on December 16, 1948, the Debtor and Creditor (Occupation Period) Ordinance, 1948 (hereinafter referred to for convenience as the Malayan Ordinance), was promulgated. It, however, came into force only on October 1, 1949. A Schedule was appended to the Malayan Ordinance which provided a table of conversion of the depreciated Japanese currency to Malayan currency. 100 dollars of the Malayan currency were taken as the unit. The Schedule showed what we mentioned earlier, that parity was maintained between the Malayan currency and the Japanese currency up to the end of December, 1942. In January, 1943, 100 Malayan dollars were worth 105 dollars of the Japanese currency. By December, 1943, the Japanese currency depreciated further, and the Schedule showed that in December, 1943, 100 Malayan dollars were worth 385 Japanese dollars. The depreciation was even more rapid in 1944, and at the end of December, 1944, 100 Malayan dollars were worth 1,850 Japanese dollars. By July, 1945, the worth of the Japanese dollar as shown in the Schedule was 7980 for 100 Malayan dollars. The depreciation day by day in August was very pronounced. By 12th August, 1945, 100 Malayan dollars corresponded to 95,000 dollars of Japanese currency and after 13th August, 1945, the Japanese currency ceased to have any value at all.
Quite number of businessmen in India, particularly members of the Nattukottai Chetti community of Ramanathapuram district, had business activities in Malaya before, during, and after the Japanese occupation of Malaya. The computation of their profits and losses for purposes of assessment to income-tax in India could not obviously have been a just computation, were they based upon the Japanese currency which was in law valid currency during the occupation period. The Government of India promulgated a special scheme to give relief to such business as had suffered real losses during the occupation period. The salient features of that scheme, relevant for our purposes, were as follows. The assessment year 1941-42 related to an accounting period well before the Japanese occupied Malaya. The accounting years corresponding to the assessment years 1942-43 to 1946-47 were taken as one unit. During most of that period, it should be remembered, Malaya was under enemy occupation. The scheme provided for the determination of the profits and losses during the period of giver years. The scheme contemplated and provided for the ascertainment of the real losses during this period. A further provision in the scheme was that these losses should be carried backward to be set off first against profits during 1942-43 assessment year and then against the profits of 1941-42. A specific provision was made that, if an assessee elected to be governed by this scheme to obtain relief, principally with reference to 1942-43 and 1941-42 assessments, he would not be allowed to carry forward his losses whether computed under the scheme or otherwise. Thus it constituted a departure from the normal principle of assessment, that a loss would not be given retrospective effect but the assessee would be permitted to carry forward the losses. The scheme further provided for raveling the stock-in-trade at the end of the occupation period in terms of Malayan currency. There was also a provision for ascertaining the value of immovable properties acquires during the occupation period value of immovable properties acquired during the occupation period at a fair price, irrespective of what had been paid for the acquisition of these properties during the period of occupation. That may not have any application of the assessee, because the immovable properties he acquired were treated as stock-in-trade.
The assessee elected to obtain the benefits he could under the special scheme. For the purpose of computing his losses during the five years period mentioned in the scheme, he valued the properties which he had acquired at a cost of 51,670 Japanese dollars at 33,700 dollars. That computation was accepted by the Department for granting relief to the assessee under the scheme.
As we mentioned earlier, on September 29, 1951, which was during the year of account corresponding to the assessment year 1952-53, a portion of the properties was sold by the assessee as part of his stock-in-trade for 24,500 dollars, that is in Malayan currency. Whether that transaction resulted in profits or loss for the assessment in 1952-53 had to be determined.
We should mention at this stage that the order of the Commissioner under the scheme, granting relief to the assessee in relation to the assessment of 1941-42 to 1946-47, was on September 22, 1953. By then the assessment for 1952-53 had been completed by the Income-tax Officer and the appeal to the Assistant Commissioner against that order had also been disposed of. The order of the Appellate Tribunal however was on April 27, 1954, that is subsequent to the order of the Commissioner dated September 22, 1953. At the stage of the appeal to the Tribunal both the assessee and the Department knew that, though the properties were shown in the books of the assessee as having been acquired for 51,670 dollars, the cost price had been recomputed for purposes of the scheme at 33,700 dollars, and that that valuation was accepted by the Department for the purpose of the scheme.
One other factor we may mention at his stage. The learned counsel for the assessee conceded that the normal method of accounting which the assessee employed was to value the stock-in-trade on the last day of every accounting period at its original cost price.
At the stage of the appeal to the Tribunal, the contention of the Department was that the cost priced of the two properties in question should be computed and that 51,670 dollars in Japanese currency which the assessee had expended for the purchase should be converted to Malayan currency in accordance with the schedule to the Malayan Ordinance. On that basis the cost price was computed at 20,036 dollars. Again on that basis, the profits of the sale were computed at 4464, that is 24,500 minus 20,036. The contention of the assessee before the Tribunal was that at least 33,700 dollars should be taken as the cost price, became that was the valuation which was accepted by the Department for granting relief to the assessee under the scheme. The Tribunal rejected that contention and confirmed the computation of profits at 4,464 dollars.
The question which the Tribunal referred to this court for its determination under section 66 (1) of the Income-tax Act ran :
'Whether the revaluation of the price of the Jalan Baru properties purchased during the occupation period at 20,036 dollars and on that basis, treating the sum of 4,464 dollars as profit on sale are legal and justified.'
Normally, of course, if an assessee values his stock-in-trade on the last day of his accounting period on a consistent basis - in the present case it was the cost price - the Department would not be entitled to reject that valuation for assessing the profits and losses of the relevant account period. But conditions were not normal during the period the Japanese occupied Malaya. Proceeding on the basis which the assessee adopted, of valuing his stock-in-trade at the close of the accounting year at its cost price, the real cost price would certainly have to be ascertained. The purchase was paid for in Japanese currency. The sale price was realised in Malayan currency. There was no parity between the two on the date of purchase. Certainly the Japanese currency ceased to be in use on the date of sale. To arrive at a computation of profits or losses where property was purchased in one currency and sold in another, it should be obvious that there should be a common standard; in the circumstances of this case the purchase price had to be computed in terms of Malayan currency in which the property was sold. The fact that the Japanese currency was also expressed in terms of dollars can make no different in principle. Suppose it was not Japanese dollars that were in circulation during the occupation period but the Japanese yen. The Japanese yen itself might have depreciated or appreciated in terms of Malayan currency. Still, if the purchase was in Japanese yen and the sale was in Malayan dollars, the purchase price would have had to be computed in terms of Malayan currency. As we said, whether the unit of the Japanese currency was the yen or dollar could make no difference to the principle to apply. The cost price expressed in Japanese currency had to be computed in terms of Malayan currency.
The learned counsel for the assessee urged at one stage that, if the assessee had not elected to come under the scheme we have referred to above, he would have been entitled to value as part of his stock-in-trade the two items of properties in question at what it had cost the assessee, 51,670 dollars. We have pointed out earlier that the Department was entitled to ascertain the cost price in terms of Malayan currency.
The next contention of the learned counsel for the assessee was, that the adoption of the conversion table given in the Schedule to the Malayan Ordinance was wrong, because that Ordinance was not intended to provide the rates of conversion for any purpose beyond what the Ordinance was expressly specified to achieve the determination of the rights and liabilities of debtors and creditors. The Report of the Select Committee which preceded the issue of Malaya Ordinance has also been made part of the record. That showed that the Committee made a real attempt to ascertain the value of the Japanese currency in relation to the Malayan currency at every stage of the occupation period. Besides, we have to point out that no other basis of conversion was proposed by the assessee at any stage. We are unable to hold that the Department and the Tribunal were in error in adopting the conversion table furnished in the Schedule to the Malayan Ordinance.
Thus the position we have reached is, that, had not the scheme intervened, the Department would have been entitled to ascertain the cost price of the properties in terms of Malayan currency and to compute the cost price of 20,036 dollars in Malayan currency. Do the intervention of the scheme and the valuation of the properties at 33,700 dollars for the purpose of the scheme make any difference is the next question.
33,700 dollars, it should be remembered, was ad hoc valuation for the purpose of the scheme, and it represented the value of the properties not on the date of the purchase but at a point of time that intervened between the date of purchased and the date of sale. We have pointed out that consisted with his normal method of accounting the assessee would have been entitled to value his stock-in-trade at its cost price. The cost price in terms of Malayan currency was ascertained as 20,036 dollars. We are really unable to see any basis, consistent with the system of accounting the assessee had adopted, to substitute 33,700 either for 51,670 Japanese dollars or what that represented, 20,036 Malaya dollars, which was the cost price.
The learned counsel for the assessee urged that the valuation at 33,700 dollars, which was accepted before the Commissioner passed his order on September 22, 1953, was itself after the Malayan Ordinance came into force. The Department was then in a position to apply the rates of conversion shown in the Schedule to the Malayan Ordinance. Still they accepted the assessees valuation of 33,700 dollars as the cost price. The learned counsel urged that the assessee was entitled to have his subsequent transactions treated on the same basis, that the cost price was 33,700 dollars.
We have pointed out that the valuation of 33,700 dollars was not consistent with the system of account the assessee adopted of valuing his stock-in-trade. Besides, the valuation for the purposes of the scheme was not really to ascertain what the cost price was in Malaya currency. As we pointed out earlier, the scheme provided for valuation of stock-in-trade at the close of the occupation period. It was a computation on an ad hoc basis for the purpose of the scheme, and the Department was entitled to decline to accept that computation for purposes of assessment in the periods not covered by the scheme.
The Tribunal observed in paragraph 4 of its order :
'Perhaps in this case if the market value of the property in question as at the date of the reoccupation is available, such a value could have been adopted for purposes of arriving at the profit on resale thereof subsequently.'
That, in our opinion, was a wholly erroneous approach to the determination of the question, whether any profits were realised by the sale of the properties in the accounting period in question.
The Tribunal, in our opinion, was right in confirming the computation of the cost price of the properties at 20,036 dollars of Malayan currency. If that basis is accepted, the computation of the profits in the years of account at 4,464 dollars was correct.
We answer the question in the affirmative and against the assessee. As the assessee had failed, he will pay the costs of this reference; counsels fee Rs. 250.
Question answered in the affirmative.