1991 (4) TMI 10 - HC - Income Tax

High Court: Exchange rate loss non-deductible for remittances. Acquisition cost spread for capital gains.

The High Court held that the loss incurred due to exchange rate fluctuations in remittance of profit and dividends is not an allowable deduction. ... Loss on remittance due to foreign exchange fluctuation - allowability of expenditure incurred for purpose of earning income - revenue v. capital characterisation of foreign exchange gains and losses - loss on remittance of dividend - cost of acquisition of original shares where bonus shares issued - spreading original cost over original and bonus shares to determine average cost - immutability of original cost of acquisition as modified by the option under section 55(2)Loss on remittance due to foreign exchange fluctuation - revenue v. capital characterisation of foreign exchange gains and losses - allowability of expenditure incurred for purpose of earning income - Loss of Rs. 1,71,066 on remittance of profits to the head office on account of exchange-rate fluctuation was not an allowable deduction. - HELD THAT: - The Court followed its earlier decision in Income-tax Reference No. 226 of 1982 (Goodricke Group Ltd. (No. 1) v. CIT) and held that where surplus funds remitted to the head office were not part of the company's trading assets or circulating capital in India and were sent for distribution or foreign investment, the loss occasioned by exchange fluctuations on such remittance could not be treated as a trading or revenue loss incurred in carrying on business in India. Applying the principle that foreign-currency gains or losses are revenue in character only when the currency is held on revenue account as part of trading assets, the Court concluded that the loss here was not laid out wholly and exclusively for the purpose of earning the profits of the Indian business and therefore was not deductible.Answered in the negative and in favour of the assessee (loss disallowance not sustained on the facts of this case pursuant to the Court's earlier decision).Loss on remittance of dividend - revenue v. capital characterisation of foreign exchange gains and losses - allowability of expenditure incurred for purpose of earning income - Loss of Rs. 368 on remittance of dividend due to exchange-rate fluctuation was not an allowable deduction. - HELD THAT: - The Court applied the same legal principle as in respect of the remittance of profits: where the loss arises on remittance of dividends abroad and the remitted funds were not part of the assessee's trading or circulating capital in India, such loss cannot be treated as revenue expenditure incidental to carrying on the Indian business. Consequently, the loss on remitting dividends by reason of exchange fluctuation was held not to be deductible.Answered in the negative and in favour of the assessee.Cost of acquisition of original shares where bonus shares issued - spreading original cost over original and bonus shares to determine average cost - immutability of original cost of acquisition as modified by the option under section 55(2) - When an assessee sells the entire block comprising original shares and bonus shares, the cost of acquisition is to be computed by spreading the cost of the original shares over the original and bonus shares collectively to ascertain an average cost. - HELD THAT: - The Court reviewed relevant authorities and held that where bonus shares rank pari passu with original shares and the entire block (original plus bonus shares) is sold, the proper method is to spread the amount spent in acquiring the original shares over the whole lot (original plus bonus) and determine an average cost per share. The Court rejected the contention that the original shares' cost remains unaffected in such a sale of the entire block, noting precedents which have applied the averaging method for valuation of shares when bonus shares are issued and the block is disposed of. Although the Court acknowledged the principle that an elected cost (for example, market value under section 55(2)) is immutable by subsequent events, it concluded that where the assessee disposes of the entire holding, the averaging method is the appropriate basis for computing cost of acquisition for capital gains purposes.Answered in the affirmative and in favour of the Revenue (Tribunal's method of spreading original cost over original and bonus shares upheld).Final Conclusion: For assessment year 1977-78 the Court (following its prior decision) rejected the revenue deductibility of exchange losses on remittance of profits and dividends to the U.K., and upheld the valuation method of spreading the cost of original shares over original and bonus shares where the entire block was sold; costs were reserved. Issues Involved:1. Allowability of loss incurred due to fluctuation of exchange rates in remittance of profit.2. Allowability of loss incurred in remittance of dividend.3. Computation of long-term capital gains arising out of the transfer of original shares and the cost of acquisition of original and bonus shares.Detailed Analysis:1. Allowability of Loss Incurred Due to Fluctuation of Exchange Rates in Remittance of Profit:The first issue relates to the assessee's claim of Rs. 1,71,066 as a loss due to exchange rate fluctuations while remitting profits from India to its UK office. The Tribunal disallowed this claim, stating that the loss was not incurred for the purpose of earning income and was not laid out for the purpose of the business. The Tribunal referenced the Supreme Court's decision in Sutlej Cotton Mills Ltd. [1979] 116 ITR 1 (SC), which distinguished between losses on revenue account and capital account. The Tribunal concluded that the remitted surplus funds did not constitute a trading asset or circulating capital and were intended for distribution as dividends or investment outside India. Consequently, the loss was not considered a trading loss or incidental to business operations. The High Court, following its earlier decision in Goodriche Group Ltd. (No. 1) v. CIT [1993] 201 ITR 261, answered the first question in the negative and in favor of the assessee, thereby disallowing the deduction.2. Allowability of Loss Incurred in Remittance of Dividend:The second issue pertains to the assessee's claim of Rs. 368 as a loss due to exchange rate fluctuations while remitting dividends from India to the UK. The Commissioner of Income-tax (Appeals) and the Tribunal rejected this claim on the same grounds as the remittance of profits. The High Court applied the same principle, determining that the loss suffered due to exchange rate fluctuations on remittance of dividends was not allowable as a deduction. Thus, the second question was also answered in the negative and in favor of the assessee.3. Computation of Long-Term Capital Gains and Cost of Acquisition of Original and Bonus Shares:The third issue involves the computation of long-term capital gains from the transfer of original shares and the cost of acquisition of original and bonus shares. The assessee-company acquired 1,200 equity shares of Duncan Bros. and Co. Ltd. and was later allotted bonus shares. The entire block of shares was sold, and the assessee contended that the cost of original shares should be taken as the actual cost and the cost of bonus shares should be determined by spreading the cost of original shares over both original and bonus shares. The Tribunal, upholding the decisions of the lower authorities, rejected this method.The High Court referenced several precedents, including CIT v. Gold Mohore Investment Co. Ltd. [1968] 68 ITR 213 (SC), Dalmia Investment Co. Ltd. [1964] 52 ITR 567 (SC), and Smt. Protima Roy [1982] 138 ITR 536 (Cal), which established that the cost of original shares should be spread over the original and bonus shares collectively to determine the average price. The High Court concluded that the method adopted by the lower authorities and upheld by the Tribunal was correct. Therefore, the third question was answered in the affirmative and in favor of the Revenue.Conclusion:The High Court ruled:1. The loss incurred due to exchange rate fluctuations in remittance of profit is not an allowable deduction.2. The loss incurred in remittance of dividends is not an allowable deduction.3. The cost of acquisition of original shares should be spread over both original and bonus shares for computing long-term capital gains.