1992 (3) TMI 61 - HC - Income Tax

Court quashes order & rules Rule 115(c) of Income-tax Rules, 1962, ultra vires. Petition allowed.

The court quashed the order dated March 30, 1989, and declared Rule 115(c) of the Income-tax Rules, 1962, as ultra vires. The petition was allowed with no ... Vires of subordinate legislation - ambatory charge - conversion of foreign currency receipts for tax computation - rule-making power under section 295 - chargeability under section 4 read with section 28 - application of rule 115(c) of the Income-tax Rules, 1962Application of rule 115(c) of the Income-tax Rules, 1962 - chargeability under section 4 read with section 28 - vires of subordinate legislation - Validity of rule 115(c) insofar as it requires conversion of foreign-currency business receipts at the rate prevailing on the last day of the previous year, and whether that rule goes beyond the charging provisions of the Income-tax Act. - HELD THAT: - The Court held that under the statutory scheme an ambulatory charge arises when an assessee actually receives money or money's worth in the course of business, so that the liability to tax in respect of receipts arises as and when payment is received. Applying that principle to export receipts realised in India through bankers, conversion for tax purposes must ordinarily relate to the rate prevailing on the actual dates of receipt. Rule 115(c), by mandating conversion of income chargeable under the head 'Profits and gains of business' at the telegraphic transfer buying rate as on the last day of the previous year, would have the practical effect of assessing the assessee on sums which were not received and could not be realised. The rule-making power under section 295 cannot be exercised so as to transgress the substantive charging provisions of the Act. Consequently, insofar as rule 115(c) operates to impose tax on notional amounts by postponing conversion to the previous year's last date, it is beyond the scope of section 4 read with section 28 and is ultra vires.Rule 115(c) as in force at the relevant time is illegal to the extent it compels conversion at the last day of the previous year resulting in taxation of amounts not actually received; the rule is beyond the scope of the charging provisions.Conversion of foreign currency receipts for tax computation - ambulatory charge - application of rule 115(c) of the Income-tax Rules, 1962 - Validity of the revision order under section 263 directing reassessment by applying rule 115(c) to the petitioners' export receipts for the relevant period. - HELD THAT: - Because the Court found rule 115(c) (as it stood at the relevant time) to be beyond the scope of the charging provisions, the first respondent's conclusion that the Assessing Officer should convert export earnings at the rate as on the last date of the previous year was impermissible. The revision order depended on applying the invalid provision to require taxation on notional, unrealised sums. Consequently, the impugned revision order could not stand.Order dated March 30, 1989 passed by respondent No.1 under section 263 is quashed and set aside.Final Conclusion: The writ petition is allowed; rule 115(c) as applied to require conversion of the petitioners' export receipts at the previous year's closing rate is beyond the charging provisions and invalid as applied, and the revision order dated March 30, 1989 is quashed. Issues Involved:1. Validity of the order passed by respondent No. 1 on March 30, 1989.2. Vires of Rule 115(c) of the Income-tax Rules, 1962, u/s 263 of the Income-tax Act, 1961.3. Applicability of Rule 115(c) to the conversion of foreign exchange earnings.4. Retrospective application of the amendment to Rule 115 effective April 1, 1990.Summary:Validity of the Order Passed by Respondent No. 1The petitioners challenged the order dated March 30, 1989, by respondent No. 1, which directed the conversion of foreign exchange earnings based on the exchange rate prevailing on the last day of the previous accounting year, i.e., June 30, 1983, rather than the rate on the date of each receipt. The court quashed this order, holding that it was incorrect in law.Vires of Rule 115(c) of the Income-tax Rules, 1962The petitioners contended that Rule 115(c) is ultra vires as it imposes a tax on notional income, which they neither received nor were entitled to receive. The court held that Rule 115(c) is beyond the scope of section 4 read with section 28 of the Income-tax Act, 1961, as it requires the petitioners to pay tax on income not actually received.Applicability of Rule 115(c) to the Conversion of Foreign Exchange EarningsThe court concluded that under the Income-tax Act, the liability to pay tax arises only when income is actually received. Rule 115(c) mandates conversion at the rate prevailing on the last day of the previous year, which could result in taxing income not actually received. The court found this rule to be inconsistent with the substantive provisions of the Act, which tax actual income received.Retrospective Application of the Amendment to Rule 115 Effective April 1, 1990The petitioners argued that the amendment to Rule 115 effective April 1, 1990, which added sub-rule (2), should be applied retrospectively. The court did not delve into this issue as it had already concluded that Rule 115(c) was illegal. However, it noted that the petitioners had received the foreign exchange in compliance with the Foreign Exchange Regulation Act, 1973.ConclusionThe court quashed the order dated March 30, 1989, passed by respondent No. 1 and declared Rule 115(c) of the Income-tax Rules, 1962, as ultra vires. The petition was allowed with no order as to costs.