1992 (3) TMI 61 - HC - Income Tax

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

Chowgule And Co. Limited Versus Commissioner Of Income-Tax And Others

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 ... Income, Income Tax Rules 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.