1991 (1) TMI 101 - HC - Income Tax

Court affirms exchange rate for tax, backs company in financial assessment

The Court upheld the Appellate Tribunal's decision to allow the conversion of a foreign loan at the prevailing exchange rate for computing surtax ... Borrowed Monies, Company, Surtax Issues:1. Whether the Appellate Tribunal was correct in upholding the Commissioner's order to recompute surtax liability by converting foreign loan at the prevailing exchange rateRs.2. Whether the Appellate Tribunal was correct in directing the Income-tax Officer to make adjustments for relief allowed in the income tax assessmentRs.Analysis:1. The case involved a company that obtained a long-term foreign loan for purchasing machinery, claiming benefits for assessment years 1975-76 and 1976-77. The dispute arose regarding the computation of surtax liability based on the conversion of the foreign loan at the exchange rate on the relevant date. The Revenue argued that the exchange rate at the time of borrowing should apply, disregarding subsequent variations. However, the Commissioner of Income-tax (Appeals) allowed the conversion at the relevant date's exchange rate. The Tribunal upheld this decision, leading to the Revenue's appeal.2. The Revenue contended that the Commissioner had erred in computing the company's profits under the Surtax Act and lacked authority to direct the re-computation of capital. The Revenue's argument was based on the Second Schedule to the Act, specifically Clause (v) of rule 1, which outlines the capital computation rules. The Revenue's position was that the borrowed amount should remain fixed once crystallized in Indian rupees. However, the Court disagreed, emphasizing that the liability in foreign currency determines the capital, subject to fluctuations in exchange rates.3. The Court highlighted that the borrowing in foreign exchange represents the company's capital, with the liability in Indian rupees fluctuating based on exchange rates. Applying the foreign exchange rate on the relevant date for conversion ensures an accurate representation of the company's liability. The Court cited a Bombay High Court decision supporting this interpretation, where the assessee was allowed to adjust the liability for rupee devaluation.4. Ultimately, the Court answered both questions in the affirmative, ruling against the Revenue. The judgment clarified that the company's capital should reflect the foreign exchange liability, with the conversion at the relevant date's exchange rate to prevent absurd outcomes and ensure a fair assessment of the company's financial position.