1982 (6) TMI 24 - HC - Income Tax

Foreign asset value increase due to rupee devaluation is taxable under income tax rules

The court held that the appreciation in value of foreign assets due to rupee devaluation was assessable to income tax. The court rejected the assessee's ... Insurance Business Issues Involved1. Assessability of the appreciation in value of foreign assets due to rupee devaluation under the Income-tax Act, 1961.2. Tax liability of the amount representing the appreciation in value of foreign assets.Issue-Wise Detailed AnalysisIssue 1: Assessability of the Appreciation in Value of Foreign AssetsThe primary question was whether the appreciation in value of the assessee's foreign assets, amounting to Rs. 21,26,932 due to the devaluation of the rupee, was assessable to income tax. The assessee argued that this amount was not income since there was no physical transfer of funds, and the appreciation was notional and unrealized. The Income Tax Officer (ITO) disagreed, treating the gain on devaluation as profit arising in the course of business and thus assessable.The Appellate Assistant Commissioner (AAC) sided with the assessee, citing precedents from the Supreme Court and the Bombay High Court, and directed the ITO to exclude the amounts related to assets in Burma, Ceylon, and Pakistan from the income, reducing the total income by Rs. 23,73,819, which included the disputed amount. However, the Tribunal reversed the AAC's decision, holding that the ITO could not go beyond the annual accounts furnished under the Insurance Act, thus restoring the ITO's original order.Issue 2: Tax Liability of the Appreciated AmountThe assessee contended that the surplus from the conversion of foreign currency into Indian currency was an accretion to fixed capital and not liable to tax. They argued that the appreciation did not arise from any trading operation as the company had ceased business in Burma, Ceylon, and Pakistan before the relevant assessment year.The court examined Section 44 of the Income-tax Act, 1961, and Rule 5 of the First Schedule, which mandate that the profits and gains of any insurance business (other than life insurance) must be computed based on the balance of profits disclosed by the annual accounts furnished to the Controller of Insurance. The court noted that the adjustments permissible under Rule 5(a), (b), and (c) were not relevant to this case. Therefore, the court concluded that the ITO was bound to accept the balance of profits as disclosed in the annual accounts, which included the disputed amount of Rs. 21,26,932.The court rejected the assessee's argument that the appreciation of assets in Burma and Ceylon should be excluded, noting that this point was not raised before the Tribunal. Additionally, the court emphasized that once the amount was shown as profits in the annual accounts, the ITO could not go behind those figures.ConclusionThe court answered the first question in the negative, stating that the appreciation in value of foreign assets was assessable to income tax. Consequently, the second question did not arise. The assessee was ordered to pay the costs of the reference.