Pr. Al. M. M. Annamalai Chettiar versus Commissioner of Income-Tax, Madras

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A

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PR. AL. M. M. ANNAMALAI CHETTIAR

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v.

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COMMISSIONER OF INCOME-TAX, MADRAS

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October 26, 1964

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B

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(K. SUBBA RAo, J. C. SHAH ANDS. M. SIKRI JJ.)

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Income Tax-Purchase and sale of property in Mal.aya-Purchase in Japanese currency and sale in J,,falayan Currency-Method of coniputing profit and loss. ·

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The assessee whose head office was in India was also carrying on businciS in the Federated Malaya States. In respect of the assessment year 1951-52, the assessee claimed that a loss Vt'as incurred as a result of the c sale of house properties and rubber gardens. Those properties were purchased by the assessee, in Malaya, during the Japanese occupation, in Japanese currency, but sold in Malayan currency after enemy occupation had ceased. The Income-tax Officer scaled down the purchase prices in accordance with the Schedule of rates contained in the Debtor and Creditor (Occupation l'eriod) Ordinance, 1948, of the Federated Malaya States. The result was that the assessee was shown to have made a profit instead D of suffering any loss. On appeal by the assessee, the Appellate Assistant Commissioner and the Appellate Tribunal confirmed the order of the Income-tax Officer. The Tribunal also refused to state a case to the High Court and the High Court rejected the assessee's application to direct the Tribunal to do so. The assessee appealed to the Supreme Court.

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E

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HELD : The Income-tax Officer was justified in adopting the schedule appended to the Ordinance for the purpose of ascertaining the cost price of the properties in Malayan Currency, [831 A-BJ

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When a property is purchased in one currency and sold in another, the profit or loss can be ascertained only when the conversion rate of the two currencies is known. The only material available to the officer for determining that common standard was the Schedule in the Ordinance. Though the Ordinance does not in terms apply to the scaling down of the coet price-it was enacted for the purpose of scaling dov./n payments made by debtors to creditors during the occupation period-still, it was F the result of a careful enquiry made by appropriate and responsible authorities in Malaya. Even if he had adopted some other method in the previous years it did not prevent him from utilizing the' correct method for the assessment year. [830 C; 830 G-831 A; 831 B-C]

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S. L. N. Sathappa Chettiar Y. Comn1issioner of l11conze-tax, Madras, (1959) 35 LT.R. 641, approved.

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G CIVIL APPELLATE JURISDICTION : Civil Appeal No. 131 of 1963.

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Appeal by special leave from the order dated July 31, 1961 of the Madras High Court in Tax Case Petition No. 44 of 1961.

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K. Snnivasan and R. Gopalakrishnan, for the appellant.

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H

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C. K. Daphtary, Attorney-General, S. V. Gupte, SolicitorGeneral, N. D. Karkhanis, R. H. Dhebar and R. N. Sachthey, for

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[1965] I S.C.R.

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828

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SUPREME COURT REPORTS

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The Judgment of the Court was delivered by

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A

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Subba Rao J. This appeal by special leave is directed against the order of the High Court of Madras in Tax Case Petition No. 44 of 1961.

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The appeliant is a Hindu undivided family carrying on business with its head office at Pageneri in Ramanathapuram District, B Madras State, and also business at Paritpuntar in the Federated Malaya States. In respect of the assessment year 1951-52, the appellant showed in the return filed on his behalf a total world income of Rs. 2,13,079, which included a sum of $ 21,350 as profit from the business at Paritpuntar. In computing the said profit from the business ~t Paritpuntar the appellant claimed an c aggregate loss of $ 68,405 incurred on the sale of house property and rubber gardens QS detailed below :

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B

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- ---- SI. No.	----··---·---·····---·· DateofPurchase Co	st price	Sale price
			(IndoTiaro)
1.	28ofAni,Angirasa-14Silama House.		500
2.	28Ani,Angirasa-No. 2) Silama House.	4t54	3920
3.	23rdA\ani,Angirasa-No.23Silama House.	2333	1425
4.	5th Avani, Subhanu-(21-8-43) Siradan House.	25453	7000
5.	24th Avani,Tharana(t5-9-44)-38Garden.	53686	5880
6.	8th Purattasai Tbarana (23-9-44)-35 Garden.	2668	1164
	TOTAL	88294	19880

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F

In respect of items Nos. I, 2 and 3 above the Income-tax Officer accepted the claim of the appellant, but in regard to the remainmg three items, namely, items Nos. 4, 5 and 6, he held that as the said purchases of property and the outlay thereon were all made during the Japanese occupation of Malaya and in Occupation Currency, then in circulation, the purchase prices of the same required to be scaled down in accordance with the schedule of rates contained in the Debtor and Creditor (Occupation Period) Ordinance, 1948, passed by the Legislative Council of Federated Malaya States and on that basis the profit and loss in respect of the Ja,t 3 items of the property were worked out by Wm as under:

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H

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ANNAMALAI CHETTIAR v. C.I.T. (Subba Rao!.)

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S.No.	SaleofProperty	Purchase pricein occupation currency	Scaled down valueof purchase price	Sale amount	Profit	Loss
		$	$	$	$	$
1.	SiradanHouse	25453	9000	7000		2000
2.	38Garden	53686	3830	5880	2050
3. -----	35Garden ---·-----	2668 -	190	J-164	974

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In the result the Income-tax Officer computed a profit of $ 382 in respect of the sale of the above gardens as against the loss of $ 68,405 claimed by the appellar;t. On appeal, the Appellate C Assistant Commissioner confirmed the order of the Income-tax Officer. On further appeal, the Income-tax Appellate Tribunal took the same view. as the Income-tax Officer had taken. The appellant applied to the Tribunal under s. 66 ( 1) of the Incometax Act requiring it to state a case and refer the following question of law arising out of its order to the decision of the High Court :

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0

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"Whether on the facts and in the circumstances of the case the disallowance of the loss of $67, 7 64 as claimed and the computation of the profit at $382 is valid in Jaw."

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E The Appellate Tribunal rejected the application. Thereupon, the appellant moved the High Court under s. 66(2) of the Incometax Act praying for an order directing the Appellate Tribunal tostate a case and refer the question of law arising out of its order. 'The High Court, following the decision in S.L.N. Sathappa Chettlar v. Commissioner of Income-tax, Madras('), dismissed

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F the application. Hence the appeal.

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Mr. Srinivasan, learned counsel for the appellant, raised before us two points, namely, ( 1) the conversion table given in the Schedule to the Debtor and Creditor (Occupation Period) Ordinance, 1948, of Malaya, hereinafter called the Ordinance,. G was not intended ·to provide the rates of conversion for any purpose beyond what the· Ordinance was expressly specified to achieve, namely, the determination of the rights and liabilities of debtors and creditors and that the adoption of the conversion rates given in the said Schedule to scale down the cost of properties in question was unwarranted; (2) the appellant maintained regular accounts H for all the years including the Japanese occupation period; the original cost of. acquisition of the 3 properties was adopted for the (I) (1959) 35 I.T.R. 641.

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(1965) I S.C.R.

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830

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SUPREME COURT REPORTS

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purpose of business balance-sheets all these years; no loss on revaluation of the said assets by scaling down their values at any time was allowed in any of the e;irlier years by the Department; and, therefore, there was no justification for a departure in the year of account.

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He also contended that if the properties were purchase.d for dollars and sold for dollars, the fact of inflation or deflation of currency would be irrelevant in ascertaining the profits. That may be so in the case of a country's currency, but when a property is purchased and sold in different currencies, say Japanese and Malayan currencies as in the present case, it is not possib!e to ascertain the profit or loss unless the exchange or conversion rate C is ascertained. When a property is purchased in one currency and sold in another currency, how can the profit or loss be ascertained unless the conversion rate of the two currencies is known? There should be a common standard. The two currencies in the present case are essentially different though they were current in the same country during the same or different periods. The extraordinary situation of two currencies coexisting during the occupation period or the situation of one property being purchued during the enemy occupation period in Japanese currency and <.old in Malayan currency after the vacation of the enemy occupation cannot be equated with fluctuations in the v~lue of a nation's currency. Unless the cost price expressed in Japanese currency is computed in terms of the Malayan currency, it is not p<liSible to arrive at the real profit accrued to the assessce. That is exactly what the Income-tax Officer did and, in our view, that is the only correct basis.

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F

It is not correct to say that the Income-tax Officer applied the said Ordinance to ascertain the profit in the present case. The scheme and the details of the Ordinance have already been considered by us in Civil Appeals Nos. 55 of I 962 etc. The Ordinance was enacted for the purpose of scaling down the payments made by debtors to creditors during the occupation period. A Schcduk was apper,ded to the Ordinance providing a table of conversion of tl1e depreciated Japanese currency into Malnyan currency. In terms the Ordinance does not directly apply to the ~.caling down of the cost price of properties purchased in Japanese currency. But to ascertain the real profit, as we have stated earlier, it is necessary to adopt a reasonable conversion rate. The only material that was available to the Income-ta.1: Officer was the Schedule appended to the Ordinance. Though that Schedule

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ANNAMALA! CHETTIAR l'. C.l.T. (Subba Rao!.) 831

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was appended to the Ordinance enacted for a di~rent purpose, it was the result of a careful inquiry made by the appropriate and responsible author:ties in Malaya. The Income-tax Officer was, therefore, justified in adopting that Schedule for the purpose of ascertaining the cost price of the properties purchased in Japanese n currency and sold in the "Malayan currency. The fact that the Income-tax Officer adopted some other method in the previous years-no material has been placed before us in reg2rd to the method adopted by the Income-tax Officer-does not prevent him from ascertaining the correct method for the assesmcnt year with which we are concerned.

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c

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The questions raised before us were the subject-matter of the decision of the Madras High Court in S.L.N. Sathappa Chetriar v. Commissioner of Income-tax, Madras('). There, as here, the asscssee, which carried on a moneylending business and had its head office in India and a branch in the Federated Malaya States. D purchased some properties when Malaya was under enemy occupation and sold them after the vacation of the enemy occupat10n in Malayan currency. In order to ascertain the profits resulting from · the sale for the purpose of assessment of the assessee for the year 1952-53 the Department valued the cost of the properties in Malayan currency in accordance with the Schedule appended to E the Ordinance. The assessee contended that the cost price of the properties mtis~ be ta.ken at the figure accepted by the Department for the purpose of the Government scheme. The High Court held that to ascertain the real profits the Department was right in computing the cost price of the properties in Malayan currency in accordance with the Schedule appended to the Ordinance. The F reason for the conclusion is stated thus at p. 649.

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"The purchase was paid for in Japanese currency. The sale price was realised in Malayan currency. There was no parity between the two on the date of purchase. Certainly the Japanese currency ceased to be in use on G the date of sale. To arrive at a computation of profits or losses where property was purchased in one currency and sold in another, it should be obvious that there shou Id be a common standard; in the circumstances of this case the purchase price had to be computed in terms of Malayan currency in which the property was sold."

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H The principle adopted by the High Cou~t appears to be unexceptionable. It accords with our view. · Adverting to the ~econd

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(I) (19S9) 3S l.T.R. 641.

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832

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11965] l S.C.R.

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SUPREME COURT REPORTS

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argument that the schedule to the Ordinance should b~ confined <mly to the scaling down of debts. the learned Judge' poin:ed out at p. 650:

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"The Report of the Select Committee which preceded the issue of the Malayan Ordinance has also been made part of the record. That showed that the Committee made a real a!lempt to ascertain the value of the Japanese currency in relation to the Malayan currency at every stage of the occupation period. Besides. we have to point out that no other basis of conversion was proposed by the asscsscc at any stage. We are unable to bold that the Department and the Tribunal were in error in adopting the conversion table furnished in the Schedule to the Malayan Ordinance."

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We also agree with this view.

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In the result the appeal fails and is dismissed with costs.

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Appeal dirn1issed.

Pr. Al. M. M. Annamalai Chettiar v. Commissioner of Income-Tax, Madras

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Pr. Al. M. M. Annamalai Chettiar v. Commissioner of Income-Tax, Madras

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