TMI Blog1988 (3) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... , the assessee had a proposal for the expansion of the fertiliser factory at Ennore and for that purpose decided to increase its share capital by means of issue of ordinary shares. After obtaining the necessary consent of the treasury of the U.K. to the issue, shares were offered to the U.K. shareholders and amounts received from them were received and retained in the U.K. subject to the directions and restrictions imposed by the Reserve Bank of India and the Controller of Capital Issues. The company issued 4,42,570 equity shares as right shares to the existing shareholders at a premium of 16 sh. per share as regards non-resident shareholders. The allotment of shares was made on November 16, 1965. The assessee had a total amount of f 1,91,074 available in the U.K. out of which a portion was utilised for purchase of plant and machinery in the U.K. for the Ennore unit. The balance was repatriated to India to be utilised for the specific purpose for which the collection was made. The company's accounting year ended with September 30, each year. During the previous years relevant to the assessment years 1967-68, 1968-69 and 1969-70, the amounts repatriated came to f 95,200, f 5,874 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Revenue by the Tribunal. The law on this subject is settled by the decision of the Supreme Court in CIT v. V. Damodaran [1980] 121 ITR 572, on which reliance is placed by counsel on both sides. In that case, the managing director of a private company withdrew from the company during the period January to March, 1959, amounts totalling Rs. 25,107. The balance-sheet of the company as at March 31, 1958, showed a net profit of Rs. 18,950. The managing director claimed that against the profit of Rs. 18,950, provision for taxation of Rs. 11,000 and provision for dividend of Rs. 6,900 had to be deducted and only the balance of Rs. 1,050 could be considered as deemed dividend under section 2(6A)(e) of the Indian Income-tax Act of 1922. Rejecting that contention, the Income-tax Officer assessed the whole amount of Rs. 25,107 as deemed dividend under section 2(6A)(e) by taking into consideration also the current profits of the year ending March 31, 1959. The Tribunal held that the current profits could not be taken into consideration, and rejecting the contention of the assessee, also held that the two sums of Rs. 11,000 and Rs. 6,900 had to be taken into account as accumulated profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... must specify the questions of law which, he claims, arise out of the order of the Appellate Tribunal made under section 254. The form of reference application prescribed by rule 48 of the Income-tax Rules, 1962, specifically requires the applicant to state the questions of law which he desires to be referred to the High Court. He may, in appropriate cases, be permitted by the Appellate Tribunal, to raise further questions of law at the hearing of the reference application. But, in every case, it is only the party applying for a reference who is entitled to specify the questions of law which should be referred. Nowhere in the statute do we find a right in the non-applicant (a phrase used here for convenience) to ask for a reference of questions of law on the application made by the applicant. In this connection, two categories of cases can be envisaged. One consists of cases where the order of the Tribunal under section 254 has decided the appeal partly against one party and partly against the other. This may be so whether the appeal consists of a single subject matter or there are more than one independent claim in the appeal. In the former, one party may be aggrieved by the gra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Tribunal, as the conclusion of the Tribunal that it is a capital gain cannot be supported by contending that it is a revenue receipt. The decision on the question whether it is a revenue receipt or not is not ancillary or incidental to the question whether it is a capital gain. The findings are independent of each other and have to be challenged separately if a party is aggrieved thereby. In this case, the Revenue did not apply for a reference in the prescribed form as required by section 256(1) of the Income-tax Act. As pointed out by learned counsel for the assessee, there was not even an oral request at the time when the application for reference filed by the assessee was considered by the Tribunal. The Tribunal did not have any power to refer the question suo motu. Hence, the Tribunal was not competent to refer the question whether the amounts under consideration are taxable as revenue receipts. To that extent, the reference must be considered to be void. However, learned counsel on both sides argued the question relating to revenue receipts on merits also. Learned counsel for the assessee supported the finding of the Tribunal that the surplus amounts are not revenue re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken to be well settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as trading asset or as part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature." In the present case, it is not in dispute that the amount kept in the U.K. arose out of subscription monies received for allotment of shares and there was no question of any sale of stock-in-trade. The issue of shares was itself for the express purpose of expansion of the assessee's fertilizer factory at Ennore. There is no dispute that a part of the amount was utilised for purchase of plant and machinery in U.K. and the other part was repatriated to India to be utilised for the purposes for which it was collected. The Tribunal has found that there is no direct relation between the excess amount and the business of the assessee. Hence, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel invited our attention to a passage in Gower's Principles of Modern Company Law, Fourth Edition, page 397, which reads thus : "What, then, is the exact juridical nature of a share ? At the present day, this is a question more easily asked than answered. In the old deed of settlement company, which was merely an enlarged partnership with the partnership property vested in trustees, it was clear that the members' 'Shares' entitled them to an equitable interest in the assets. It is true that the exact nature of this equitable interest was not crystal clear, for the members could not, while the firm was a going concern, lay claim to any particular asset or prevent the directors from disposing of it. Even with the modern partnership, no very satisfactory solution to this problem has been found, and the most one can say is that the members have an equitable interest, often described as a lien which floats over the partnership assets throughout the duration of the firm, although it only crystallises on dissolution. Still, there is admittedly some sort of proprietary nexus (however vague and ill-defined) between the partnership assets and the partners." Learned counsel proceeded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms of section 48 of the Income-tax Act are not fulfilled in this case too. The Supreme Court had also referred to an earlier decision in CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294 (SC), on which considerable reliance is placed by learned counsel for the assessee in the present case. In Srinivasa Setty's case [1981] 128 ITR 294 (SC), the question related to the transfer of the goodwill in a newly commenced business. The Supreme Court held that transfer of such goodwill does not give rise to a capital gain for the purposes of income-tax. After holding that goodwill is an asset of the business, the Supreme Court posed to itself the question whether it is an asset contemplated by section 45 of the Income-tax Act and answered the same in the following words (p. 299 of 128 ITR) : "Section 45 charges the profits or gains arising from the transfer of a capital asset to income-tax. The asset must be one which falls within the contemplation of the section. It must bear that quality which brings section 45 into play. To determine whether the goodwill of a new business is such an asset, it is permissible, as we shall presently show, to refer to certain other sections of the head 'Cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the income chargeable under the head 'Capital gains'. The section provides that the income chargeable under that head shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset : ' (ii) the cost of acquisition of the capital asset ... What is contemplated is an asset in the acquisition of which it is possible to envisage a cost. The intent goes to the nature and character of the asset, that it is an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. It is immaterial that although the asset belongs to such a class, it may, on the facts of a certain case, be acquired without the payment of money. That kind of case is covered by section 49 and its cost, for the purpose of section 48, is determined in accordance with those provisions. There are other provisions which indicate that section 48 is concerned with an asset capable of acquisition at a cost. Section 50 is one such provision. So also is sub-section (2) of section 55. None of the provisions pertaining to the head 'Capital gains' suggests that they include an asset in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected by it in the U.K. to this country. It is only a case of an assessee bringing his own money held by him in foreign countries into this country in accordance with the procedure prescribed under the Foreign Exchange Regulation Act. The only method by which a person could make use of his foreign currency in this country is by converting it into rupees in accordance with the relevant rules and regulations. Such conversion of foreign currency into Indian rupee is metaphorically termed as "sale of foreign exchange". No doubt, the Foreign Exchange Regulation Act uses the term "sale of foreign exchange", but that would not bring the conversion of foreign exchange within the definition of "transfer" under section 2(47) of the Income-tax Act. For a transfer of an asset, there must be two persons. There cannot be a transfer of an asset by a person in favour of himself. The conversion of foreign currency into Indian money does not involve a transfer by one person to another. The Karnataka High Court has recently considered the question whether conversion of foreign currency into Indian money is transfer within the meaning of section 2(47) of the Income-tax Act in Jayakumari and Dilharkuma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m capital gains and this view was confirmed by the Appellate Assistant Commissioner and the Tribunal. On reference, the Karnataka High Court took the view that foreign exchange is in the nature of a commodity which can be converted into local currency by selling it. It was held that the dollars, which were repatriated to India, constituted a capital asset of the assessee and any profit derived on account of its transfer should be treated as capital gain, since the assessee was able to acquire Indian currency only by transferring the capital asset and that the sale of foreign exchange was a transfer within the meaning of section 2(47) of the Income tax Act. The Bench did not consider whether the terms of section 48 of the Income-tax Act were fulfilled nor is there any discussion in the judgment as to how the conversion of foreign currency could be treated as a transfer between two persons. The Bench has proceeded on the footing that local currency can be only by sale of foreign currency and that such sale will fall within the definition of "transfer" under section 2(47) of the Income tax Act. We are riot to agree with the reasoning of the Bench in that case as the aspects referred t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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