ORDER
Pramod Kumar, A.M.
1. In this appeal, solitary grievance of Revenue is against CIT(A)’s directing the AO to apply Liberalised Exchange Rate Control Rate Management System (LERMS) to the asst. yr. 1992-93- This controversy revolves around interpretation of Rule 115, of the IT Rules, 1962, which deals with rate of exchange for conversion, into rupees, of assessee’s income expressed in foreign currency.
2. The issue in this appeal lies within narrow compass of undisputed facts. The assessee,, a commercial airline, is a Hong Kong based foreign company which is engaged in the business of aircraft operations. Its income is assessed under the provisions of Section 44BBA of the IT Act, 1961. During the course of assessment proceedings, AO noticed that, in the relevant previous year, the assessee had received HK $ (Hong Kong Dollars) 6,22,62,223. It was further noted that this foreign exchange earning was converted, for the purpose of computing rupee value so as to work out the tax liability under Section 44BBA, by taking 60 per cent thereof at the ‘market rate of exchange’ while the remaining 40 per cent was converted at the ‘official rate of exchange’. The assessee thus converted HK $ 3,73,57,334 by taking the market rate of exchange which was Rs. 100=HK $ 24.95, and the balance HK $ 2,49,04,889 were converted at the official rate of exchange which was Rs. 100=HK $ 30. It was explained by the assessee that the above computation was under the Liberalised Exchange Rate Control Rate Management System (LERMS), in terms of Reserve Bank of India’s Circular dt. 20th Feb., 1992. However, the AO rejected this explanation on the ground that it is clearly observed, in the aforesaid RB1 circular itself, “the Liberalised Exchange Rate Control Rate Management System (LERMS) will become effective from 1st March, 1992”. Accordingly, in view of the AO, LERMS could not be applied for converting foreign exchange earnings of the entire previous year. The AO further observed that only one month’s receipt in the relevant previous year (i.e. the period during which LERM was in force, which was the month of March, 1992) was to be converted by applying the official rate of exchange as well as market rate of exchange and since separate figures for this month were not available, he proceeded to adopt the “flat rate as per Rule 115(c)”. The AO then proceeded to work out rupee value of foreign exchange earnings by adopting the market rate of exchange (i.e., Rs. 100=HK$ 24.95) on the entire earnings. Based on this computation, addition was made to the returned income offered for taxation under Section 44BBA. In appeal, however, CIT(A) deleted the addition and upheld the computation of rupee value of foreign exchange earnings made by the assesses. Revenue is aggrieved and in appeal before us.
3. Rival contentions are conscientiously heard, orders of the authorities below carefully perused, and applicable legal position . duly deliberated upon.
4. It may be useful to reproduce Rule 115 of the IT Rules 1962, before we address ourselves to the core issue in this appeal. Rule 115 provides as follows :
“Rate of exchange for conversion into rupees of income expressed in foreign currency-(1) The rate of exchange for the calculation of the value in rupees of any income accruing or arising or deemed to accrue or arise to the assessee in foreign currency or received or deemed to be received by him or on his behalf in foreign Currency shall be the telegraphic transfer buying rate of such currency as on the specified date.
Explanation : For the purposes of this rule,–
(1) “telegraphic transfer buying rate” shall have the same meaning as in the Explanation to Rule 26 ;
(2) “specified date” means–
(a) in respect of income chargeable under the head “Salaries”, the last, day of the month immediately preceding the month in which the salary is due, or is paid in advance or in arrears;
(b) in respect of income by way of “interest on securities”, the last day of the month immediately preceding the month in which the income is due;
(c) in respect of income chargeable under the head “Income from house property”, “Profits and gains of business or profession” [not being income referred to in Clause (d)] and “Income from other sources” (not being income by way of dividends) and “interest on securities”, the last day of the previous year of the assessee;
(d) in respect of income, chargeable under the head “Profits and gains of business or profession” in the case of a non-resident engaged in the business of operation of ships, the last day of the month immediately preceding the month in which such income is deemed to accrue or arise in India;
(e) in respect of income by way of dividends, the last day of the month immediately preceding the month in which the dividend is declared, distributed or paid by the company;
(f) in respect of income chargeable under the head “Capital gains”, the last day of the month immediately preceding the month in which the capital asset is transferred:
Provided that the specified date, in respect of income referred to in Sub-clauses (a) to (f) payable in foreign currency and from which tax has been deducted at source under Rule 26, shall be the date on which the tax was required to be deducted under the provisions of the Chapter XVII-B
(2) Nothing contained in Sub-rule (1) shall apply in respect of income referred to in Clause (c) of the Explanation to Sub-rule (1) where such income is received in, or brought into India by the assessee or on his behalf before the specified date in accordance with the provisions of the Foreign Exchange. Regulation Act, 1973 (46 of 1973).”
We may also mention that Explanation to Rule 26, referred to in Expln. 1 above, lays down that the ‘telegraphic transfer buying rate’ means the rate or rates of exchange for the same as adopted by the State Bank of India
5. In view of the aforesaid provision, and as observed by Hon’ble Supreme Court in CIT vs Chowugle & Co. Ltd. (1996) 218 ITR 384 (SC), it is clear that “if an assessee is assessable in respect of any income accruing or arising or deemed to have accrued or arisen in foreign currency or has received or deemed to have receive income in foreign currency, then such foreign currency shall be converted into rupees notionally at the telegraphic transfer buying rate of such currency as on the last day of the previous year of the assessee.” Hon’ble Supreme Court has further observed that, while doing so, the monies already received in India during the relevant previous year itself, and, therefore, already converted into Indian rupees, are required to be excluded, but then, in the instant case, assessee being a foreign company and retaining its foreign exchange earnings abroad, there is no question of any such exclusion. Therefore, in view of the specific provisions of Rule 115(c) and so far as income under the head ‘profits and gains from business and profession’ is concerned, the date relevant for this purpose is the last date of the previous year. The only exception to this rule is non-resident’s income from shipping business but that is admittedly not applicable here. In view of these discussions, we are of the considered view that so far as notional conversion of foreign exchange earnings into Indian rupees, of earnings expressed in foreign exchange, is concerned, the relevant rate of exchange is the ‘Telegraphic Transfer (Buying) Rate’ adopted by the State Bank of India as on the last date of the previous year, irrespective of the actual date or period of such foreign exchange earnings.
6. There is no dispute about the fact that Liberalised Exchange Rate Control Rate Management System (LERMS) was in force as on the specified date, i.e., 31st March, 1992, for which notional conversion was to be done. We further find that in terms of AD(MA) Circular No 11, dt. 29th Feb., 1992, issued by the Reserve Bank of India, Exchange rate, under the LERMS, was to be worked out as follows :
“2. Exchange requirement and surrender requirement
(i) All receipts under current account transactions (both merchandise export, and invisible receipts) will be required to be surrendered to ‘Authorised Dealers’ (ADs) as hitherto. The rate of exchange for these transactions will be free market rate quoted by ADs , except for 40 per cent of the proceeds which would be based on the RBI official rate.
(ii) the ADs will be correspondingly required to surrender to the RBI only 40 per cent of their purchases of foreign currencies representing current account receipts (including foreign currency equivalent, at the official rate, of convertible rupees) at the official rate of exchange. They will be free to retain the remaining 60 per cent of foreign exchange and sell it at free market rates for all permissible transactions.”
It is, therefore, clear that the conversion of foreign exchange receipts into Indian rupees, as on 31st March, 1992, could only have been done by taking 60
per cent receipts at the market rate and 40 per cent receipts at the official rate. We have also noticed that for the purpose of r, 115, foreign exchange earnings of the assessee are required to be converted, on notional basis, as on 31st March, 1992 i.e., last day of the relevant previous year. We have also noticed that, as per SBI certificate dt. 27th Sept., 1994 (placed at p; 1 of assessee’s paper book), telegraphic transfer buying rate as on 31st March, 1992, was Rs 100=HK $ 30 (official rate of exchange) and Rs. 100=HK $ 24.95 (market rate of Exchange). In view of these facts, we see no infirmity in assessee’s converting 60 per cent of HK $ earnings during the year @ Rs. 100=HK $ 24.95 and balance amount (c) Rs. 100 = HK $ 30. We, therefore, support the conclusion arrived at by the CIT(A) and decline to interfere in the matter.
7. Before parting with this matter, we may also mention that if. the LERMS conversion method was applied only to the earnings for the month of March 1992, the rupee value of foreign exchange earnings of the assessee would have been far less than the earnings computed by the assessee, since, in that case, entire earnings for first eleven months were to be notionally converted at official rate of exchange, whereas the assessee had taken only 60 per cent earnings at the official rate of exchange. The only rate of exchange available for the period prior to 1st March, 1992, was the official rate of exchange. The official rate of exchange being less than the market rate of exchange, the rupee value of foreign exchange earnings had to be, therefore, lower. The stand of the AO was, for this reason also, ill-conceived. It is an “altogether different matter that, in view of the specific provisions of Rule 115(c) as discussed above, it was not open to the AO to do this notional conversion, for entire earnings expressed in foreign currency, on the basis of a rate other than the TT buying rate, adopted by the State Bank of India, as on the last day of the previous year.
8. In the result, appeal is dismissed.