Commissioner of Income Tax vs Mahavir Plantations Ltd.

Arijit Pasayat, C.J.—Accepting the prayer for reference u/s 256(1) of the Income Tax Act, 1961 (in short "the Act"), the following" questions for the assessment year 1982-83 have been referred by the Income Tax Appellate Tribunal, Cochin Bench (in short, "the Tribunal") :

I. T. R. No. 152 of 1995 :

"Whether, on the facts and in the circumstances of the case and also in view of the fact that the assessee had credited its profit and loss account with a sum of Rs. 5,37,909 representing the estimated amount of exchange difference, the Tribunal is right in law and fact in holding that no income accrued to the assessee or arose to the assessee as a result of fluctuations in the foreign exchange rate and in deleting the addition of Rs. 5,37,909 ?"

I. T. R. No. 153 of 1995 :

"Whether, on the facts and in the circumstances of the case, the assessee is entitled to weighted deduction on the commission paid by it abroad in respect of its exports ?"

For the same assessment year, two reference applications were filed as there were two appeals before the Tribunal, one by the assessee and the other by the Revenue in respect of two different points.

The factual position, as set out in the statement of case, is as follows : The assessee is a company engaged in multifarious business activities. It owns four estates, which mainly grow and manufacture tea. Minor produces like cardamom, etc., are also raised in these estates. The assessee''s Cochin office mainly deals in exports, in addition to doing shipping agency business on a limited scale. The assessee had credited its profit and loss account with a sum of Rs. 5,37,909 representing estimated amount of exchange difference on outstanding bills relatable to exports to Sudan. However, the assessee claimed that this amount did not represent any income received or accrued as on date of the balance-sheet, and, therefore, the same should be excluded while determining the income from Cochin office. For working out the above difference, the following details were given :

Dollars Rupees

"Value as per register* 1,806,746.08 1,45,49,132.03

Less : Value as on 11-6-81 at 8.35 applicable on 11-6-1981 1,806,746.08 1,50,86,329.77

Nil 5,37,909.74

*Rate in sales register for conversion is taken as the prevailing rate on date of shipments."

The exchange difference was calculated at the rate prevailing on June 11, 1981, whereas the previous year of the assessee ended on March 31, 1981. The Tribunal held that the exchange difference, as worked out by the assessee, did not relate to the last day of the previous year, but was on an ad hoc basis. It further held that the basic question at issue was whether the entries passed in the books of the assessee, which keeps its accounts on the mercantile system of accounting taking credit for fluctuation in foreign exchange rate have really resulted in accrual of income to the assessee or, in other words, whether any income arose to the assessee as a result of such fluctuation. It was held that no income arose or accrued as a result of fluctuation in foreign exchange rates. The further issue before the Tribunal was whether the assessee was entitled to deduction on the commission paid by it abroad in respect of its exports. Applying the ratio of a decision of this court in Commissioner of Income Tax Vs. Kerala Nut Food Co., P. Gopinatha Pillai, M. Shamsuddin and Co., Indian Nut Products, Asiatic Export Enterprises and General Industrial Corporation, , it was held that the matter was to be decided in favour of the assessee. So far as the question relating to fluctuation in foreign exchange rate is concerned, learned counsel for the Revenue submitted that the assessee itself had included the income in the profit and loss account. Having done so, it was precluded from taking the hypothetical stand that it was not to be treated as income. Learned counsel for the assessee submitted that what is to be assessed is real income and merely because an entry has been made unless the same related to an income, the assessment should not have been done. So far as the other question related to weighted deduction is concerned, learned counsel for parties accepted that the question is covered by the decision of this court in Commissioner of Income Tax Vs. Kerala Nut Food Co., P. Gopinatha Pillai, M. Shamsuddin and Co., Indian Nut Products, Asiatic Export Enterprises and General Industrial Corporation, .

The factual position is really confusing and the assessee has added abundantly to it. No satisfactory explanation was given as to why the figure was indicated in the financial statements filed, including the same in the profit and loss account. It is to be noted that in the total exports sales as indicated in financial statements, variation in the figure relating to foreign exchange rate was included. Thereafter, a note was added that the same did not constitute an income and should be excluded. No explanation, whatsoever, has been given except evasively stating that to avoid confusion, the same was included. If that be so, it is not open to the assessee to turn around and say that the same did not form an addition to consideration as sale price. Additionally, the figure did not represent the factual position on the last date of the accounting period, i.e., March 31, 1981, but related to the rate applicable on June 11, 1981. This aspect does not appear to have been considered by the Tribunal. It was for the assessee to show the correctness of the figures and if called upon, to explain the relevance of the entry. In view of the aforesaid confused factual position, we think it proper to direct the Tribunal to get the correct picture of the factual position. The assessee is to be given an opportunity to explain about the entries made and the background in which they were made. It is true, as contended by learned counsel for the assessee, that the actual income has to be assessed. But, when it had given figures which later on was claimed to be not relevant, requirement was placed on it to explain under what circumstances entries have been made and for what purpose. It is not open to an assessee to make irrelevant entries and then ask the Department to find out and tax the actual income. Instead of answering the reference, we direct the Tribunal to hear the matter afresh keeping in view the observations made hereinabove.

So far as the question of weighted deduction is concerned, the decision of this court in Commissioner of Income Tax Vs. Kerala Nut Food Co., P. Gopinatha Pillai, M. Shamsuddin and Co., Indian Nut Products, Asiatic Export Enterprises and General Industrial Corporation, , applies to the facts of the case and, therefore, the question is answered in the affirmative, in favour of the assessee and against the Revenue. References are accordingly disposed of.