Pr. Al. M. M. Annamalai Chettiar vs Commissioner Of Income-Tax, Madras

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 131 of 1963

Decision Date: 26 October 1964

Coram: J.C. Shah, S.M. Sikri, Subba Rao J

In the matter titled Pr. Al. M. M. Annamalai Chettiar versus Commissioner of Income‑Tax, Madras, the Supreme Court rendered its judgment on 26 October 1964. The case was heard by a bench comprising Justice Subba Rao, Justice J. C. Shah, Justice S. M. Sikri, and Justice K. Subbarao. The official citation of the decision is 1965 AIR 1210 and 1965 SCR (1) 827. The dispute concerned the application of the Income‑Tax Act to transactions involving the purchase and sale of property situated in the Federated Malaya States, where the purchase was effected in Japanese currency during the period of Japanese occupation and the subsequent sale was carried out in Malayan currency after the occupation ended. The assessee, whose head office was located in India, also conducted business in Malaya. For the assessment year 1951‑52 the assessee reported in its tax return a total world income of Rs 2,13,079, which included a profit of $ 21,350 derived from the Malayan operations. The assessee claimed that a loss of $ 68,405 arose from the sale of house properties and rubber gardens, furnishing details of the purchases and sales conducted in the foreign currency. The Assessing Officer applied a reduction of the purchase prices in accordance with the Schedule of rates contained in the Debtor and Creditor (Occupation Period) Ordinance of 1948, which was a legal instrument of the Federated Malaya States. By using that schedule, the officer concluded that the assessee had actually realised a profit rather than a loss. The assessee appealed the assessment, but both the Appellate Assistant Commissioner and the Appellate Tribunal affirmed the officer’s calculation. The Tribunal also declined to refer any question of law to the High Court, and the Madras High Court dismissed the assessee’s petition seeking such a referral. Consequently, the assessee filed a special leave appeal before this Court, challenging the earlier determinations and seeking a reversal of the profit assessment.

The Court held that the Assessing 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. The Court explained that when a property is bought in one currency and sold in another, the profit or loss can be measured only if the conversion rate between the two currencies is known, and the Schedule provided the only reliable standard available to the officer for that conversion. Although the Ordinance was enacted principally to scale down payments made by debtors to creditors during the occupation period, the Court observed that the Schedule represented the result of a careful enquiry undertaken by competent authorities in Malaya and therefore constituted an appropriate basis for the officer’s computation. The Court further noted that even if the officer had employed a different method in previous years, this did not bar him from applying the correct method for the assessment year in question. The principle was reinforced by reference to the earlier decision of S. L. N. Sathappa Chettiar v. Commissioner of Income‑Tax, Madras (1959) 35 I.T.R. 641, which the Court approved. The appeal proceeded as Civil Appeal No. 131 of 1963, issued by special leave from the order dated 31 July 1961 of the Madras High Court in Tax Case Petition No. 44 of 1961. The judgment was delivered by Justice Subba Rao. Counsel for the appellant was identified as the legal representative of the petitioner, while counsel for the respondent was identified as the legal representative of the Commissioner of Income‑Tax, Madras.

The Solicitor‑General, N D Karkhanis, R H Dhebar and R N Sachthey, appeared for the respondent. The judgment was delivered by Subba Rao J. This appeal, granted by special leave, challenged the order of the Madras High Court in Tax Case Petition No 44 of 1961.

The appellant was a Hindu undivided family that conducted business from its head office at Pageneri in Ramanathapuram District, Madras State, and also maintained trading activities at Paritpuntar in the Federated Malaya States. For the assessment year 1951‑52 the family filed a return that reported a total world income of Rs 2,13,079. That amount included a profit of US $21,350 that the family claimed to have earned from its business carried on at Paritpuntar.

In computing the profit from the Malayan business the appellant asserted that it had incurred a total loss of US $68,405 on the sale of several house properties and rubber gardens. The details of those transactions were set out in a schedule. The first transaction involved a purchase on 28 Ani, Angirasa of a property described as “14 Silama House” with a sale price of US $500. The second transaction related to a purchase on 28 Ani, Angirasa‑No 20 of “Silama House” that had a cost of US $4,154 and was sold for US $3,920. The third transaction recorded a purchase on 23 Avani, Angirasa‑No 23 of “Silama House” costing US $2,333 and sold for US $1,425. The fourth transaction concerned a purchase on 5 Avani, Subhanu (21‑8‑43) of “Siradan House” for US $25,453, which was sold for US $7,000. The fifth transaction involved a purchase on 24 Avani, Tharana (15‑9‑44) of “38 Garden” for US $53,686, sold for US $5,880. The sixth transaction recorded a purchase on 8 Purattasai, Tharana (23‑9‑44) of “35 Garden” for US $2,668, sold for US $1,164. The aggregate cost of the six properties summed to US $88,294, while the total sale proceeds amounted to US $19,880.

The Income‑Tax Officer accepted the appellant’s claim of loss for the first three items, namely the three “Silama House” transactions. However, the officer rejected the appellant’s loss claim for the remaining three items – the Siradan House, the 38 Garden and the 35 Garden – on the ground that those purchases had been made during the Japanese occupation of Malaya using the occupation currency then in circulation. The officer held that the purchase prices must be reduced in accordance with the schedule of rates contained in the Debtor and Creditor (Occupation Period) Ordinance, 1948, passed by the Legislative Council of the Federated Malaya States.

Applying the scaling down prescribed by the Ordinance, the officer recalculated the profit or loss for each of the three disputed properties. For Siradan House the original purchase price of US $25,453 was scaled down to US $9,000; the sale price remained US $7,000, resulting in a loss of US $2,000. For the 38 Garden the purchase price of US $53,686 was scaled down to US $3,830; the sale price of US $5,880 gave a profit of US $2,050. For the 35 Garden the purchase price of US $2,668 was scaled down to US $190; the sale price of US $1,164 produced a profit of US $974. On the basis of these revised figures the officer concluded that the appellant had a net profit of US $382 from the sale of the gardens, rather than the loss of US $68,405 claimed.

The appellant contested the officer’s computation. The Appellate Assistant Commissioner affirmed the officer’s order, and the Income‑Tax Appellate Tribunal subsequently upheld the same view. The appellant then filed an application to the Tribunal under section 66(1) of the Income‑Tax Act, seeking a declaration of a case and a reference of the legal question arising from the Tribunal’s order to the High Court. The specific question posed was whether, on the facts and circumstances of the case, the disallowance of the loss of US $68,405 and the computation of a profit of US $382 were legally valid.

In this matter the appellant sought a declaration from the Appellate Tribunal that, given the facts of the case, the refusal to allow a loss of $67,764 as claimed and the calculation of a profit of $382 were legally correct. The Tribunal rejected that application. Consequently the appellant filed a petition in the High Court under section 66 of the Income‑tax Act, requesting an order that would compel the Tribunal to state a case and refer the legal question arising from its order. The High Court, relying on the precedent set in S.L.N. Sathappa Chettiar v. Commissioner of Income‑tax, Madras (1959) 35 I.T.R. 641, dismissed the appellant’s petition. The dismissal of the High Court’s order gave rise to the present appeal. The counsel representing the appellant presented two principal submissions. First, he argued that the conversion table contained in the schedule to the Debtor and Creditor (Occupation Period) Ordinance, 1948, of Malaya—hereinafter referred to as the Ordinance—was intended solely to determine the rights and liabilities of debtors and creditors during the occupation period and was not meant to supply conversion rates for any other purpose. Accordingly, he maintained that using the rates in that schedule to reduce the cost of the properties in dispute was improper. Second, the counsel asserted that the appellant had kept regular accounts for every year, including the period of Japanese occupation, and that the original acquisition costs of the three properties had been recorded in the business balance‑sheets for all those years. He emphasized that the Department had never permitted any loss resulting from a revaluation of those assets by scaling down their values in any earlier year, and therefore there was no justification for a deviation in the year of account. He further contended that if both the purchase and the sale of the properties had been made in the same currency, the effect of inflation or deflation would be immaterial in determining profit. However, he observed that in the present case the properties were bought in Japanese currency and sold in Malayan currency, making it impossible to determine profit or loss without first establishing an exchange or conversion rate. He argued that a common standard was required because the two currencies, although both circulating in the same country at different times, were essentially different. The extraordinary circumstance of two concurrent currencies during the occupation, or the purchase of a property in Japanese money during enemy occupation and its subsequent sale in Malayan money after the occupation ended, could not be compared with ordinary fluctuations in a nation’s currency. Unless the purchase price expressed in Japanese currency were converted into Malayan currency, the true profit earned by the assessee could not be ascertained. The counsel noted that the Income‑tax Officer had performed precisely this conversion, and, in the Court’s view,

In this matter, the Court observed that the approach adopted by the Income‑tax Officer represented the only correct basis for determining the profit. The Court rejected the proposition that the Officer had applied the Ordinance itself to compute the profit in the present case. It noted that the scheme and the details of the Ordinance had already been examined by the Court in civil Appeals numbered 55 of 1962 and others. The Ordinance, the Court explained, had been enacted for the purpose of scaling down the payments that debtors made to creditors during the period of enemy occupation. A Schedule had been appended to that Ordinance and it contained a table showing the conversion of the depreciated Japanese currency into Malayan currency. Although the Ordinance did not directly address the scaling down of the cost price of property purchased in Japanese currency, the Court held that a reasonable conversion rate was necessary to ascertain the real profit, as it had previously stated. The only material available to the Income‑tax Officer for this purpose was the Schedule attached to the Ordinance. The Court observed that, although the Schedule was appended to legislation that was intended for a different purpose, it resulted from a careful inquiry carried out by the appropriate and responsible authorities in Malaya. Consequently, the Court found that the Officer was justified in using that Schedule to determine the cost price of properties that had been bought in Japanese currency and later sold in Malayan currency. The Court further held that the fact that the Officer had employed a different method in earlier years, as shown by material placed before the Court, did not prevent him from adopting the correct method for the assessment year that was under consideration. The issues presented to the Court were the same as those decided by the Madras High Court in S.L.N. Sathappa Chettiar v. Commissioner of Income‑tax, Madras. In that case, as here, the assessee—who operated a money‑lending business, had its head office in India and maintained a branch in the Federated Malaya States—had purchased certain properties during the enemy occupation of Malaya and had sold them after the occupation ended, receiving payment in Malayan currency. To determine the profits arising from those sales for the assessment year 1952‑53, the Department valued the cost of the properties in Malayan currency by applying the Schedule appended to the Ordinance. The assessee argued that the cost price should be taken at the figure accepted by the Department under the Government scheme. The High Court rejected that contention and held that, in order to ascertain the genuine profits, the Department was correct in computing the cost price in Malayan currency in accordance with the Schedule. The Court quoted the High Court’s reasoning at page 649, stating that the purchase had been paid for in Japanese currency, the sale price was realized in Malayan currency, there was no parity between the two currencies at the date of purchase, and the Japanese currency had ceased to be in use by the date of sale; therefore, a common standard was required to compute profit or loss when property was bought in one currency and sold in another.

In the present case the property had been bought using Japanese currency and later sold for consideration in Malayan currency. The Court observed that when a transaction involves two different currencies it is essential to apply a single, uniform standard for conversion. Accordingly, the purchase price had to be expressed in the same currency in which the sale took place, namely Malayan currency, so that the profit or loss could be measured on a consistent basis. The Court described this approach as a logical requirement and noted that it was the method adopted by the High Court. The judgment of the High Court was characterized as “unexceptionable,” meaning that it was without fault and wholly acceptable. The Court further stated that this principle exactly matched its own view of the matter, confirming that the conversion of the purchase price into Malayan currency was the proper method for determining the taxable profit.

The discussion then turned to the second argument, which was referenced in the citation second (1) (1959) 35 T.R. 641. That argument suggested that the schedule attached to the Ordinance should be applied only to the reduction of indebtedness and not to the valuation of assets. The learned judges rejected this contention and, quoting at length from the record, explained that the Report of the Select Committee that preceded the enactment of the Malayan Ordinance had been incorporated into the case file. The report demonstrated that the Committee had undertaken a thorough effort to determine the value of the Japanese currency in relation to the Malayan currency for every stage of the occupation. Moreover, the judges observed that the assessee had never proposed any alternative method of conversion at any time during the proceedings. Consequently, the Court found no error on the part of the Department or the Tribunal in using the conversion table provided in the Schedule to the Malayan Ordinance. The Court concurred with the High Court’s reasoning, affirmed that the conversion method was appropriate, and consequently held that the appeal could not succeed. As a result, the appeal was dismissed, and the parties were ordered to bear the costs of the proceeding.