Pr. Al. M. M. Annamalai Chettiar Vs.
Commissioner of Income-Tax, Madras  INSC 236 (26 October 1964)
26/10/1964 SUBBARAO, K.
CITATION: 1965 AIR 1210 1965 SCR (1) 827
Income Tax-Purchase and sale of Property in
Malaya-Purchase in Japanese currency and sale in Malayan Currency-Method of
computing profit and loss.
The assessee whose head office was in India
was also carrying on business in the Federated Malaya States. In respect of the
assessment year 1951-52, the assessee claimed that a loss was incurred as a
result of the sale of house properties and rubber gardens. Those properties
were purchassed 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
Period) Ordinance, 1948, of the Federated Malaya States. The result was that
the assessee was shown to have made a profit instead 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.
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-B] 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 cost price was enacted for the purpose of scaling down
payments made by debtors to creditors during the occupation period-still, it
was the result of a careful enquiry made by appropriate and responsible
authorities in Malaya. Even if he bad 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] S. L. N. Sathappa Chettiar v.
Commissioner of Incometax, Madras, (1959) 35 I.T.R. 641, approved.
CIVIL APPELLATE JURISDICTION : Civil Appeal
No. 131 of 1963.
Appeal by special leave from the order dated
July 31, 1961 of the Madras High Court in Tax Case Petition No. 44 of 1961.
K. Srinivasan and R. Gopalakrishnan, for the
C. K. Daphtary, Attorney-General, S. V.
Gupte, SolicitorGeneral, N. D. Karkhanis, R. H. Dhebar and R. N. Sachthey, for
828 The Judgment of the Court was delivered
by 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.
The appellant is a Hindu undivided family
carrying on business with its head office at Pageneri in Ramanathapuram
District, 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 at Paritpuntar the appellant
claimed an aggregate loss of $ 68,405 incurred on the sale of house property
and rubber gardens as detailed below
---------------------------------------------------------SI No. Date of
Purchase Cost price Sale price (in dollars)
1. 28 of Ani, Angirasa 14 Silama House. 500
2. 28 Ani, Angirasa-No. 20 Silama House. 4154
3. 23rd Avani, Angirasa-No. 23 Silama House.
4. 5th Avani, Subhanu-(21-8-43) Siradan
House. 25453 7000
5. 24th Avani, Tharana (15-9-44)-38 Garden. 536865880
6. 8th Purattasai Tharana (23-9-44)-35
Garden. 26681164 TOTAL 88294 19880
-----------------------------------------------------------In respect of items
Nos. 1, 2 and 3 above the Income-tax Officer accepted the claim of the
appellant, but in regard to the remaining 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 last 3 items of the property were worked out by him as under 829
-----------------------------------------------------------Purchase Scaled S.
No. Sale of price in down Sale Profit Loss property occupation value of amount
currency purchase price
------------------------------------------------------------$ $ $ $ $
1. Siradan House 25453 9000 7000 2000
2. 38 Garden 53686 3830 5880 2050
3. 35 Garden 2668 190 1164 974 ------------------------------------------------------------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
appellant. On appeal, the Appellate 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 Income-tax 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 "Whether on the facts and in the circumstances
of the case the disallowance of the loss of $67,764 as claimed and the
computation of the profit at $382 is valid in law." The Appellate Tribunal
rejected the application. Thereupon, the: appellant moved the High Court under
s. 66(2) of the Income-tax Act praying for an order directing the Appellate
Tribunal to, state a case and refer the question of law arising out of its
order. The High Court, following the decision in S.L.N. Sathappa Chettiar v.
Commissioner of Income-tax, Madras(1), dismissed the application. Hence the
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, 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 for all the years including the
Japanese occupation period; the original cost of acquisition of the 3
properties was adopted for the (1) (1959) 35 I.T.R. 641.
830 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 earlier years by the Department;
and, therefore, there was no justification for a departure in the year of
He also contended that if the properties were
purchased 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 'possible to ascertain the profit or loss unless the exchange
or conversion rate 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 purchased during the enemy
occupation period in Japanese currency and sold in Malayan currency after the
vacation of the enemy occupation cannot be equated with fluctuations in the
value of a nation's currency. Unless the cost price expressed in Japanese
currency is computed in terms of the Malayan currency, it is not possible to
arrive at the real profit accrued to the assessee. That is exactly what the
Income-tax Officer did and. in our view that is the only correct basis.
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 1962 etc. The Ordinance was enacted for the purpose
of scaling down the payments made by debtors to creditors during the occupation
period. A Schedule was appended to the Ordinance providing a table of
conversion of the depreciated Japanese currency into Malayan currency. In terms
the Ordinance does not directly apply to the scaling 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-tax Officer was the Schedule
impended to the Ordinance. Though that Schedule 831 was appended to, the
Ordinance enacted for a different purpose, it was the result of a careful
inquiry made by the appropriate and responsible authorities 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
currency and sold in the Malayan currency. The fact that the Income-tax Officer
adopted some other method in the previous years material has been placed before
us in regard to' the method adopted by the Income-tax Officer--does not prevent
him from ascertaining the correct method for the assesment year with which we
The questions raised before us were the
subject-matter of the decision of the Madras High Court in S.L.N. Sathappa
Chettiar v. Commissioner of Income-tax, Madras(1). There, as here, the
assessee, which carried on a moneylending business and had its head office in
India and a branch in the Federated Malaya States, purchased some properties
when Malaya was under enemy occupation and sold them after the vacation of the
enemy occupation in Malayan currency. In order to ascertain the profits
resulting from the sale for the purpose of assessment of the assessee for the
year 195253 the Department valued the cost of the properties in Malayan
currency in accordance with the Schedule appended to the Ordinance. The
assessee contended that the cost price of the properties must be taken 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 reason for the conclusion is stated thus at p. 649.
"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 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 should 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." The principle adopted by the High Court
appears to be unexceptionable. It accords with our view. Adverting to the
second (1) (1959) 35 T.R. 641.
832 argument that the schedule to the
Ordinance should be confined only to the scaling down of debts, the learned Judges
pointed out at p. 650 :
"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 attempt 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 assessee at any stage. We are unable to
hold that the Department and the Tribunal were in error in adopting the
conversion table furnished in the Schedule to the Malayan Ordinance." We
also agree with this view.
In the result the appeal fails and is
dismissed with costs.