Income Tax Rule 115 – Income Received in Foreign Currency
Extract of Rule 115 of Income Tax Rules, 1962:
[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 heads “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;
(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).]
Income Tax Rule 115 deals with situation where a person has earned income in foreign currency. This income can accrue and can be received in India or out side India, but if that income is taxable in the hands of recipient then this provision has to be applied.
Now a days when we are in a global environment earning in foreign currency is a common phenomenon – person employed in India go abroad and earn Salary income there which is taxable in their hands, Indian Businessman accepts foreign exchange for sale in India and abroad. This global world was not in existence when rule was amended in 1977 (effective since 1.11.1977).
This has been held in CIT Vs. Chowgule & Co Ltd. (1996) 218 ITR 384 (SC) that rule 115 is to be applied only in cases when income is received in foreign currency – It was sited that Commissioner of Income Tax came on a wrong conclusion that the assessment was erroneous and prejudicial to the interest of the revenue. In the facts of the case, there was no question of invoking Rule 115, The sale proceeds of the goods exported by the assessee were credited to their bank account in Indian rupees. There is no dispute that the amounts which were outstanding and receivable by the assessee on the last day of the accounting year from the foreign buyers had to be converted into Indian rupees at the rate of exchange prevalent on the last day .
Commissioner Of Income Tax vs E. R. Squibb & Sons Inc,[ (1999) 152 CTR Bom 89] The income accrued to the assessee when the sale of shares took place in India in Indian currency – while computing the capital gain one has to reduce the cost of shares from the sale proceeds in Indian currency. This is not a case for application of rule 115 – as the income earned by the assessee was in Indian currency and the said amount was subsequently converted into US Dollars for remittance. The price was fixed in Indian currency with the approval of the Reserve Bank of India. The approval granted by the RBI was for a transaction in Indian currency. Thus, Bombay High Court rightly held that the Income Tax Officer and the Commissioner (Appeals) were right in overruling the assessee’s submission for application of rule 115 and the Tribunal committed an error in accepting the assessee’s submission and applying rule 115 to the present case.