TMI Blog1981 (5) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... lculated with reference to the credit balance of the head office with the Indian branch and represented the difference between dinars and Indian rupee on conversion as on the 5th May, 1966, and the 6th June, 1966. In the assessment, this deduction was considered by the ITO, who was of the view that the loss debitable to the head office could be claimed only at the time when the circulating capital was remitted from India to Yugoslavia and that as the remittances of the amounts due to the head office were made during January and March, 1968, the loss could not be considered in the assessment for the year 1967-68. Therefore, we have a finding which does not seem to have been altered by the Tribunal that the amount due to the head office from the Calcutta office was remitted in January to March, 1968, that is, beyond or subsequent to the relevant assessment year. The ITO was also of the view that the projects having been completed before the devaluation, there could be no expenses in respect of which the devaluation loss could be claimed and that the expenses subsequent to the devaluation would be debited at the next rate of exchange and there would be no question of devaluation loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad office. In other words, its funds in terms of dinars have been depleted by reason of the devaluation of the rupee. If the assessee should make up that deficit it cannot but transfer an amount equal to the reduction in value from out of its profits. The assessing authorities have made a point that the assessee is one single legal entity and its head office and branches cannot be considered separately. But they have failed to push the logic to the right conclusion. The assessee being one entity, it is not possible to keep in mind (sic) its funds in rupees and ignore its funds valued in dinars at the head office accounts. It has to be viewed as a foreigner having funds from Yugoslavia for use in Indian business converted in rupees for the business but eventually to be accounted for at all material times in dinars. Viewed in that light it cannot be gainsaid that there was a reduction in the value of the funds held by the assessee in India and that amounts to a loss on account of devaluation." Thereafter the Tribunal discussed the various authorities and also noted that the assessee had retained the circulating capital employed in the relevant projects after the completion of those ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to him shall not again be so included on the basis that it is received or deemed to be received by him in India. " It has to be borne in mind as indicated before that Expln. 1 clarifies that the income accruing or arising outside India shall not be deemed to be received in India within the meaning of the section by reason only of the fact that it was taken into the balance-sheet prepared in India. Now, it is apparent from the facts found by the Tribunal that there was devaluation on a particular date falling within the relevant assessment year with which we are concerned, namely, 1967-1968. As a result of such devaluation the value of dinars which was originally brought, from Yugoslavia was depleted. This amount which had been brought from Yugoslavia for use in the business of the assessee represented circulating capital. This point is also not in dispute. It is also relevant that for assessment in India, in computing the income, the loss has to be taken into account and such loss has to be computed by taking into consideration the value of the stock-in-trade as well as the circulating capital. But the question here is, when such circulating capital is employed in the business i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Regulations, 1939, of England, to sell its surplus dollars to the Treasury and owing to the rise, which had occurred in the dollar exchange, the sale resulted in a profit for the company. This profit was included in the assessment upon the company to income-tax under Schedule D, Case I, and to the national defence contribution of England. On appeal to the Special Commissioners, the assessee had contended that in the events which had happened, the profit was a realised appreciation of a temporary investment in foreign currency and not profit of its trade. The Commissioners, found that the profit from the sale of dollars to the Treasury had been correctly brought into the computation of the profits of the company's trade, and dismissed the appeal. It was held that the profit made by the assessee on the compulsory sale of surplus dollars to the Treasury must be included in the computation of the profits of its trade for income-tax and national defence contribution purposes. It has to be borne in mind that in this case the appreciation had been brought to tax in the, year in which the conversion took place. In the said decision, at p. 300, Lord Greene M.R. observed as follows: " We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng profit should be regarded as income, whereas if the sale were a compulsory one the resulting profit would be capital. That is a distinction which, in my opinion, cannot, possibly be made. To reduce the matter to its simplest elements a the appellant, company has sold a surplus stock of dollars which it had acquired for the purpose of effecting a transaction on revenue account. If the transaction is regarded in that light, it seems to me it is precisely on all fours with the case of any trader who, having acquired commodities for the purpose of carrying out a contract, which falls under the head of revenue for the purpose of assessment under Schedule D. Case I, then finds that he has bought more than he ultimately needs and proceeds to sell the surplus. In that case it could not be suggested that the profit so made was anything but income it had an income character impressed upon it from the very first. " In the instant case, however, we are not really concerned with this question. Our attention was drawn to the decision in the case of CIT v. Mogul Line Ltd., [1962] 46 ITR 590, where the Division Bench of the Bombay High Court observed that if foreign fund of the assessee w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the money was lying idle in the Karachi branch and was not utilised in any banking operation even within Pakistan. The State Bank of Pakistan granted permission oil July 1, 1953, and two days later the bank remitted the amount to India and, in view of the difference in values of the currencies, made a profit of Rs. 1,73,817. The question was whether the amount was revenue receipt. It was held by the Supreme Court on the facts that appreciation of money did not arise in the course of trading operation. Assuming that the amount of Rs. 3,97,221 was originally stock-in-trade, when it was blocked and sterilised and the bank was unable to deal with that amount, it ceased to be its stock-in-trade and the increase in its value owing to exchange fluctuation was a capital receipt. By virtue of exchange operations, according to the Supreme Court, profits made during the course of business and in connection with the business transactions, the excess receipts on account of conversion of one currency into another would be revenue receipts. But the Supreme Court pointed out that if the profit by exchange operations came in, not by way of business of the assessee, the profit would be capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Court, valuation of unsold stock at the close of an accounting period was a necessary part of the process of determining the trading results of that period, and could in no sense be regarded as the " source " of such profits. Now, could the place where such valuation was made be regarded as the situs of their accrual ? The source of the profits and gains of a business was indubitably the business and the place of their accrual was where the business was carried on. As such profits could be correctly ascertained according to the method adopted by an assessee only after bringing into the trading account his closing stock wherever it might exist, the whole of the profits must be taken to accrue or arise at the place of carrying on the business. In that case the assessee, a registered firm consisting of two partners and carrying on business in Calcutta as bullion merchants dealing mainly in silver, kept its books on the mercantile basis. In the relevant year of account some bars of silver were sent to the Indian State of Bikaner where the partners resided and their value at cost was credited in the assessee's books. In the assessment of the assessee it was alleged that the silver ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d but remained part of the unsold stock of the firm's business at the end of the accounting year, the whole of the profits of that year must be taken to have accrued or arisen at Calcutta where the business was carried on, no part of that business having admittedly been transacted at Bikaner. " Learned advocate for the Revenue sought to draw support for his theory that it was only on conversion that a profit or less could be said to arise and, as, in this case, there was no finding that there was any conversion in the year or any loss had accrued as a result of conversion, there was no revenue loss in the year in question. Our attention was also drawn to the decision in the case of Badridas Daga v. CIT [1958] 34 ITR 10 (SC). It is not necessary to discuss the said decision in detail. It has already been discussed in several decisions. Learned advocate for the revenue drew our attention to the observations of the court at pp. 15-16 of the report to the following effect: " These being the governing principles, in deciding whether loss resulting from embezzlement by an employee in a business is admissible as a deduction under section 10(1) what has to be considered is whether it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rely agree with what the Master of the Rolls has said, that for practical purposes, so far as the present claims are concerned, it would have made little difference if the contract had provided for payment in sterling, for the simple reason that the loss in respect of which the English company is asking for relief under the Act of 1923 was a loss entirely due to its inability to find the necessary cash to make the payments to the American company on the dates when they fell due. There was a sudden fall in the purchasing power of the pounds sterling after this country went off gold in September, 1931. That would not of itself have caused any loss to the English company if the English company had been in a position to buy dollars on the due dates for making its remittances, since the contract provided for loss on exchange up to that point resting with the American company, and only after that point with the English company. That is true equally of the agreement of the 20th August and of the letter of the 14th August. In either case the due date of payment was the dividing line. The facts of the case are that the English company had no sufficient cash to make the earlier payments due ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estion of conversion. Sometimes the conversion takes place later on. At what point of time the profit should be computed and to which year would that profit or loss be attributed, that aspect the Supreme Court has not clarified. The second aspect that requires consideration and upon which stress was laid in this case was that where a profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency, then such profit should be attributable either to capital or revenue, if the amount was held either as capital or as revenue. Now, in so far as it held that merely the character of the asset would be decisive this aspect of the decision, in our opinion, with great respect, runs counter to the ratio of the decision of the Supreme Court in the case of Canara Bank [1967] 63 ITR 328 (SC), where the exact point was in dispute and the relevant passage we have quoted hereinbefore. We must hesitate to observe that this observation of the Supreme Court in the subsequent case was an observation of a general nature and was not necessary for the purpose of determining the actual point involved before the Supreme Court. The point involved before the Sup ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
