1978 (3) TMI 38 - HC - Income Tax

Accounting Year Business Income Foreign Exchange Indian Company Mercantile System Profit Due To Devaluation Trading Receipt

Summary

Issues Involved:
1. Whether the profit of Rs. 1,95,883 accrued to the assessee on account of devaluation of Indian rupee was business income.
2. Whether the profit of Rs. 1,95,883 on account of devaluation of Indian rupee did not accrue or arise to the assessee on 3rd November, 1964, when the assessee actually adjusted its account.

Detailed Analysis:

Issue 1: Nature of the Profit as Business Income
The Tribunal held that the amount initially due to the assessee from K. A. Export Corporation, New York, was on account of commission, thereby categorizing it as a business receipt. This character was retained throughout until the final adjustment. The devaluation of the Indian rupee before the receipt of the amount in India transformed the surplus into a revenue receipt, constituting a trading profit. This decision was supported by various precedents, including Hindustan Aircraft Ltd. v. CIT, where appreciation in foreign currency held for business purposes was treated as business income. The Tribunal's conclusion was that the surplus arose in the course of the assessee's trade and thus constituted a trading profit.

Issue 2: Timing of Accrual of the Profit
The Tribunal further held that the income accrued to the assessee on 1st February 1963, when the Reserve Bank of India sanctioned the necessary adjustments, and not on 3rd November 1964, when the actual adjustment took place. This was based on the principle that accrual happens when the right to receive the income is established, not necessarily when it is recorded in the books. The Tribunal relied on the fact that the assessee's accounts were kept on a mercantile basis, meaning income should be recognized when it is earned rather than when it is received.

Conclusion:
The High Court affirmed the Tribunal's findings on both issues. It held that the surplus arising from the devaluation was indeed a business income, as it was part of the circulating capital used in the assessee's business operations. The Court also agreed that the surplus accrued at the time of devaluation and not at the subsequent adjustment of accounts. The Tribunal was directed to ascertain the exact amount of foreign exchange receivable by the assessee on the date of devaluation and calculate the surplus accordingly. The Court emphasized that the way an accrual is shown in the accounts is of little consequence; what matters is when the income actually arises or accrues.

Both questions were answered in favor of the revenue, with the Tribunal instructed to compute the profit based on the total amount of dollars receivable by the assessee on the date of devaluation. There was no order as to costs.