TMI Blog1961 (9) TMI 65X X X X Extracts X X X X X X X X Extracts X X X X ..... 1950, the company got special permission to remit all earnings after May, 1950, to India. The balance standing to the credit of the assessee's account in the agency books amounted to a sum of Rs. 7,33,794 as on April 30, 1950. As Indian rupee was devalued, the assessee company ascertained that the value in Indian rupee would have to be increased by a sum of Rs. 3,22,869 in the Bombay books. This amount was credited by the assessee to an account styled as Pakistan Exchange Suspense Account. In the balance-sheet for the year ending Decem ber 31, 1950, the assessee company showed the value of its assets in Pakistan in Indian currency and the sum of Rs. 3,22,869 in the Pakistan Exchange Suspense Account on the liability side. 4. In the year of account, the Pakistan authorities ascertained the assessee company's liability to tax at Rs. 2,52,799 (Pakistan rupees). We were told that this liability related to a number of earlier assessment years. The equivalent of this amount in the Indian rupee was a sum of Rs. 17,79,793. The assessee paid this amount, but debited only a sum of Rs. 12,52,799 to the taxation account. The balance of Rs. 5,26,994 was debited to the Pakistan Exchange Suspen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he held that it could not be taxed as no remittance as such had come to India. The addition made of Rs. 3,22,869 was, therefore, directed to be deleted. 7. The assessee accepted the finding of the Appellate Assistant Commissioner in respect of the add back of Rs. 2,04,124. The depart ment, however, came up in appeal to the Tribunal and urged that the Appellate Assistant Commissioner erred in holding that the sum of Rs. 3,22,869 was not profit of the assessee and taxable in the year of account. The assessee contended that as a result of the devaluation, no profit accrued to the assessee and the sum of Rs. 3,22,869 credited to the Pakistan Exchange Suspense Account was not liable to tax. In the alternative it was contended that it was not profit of the year relevant to the accounting year under reference. 8. The Tribunal accepted the department's stand that as a result of the devaluation of the Indian currency, profit could have accrued to the assessee. In terms of the Indian money, a foreign asset had increased in value. In the opinion of the Tribunal, however, it was necessary to ascertain the assets and liabilities in Pakistan as on the date of the devaluation. According to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment year 1952-53 ? (3) If the above questions are answered in the affirmative, whether the said sum of Rs. 3,22,869 was liable to be taxed without ascertaining the assessee's liability to tax in Pakistan on the date of devaluation and without deducting such liability from the said amount of Rs. 3,22,869? (4) Whether the Tribunal erred in law or acted without evidence in holding that there was any realisation of the alleged appreciation of the Karachi rupees ? (5) Having taken the Pakistan tax liability only at Rs. 12,52,799 for the purpose of double taxation relief, was it open to the department to take the amount of the said Pakistan tax liability at Rs. 17,79,793 in Indian currency for the purposes of computing profits ? " We think that the question referred by the Tribunal brings out the point in issue clearly. 13. A copy of the miscellaneous application dated February 11, 1958, filed by the department and a copy of the order of the Tribunal thereon dated April 23, 1958, are made a part of the case at the special request of the assessee and are annexures " B " and " C " respectively. 14. Copies of orders of the Appellate Assistant Commissioner an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be increased by a sum of Rs. 3,22,869 in the Bombay books in terms of the Indian currency. It credited this amount to an account styled as "Pakistan Exchange Suspense Account", and in its balance-sheet for the year ending 31st December, 1950, it showed the value of its assets in Indian rupees, and the sum of Rs, 3,22,869 in the Pakistan Exchange Suspense Account was shown on the liability side. In the year of account, which was the year ending with 31st December, 1951, the Pakistan authorities determined the company's liability to tax for the assessment years 1947-48, 1948-49 and 1949-50 at Rs. 12,52,799 (Pakistan rupees). This amount was equivalent to Rs. 17,79,793 in Indian coin. The company, in its accounts, debited a sum of Rs. 12,52,799 to the taxation account and debited the balance of Rs. 5,26,994 to the Pakistan Exchange Suspense Account, in which there was a credit balance of Rs. 3,22,869 brought forward from the preceding year. There was, therefore, a resulting debit balance to the extent of Rs. 2,04,124 in the Pakistan Exchange Suspense Account, which was written off by the assessee in its profit and loss account for the year under reference. In assessing the company's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of devaluation in order to find out what part of the appreciation of its fund in Pakistan can be regarded as profit on exchange fluctuation. If there was a liability in Pakistan equal to the sum standing to the credit of the assessee's account in Pakistan books no profit could possibly accrue to the assessee. Profit would only accrue to the assessee if there was an excess of assets over liabilities in Pakistan at the material time and, according to the Tribunal, therefore, it was necessary to determine that position in order to determine the profit on devaluation. It therefore directed the Income-tax Officer that he should ascertain whether the tax paid to Pakistan related to a period prior to the devaluation of the currency, and if that was so, such payment should be taken out from the credit balance lying to the assessee's account with its agents at the time of the devaluation, and profit on devaluation of the currency should be only taken in respect of the excess of the credit balance in the books of the agents over the liabilities payable by the assessee company in Pakistan at the material time. In the view that the Tribunal took of the matter, it allowed the appeal and directe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pakistan Exchange Suspense Account. The asset was not then remitted to India, nor was it utilised in that year. The entry in the accounts, therefore, was a book entry and that was the explanation which the assessee gave to the Income-tax Officer in the assessment of that year, and stated that if nay amount out of the balance was allowed to be remitted to India, profit on the same would be declared for the year in which the remittance was made. In the accounting year, which was the year ending 31st December, 1951, the Pakistan authorities determined the liability of the assessee at Rs. 12,52,799 (Pakistan rupees) and the assessee paid the same. In making that payment, the assessee utilised the appreciated asset and thus realised the appreciation. The tax paid in Pakistan amounted to Rs. 17,79,793 in terms of Indian coin. In the accounts for the year ending 31st December, 1951, the payment was accounted by the assessee by debiting Rs. 12,52,799 to the taxation account and the balance in the Pakistan Exchange Suspense Account. The debit in that account was off-set against the credit carried forward from the preceding year, and the net result was written off in the profit and loss acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent case, the fund was utilised for the payment of income-tax which was not a business operation. Mr. Palkhivala has argued that the payment of income-tax is merely a payment to the Government of its due share of the profit of the assessee. The assessee paid the said share of its profits, which was due to the Pakistan State, out of its Pakistan income in terms of Pakistan rupee. The payment of the Pakistan fund held by the assessee to the income-tax authorities, therefore, cannot be said to be an operation either of a factual or constructive conversion of the currency of one country into the currency of another country and, moreover, no trading or business operation was involved in the said payment. Now, it is not altogether impossible that even in a case where fund available in Pakistan has been utilised for the payment of a tax liability to the Pakistan Government, there may be an accrual of a profit on exchange differences. Thus, for instance, if, instead of the present fund lying with the assessee at Karachi, it was in the nature of a debt payable by a Pakistan debtor to the assessee in the course of its trade, and the assessee were to realise the said debt in Pakistan and ut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the values as a result of the rupee having been devalued, he made entries in his books of account to show the difference. The entry for the year 1950 which showed a credit of Rs. 3,22,869 in the Pakistan Exchange Suspense Account was not the entry of a profit realised by him. It was also not regarded as the entry of the profit realised by him even on the mercantile system of accounts maintained by him during that year, by the Income-tax Officer in the assessment of that year. If in was an entry of the profit accrued, then Mr. Palkhivala says, the profit had accrued not in the year of account but in the previous year, and even on that ground it would be not taxable in the year of account. The true position of that entry, according to us, was that it was merely a book entry showing the potential appreciation of the Pakistan asset in terms of Indian rupees. The entry for the next year also, showing the debit balance to the Pakistan Exchange Suspense Account, is an entry made to account for the differences in the amount of the Pakistan tax paid in terms of Indian rupees. It is true that in taking the net result of the debit and the credit entries to the profit and loss account, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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