TMI Blog1978 (9) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... case, the assessee's claim for the exchange loss of ₹ 11 lakhs for the assessment year 1957-58 and ₹ 5,50,000 for the assessment year 1959-60, in respect of remittances of profit from Pakistan, was not allowable as a deduction ? Since there are two assessment years in regard to which the question arises, there are two appeals, one in respect of each assessment year, but the question is the same. We will briefly state the facts as that is necessary for the purpose of answering the question. The assessee is a limited company having its head office in Calcutta. It has, inter alia, a cotton mill situate in West Pakistan where it carries on business of manufacturing and selling cotton fabrics. This textile mill was quite a prosperous unit and in the financial year ending 31st March, 1954, being the accounting year relevant to the assessment year 1954-55, the assessee made a large profit in this unit. This profit obviously accrued to the assessee in West Pakistan and according to the official rate of exchange which was then prevalent, namely, 100 Pakistani rupees being equal to 144 Indian rupees, this profit, which may, for the sake of convenience, be referred to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, therefore, when the assessee received the sum of ₹ 25 lakhs in Indian rupees on remittance of the profit of ₹ 25 lakhs in Pakistani rupees on the basis of 100 Pakistani rupees being equal to 100 Indian rupees, the assessee suffered a loss of ₹ 11 lakhs in the process of conversion on account of appreciation of the Indian rupee qua Pakistani rupee. Similarly, on remittance of the profit of ₹ 12,50,000 in Pakistani currency the assessee suffered a loss of ₹ 5,50,000. The assessee claimed in its assessments for the assessment years 1957-58 and 1959-60, that these losses of ₹ 11 lakhs and ₹ 5,50,000 should be allowed in computing the profits from business. This claim was, however, rejected by the ITO. The assessee carried the matter in further appeal to the Tribunal but the Tribunal also sustained the disallowance of these losses and rejected the appeals. The decision of the Tribunal was assailed in a reference made at the instance of the assessee and question No.1 which we have set out above was referred by the Tribunal for the opinion of the High Court. On a reference, the High Court took substantially the same view as the Tribunal and hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of the assessee and hence it could not figure in the balance-sheet and profit and loss account. But it is now well settled that the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. The assessee may, by making entries which are not in conformity with the proper accountancy principles, conceal profit or show loss and the entries made by him cannot, therefore, be regarded as conclusive one way or the other. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee. Here, it is clear that the assessee earned ₹ 36 lakhs and ₹ 18 lakhs in terms of Indian rupees in the assessment year 1954-55 and retained them in West Pakistan in Pakistani currency and when they were subsequently remitted to India, the assessee received only ₹ 25 lakhs and ₹ 12,50,000 and thus suffered loss of ₹ 11 lakhs and ₹ 5,50,000 in the process of conversion on account of alteration in the rate of exchange. It is, therefore, not possible to accept the view of the High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at a loss. There can be little doubt that the loss in such a case would clearly be a trading loss. But the loss may also arise by reason of the stock-in-trade being stolen or burnt and such a loss, though occasioned by external agency or act of God, would equally be a trading loss. The cause which occasions the loss would be immaterial: the loss, being in respect of a trading asset, would be a trading loss. Consequently, we find it impossible to agree with the High Court that since the loss in the present case arose on account of devaluation of the Pakistani rupee and the act of devaluation was an act of sovereign power extrinsic to the business, the loss could not be said to spring from the business of the assessee. Whether the loss suffered by the assessee was a trading loss or not would depend on the answer to the question, whether the loss was in respect of a trading asset or a capital asset. In the former case, it would be a trading loss but not so in the latter. The test may also be formulated in another way by asking the question whether the loss was in respect of circulating capital or in respect of fixed capital. This is the formulation of the test which is to be found in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces in dollars were made by the appellants to the company against goods consigned and the dates when the appellants recouped themselves for the advances on the sale of the goods, a profit accrued to the appellants on the conversion of repaid advances into sterling. The question arose whether this profit formed part of the trading receipts of the appellants so as to be assessable to tax. Singleton J. held that the exchange profit arose directly in the course of the appellants' business with the company and formed part of the appellants' trading receipts for the purpose of computing their profits assessable to income-tax under Case I of Schedule D. The learned judge pointed out that (page 69) the profit which arises in the present case is a profit arising directly from the business which had to be done, because ...... the business was conducted on a dollar basis and the appellants had, therefore, to buy dollars in order to make the advances against the goods as prescribed by the agreements. The profit accrued in this case because they had to do that, thereafter as a trading concern in this country re-transferring or re-exchanging into sterling. Since the dollars were purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs have lost the revenue characteristic which attached to them when they were originally bought, and in some mysterious way have acquired a capital character. In my opinion, it does not make any difference that the contemplated purchases were stopped by the operation of Treasury or governmental orders, if that were the case; nor is the case affected by the fact that the purchase was under a Treasury requisition and was not a voluntary one. It would be a fantastic result, supposing the company had been able voluntarily, at its own free will, to sell those surplus dollars, if in that case the resulting 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, 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 ally trader who, having acquired commodities for the purpose of carrying out a contract, which falls unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of saying that they must prima facie be considered as part of the company's fixed and not of its circulating capital. As appears from what I have said above, the evidence does not show that there was anything in the company's mode of dealing with the deposits when received to displace this prima facie conclusion. In my view, therefore, the conversion of the company's balances of Chinese dollars into sterling and the subsequent re-purchase of Chinese dollars at a lower rate which enabled the company to pay off its agents' deposits at a smaller cost in sterling than the amount it had realised by converting the deposits into sterling, was not a trading profit, but it was simply the equivalent of an appreciation in a capital asset not forming part of the assets employed as circulating capital in the trade. Since the court took the view that the deposits were in the nature of fixed capital, any appreciation in their value on account of alteration in the rate of exchange would be on capital account and that is why the court held that such appreciation represented capital profit and not trading profit. That takes us to the two decisions of this court which have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to India. The repatriation of this amount at the altered rate of exchange gave rise to a surplus of ₹ 70,147 in the process of converting dollar currency into rupee currency. The question arose in the assessment of the assessee to income-tax whether that part of the surplus of ₹ 70,147, which was attributable to $ 36,123 received as commission from Baldwin Locomotive Works was a trading profit or a capital profit. The matter was carried to this court by the revenue and, in the course of the judgment delivered by Sikri J., this court pointed out that the answer to the question: ...depends on whether the act of keeping the money, i.e., $ 36,123.02, for capital purposes after obtaining the sanction of the Reserve Bank was part of or a trading transaction. If it was part of or a trading transaction then any profit that would accrue would be revenue receipt; if it was not part of or a trading transaction then the profit made would be a capital profit and not taxable. There is no doubt that the amount of $ 36,123.02 was a revenue receipt in the assessee's business of commission agency. Instead of repatriating it immediately, the assessee obtained the sanction of the R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other decision to which we must refer is the one in CIT v. Canara Bank Ltd. [1967] 63 ITR 328 (SC). The assessee in this case was a public limited company carrying on the business of banking in India and it had opened a branch in Karachi on 15th November, 1946. After the partition in 1947, the currencies of India and Pakistan continued to be at par until the devaluation of the Indian rupee on September 18, 1949. On that day, the Karachi branch of the assessee had with it a sum of ₹ 3,97,221 belonging to its head office. As Pakistan did not devalue its currency, the old parity between Indian and Pakistani rupee ceased to exist. The exchange ratio between the two countries was, however, not determined until 27th February, 1951, when it was agreed that 100 Pakistani rupees would be equivalent to 144 Indian rupees. The assessee did not carry on any business in foreign currency in Pakistan and even after it was permitted to carry on business in Pakistan currency on 3rd April, 195 1, it carried on no foreign exchange business. The amount of ₹ 3,97,221, which was lying with the Karachi branch, remained idle there and was not utilised in any banking operation even within Pakist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital nature. Now, in the present case, no finding appears to have been given by the Tribunal as to whether the sums of ₹ 25 lakhs and ₹ 12,50,000 were held by the assessee in West Pakistan on capital account or revenue account and whether they were part of fixed capital or of circulating capital embarked and adventured in the business in West Pakistan. If these two amounts were employed in the business in West Pakistan and formed part of the circulating capital of that business, the loss of ₹ 11 lakhs and ₹ 5,50,000 resulting to the assessee on remission of those two amounts to India, on account of alteration in the rate of exchange, would be a trading loss, but if, instead, these two amounts were held on capital account and were part of fixed capital, the loss would plainly be a capital loss. The question whether the loss suffered by the assessee was a trading loss or a capital loss cannot, therefore, be answered unless it is first determined whether these two amounts were held by the assessee on capital account or on revenue account or, to put it differently, as part of fixed capital or of circulating capital. We would have ordinarily, in these circumstanc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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