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TMI Blog1969 (6) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... nts and as the statements were received by the assessee in India the profit or loss was accounted for in the books of the assessee. The accounts used to be shown in the Indian books after converting from Pakistani currency into Indian currency at the then prevailing rate of exchange. As stated in the question referred, we are concerned with a sum of Rs. 95,148, claimed by the assessee as loss in exchange in the profit and loss account. How this amount arose is shown in the accounts of the assessee. In the year of account the assessee had to his credit in Karachi with its distributors a sum equivalent to Rs. 3,60,127 in Indian currency, but in the account year 1st October to September 30, 1955, the Government of Pakistan devalued its currency with the result that the amount which the assessee was to receive in India in terms of Indian rupees was less. In terms of Indian rupees after the devaluation of the Pakistani currency, the amount came to Rs. 2,04,955 and the assessee accordingly revalued it in its books in India. The difference between the amount as expressed in Indian currency before and after the devaluation is the amount which the assessee now claims as loss in the year of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 95,160. Depreciation in the value of an asset cannot be called a trading loss. This loss was certainly connected with the business of the appellant, but was not incidental to the appellant's business." The Appellate Assistant Commissioner also held that the amount could not be treated as a bad debt, because even if the entire amount due in Pakistan rupees was remitted to India by the Pakistan party, the loss would still be there and no part of it would be le-ally enforceable against the Pakistan party. He concluded that the amount of Rs. 95,148 (the figure of Rs. 95,160 which he has mentioned is an error) would represent the capital loss of the assessee. When the assessee went up to the Tribunal in appeal, the Tribunal reversed the decisions of the Income-tax Officer and the Appellate Assistant Commissioner, not upon the points which either of them had made in their orders but upon a wholly different point. The Tribunal looked into the accounts of the assessee and found that in the past, whenever profits were earned by or accrued to the assessee from conversion of Pakistani currency into Indian currency the assessee had offered the profits for taxation and had been actual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be the capital asset of the assessee. To this contention Mr. Mehta, on behalf of the assessee, has made a twofold answer. First and foremost Mr. Mehta has submitted that the contention on behalf of the department is wholly unjust. The department had, when the exchange ratio resulted in profits to the assessee, accepted the difference and taxed the assessee upon those profits and now when, as a result of the devaluation, the assessee has sustained a loss, the department has turned round and taken the point that this was not a business loss. The stand of the department, says counsel, is inequitable and unjust. Apart from that, counsel has urged that really the amount standing to the credit of the assessee with their distributing agents in Karachi was in the nature of business profits and treated by the assessee as either business profits or as business asset. If therefore such a business asset underwent a diminution in value the assessee could claim it as a loss in business, to the extent of the diminution. Alternatively, counsel has urged that, if relief cannot be granted under this head, then the assessee was entitled to claim it as if it were a bad debt and counsel urged that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration that, in the past, profits arising in favour of the assessee had been taxed is an irrelevant consideration upon the question arising before us. That also answers the point taken by Mr. Mehta regarding the injustice of the departmental stand. " Income-tax legislation knows nothing of hardship." The true ratio, it seems to us, is to consider the nature of the amount standing to the credit of the assessee in the books of Mehboob Pictures at Karachi. On the one hand it has been urged that it is nothing more than a capital asset. That is the stand of the department. On the other hand, it has been urged that it was in the nature of an amount of business profits or a business asset or at any rate in the nature of a debt due from a debtor to the assessee who was a creditor and that in either case if the amount underwent diminution in value, that amount was claimable by the assessee as a loss. It is no doubt true that the entire amount standing to the credit of the assessee in the books of their Pakistan agent was initially earned by the assessee as their profits from their trading in Pakistan. Perhaps, the truer position would be that part of it represented its initial outlay and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits by the assessee, which had once been assessed and borne tax, was merely lying with their distributing agent in a foreign country as an asset of the assessee. In our opinion, it cannot partake of the nature of a business asset and, on the other hand, could only be held to be an asset of a capital nature. The principle governing cases like this was adverted to in the decision of this court in Commissioner of Income-tax v. Mogul Line Ltd. At page 599, the principle was thus stated by the Division Bench (to which my learned brother was a party) : " But, in order to see whether such a profit has resulted in a given case must be determined by considering the purpose for which and the manner in which the asset has been utilised. It is undisputed that if the foreign fund is allowed to remain unused where it lies, the more circumstance that there has been a fluctuation in the currency resulting either in appreciation or depreciation of the fund in terms of the coin of another country will not result either in profit or loss to the fund-holder. If the fund is utilised in the course of trade for a trading purpose, there can be no doubt that there would be realisation of the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee that alternatively this amount should be allowed to the assessee as a deduction on account of bad debt. The contention is that Mehboob Pictures at Karachi were no more than the debtors of the assessee-company and the amount standing debited to their name in the assessee's books showed the relationship of debtor and creditor between Mehboob Pictures and the assessee and due to the devaluation of Pakistani currency that debt underwent a diminution. To the extent of the diminution, therefore, the debt became bad and was legitimately written off by the assessee. We have already referred to the two contracts which were produced on behalf of the assessee and the conclusion which the Tribunal came to as regards the two contracts is stated in the supplementary statement. They found that Mehboob Pictures, Karachi, were merely the distributing agents of the assessee. That is also not disputed before us. The relationship being that of principal and agent, there was no question, in the first place, of any debt as such being owed to the assessee. The amount was in the hands of the agent of the assessee and held by the agent for the benefit of his master or the principal. The agent admitt ..... X X X X Extracts X X X X X X X X Extracts X X X X
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