TMI Blog1970 (4) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of business profits tax appeals for the assessment years 1957-58 and 1959-60 were not allowable as deductions ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that law charges of Rs. 2,551 incurred for effecting changes in the existing managing agency agreement were not allowable as a deduction for the assessment year 1957-58 ? 4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that interest amounting to Rs. 5,236 paid on funds invested in shares which produced no dividend income was not allowable as a deduction for the assessment year 1957-58 ? 5. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that interest amounting to Rs. 10,671 disallowed in the assessments for the assessment years 1957-58 and 1958-59 on funds invested in shares was not allowable as a deduction in the assessment year 1959-60 ? " The assessee has not pressed questions Nos. 3 and 5 as set out above. That position is accepted by the revenue. The court, therefore, will not record an answer on either of questions Nos. 3 and 5. The facts of the case are as fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llate Assistant Commissioner disallowed the assessee's claims for losses and upheld the order of the Income-tax Officer. In further appeal before the Tribunal, the Tribunal rejected the assessee's appeals and upheld the orders of the taxing authorities. The judicial Member of the Tribunal held that there had been neither any loss nor any gain in exchange on the transfer of the amounts from Pakistan to India. In the assessee's books of account in the head office in Calcutta the profits of Pakistan had been shown in rupees and the remittance from Pakistan had also been shown in rupees, without showing any loss in the process or due to the exchange fluctuation between the Pakistan rupee and the Indian rupee. He, therefore, came to the conclusion that there was neither any loss nor any gain in exchange so far as the assessee's own books were concerned. The Tribunal found that the head office books of the assessee disclosed no loss in respect of the remittances from Pakistan. The Tribunal expressed the view that simply because the assessee's profits in Pakistan for the assessment year 1954-55 were included in the assessee's total income in the Indian assessment for that year at an enhan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Income-tax Act, 1922. The Tribunal rejected the assessee's claim on appeal and upheld the orders of rejections by the Income-tax Officer and the Appellate Assistant Commissioner. On those facts question No. 2 has been asked. The third question raises the other item of Rs. 2,551 claimed as a deduction on account of law charges for the assessment year 1957-58 and it would be unnecessary to describe the facts on the point as this question is not being pressed. The next question No. 4 raises the item of Rs. 5,236. The relevant facts appear from paragraph 7 of the statement of the case. The assessee's Jaitu branch moneys which had been borrowed were later invested in the shares of Gwalior Rayon and Silk Manufacturing Ltd., and interest amounting to Rs. 5,236 and Rs. 5,435 respectively were claimed as deductions as interest paid on such borrowings in the assessment years 1957-58 and 1958-59. The claim for these two years was disallowed on the ground that as the income from dividend was taxable under section 12 and that in these two years there was no income from such dividend the amount of interest was not allowable as a deduction for these two years. The Tribunal held that as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is, in fact, no loss suffered by the assessee for which any claim could be made. He supports this branch of his argument by the fact that the assessee does not register this loss in any of the books of the company. This loss is not shown or registered either in the profit and loss account or in the balance-sheet or in the books of account of the assessee. Therefore, it is contended for the revenue that there is, in fact, no exchange loss as such. Secondly, he invokes the proposition that each assessment year is complete and independent under the Income-tax Act and, therefore, the prevailing rate of 100 Pakistan rupees equivalent to 144 Indian rupees was rightly applied at the time for the relevant year concerned. For this purpose, Mr. Pal for the revenue relies on the two well-known decisions, one of the Privy Council and the other of the Supreme Court : Commissioner of Income-tax v. S. M. Chitnavis and Kikhabhai Premchand v. Commissioner of Income-tax . In the first case, the Privy Council laid down the proposition that in assessing the yearly profits and gains of a business for the purpose of the Indian Income-tax Act, 1922, each year was a self-contained period. Lord Russell, d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arity, i.e., hundred Pakistan rupees became equal to hundred Indian rupees. The question is : is it a business loss in connection with the business of the assessee ? Logically, the answer seems to be that it cannot be termed or called a business loss at all even if it is a loss of some other kind. We shall now proceed to examine the different decisions relevant on the point. The first case on which Dr. Pal for the assessee relied was Commissioner of Income-tax v. Canara Bank Ltd. There Ramaswami J., speaking for the Supreme Court, at page 330, points out that the question involved in that appeal is whether the profits of the bank on account of fluctuation of exchange arose in the course of trading operations of the bank or whether it was incidental to any such trading operations. He observed : " If by virtue of exchange operations profits are made during the course of business and in connection with business transactions, the excess receipts on account of conversion of one currency into another would be revenue receipts. But if the profit by exchange operations comes in, not by way of business of the bank, the profit would be capital profit. " The central fact there was that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ason of the exchange fluctuation between Lira and Pound Sterling. Rowlatt J. came to the conclusion that the sum of pounds 6,707 in that case was not a profit arising out of the contract for the supply of marble, but was merely an appreciation of a temporary investment and was not a business profit assessable to income-tax. Rowlatt J., at page 405, observed as follows : " It seems to me that this profit out of the change from currency to currency three times does not touch the question of what the profit on the contract was at all. The profit on the contract is the difference between the sum they received and what it cost them to supply the marble, and this intermediate use that was made of the sum which they happened to have because they had got this contract has nothing to do with the profits of the contract, I think, at all. It was an accident that this sum can be identified, as I have already explained, as, coming from the contract, but it has nothing to do with the profit of the contract. If that is so, what is it ? It seems to me it is the mere appreciation of an investment into which they had put their money temporarily ; an appreciation of something, if you like to look a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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. On those facts, it was held that the exchange profits arose in that case directly in the appellants' business with the company and formed part of the appellants' trading receipts and was, therefore profit taxable under the Income Tax Act. This was also not a case of devaluation by a sovereign power. In Radio Pictures Ltd. v. Commissioners of Inland Revenue, the question was whether the assessee could deduct the adverse differences in exchange in computing the profits. The court held that the assessee was entitled to the deduction. There the question was of conversion between dollar and sterling by ordinary fluctuations and not by any act of devaluation. That case also turned on the construction of the particular contract and a letter by which the English company was instructed to keep its accounts with the American company, by reference to a fixed rate of exchange, the difference between that rate and the rate prevailing at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t this was not dealing with devaluation by one State or another. Secondly, it was also a case of sale of the dollars although it was a compulsory sale to the Treasury. The other English case is Davies v. Shell Company of China Ltd. There a British company sold and distributed petroleum products in China. That company made a practice of requiring its agents to deposit with the company a sum of money in Chinese dollars which was repayable when the agency came to an end. Previously the company had left on deposit with banks in Shanghai amounts approximately equal to the agency deposits. But, because of the hostilities between China and Japan, the company transferred these sums to the United Kingdom and deposited the sterling equivalents with its parent company which acted as its banker. Owing to the subsequent depreciation of the Chinese dollar with respect to sterling, the amounts eventually required to repay agency deposits in Chinese currency were much less than the sums held by the company to meet the claims and a substantial profit accrued to the company. The company's contention was that the deposits received from its agent had been used as fixed capital and not as circulating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to buy American goods and, as the Government of India also imposed some restrictions on imports from U.S.A., the assessee with the permission of the Reserve Bank repatriated $ 49,500. This resulted in a surplus and the Income-tax Officer assessed it as a profit arising to the assessee incidental to its carrying on business. It was on those facts that the Supreme Court came to the conclusion that it was a case of capital acquisition and not profits taxable in the hands of the assessee. At page 410 of that report Sikri J., delivering the judgment of the Supreme Court, observed as follows : " A number of cases have been cited before us, but it seems to us that the answer to the questions depends on whether the act of keeping 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 agenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions of the law. It has to be noted, however, as was pointed out by the court at pages 598-99 of that report, that in that case the asset was never remitted to India at all. There was also no actual conversion of Pakistan monies into Indian rupees and no increase on conversion had actually been received by the assessee. At page 599, the court observed : " 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. " That case, therefore, on those facts, is entirely distinguishable from the present reference. It is noticeable that in the present, reference before us, it is an admitted fact that this money represented the assessee's Pakistan profits in Pakistan currency. Admittedly, therefore, such profits arose out of business in Pakistan. Admittedly also, this was a case of profit or even accumulated profits. Therefore, normally, it would be a trading profit or a revenue receipt even when it comes to a question of actual remittance to the head office after conversion into Indian currency. We cannot subscribe to the extreme proposition advanced by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss " within the meaning of section 4(3)(vii) of the Income-tax Act. The context of that case provides that the origin of this money was stamped with trading profits. Secondly, this case did not discuss section 10(1) of the Indian Income-tax Act but was concerned with the interpretation of section 4(3)(vii) of the Income-tax Act. Dr. Pal for the assessee also relied on a decision of the Division Bench of this court in Haji Hamed Haji Abdulla v. Commissioner of Income-tax. In that case, the assessee-firm had been carrying on a general import business mainly in betelnuts, spices, oils, chemicals and petroleum products. It entered into an agreement for the import of balls, roller bearings, and other allied machine parts and for that purpose made forward purchases of dollars and sterling. Eventually, the contract did not materialise and the assessee sold dollars and sterling. As a result of such sale, a net profit of Rs. 2,59,399 was made. The assessee claimed that this amount could not be taxed because (i) it was in the nature of a capital receipt and that (ii) it was a casual receipt as it did not arise out of his business. The court held that, on the facts of that case, there were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y reason of the devaluation could not be allowed as a deduction. The view that we are taking on the reasons already stated follows the principles laid down in this Bombay decision. The next case on which Mr. Pal for the revenue relied is Badridas Daga v. Commissioner of lncome-tax , a decision of the Supreme Court. This decision of the Supreme Court deals with the very section 10(1) of the Indian Income-tax Act, 1922. The importance and relevance of this case for the purpose of our decision in the instant reference can be realised when we come to analyse the ratio of that decision. In the first place, the Supreme Court here, lays down the principle that profits and gains which are liable to be taxed under section 10(1) are what are understood to be such under ordinary commercial principles. Applying that test, it would not appear to be at all a loss or a business loss in the present reference where all that has happened is that there is no actual loss but the loss of a prospect or what can be more accurately described by the assessee saying that he could have made a greater profit if the devaluation had not caused an unfavourable exchange ratio for him so that his profit had not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntal to it and is not any loss sustained by the assessee even if it had some connection with his business. In this subsequent case of Nainital Bank Ltd. , the Supreme Court came to the conclusion that on the facts of that case the trading loss of a business was deductible in computing the profit earned by the business. In other words, it is now a settled principle after this decision of the Supreme Court in Commissioner of Income-tax v. Nainital Bank Ltd. that in calculating taxable profit under section 10(1), a trading loss of a business is deductible, independently of the different allowances permitted under section 10(2) of the Income-tax Act 1922. But, then again, the Supreme Court here also emphasizes the principle laid down in Badridas Daga's case that any and every loss was not so deductible under section 10(1) of the Income-tax Act, unless it was incurred in carrying out the operation of the business and was incidental to its operation. Subba Rao J., in delivering the judgment in the Nainital Bank's case , explained the decision of the Supreme Court in Badridas Daga's case, by discussing the question raised in Nainital Bank's case whether the loss in that case fell on the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar No. 16 (XL-10) of 1953, No. 73(33)-I.T./52 dated the 8th July, 1953, and the subsequent exchange of correspondence between the Central Board of Revenue and the secretary of the Indian Chamber of Commerce dated the 22nd May, 1956, and the 2nd July, 1956. The Income-tax Officer expressed the view that a reading of this circular showed that it was irrelevant for the purpose of this question. The Appellate Assistant Commissioner also came to the same view that the circular of the Board was not applicable to the case under consideration. Apparently, before the Tribunal, nobody relied on this circular of the Central Board of Revenue and the Tribunal makes no reference to it. Now this circular of the Central Board of Revenue reads as follows : " Sub-Pakistan income arising in-Conversion into Indian rupees. The Indian currency was devalued with effect from the 19th September, 1949. In computing the total income of an assessee for any previous year ending after that date, the income arising in Pakistan should be converted into Indian rupees at the rate of Rs. 100 (Pakistan) equal to Rs 144 (Indian). Where, however, the income from Pakistan was actually remitted to India at a lower ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and context. It will be dogmatic to assert that under no circumstances exchange loss be a trading or a revenue loss which cannot be allowed in calculating the profits of a business under section 10(1) of the Indian Income-tax Act, 1922. That will be in our view too sweeping a generalisation and formulation of the law on the point. The question as the Supreme Court has said is to be determined on the basis of the calculation of the Profit under section 10(1) and in doing so the commercial concept of what a profit is should be the first and paramount consideration. A profit is a surplus basically and essentially after allowing for certain losses which again must be business losses in the sense that the loss must arise out of the business or to use the expression of the Supreme Court, " springing directly from " the business or is incidental to it. Normally, a difference is obvious in the ordinary day-to-day fluctuations of the foreign exchanges of the different currencies of the different States. That is determined by the rise and fall of prices and the demand and supply of particular foreign exchanges in question. In that sense each currency is a commodity, as some of the authori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trading agreement in trading context resulting in the profit and where the court held that, in spite of the fact that it arose out of devaluation, and, no doubt, under compulsory powers of the State, yet it was a trading profit and, therefore, taxable. That is the reason why we say that there cannot be a cut and dried formula and a dogma in this respect to say that under no circumstances an exchange loss either for devaluation or due to any other cause can ever be allowed in computing profit. Whether it will be allowed or not is to be determined by the basic tests laid down by the Supreme Court, that it is a loss which springs directly or indirectly from the business itself and/or incidental to it. For these reasons, we answer question No. 1 by saying that the assessee's claim for the exchange loss of Rs. 11,00,000 for the assessment year 1957-58 and Rs. 5,50,000 for the assessment year 1959-60 is not allowable as a deduction and we answer the question in favour of the revenue. On the 2nd question, the facts have already been set out elsewhere in this judgment. It relates to two sums of Rs. 1,170 and Rs. 3,573 in respect of law charges arising in connection with business profits ..... 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