TMI Blog1985 (9) TMI 52X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee. The facts that are set out are in relation to the second question. The assessment years involved are 1967-68 to 1971-72. The method of accounting followed by the assessee is the mercantile system. The head office of the IBM World Trade Corporation is at New York. It has branches all over the world, including one in India which is " the assessee ". It is an admitted position that the assessee was required to pay to the head office in U.S. Dollars its share of "administrative and overhead expenses " incurred by the head office. The liability of the assessee to pay its share of administrative and overhead expenses to the head office has been considered by the Income-tax Officer year after year to be allowable revenue expenditure. Although this allowance had been granted from year to year, the assessee had not been able to remit to the head office the amounts due on this account for the Reserve Bank's permission therefor had not been obtained. This was because the assessee's income-tax assessments were not completed. On June 6, 1966, the amount on account of administrative and overhead expenses unremitted to the head office and standing to its credit amounted to U.S. $16 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a capital asset, as was argued on behalf of the Revenue. Mr. Jetly, learned counsel for the Revenue, submitted that the unremitted head office expenses, which had been allowed from year to year as revenue expenditure and which were held by the assessee on behalf of the head office, were held as part of its capital; that the loss at the time when these expenses were actually remitted was a capital loss and not revenue loss; that the unremitted head office expenses did not form part of the circulating capital of the assessee but were in the nature of a capital asset and that the loss suffered by the assessee towards increased liability on account of devaluation was, therefore, a capital loss and not a loss incurred in the carrying on of its business; and that the unremitted head office expenses were in the nature of a debt and the liability was of capital nature. Alternatively, it was urged by Mr. Jetly that the increased liability caused by devaluation could not be treated as a trading or revenue loss but as a capital loss. Great emphasis was laid by Mr. Jetly upon the decision of the Supreme Court in Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1. The appellants before the Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the foreign currency was held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. If, on the other hand, the foreign currency was held as a capital asset or as fixed capital, such profit or loss would be of a capital nature. On the facts of the case before the Supreme Court, the question whether the loss suffered by the appellants was a trading loss or a capital loss could not be answered, unless it was first determined whether the amounts had been held by the appellants on capital account or on Revenue account or, to put it differently, as part of fixed capital or of circulating capital. The Supreme Court, therefore, ordered that the matter should go back to the Tribunal to make a report on whether the sums were held by the appellants in West Pakistan as a capital asset or as a trading asset or, in other words, as part of fixed capital or part of circulating capital in the business. The facts in the Supreme Court case were different from those before us, in that, there, it was the appellants themselves who held the foreign currency in West Pakistan. There was no material to show whether it had been so held as par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir claims. The question was whether the profit thus made by the company was assessable to income-tax. The Special Commissioners found that the assessee was free to use the moneys for the time being in its hands for investment as part of its fixed capital and did, in fact, so use them. On these facts, the Court of Appeal observed that the agents' deposits were not trade receipts bat were anterior to the stage of trade receipts and that the excess amount was not a trading profit but was the equivalent of an appreciation in a capital asset not forming part of the assets employed as circulating capital in the trade. In CIT v. Tata Locomotive and Engineering Co. Ltd. [1966] 60 ITR 405 (SC), the assessee had to make purchases of plant and machinery in the U.S.A. and had remitted to its agent there a certain sum for purchasing capital goods and other expenses. As selling agents of an American company, the assessee had earned the amount of $36,123. With the sanction of the exchange control authorities, this amount was retained with the assessee's agent in the U.S.A. for the purchase of capital goods. The pound sterling, and, with it, the Indian rupee, was devalued on September 16, 1949, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . have been treated by the Revenue as different units. The liability of the assessee to pay its share of administrative and overhead expenses of the head office has, year after year, been recognised by the Revenue to be revenue expenditure. Remittances in respect of these annual liabilities were not made by the assessee for lack of the Reserve Bank's sanction. By the time the remittances could be made, devaluation had been effected and to meet the same liability in U.S. dollars, more Indian rupees were required. The excess in Indian rupees in the year in which the remittance was made was as much a trading liability as the amounts in Indian rupees required earlier and allowed as revenue expenditure. Nothing had transpired till the time of the remittance to change the character of the assessee's liability to the head office. The trading liability remained a trading liability. In the view we take, which is supported by the decision of the Calcutta High Court, we find that the Tribunal was right in holding that the devaluation loss of Rs. 42,44,932 was an allowable revenue loss. We answer the questions thus; Question No. 1 : In the negative and in favour of the assessee. Questi ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
