TMI Blog1980 (9) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... facts as mentioned in the statement of case. But we will refer to certain summary of facts, because there is some suggestion by learned advocate for the assessee that the statement of case does not correctly summarise all the essential ingredients of the findings or of the facts admitted. It appears that during the year 1950, the assessee-company had received a sum of Rs. 97,01,124 from the Govt. of the U.K. by way of ex gratia grant for the rehabilitation of its war-damaged industry in Burma. This amount was credited, according to the statement of case, to its capital reserve account. Learned advocate for the assessee stresses the point that it was held as fixed assets. This reserve, subject to certain subsequent adjustments, had been permanently reflected in the company's investments in U.K. Govt. securities, B.O.C. (1954) shares and U.K. Municipal Corporation deposits. Subsequently, the company's investments in 2,01,886 shares of B.O.C. (1954) were disposed of in different years and the whole amount thereof was paid by the Government of Burma through B.O.C. in the U. K. The realisation was always treated for tax purposes as on capital account. The dividends received from B.O.C. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formal approval to these transactions which have now been completed. You will recall from our earlier correspondence and discussions that we requested favourable consideration to our request to exchange sterling funds for shares in another rupee company and permit the company to use the sterling. We gave our reasons for requesting special consideration in a Note with our letter of 29th May, 1963. Our position, now that we have received the final settlement for our Burma assets, is that we wish to utilise the proceeds in whatever way will benefit the Company to the greatest extent possible. We are considering a number of projects, none of which has yet reached a stage where we can place a definite proposal before you; until such time as we are in position to do so, we request your approval to retain the capital sum now received in the U.K. on term deposit. We would remit the interest after the U.K. tax as and when received. Our grounds for requesting special consideration are that these funds have their origin outside India, prior to the passing of the Foreign Exchange Regulation Act, 1947. The Company has for many years carried on business outside India (in Burma, Pakistan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as repatriated to India in July, 1966, shortly after the devaluation of the Indian Rupee in June, 1966. The assessee, as a result of the remittance and on account of the devaluation, realised an extra sum of Rs. 1,88,157 in terms of Indian currency. In fact, as per details furnished by the assessee, it is seen that it had earned an extra profit of Rs. 2,03,300 on account of devaluation from the funds lying in current accounts with the banks and deposits with the Municipal Corporation. The whole of this amount was originally offered for tax in the return filed by the assessee. Subsequently, a revised return was filed in which the company offered to tax only Rs. 35,143 as revenue profit and the balance of Rs 1,68,157 was offered as capital gains. The ITO treated the above amount of Rs. 1,68,157 also as a profit on revenue account on the ground that it consisted of various remittances made from India to the U.K. which remained unutilised in the assessee's business there. In appeal, the AAC confirmed the order of the ITO. The assessee, thereafter, went up in appeal before the Tribunal. It was contended on behalf of the assessee that the above amount was not taxable at all. Accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d decision clearly established that it was so. Then on behalf of the Revenue reliance was placed on the balance-sheet of the company for the year under reference and it was pointed out that the deposits with the Municipal Corporation in the U.K. appeared under the head " Current Assets, Loans and Advances ", on its assets side which too showed that the funds in the U.K. were held not as fixed capital but as its circulating capital by the assessee-company. It was submitted that according to the assessee's own letter dated 26th December, 1963, the above funds were not earmarked for the purpose of any capital activity of the assessee or for any capital investment of the company as the company was still at the stage of considering a number of projects, none of which had yet reached a stage where it could place a definite proposal before the Govt. of India. After considering the rival contentions, the Tribunal in its order held as follows : " 7. We have considered the facts of the case and the submissions placed before us on behalf of both the above parties. In our opinion, the amount is liable to tax as revenue receipt. As pointed out by the learned departmental representative the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r were invested in fixed assets. We are, therefore, of the considered opinion that the assessee's funds in the U.K. formed part of its circulating capital and, therefore, the profit arising therefrom was revenue receipt liable to be taxed under the Income-tax Act. In view of our this finding we do not find any force in the contention of the assessee that a part of the profit arising on the amount of 1,796 that was spent in the U.K. towards drilling expenses could not be taxed as that amount was not remitted to India. We, therefore, uphold the order of the Appellate Assistant Commissioner and confirm the addition. 8. We now take up the departmental appeal being ITA No. 5250. The two contentions raised in this appeal relate to the allowances of depreciation in respect of direct drilling expenses incurred by the assessee in the U.K. and the expenditure incurred in the construction of driveways, compound walls, etc., on the footing that they should be classified as 'buildings'. As pointed out by the Appellate Assistant Commissioner both these points are already covered by the decision of the Tribunal dated 27th May, 1970, in ITA Nos. 17131 to 17134 and 20117 and 20116 of 1966-67 rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 97, 01,124 from the U.K. govt. by way of ex gratia grant for the rehabilitation of its war-damaged industry in Burma. It may incidentally be mentioned that Rs. 97,01,124 was equivalent to pound 7,27,584. This amount was credited to the assessee's capital reserve account. This reserve, subject to certain subsequent adjustments, had been permanently reflected in the company's investments which had been held as assets, such as, investments in the U.K. Govt. securities, Burma Oil Co. (1954) Ltd. shares-there were 2,01,886 shares of the book value of Rs. 72,36,640 and the U.K. Municipal Corporation deposits. After the destruction of its oil fields in Burma, these sums could not be made use of by the assessee. It could not also embark on the production of oil in India because that was not open to private enterprises. Learned advocate for the assessee asserted before us that the assessee had to look for an activity elsewhere. In 1956, the company had entered into an arrangement with Steel Brothers Ltd. for prospecting for oil in the U.K. The assessee's scheme for drilling operations was approved and finalised and for this the company had obtained the Reserve Bank's approval to retain a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the possibilities for investment outside India using funds realised from Burma. No approval for such retention of funds in the U.K. appears to have been given by the government. At the relevant time the assessee had funds totalling pound 74,468 in short-term deposits with Colchester and Hawick Borough Councils. Out of this a sum of pound 52,881 was retained in the U.K. for incurring drilling and prospecting expenses representing the unspent balance of the sum approved for such expenditure by the Reserve Bank and a further sum of pounds 1,383 was retained for the estimated expenditure to be incurred for Denial Suits, this also having been approved by the Reserve Bank. The balance amount of pound 20,204 was to be repatriated to India and it was so repatriated in July, 1966, shortly after the devaluation. As mentioned hereinbefore pound 52,881 together with pound 1,383 mentioned before along with pound 20,204 made up the total sum of pound 74,468. On 6th June, 1966, the rupee was devalued from Re. 1 equal to 1 sh. 5,31/32 d. to Rs. 21= pound 1. So, the amount pound 22,000 under pre-devaluation rate amounted to Rs. 2,93,843.47 and on the basis of post-devaluation rate it would amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lus in the United Kingdom. He, therefore, held that the ITO had rightly assessed the amount of Rs. 1,68,157. On the ITO's appeal against the order of the AAC, the Tribunal upheld the directions of the AAC and, on the assessee's appeal, the Tribunal found: (a) that the assessee had been holding its funds in the U.K. for the purpose of its business of prospecting for oil only, (b) that the assessee's drilling operations in the U.K. was a part of the trading or manufacturing transaction of the assessee, (c) that the funds were utilised by the assessee-company by way of investments in certain realisable securities and there was no question of their blocking up or sterilisation, (d) that the assessee-company had been holding the various deposits in the Municipal Corporation in the U.K. as its current assets, loans and advances which itself negatived any contention that these were held on any capital account or were invested in fixed assets, (e) that the assessee's funds in the U.K. formed part of its circulating capital and, therefore, the profit arising therefrom was revenue receipt liable to be taxed, (f) that the amount of Rs. 1,68,157 was liable to tax as revenue receipt, and (g) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave and except with the permission of the Reserve Bank and upon the terms and conditions imposed by the Reserve Bank. From that point of view, it could not be termed to be held on revenue account, nor could it be treated as circulating capital because circulating capital in contradistinction to the fixed capital was a capital which the assessee was free to utilise to earn profits; this amount, which was held in the U.K., according to the assessee could not, and, in our opinion rightly, be treated as free asset or liquid asset. This position would be clear if we refer to this aspect which was adverted to by the Supreme Court in similar situation in the decision in the case of CIT v. Canara Bank Ltd. [1967] 63 ITR 328 (SC), where, for our present purpose, it is material to refer to the observations appearing at pages 331-332 of the report, where similar types of moneys in Pakistan were treated by the Supreme Court as blocked asset. Learned advocate for the revenue sought to urge before us that the Tribunal had considered all aspects of the matter and the view taken by the Tribunal that these were easily convertible assets to be utilised by the assessee was a possible conclusion, Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conditions on which the said sums were remitted to India had not been properly appreciated by the Tribunal. The Tribunal had also referred to the fact that in its balance-sheet the assessee had treated its deposit with the Municipal Corporation in the U.K. under the head " Current assets, loans and advances ". It was treated by the assessee, according to the Tribunal, as current assets a point upon which the learned advocate for the revenue also relied heavily before us. It was also submitted that this practice or the procedure followed by the assessee was in consonance with Spicer Pegler's Book Keeping and Accounts and our attention was drawn to certain principles enunciated therein. The true nature of an amount must be found out by discovering the true nature of the amount in question and if the consequences of the funds being not permitted to be utilised save and except with the permission of the Reserve Bank make the funds sterilized or blocked, as was adverted to by the Supreme Court in the case of Canara Bank referred to hereinbefore, then the fact that the assessee had treated this amount as current assets on revenue account or the fact that the assessee offered a par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is connection, the observations in the case of Golden Horse Shoe (New) Ltd. v. Thurgood [1933] 18 TC 280 (CA)). The fundamental point that require consideration in this question is whether this money was utilised for earning profit, as such, which resulted in the sum of Rs. 1,68,157. There was, according to learned advocate for the assessee, no dealing in foreign exchange by the assessee. The accretion happened merely because the money was there. Now, this aspect raises several questions, viz., is the accretion or the profit or the excess amount realised as a result of any trading activity of the assessee ? Secondly, if it is profit then when did this profit arise ? Is it at the time of appreciation or depreciation of the currency, that is to say, at the time of devaluation or otherwise or is it at the time of conversion by repatriation ? In this connection, it may be instructive to refer to certain decisions, both English and Indian, which, in our opinion, have dealt with this question precisely. Reference may be first made to the decision in the case of Californian Copper Syndicate Ltd. v. Harris (Surveyor of Taxes) [1904] 5 TC 159 (C of Exch). There, the company was formed for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. [1926] 10 TC 372 (KB). There, under an agreement dated the 8th March, 1921, for the supply of a quantity of marble by Torquay Company of marble and stone merchants to certain building contractors, the contractors had agreed, on receipt of a guarantee for the fulfilment of the contract, to advance pound 20,000 of the price, percentage deductions being made from the amount due on each consignment of marble until the advance had been repaid. On the 17th March, 1921, the pound 20,000 was paid to the company and was credited to an account at a London bank in the joint names of nominees of an insurance company, acting as guarantor, and of the Torquay Company, the nominee of the latter being its controlling shareholder. In anticipation of the required marble being purchased in Italy-though not till the autumn of 1921 the company at once arranged for the conversion of the greater part of the pound 20,000 into lire at 103 to the pound, and a lira account in the same joint names was opened. In May, 1921, the lira had appreciated in value, and, as the money was not yet required by the Torquay Company, its nominee, on the 25th May, 1921, without the company's knowledge or authority, but wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... very case it is not assessable to Income Tax, because it may mean that it is only an isolated instance of what, nevertheless, is in itself a profit, such as writing one book for reward, or something of that sort. But in this connection what is meant is that the contention was quite obviously that, it being an appreciation of an object bought, it was an isolated appreciation of that object, and was not merged in a trade, because, as the first contention showed, it was no part of the Company's business to speculate in the exchanges. That is what it means, and the Commissioners have given effect to those arguments. I think that this appeal fails, but I do not want to put it upon the ground that the Commissioners have decided it in point of fact, and that I cannot go beyond that. Whether that would be right or not, I do not pause to consider, but I think that from every point of view their decision was perfectly right, and I do not think they could very well have decided the other way, if I may go as far as that. 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... how you look at the facts. On the facts I think this is simply a case of a person who is bound to buy a certain amount of consumable stores, who over buys and is lucky enough to dispose of those consumable stores, which he has got in the way of his business in relief of his business at a profit, or whatever way in which you like to put it. He has simply got out of it, and not only escaped the expenses, but there is something put in his pocket for it in the way of his business, I think the whole of it comes in. That is my straight-forward view, I think, on the facts. I think no other question is involved. The case which does bear rather an interesting affinity to this case is the marble case (10 TC 372), but there the way I looked at it-I do not think the case was appealed-was simply this, that they had some capital lying idle, and they embarked upon an exchange speculation. They bought the lire as a speculation, not as consumable stores, or anything of that sort, but they simply bought them as a speculation rather than keep the money in the bank. That is how I looked at it, and I do not think it bears any affinity to this case where, as I say, the essence of it is that they were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re High Court held that the mere fact that the asset had increased in value would not attract income-tax even if a profit was thereby made. The real test was whether the profit, though the accretion to the value of the stock-in-trade was produced in what was truly " the carrying on or carrying out of business ". The increment in this case was not due to any act of carrying on or carrying out of the business of the bank and the amount in question was, therefore, according to the Mysore High Court, a capital gain not assessable to income-tax. The Division Bench had, further, occasion to consider that it was impossible to assert that a trader's assets could always be placed at any given point of time in two compartments, fixed capital in one and the circulating capital in the other. To think that the assets of trader were always capable of physical division into two groups, one constituting circulating capital and the other fixed capital, regardless of the activity or purpose in or for which those assets were employed and without reference to whether they were or were not employed for trading operations would be to ignore the attributes of circulating capital as contrasted with those ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Division Bench, suffered from oversimplification. The true test was whether the accretion arose as result of any trading operation carried on by the assessee not on the nature of the asset and the Division Bench in that case found that it was not possible to hold that the accretion had occurred as a result of any operation carried on by the assessee. This decision, as we have mentioned before, was affirmed by the Supreme Court in the case of CIT v. Canara Bank Ltd. [1967] 63 ITR 328 (SC). There, the Supreme Court observed at page 332 as follows : " We shall assume in favour of the appellant that the money was stock-in-trade of the bank. But it does not necessarily follow that the increment due to the fluctuation in the exchange rate was due to trading operations in the carrying on of the banking business. On the contrary, it has been found by the Appellate Tribunal that the amount of Rs. 3,97,221 was a 'blocked' and 'sterilised' balance and the bank was unable to deal with that amount or use it for any banking purpose between September, 1949, and July, 1953, when it was finally remitted to India. In our opinion, the money changed its character of 'stock-in-trade' when it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR I (SC). In that case, the assessee-company which had its head office in Calcutta had a cotton mill situate in West Pakistan where it manufactured and sold cotton fabrics. During the financial year ending 31st March, 1954, relevant to the assessment year 1954-55, the appellant made large profits amounting to Indian Rs. 1,68,97,232 converted at the then prevailing rate of exchange 100 Pakistani rupees equal to 144 Indian rupees. On 8th August, 1955, Pakistan devalued its rupee restoring the parity between the Indian rupee and the Pakistani rupee. Thereafter during the accounting periods relevant to the assessment years 1957-58 and 1959-60, the assessee had obtained the permission of the Reserve Bank of Pakistan and remitted to India Rs. 25 lakhs and Rs. 12 lakhs, respectively. The assessee claimed that on remittance the assessee had suffered respectively a loss of Rs. 11 lakhs and Rs. 51 lakhs but the claim was rejected by the department and the Tribunal sustained the disallowance. On reference the Calcutta High Court held that no loss was sustained by the assessee on the remittance of the amounts from West Pakistan, and, in that event, the loss could not be said to be a business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n West Pakistan and formed part of the circulating capital of that business, the loss of Rs. II lakhs and Rs. 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 of 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 circumstances, called for supplementary statement of case from the Tribunal giving its, finding on this question, but both the parties agreed before us that their attention was not directed to this aspect of the matter when the case was heard before the revenue authorities and the Tribunal and hence it would be desirable that the matter should go back to the Tribunal with a direction to the Tribunal either to take additional evidenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C), where the exact point was in dispute and the relevant passage we have quoted hereinbefore. We must hesitate to observe that this observation of the Supreme Court in the subsequent case was an observation of a general nature and was not necessary for the purpose of determining the actual point involved before the Supreme Court. The point involved before the Supreme Court was the allowability of a particular loss. It is well settled that a loss may be allowable in a business, even though the loss is not occasioned by the carrying on of the operation by the assessee. No assessee carries on business for making losses, but losses are incidental to or arise in the course of the business. Bat the assessee carries on business for making profit. Therefore, profit being taxable must arise out of or in the course of the activity of the assessee. It would not be sufficient if it was merely connected with the business of the assessee. In this connection, reference may be made to be observations of the Supreme Court in the case of Badridas Daga v. CIT [1958] 34 ITR 10 (SC) as well as the observation of the Bombay High Court in the case of Pohoomal Bros. v. CIT [1958] 34 ITR 64 (Bom). Now, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made and reliance was placed by the learned judge in the case of Canara Bank Ltd. [1967] 63 ITR 328 (SC) but such reference was made and reliance was placed not on this proposition and this aspect of the decision was not adverted to in the case of Sutlej Cotton Mills [1979] 116 ITR 1 (SC). In this connection, reference was made to several decisions of the High Court which we must also notice. Reliance was placed on the decision of this court in the case of Khandelwal Brothers Pvt. Ltd. v. CIT [1979] 117 ITR 452 (Cal). There it was held that in order to determine whether a surplus arising from exchange fluctuations was taxable as income or not in any particular case, the facts had to be carefully considered and there was no general principle which could be applied to all cases. Sen J., observed that the following salient facts of that case had been found by the Tribunal, (a) the foreign exchange was originally accumulated from receipts on account of commission from an American company ; (b) the assessee became entitled to receive that amount by October, 1949, i. e., in the assessment year 1950-51 ; (c) in the very same year there was an adjustment in this account and over $ 5,00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business of manufacture of locomotive boilers and locomotives, with which the assessee Was concerned; it was clearly transaction of accumulating dollars to pay for capital goods, the first stop to the acquisition of capital goods. The surplus attributable to $ 36,123 was a capital accretion and not a profit taxable in the hands of the assessee. We are not concerned with this controversy whether any loan was attributable on capital account or not. In this connection, reference may also be made to an unreported decision given by us in I.T. Reference No. 127 of 1977, Union Carbide India Ltd. v. CIT, judgment delivered on 28-4-1980 [since reported in [1981] ,130 ITR 351 (Cal)]. There, the question involved was different. The main question was whether the Tribunal was justified in holding that the increase in liability of Rs. 1,75,99,854 due to devaluation was not deductible in computing the assessee's business income. Having regard to the ratio of the decision in the case of Tata Locomotive Engineering Co. Ltd. [1966] 60 ITR 405 (SC), referred to hereinbefore, we came to our conclusion with which the present controversy is, not concerned. In that view of the matter, on the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X
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