TMI Blog1979 (7) TMI 76X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The goods were to be shipped before August, 1965, at the latest. The assessee opened a letter of credit in favour of the American seller in the Bank of Baroda at Coimbatore. On August 12, 1965, the shipment was made by the American suppliers on board S. S. Express, and the ship was expected to be in Bombay on or about September 21, 1965. Hostilities opened between India and Pakistan and the vessel was seized by the Government of Pakistan towards the end of September, 1965. The assessee and its clearing agents took up the matter with the insurance company. After some correspondence, the insurance company in New York accepted liability and issued a draft for U. S. $45,825 on October 19, 1966. This amount was credited to the assessee's account in the Bank of Baroda. As a result of the devaluation of the Indian rupee on June 6, 1966, the equivalent of U. S. $45,825, in Indian currency came to Rs. 3,43,556 as against Rs. 2,00,164 which would be the equivalent prior to the devaluation. The difference between the two amounts came to Rs. 1,43,392 and this amount was brought to tax in the hands of the assessee as profit arising out of devaluation and as the business income of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the difference as a result of devaluation. In that case, commission had been earned in the United States. This amount was retained there for purchase of plant and machinery or other capital goods. There was a devaluation and the assessee found it more expensive to buy American goods and as there were restrictions on imports from the United States, the assessee with the permission of the Reserve Bank, repatriated the amount remitted abroad. This resulted in a surplus in terms of Indian currency and the question was whether the surplus was liable to be taxed in India. The Supreme Court pointed out that the answer to the question depended on whether the act of keeping the money for capital purposes after obtaining the sanction of the Reserve Bank was part of or a trading transaction, affected its character and if so, whether any profit that accrued would be a revenue receipt. If it was not part of or a trading transaction, the profit made would be a capital profit and not taxable. On the facts of that particular case it was found that the money ceased to have anything to do with the trading account after the sanction was obtained from the Reserve Bank of India to be utilised for certa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pply the same principle. There is one particular aspect to be borne in mind in these days of increasing international trade. The devaluation was a rare event in earlier days after the Second World War. But, in these days, devaluation or revaluation in currencies is a matter of everyday event in many currencies of the world. Except with reference to absolutely capital payments or receipts, the surplus or the deficiency as a result of the devaluation or revaluation on trading transactions cannot but be on revenue account. Any other conclusion would result in trading profits being left out of assessment. In Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1, the Supreme Court considered a case where a company in India had a cotton mill in West Pakistan where cotton fabrics were manufactured and sold. Large profits were made in the financial year 1953-54, and as converted at the then prevailing rate of exchange the profits came to Rs. 1,68,97,232. Subsequently, Pakistan devalued its rupee and, thereafter, during the financial years 1956-57 and 1958-59, the assessee obtained the permission of the Reserve Bank of Pakistan and remitted to India certain amount. The assessee claimed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dian rupee. The excess arising out of the devaluation was, therefore, held to be capital receipt and not a revenue receipt. The facts were found to be similar to or identical with those in CIT v. Canara Bank Ltd. [1967] 63 ITR 328 (SC). We have already discussed how the principle of the decision in the Canara Bank's case [1967] 63 ITR 328 (SC) cannot be applied to the present case, and, therefore, no further discussion is necessary for distinguishing Chettinad Corporations's case [1978] 112 ITR 898 (Mad). Seizure of goods and their appropriation by the enemy is not the same as blocking or sterilisation of the amount temporarily. The above decision cannot be of any assistance to the assessee here. There is a later decision of this court in S. G. R. Subramania Iyer v. CIT [1979] 116 ITR 746, in which a similar point came to be considered. The assessee in that case had placed an order with an American firm for supply of pesticides of particular purity. As the goods were found to be sub-standard, the consignment was returned to the supplier. The bank, with whom the letter of credit had been opened, had paid an amount of Rs. 24,300 being the actual value of the goods and the consignor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9] 117 ITR 741. In that case, the agent of the assessee contracted for purchase of jute in London from Pakistan in 1965. Hostilities broke out between India and Pakistan and the contract could not be performed. There was devaluation of the Indian rupee in June, 1966, and by reason of the unoperated letter of credit the agent received Rs. 1,52,710 in excess over the amount originally deposited in Indian rupees. The taxability of the surplus was the subject-matter of controversy in that case. The Calcutta High Court pointed out that money lying in the foreign country was indubitably part of the circulating capital of the assessee and that the fund had not changed its character at the material time. It was meant to be used for a particular purpose and the fact that the purpose was frustrated, by itself could not change the character of the fund. The accretion to the fund resulted in a profit to the assessee in its business, though the accretion might have been caused by an external factor like devaluation. Though the fund became frozen or immobilized, the nature and character of the fund had not changed and its mobility or immobility was considered to be irrelevant. Therefore, the sum ..... X X X X Extracts X X X X X X X X Extracts X X X X
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