TMI Blog1978 (3) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... ember, 1964, when the assessee actually adjusted its account in respect of the sum due to the assessee from Messrs. K. A. Export Corpn., New York ?" The facts found and/or admitted in the proceedings are shortly as follows : The Indian rupee was devalued on the 16th September, 1949. At the end of the Diwali year 2006 corresponding to 21st October, 1949, i.e., the assessment year 1950-51, the assessee became and continued to be entitled to a sum of $1,08,540.20 from one K. A. Export Corporation, New York, by way of commission equivalent to Rs. 3,60,624-12-3 under the rate of exchange prevailing prior to the said devaluation. In the same year, a sum of $5,477.67 was adjusted on account of certain expenses incurred by the assessee during the period prior to devaluation. In the same year, one Khandelwal Refrigeration Corpn. Ltd., an allied concern, was amalgamated with the assessee. An amount of $36,968'08 standing to the debit of the said Messrs. K. A. Export Corporation, New York, in the accounts of the said amalgamated company was adjusted in the accounts of the assessee after amalgamation in the same year. Thus, a sum of $1,40,030.61 became due to the assessee as aforesaid in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the devaluation of the rupee was a business income of the assessee. He held further that the sanction of the Reserve Bank of India for making necessary adjustments in the accounts having been received and the adjustments in fact having been made during the year under appeal the income had accrued to the assessee in the said year. The assessee preferred a further appeal to the Tribunal. It was contended before the Tribunal that the surplus arising out of devaluation of the Indian rupee in the hands of the assessee was not taxable as it did not arise out of any business transaction. It was contended further that the sanction for the necessary adjustment having been given by the Reserve Bank of India on the 1st February, 1963, the income in any event would be deemed to have accrued on the 1st February, 1963, and, therefore, could not be taxed in the year in question. The revenue contended to the contrary. After considering a number of reported decisions cited, the Tribunal held that the amount originally due to the assessee from the said K. A. Export Corporation, New York, was on account of commission and as such it was a business receipt and retained such character throughout ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. He submitted that there is no finding in the present case that the assessee had elected to treat the amount lying in the hands of its foreign agents as its circulating capital and, therefore, any accrual thereto by reason of exchange fluctuation could not be taxed. Mr. Ginwalla contended further that the amount of $36,968.08 which came to the assessee as a result of its amalgamation with Messrs. Khandelwal Refrigeration Corporation Ltd. in any event could not be treated as part of its revenue receipts and must be treated as its capital. In support of this contention he cited Spicer Pegler's "Book-Keeping and Accounts ", 16th edn., for the following passages: "It will be noticed that the Reserve and Profit and Loss Account balances of the transferor companies do not appear as such in the books of the transferee company, as they are not available for revenue purposes in the hands of that company, being represented by net assets purchased and paid for out of capital." on amalgamation of companies: "Treatment of revenue balances and reserves.-The accumulated revenue balance and reserves of the vendor company should not be brought into the purchasing company's b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Pakistan asset which had increased in value in terms of the Indian rupee had no doubt been utilised but such utilisation did not result in the accrual of a taxable profit to the assessee, there was no actual conversion of the Pakistan money into Indian rupee and no surplus was actually received by the assessee. The High Court observed as follows : "It is undisputed that if the foreign fund is allowed to remain unused where it lies, the mere circumstance that there has been 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 on exchange, and the profit would be taxable. If, on the other hand, the fund is used not for a business operation or for the purpose of trade, but for a non-business operation, there may not be a taxable profit arising on its utilisation. In the present case, the fund was utilised for the payment of income-tax which was not a business operation... The payment of the Pakistan fund held b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s kept with the said agents for purchase of capital goods as aforesaid. On the 16th September, 1949, as a result of devaluation of the pound sterling, dollar appreciated in value compared to the rupee. American goods having become more expensive in terms of rupees and the Government of India having imposed restrictions on imports from U.S.A., the assessee with the permission of the Reserve Bank of India repatriated the accumulated dollars in two instalments in December, 1949, and October, 1950, respectively. This resulted in a rupee surplus in the hands of the assessee and the question arose whether it should be taxed as profits arising incidentally to the carrying on of business. On a reference, the Bombay High Court held that the amounts in the hands of purchasing agents of the assessee were fixed capital retained for the specific purpose of purchasing capital goods with permission of the Reserve Bank of India and accrual thereto would not be a taxable revenue receipt. On further appeal, the Supreme Court affirmed the decision of the High Court and observed as follows : "There is no doubt that the amount ...... (commission) was a revenue receipt in the assessee's business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urrency at the current rate of exchange. During the relevant year, Pakistan devalued her currency and the assessee became entitled to receive from Pakistan a lesser amount in terms of Indian rupees. The Tribunal allowed the claim of the assessee for the loss on the ground that when profits had accrued to the assessee on conversion of Pakistan currency into Indian currency, the same had been taxed and, therefore, when there was a loss on similar conversion, the same must be allowed as a business loss. On a reference, the Bombay High Court held that the nature of the amount standing to the credit of the assessee in the books of the distributing agents at Karachi would determine the question. The assessee had included the amount in its account and offered the same for taxation. Thereafter, the amount ceased to bear the character of business profits. There was no evidence that the said amount which was lying idle with the distributing agents was utilised or intended to be utilised for the purpose of the assessee's business. The High Court held that the amount was an asset of capital nature and the loss incurred was a capital loss and not allowable. (f) Sutlej Colton Mills Ltd. v. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions, including the forward contracts, the price was quoted in dollars. On the 6th June, 1966, when the Indian rupee was devalued the assessee was entitled to receive dollars for exports actually effected before that date and also on account of forward contracts entered into earlier and by reason of the devaluation the assessee received a greater amount in rupees and a surplus accrued in the hands of the assessee. In the assessment in the relevant year the assessee claimed that the surplus due to devaluation was casual and not taxable. The ITO held that the profits arose out of the trading activities of the assessee and assessed the entire amount. The AAC and the Tribunal upheld the assessment. On a reference, the Kerala High Court, following Hindustan Aircraft Ltd. [1963] 49 ITR 471 (Mys), held this surplus to be a trading profit as it represented part of the sale proceeds. It was found that the assessee had become entitled to receive a larger amount in terms of rupees as price of the goods. (h) Bank of Cochin Ltd. v. CIT [1974] 94 ITR 93 (Ker). In this case, the assessee used to purchase cheques, payment orders, mail transfers, demand drafts, bills and other negotiable instrum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee used to buy and accumulate dollars each year before the commencement of the tobacco leaf season. At the outbreak of war in September, 1939, at the request of the Treasury, the assessee stopped further purchases in the United States and on the 30th September, 1939, as required under the Defence (Finance) Regulations, 1939, the assessee sold its surplus dollars to the Treasury. Owing to a rise of value of the dollar in the meantime, the sale of the dollars resulted in a profit. The assessee contended that this profit did not arise from its trade and should not be included for tax. It was held that the profit made by compulsory sale of surplus dollars to the Treasury must be computed in the assessee's trade profits. The assessee had collected dollars in the course of its trade and, though the profit arose incidentally, the money being a part of the assessee's circulating capital, the profit was to be taxed as a trading receipt. (c) Davies v. Shell Co. of China Ltd. [1951] 32 TC 133; [1952] 22 ITR (Supp.) 1 (CA). The assessee, in this case, sold and distributed petroleum products in China. The local agents of the assessee in China were required to deposit with the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee's business expenses. Therefore, any accretion in the value of this fund as a result of devaluation or exchange fluctuation must be held to be in the nature of a trading accrual. The observations of the Supreme Court in Tata Locomotive Engineering Co. Ltd. [1966] 60 ITR 405 is clearly applicable in these facts and we hold that this fund represented the circulating capital in the hands of the assessee and not its fixed capital. In our opinion, however, the surplus accrued to the assessee at the time of devaluation and not at the subsequent adjustment of the accounts of the assessee or at the time when the assessee obtained the sanction of the Reserve Bank of India to adjust its two accounts. We direct the Tribunal to ascertain the exact amount of foreign exchange receivable by the assessee on the 16th September, 1949, and calculate the surplus accordingly. It has also been contended by Mr. Suhas Sen for the revenue that the assessee had shown in its accounts that the surplus arose in the year relevant to the assessment year 1965-66 and not earlier. In our view, the way an accrual is shown in the accounts is of little consequence. The assessee's accounts were kept on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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