1961 (12) TMI 100 - HC - Income Tax

Summary

Issues Involved:
1. Assessability of profits arising from fluctuations in the exchange rates of foreign currency.
2. Classification of the profit as a revenue receipt or a capital gain.
3. Determination of whether the asset in question was part of the bank's stock-in-trade or circulating capital.
4. Examination of whether the accretion was produced by a business activity of the bank.

Issue-wise Detailed Analysis:

1. Assessability of profits arising from fluctuations in the exchange rates of foreign currency:

The primary issue in this case was whether the profit of Rs. 1,70,746, resulting from the appreciation of funds remitted from the Karachi branch to the head-office due to fluctuations in exchange rates, was assessable under the Indian Income-tax Act. The bank argued that this sum was a non-taxable capital gain, but the Income-tax Officer, the Appellate Assistant Commissioner, and the Income-tax Appellate Tribunal disagreed, classifying it as a taxable revenue receipt.

2. Classification of the profit as a revenue receipt or a capital gain:

The Tribunal concluded that the appreciation in value of the money sent to India resulted in an accretion to the bank's stock-in-trade, thus making it a taxable profit rather than a capital gain. The Tribunal's rationale was based on the premise that the profit was realized in the normal course of business, akin to trading profit. The Tribunal relied on the distinction between fixed and circulating capital, stating that accretions to circulating capital are taxable revenue accretions.

3. Determination of whether the asset in question was part of the bank's stock-in-trade or circulating capital:

The Tribunal assumed that all moneys held by a bank in its foreign branches form part of its stock-in-trade. It deduced that the sum of Rs. 3,97,221, returnable by the Karachi branch to the head-office, was part of the bank's circulating capital. However, the judgment clarified that not all monetary wealth of a bank is its circulating capital or stock-in-trade. The Tribunal's approach was criticized for failing to consider whether the asset was employed in a banking operation, which is the real test for determining its nature.

4. Examination of whether the accretion was produced by a business activity of the bank:

The Tribunal did not find that the accretion arose by any activity on the part of the bank. Instead, it was concluded that the accretion was fortuitous and not a result of any business operation. The judgment emphasized that an accretion of value by itself is not taxable unless it arises from a trade carried on with the desire to secure such accretion. The Tribunal's finding that the blocked balance became "sterilized" indicated that the asset was not employed for any banking operation, thus losing its character as circulating capital.

Conclusion:
The judgment ultimately held that the exchange difference of Rs. 1,70,746 was not assessable under any provisions of the Indian Income-tax Act. The Tribunal's approach was found to be flawed as it did not establish that the accretion was produced by a business activity of the bank. The bank's argument that the appreciation was a capital gain, not a revenue receipt, was accepted, leading to the conclusion that the profit was not taxable. The bank was entitled to the costs of the reference, with an advocate's fee of Rs. 250.