1961 (8) TMI 57 - HC - Income Tax

Summary

Issues Involved:
1. Taxability of surplus arising from devaluation in converting dollar currency to rupee currency.
2. Treatment of previously taxed sums in relation to surplus arising from devaluation.

Issue-wise Detailed Analysis:

1. Taxability of surplus arising from devaluation in converting dollar currency to rupee currency:

The primary issue was whether the surplus or difference arising as a result of devaluation in the process of converting dollar currency into rupee currency, specifically the sum of $36,123.02 repatriated to India, was taxable as profit in the hands of the assessee. The assessee argued that the amounts held in America were earmarked for the purchase of capital goods, thus retaining the character of fixed capital. The Tribunal had accepted this contention for two sums ($3,567.04 and $8,882.24) but not for the $36,123.02 received as commission from Baldwin Company.

The court noted that initially, the $36,123.02 was income, but the assessee had obtained Reserve Bank permission to retain this amount in America for purchasing capital goods, which changed its character to fixed capital. The court emphasized that the subsequent dealings with the amount and the specific purpose for which it was retained (purchase of capital goods) were crucial. The court concluded that the amount had assumed the character of fixed capital and remained so until repatriation, making the surplus arising from devaluation an accretion to fixed capital and not liable to tax.

2. Treatment of previously taxed sums in relation to surplus arising from devaluation:

The second issue was whether the surplus or difference in dollar exchange account arising from the repatriation of the $36,123.02, which had been taxed in earlier years, was rightly taken as profit taxable. The assessee contended that the character of the amount had changed to fixed capital due to the Reserve Bank's permission and its earmarking for capital purposes. The Revenue argued that the character of the amount as income did not change and that the surplus from devaluation was incidental income.

The court found that the permission from the Reserve Bank and the specific purpose for which the amount was retained (purchase of capital goods) changed the character of the amount to fixed capital. The court also noted that practical impossibility of purchasing goods from America due to increased costs and import restrictions led to the repatriation, not a change in the intended use of the funds. Therefore, the surplus arising from devaluation was an accretion to fixed capital and not taxable.

Conclusion:

The court concluded that the surplus arising from devaluation in converting the $36,123.02 into rupee currency was not taxable as it was an accretion to the fixed capital of the assessee. The answers to both questions raised were in the negative, and the costs of the assessee were to be paid by the department.