1981 (5) TMI 5 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sum of Rs. 13,02,495 represented revenue loss accruing to the assessee during the assessment year 1967-68 due to devaluation of the rupee on June 6, 1966.

Issue-wise Detailed Analysis:

1. Assessment Year and Devaluation Loss:
The primary issue was whether the Tribunal was correct in holding that the sum of Rs. 13,02,495 represented a revenue loss for the assessee during the assessment year 1967-68 due to the rupee's devaluation on June 6, 1966. The assessee, a non-resident company with its head office in Belgrade, Yugoslavia, claimed a devaluation loss of Rs. 14,55,970. This amount was calculated based on the credit balance of the head office with the Indian branch, representing the difference in exchange rates between dinars and Indian rupees as of May 5, 1966, and June 6, 1966.

2. Income Tax Officer's (ITO) View:
The ITO disallowed the deduction, stating the loss could only be claimed when the circulating capital was remitted from India to Yugoslavia. Since the remittances occurred in January and March 1968, the loss could not be considered for the 1967-68 assessment year. The ITO also argued that since the projects were completed before the devaluation, there were no expenses against which the devaluation loss could be claimed. The ITO further stated that the head office and branch office should be considered as one entity, and any loss due to devaluation was capital loss, not revenue loss.

3. Appellate Assistant Commissioner's (AAC) View:
The AAC upheld the ITO's decision, stating that the notional loss on June 6, 1966, was not a revenue loss as the current account between the head office and Indian branch represented capital employed in India. The AAC emphasized that the head office and branch office were not separate entities, and the loss was related to capital invested, not a trading expense.

4. Tribunal's View:
The Tribunal reversed the AAC's decision, stating the assessee was entitled to deduct the devaluation loss for the 1967-68 assessment year. The Tribunal noted that the assessee had brought funds from Yugoslavia for its business in India, and the devaluation of the rupee led to a reduction in the value of these funds in terms of dinars. The Tribunal held that the loss arose from devaluation and did not depend on actual remittance. The Tribunal viewed the funds as circulating capital, and the depreciation in value due to devaluation was a trading loss.

5. Legal Precedents and Analysis:
The court reviewed several legal precedents, including:
- Imperial Tobacco Co. v. Kelly [1943] 25 TC 292: This case involved the appreciation of dollars held for business purposes, which was taxed in the year of conversion.
- CIT v. Mogul Line Ltd. [1962] 46 ITR 590: This case held that appreciation or depreciation in foreign funds not utilized for business operations did not result in taxable profit.
- CIT v. Canara Bank Ltd. [1967] 63 ITR 328: The Supreme Court held that appreciation of blocked funds not utilized in business operations was a capital receipt.
- Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1: The Supreme Court clarified that profit or loss from foreign currency held on revenue account or as circulating capital was trading profit or loss, but if held as a capital asset, it was capital profit or loss.
- Chainrup Sampatram v. CIT [1953] 24 ITR 481: This case emphasized that profit arises from business operations, not from the valuation of closing stock.

6. Court's Conclusion:
The court concluded that since the repatriation to the head office occurred after the relevant assessment year and there was no diminution in the value of Indian currency, there was no revenue loss for the year in question. The court held that the loss, if any, should be considered in the year of actual conversion. Consequently, the question was answered in the negative and in favor of the revenue.

Final Judgment:
The court ruled that the Tribunal was not correct in holding that the sum of Rs. 13,02,495 represented revenue loss for the assessment year 1967-68 due to the rupee's devaluation. The question was answered in the negative, in favor of the revenue, with no order as to costs.