1966 (1) TMI 24 - SC - Income Tax

Whether on the facts and in the circumstances of the case, the surplus or difference arising as a result of devaluation in the process of converting dollar currency in regard to the sum of 36,123.02 repatriated to India was profit which was taxable in the hands of the assessee ? Whether the said sum of 36,123.02 having been taxed in the relevant earlier years, the surplus or difference in dollar exchange account arising by reason of the repatriation thereof as a result of devaluation was rightly taken as profit taxable ? Held that - In our view it was not a trading transaction in the business of manufacture of locomotive boilers and locomotives; it was clearly a transaction of accumulating dollars to pay for capital goods, the first step to the acquisition of capital goods. If the assessee had repatriated 36,123.02 and then after obtaining the sanction of the Reserve Bank remitted 36,123.02 to the U.S.A., Mr. Sastri does not contest that any profit made on devaluation would have been a capital profit. But, in our opinion, the fact that the assessee kept the money there does not make any difference especially, as we have pointed out, that it was a new transaction which the assessee entered into, the transaction being the first step to acquisition of capital goods. In our view the High Court was right in answering the questions in the negative. In the result the appeal fails and is dismissed.

Summary

Issues:
1. Taxability of surplus arising from devaluation in the process of converting dollar currency.
2. Characterization of commission earned and its tax treatment.

Analysis:

Issue 1: Taxability of surplus arising from devaluation
The case involved the question of whether the surplus arising from the devaluation of dollar currency during the conversion process was taxable in the hands of the assessee. The Tribunal held that the surplus related to certain amounts held for capital purposes should be treated as capital account profits and excluded them from tax liability. However, regarding a specific sum of $36,123.02, the Tribunal found it to be earned as commission and subject to taxation. The High Court, on the other hand, concluded that the surplus arising from the devaluation in the process of converting dollars into rupees for repatriation was an accretion to the fixed capital of the company and not liable to tax. The High Court's decision was supported by the case law of Davies v. Shell Company of China.

Issue 2: Characterization of commission earned and tax treatment
The Appellate Assistant Commissioner and the Tribunal considered the commission earned by the assessee as part of its trading receipts and subject to tax. The Tribunal specifically noted that the commission amount physically remained in the U.S.A. and was converted into rupees only when the need arose, which was considered incidental to the assessee's business as a selling agent. The High Court, however, held that the commission amount, when appropriated for the specific purpose of purchasing capital goods with the permission of the Reserve Bank of India, assumed the character of fixed capital of the company. Therefore, the High Court determined that the commission amount retained its fixed capital character until repatriated to India and was not taxable.

In the Supreme Court's judgment, it was emphasized that the nature of the transaction, specifically the act of keeping the commission amount for capital purposes after obtaining Reserve Bank's sanction, was crucial in determining the tax treatment. The Court concluded that the transaction was not a trading transaction but a step towards acquiring capital goods, making any profit arising from it a capital profit and not taxable. The Court upheld the High Court's decision and dismissed the appeal with costs.