1978 (9) TMI 1 - SC - Income Tax

Assesse, a limited company having a cotton mill situated in west Pakistan accrued some profits due to fluctuation in exchange rate of rupees in west Pakistan - assessee claim for the exchange loss in respect of remittance of profit from Pakistan for deduction - Tribunal had not enquired that amounts held by assessee were on capital account or on revenue account - case remanded

Issues Involved:
1. Whether the assessee suffered any loss on the remittance of Rs. 25 lakhs and Rs. 12,50,000 in Pakistani currency from West Pakistan.
2. Whether the loss sustained by the assessee was a trading loss or a capital loss.

Issue-wise Detailed Analysis:

1. Whether the assessee suffered any loss on the remittance of Rs. 25 lakhs and Rs. 12,50,000 in Pakistani currency from West Pakistan:

The Supreme Court examined whether the assessee experienced a loss when remitting profits from Pakistan due to changes in the exchange rate. The assessee, a limited company with a cotton mill in West Pakistan, made a profit of Rs. 1,68,97,232 in the financial year ending March 31, 1954. This profit was included in the assessee's total income for the assessment year 1954-55, converted at the then-prevailing exchange rate of 100 Pakistani rupees to 144 Indian rupees. However, by the time the assessee remitted Rs. 25 lakhs and Rs. 12,50,000 to India in the assessment years 1957-58 and 1959-60, respectively, the exchange rate had changed to parity (100 Pakistani rupees equaled 100 Indian rupees). Consequently, the assessee received only Rs. 25 lakhs and Rs. 12,50,000 in Indian currency instead of Rs. 36 lakhs and Rs. 18 lakhs, suffering losses of Rs. 11 lakhs and Rs. 5,50,000, respectively.

The Court noted that although these losses were not reflected in the assessee's books of account, the true nature of the transaction indicated that the assessee did suffer a loss due to the alteration in the exchange rate. The Court emphasized that the way entries are made in the books of account is not determinative of whether a profit or loss has been incurred. The Court concluded that the assessee did suffer a loss of Rs. 11 lakhs and Rs. 5,50,000 on the remittance of the amounts from West Pakistan.

2. Whether the loss sustained by the assessee was a trading loss or a capital loss:

The Supreme Court then addressed whether the loss was a trading loss, which would be deductible in computing taxable profit under Section 10(1) of the Income-tax Act. The High Court had held that the loss was not a trading loss because it was caused by devaluation, an act of State. The Supreme Court rejected this reasoning, stating that the cause of the loss (devaluation) was immaterial. What mattered was whether the loss occurred in the course of carrying on the business or was incidental to it.

The Court explained that a loss in a trading asset is a trading loss, regardless of its cause. The key question was whether the loss was in respect of a trading asset or a capital asset, or in terms of circulating capital or fixed capital. If the foreign currency is part of the circulating capital employed in the business, any loss due to depreciation in its value would be a trading loss. Conversely, if the foreign currency is held as a capital asset, the loss would be a capital loss.

The Supreme Court referred to various English and Indian cases to illustrate these principles. In particular, the Court cited the decisions in CIT v. Tata Locomotive and Engineering Co. Ltd. and CIT v. Canara Bank Ltd. to support its analysis. The Court noted that in the present case, the Tribunal had not determined whether the sums of Rs. 25 lakhs and Rs. 12,50,000 were held on capital account or revenue account, or as part of fixed capital or circulating capital.

The Supreme Court remanded the case to the Tribunal with directions to take additional evidence and determine whether the sums in question were held as capital assets or trading assets. Based on this determination, the Tribunal would then decide whether the loss was a trading loss or a capital loss.

Conclusion:

The Supreme Court set aside the High Court's order and remanded the case to the Tribunal to dispose of it in accordance with the directions given and the law laid down in the judgment. The Tribunal was instructed to determine whether the sums of Rs. 25 lakhs and Rs. 12,50,000 were held as capital assets or trading assets and, consequently, whether the loss suffered by the assessee was a trading loss or a capital loss. There was no order as to the costs of the appeal.

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