1985 (10) TMI 3 - SC - Income Tax

Held that excess amount received due to devaluation of Indian Rupee by realisation of cheques, drafts, bills etc., abroad is taxable as revenue receipt

Summary

Issues:
1. Taxability of profit on devaluation of Indian rupee.
2. Deductibility of loss on valuation of closing stock of Government securities.

Analysis:
1. The appeal involved a question regarding the taxability of profit amounting to Rs. 4,65,515, arising from the devaluation of the Indian rupee on June 6, 1966. The High Court held that the appreciation in value of foreign exchange assets, constituting trading receipts in the course of banking business, was chargeable to income tax. The court emphasized that the profit was an incidental income from banking activities, citing relevant case laws such as Imperial Tobacco Co. v. Kelly and CIT v. A. S. A. Concern.

2. The second issue pertained to the deductibility of a loss of Rs. 52,935 on the valuation of closing stock of Government securities for the assessment year 1967-68. The Income-tax Officer disallowed the loss, which was upheld by the Appellate Assistant Commissioner and the Appellate Tribunal. However, the High Court ruled in favor of the assessee, but this issue was no longer alive before the Supreme Court, as mentioned in the judgment.

3. The court referred to the principles established in Sutlej Cotton Mills Ltd. v. CIT, stating that profit or loss from foreign currency valuation would be trading profit or loss if held on revenue account or as part of circulating capital. The judgment highlighted that the true nature of the transaction determines taxability, irrespective of how entries are made in the books of account. The court also cited CIT v. Mogul Line Ltd., emphasizing that taxability is determined by the utilization of funds in business operations.

4. Ultimately, the Supreme Court upheld the High Court's decision regarding the taxability of the profit on devaluation of the rupee, dismissing the appeal and ordering costs to be paid. The judgment reiterated that the profit was incidental to the banking business, aligning with established legal principles and precedents.

5. In conclusion, the Supreme Court's judgment focused on the tax treatment of profit and loss in the context of banking activities, emphasizing the principles of taxation based on the true nature of transactions and utilization of funds in business operations. The decision provided clarity on the taxability of profits arising from currency valuation and upheld the High Court's ruling on the matter.