1984 (9) TMI 106 - AT - Income Tax

Capital Receipt, Carrying On Business, Exchange Fluctuation, Foreign Currency, Foreign Exchange, Revenue Receipt

Issues Involved:
1. Taxability of net surplus due to exchange rate fluctuations.
2. Classification of the surplus as capital receipt or revenue receipt.
3. Applicability of precedents from various High Courts and the Supreme Court.

Detailed Analysis:

1. Taxability of Net Surplus Due to Exchange Rate Fluctuations:
The primary issue in this case revolves around the taxability of a net surplus of Rs. 4,04,972 that arose due to exchange rate fluctuations. The assessee, engaged in the export of handloom products, initially records the value of exported goods in rupees. The export invoices, however, are in foreign currency. The amount realized from foreign buyers, after being converted into rupees, resulted in a net surplus due to favorable exchange rate fluctuations.

2. Classification of the Surplus as Capital Receipt or Revenue Receipt:
The assessee contended that the surplus was a capital receipt, not chargeable to tax, citing the Calcutta High Court's decision in the case of Indian Leaf Tobacco Development Co. Ltd. v. CIT. However, the Commissioner (Appeals) distinguished this case and relied on the Delhi High Court's decision in Fabindia v. CIT and the Kerala High Court's decision in M. Shamsuddin & Co. v. CIT, concluding that the surplus was a revenue receipt.

The Commissioner (Appeals) observed:
> "The only difference in the facts is that whereas in the case decided by Delhi High Court, the exchange fluctuation was on account of an act of the Government, namely, the devaluation of the Indian rupee, in the assessee's case it is on account of normal market and economic forces which govern the exchange rates between different currencies. This, in my view, would not make any material difference so long as the profit is arising during the course of normal carrying on of trading activities and is directly or indirectly linked with the normal trading or business activity of the assessee."

3. Applicability of Precedents from Various High Courts and the Supreme Court:
The Tribunal considered the arguments from both sides. The representative for the assessee, Mr. Ganeshan, argued that the Calcutta High Court's decision in Indian Leaf Tobacco Development Co. Ltd.'s case applied, emphasizing that the surplus due to exchange rate fluctuation was a capital receipt. The departmental representative countered, stating that the facts of the present case were similar to those in the Kerala High Court's decision in M. Shamsuddin & Co.'s case and the Delhi High Court's decision in Fabindia's case.

The Tribunal reviewed the precedents:
- In M. Shamsuddin & Co.'s case, the Kerala High Court held that the profit due to devaluation was a trading profit.
- In Fabindia's case, the Delhi High Court held that the excess amount received due to devaluation was a revenue receipt, integral to the trading operations.

The Tribunal also referred to the Supreme Court's decision in Sutlej Cotton Mills Ltd. v. CIT, which summarized:
> "The law [is]... well settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business...."

Conclusion:
The Tribunal concluded that the profit in question was a trading profit, as the foreign currency was held by the assessee on revenue account or as a trading asset or as part of circulating capital. The Commissioner (Appeals) correctly held the surplus to be a taxable revenue receipt.

> "The profit in question is taxable revenue receipt because the foreign currency was held by the assessee on revenue account or a trading asset or as part of the circulating capital embarked in the business and not on capital account."

Result:
The appeal by the assessee was partly allowed, affirming the classification of the surplus as a taxable revenue receipt.

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