1969 (6) TMI 1 - HC - Income Tax

Loss on conversion of the unremitted profit in Pakistan from Pakistani rupee to Indian rupee - loss would merely be a loss due to depreciation in value of capital asset - therefore the loss was not allowable loss

Issues Involved:
1. Whether the loss of Rs. 95,148 due to the devaluation of Pakistani currency is an allowable loss for tax purposes.
2. The nature of the amount standing to the credit of the assessee in the books of Mehboob Pictures at Karachi.
3. Whether the amount can be treated as a business loss or a capital asset.
4. If the amount can be claimed as a bad debt under section 10(2)(xi) of the Income-tax Act.

Issue-Wise Detailed Analysis:

1. Allowable Loss Due to Devaluation:
The primary issue was whether the amount of Rs. 95,148, representing the loss on conversion of unremitted profit from Pakistani rupees to Indian rupees, was an allowable loss in the assessments. The Income-tax Officer initially rejected the claim on the ground that the loss could only arise when the money was actually remitted to India. The Appellate Assistant Commissioner confirmed this but added that the loss was a depreciation of a capital asset, not a trading loss.

2. Nature of the Amount:
The Tribunal reversed the decisions of the lower authorities, stating that the amount should be treated as a business loss because the assessee had been taxed on profits from similar conversions in the past. The Tribunal emphasized that since the profits were taxed, the loss due to devaluation should also be allowed. However, the High Court found this reasoning unconvincing, stating that equitable considerations are irrelevant in tax matters. The court focused on the nature of the amount standing to the credit of the assessee in the books of Mehboob Pictures at Karachi.

3. Business Loss or Capital Asset:
The High Court held that the amount could not be considered a business asset. The court noted that the profits earned during the assessment years 1952-53, 1953-54, and part of 1954-55 were fully remitted to India, leaving only the balance of 1951-52 in Pakistan. This amount had already been taxed and could not be considered business profits. The court concluded that the amount was a capital asset, not a business asset, and thus, the loss due to devaluation could not be claimed as a business loss.

4. Claim as Bad Debt:
The assessee alternatively argued that the amount should be allowed as a deduction on account of bad debt. The court rejected this argument, stating that the relationship between the assessee and Mehboob Pictures was that of principal and agent, not debtor and creditor. The amount was held by the agent for the benefit of the principal, and the agent had not repudiated the agency. The court also noted that the debt had not become bad in the commercial sense; it had merely undergone a diminution in value due to devaluation. Hence, it could not be claimed as a bad debt under section 10(2)(xi) of the Income-tax Act.

Conclusion:
The High Court concluded that the amount of Rs. 95,148 could not be considered an allowable loss for tax purposes. The court held that the amount was a capital asset and not a business asset, and the loss due to devaluation could not be claimed as a business loss or a bad debt. The question referred was answered in the negative, and the assessee was ordered to pay the costs of the Commissioner.

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