1973 (1) TMI 8 - HC - Income Tax

Assessee is a banking company and as part of its banking business has been purchasing cheques payment orders mail transfers demand drafts bills and other negotiable instruments drawn in foreign currencies and sometimes foreign currencies themselves from its clients - (i) Whether the sum of Rs. 4, 65, 515 being profit arising on the devaluation of the Indian rupee on 6th June 1966 was income chargeable to income-tax ? (ii) Whether Tribunal was right in law in rejecting the assessee s claim to deduct an amount of Rs. 52, 935 being loss arising on the valuation of closing stock of Government securities in determining its total income for the assessment year 1967-68 ? - first question referred to above is answered in favour of the revenue and against the assessee and the second question is answered against the revenue and in favour of the assessee

Summary

Issues Involved:

1. Whether the profit arising on the devaluation of the Indian rupee was income chargeable to income-tax.
2. Whether the Appellate Tribunal was right in law in rejecting the assessee's claim to deduct a loss arising on the valuation of closing stock of Government securities in determining its total income for the assessment year 1967-68.

Issue-Wise Detailed Analysis:

1. Profit Arising on Devaluation of the Indian Rupee:

The assessee, a banking company, had foreign exchange assets that appreciated in value due to the devaluation of the Indian rupee on June 6, 1966. The Income-tax Officer treated this appreciation, amounting to Rs. 4,65,515, as income from business, which was upheld by the Appellate Assistant Commissioner and the Appellate Tribunal. The Tribunal referenced the Supreme Court decision in Commissioner of Income-tax v. Canara Bank Ltd., distinguishing that in the Canara Bank case, the assets were blocked and sterilised, thus considered capital receipts. In contrast, the assessee's foreign exchange assets remained active stock-in-trade, and their appreciation was deemed trading receipts, thus constituting revenue receipts. The High Court upheld this conclusion, noting that the appreciation in value of the sale proceeds of these assets represented trading receipts and, therefore, constituted revenue receipts in the hands of the assessee.

2. Loss on Valuation of Closing Stock of Government Securities:

The assessee claimed a deduction of Rs. 52,935 due to a decrease in the market value of Government securities as of December 31, 1966. The Income-tax Officer disallowed this claim, noting the assessee's consistent practice of valuing securities at cost in previous years. The Appellate Assistant Commissioner and the Tribunal upheld this disallowance, with the Tribunal observing that the Government securities were not stock-in-trade in the ordinary sense but were held as easily realisable investments. However, the High Court found this view legally incorrect, noting that the securities constituted stock-in-trade without restriction. The court emphasized that it is a sound commercial practice to value closing stock at cost or market price, whichever is lower, and this method should be consistently followed. The court concluded that the assessee's adoption of this valuation method disclosed a loss, which should be allowed as a permissible deduction in determining the total income for the assessment year 1967-68.

Conclusion:

The High Court answered the first question in favor of the revenue, affirming that the profit arising from the devaluation of the Indian rupee was income chargeable to income-tax. The second question was answered in favor of the assessee, allowing the deduction of the loss arising from the valuation of closing stock of Government securities. The parties were directed to bear their own costs, and a copy of the judgment was to be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.