1961 (9) TMI 65 - HC - Income Tax

Summary

Issues Involved
1. Whether the sum of Rs. 3,22,869 represented the assessee's profit liable to be taken into account for tax purposes.
2. Whether the sum of Rs. 3,22,869 could be taxed as the income of the accounting year relevant to the assessment year 1952-53.
3. Whether the sum of Rs. 3,22,869 was liable to be taxed without ascertaining the assessee's liability to tax in Pakistan on the date of devaluation and without deducting such liability from the said amount.
4. Whether there was any realization of the alleged appreciation of the Karachi rupees.
5. Whether the department could take the amount of the Pakistan tax liability at Rs. 17,79,793 in Indian currency for computing profits, despite taking it as Rs. 12,52,799 for double taxation relief.

Issue-wise Detailed Analysis

Issue 1: Whether the sum of Rs. 3,22,869 represented the assessee's profit liable to be taken into account for tax purposes.
The assessee, a limited liability company, had a balance of Rs. 7,33,794 in its agent's books in Karachi. Upon the devaluation of the Indian rupee in September 1949, the value in Indian rupees increased by Rs. 3,22,869. The assessee credited this amount to the "Pakistan Exchange Suspense Account" and showed it on the liability side of its balance sheet. The Income-tax Officer added back this sum to the assessee's income, asserting that the company realized a profit due to exchange differences. However, the Appellate Assistant Commissioner disagreed, stating that no profit had arisen as there was no remittance to India. The Tribunal concluded that profit could accrue if there were excess assets over liabilities in Pakistan at the material time.

Issue 2: Whether the sum of Rs. 3,22,869 could be taxed as the income of the accounting year relevant to the assessment year 1952-53.
The Tribunal held that the appreciation could be assessed only in the year it was realized. The appreciation was realized when the company used the funds to pay its tax liabilities in Pakistan in 1951. Therefore, the amount was taxable in the year of account (1951) and not in the previous year. The Tribunal directed the Income-tax Officer to ascertain the assets and liabilities in Pakistan on the date of devaluation to determine the profit on devaluation.

Issue 3: Whether the sum of Rs. 3,22,869 was liable to be taxed without ascertaining the assessee's liability to tax in Pakistan on the date of devaluation and without deducting such liability from the said amount.
The Tribunal emphasized the necessity to ascertain the assets and liabilities in Pakistan as on the date of devaluation. If the liabilities equaled or exceeded the assets, no profit could accrue. Profit would only accrue if there was an excess of assets over liabilities. This approach was taken to ensure that only the net appreciation, if any, was considered for taxation.

Issue 4: Whether there was any realization of the alleged appreciation of the Karachi rupees.
The Tribunal noted that the appreciation was realized when the assessee used the funds to pay its tax liabilities in Pakistan. However, the court found that the utilization of the fund for tax payment, which was not a business operation, did not result in a taxable profit. The payment of income tax was not considered a business operation that could lead to the realization of a profit on exchange differences.

Issue 5: Whether the department could take the amount of the Pakistan tax liability at Rs. 17,79,793 in Indian currency for computing profits, despite taking it as Rs. 12,52,799 for double taxation relief.
The Tribunal pointed out that the double taxation relief was allowed on the basis that the tax paid by the assessee was Rs. 12,52,799, not Rs. 17,79,793. The court noted that the income-tax authorities had ignored the differences on devaluation for the purpose of double taxation relief. This inconsistency was highlighted as a relevant consideration in deciding whether the appreciation should be taxed.

Conclusion
The court concluded that the amount of Rs. 3,22,869 was not the income of the assessee liable to tax in the assessment year 1952-53. The utilization of the fund for the payment of tax did not result in a taxable profit. The court answered the question referred to it in the negative, entitling the assessee to its costs from the department.