9911796707
TMI Blog1978 (9) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment year, but the question is the same. We will briefly state the facts as that is necessary for the purpose of answering the question. The assessee is a limited company having its head office in Calcutta. It has, inter alia, a cotton mill situate in West Pakistan where it carries on business of manufacturing and selling cotton fabrics. This textile mill was quite a prosperous unit and in the financial year ending 31st March, 1954, being the accounting year relevant to the assessment year 1954-55, the assessee made a large profit in this unit. This profit obviously accrued to the assessee in West Pakistan and according to the official rate of exchange which was then prevalent, namely, 100 Pakistani rupees being equal to 144 Indian rupees, this profit, which may, for the sake of convenience, be referred to as Pakistan profit, amounted to Rs. 1,68,97,232 in terms of Indian rupees. Since the assessee was taxed on actual basis, the sum of Rs. 1,68,97,232 representing the Pakistan profit was included in the total income of the assessee for the assessment year 1954-55, and the assessee was taxed accordingly after giving double taxation relief in accordance with the bilateral agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Pakistani currency the assessee suffered a loss of Rs. 5,50,000. The assessee claimed in its assessments for the assessment years 1957-58 and 1959-60, that these losses of Rs. 11 lakhs and Rs. 5,50,000 should be allowed in computing the profits from business. This claim was, however, rejected by the ITO. The assessee carried the matter in further appeal to the Tribunal but the Tribunal also sustained the disallowance of these losses and rejected the appeals. The decision of the Tribunal was assailed in a reference made at the instance of the assessee and question No.1 which we have set out above was referred by the Tribunal for the opinion of the High Court. On a reference, the High Court took substantially the same view as the Tribunal and held that no loss was sustained by the assessee on remittance of the amounts from West Pakistan and that in any event the loss could not be said to be a business loss, because it was not a loss arising in the course of business of the assessee but it was caused by devaluation which was an act of State. The High Court, accordingly, answered the question in favour of the revenue and against the assessee. The assessee thereupon preferred the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rded as conclusive one way or the other. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee. Here, it is clear that the assessee earned Rs. 36 lakhs and Rs. 18 lakhs in terms of Indian rupees in the assessment year 1954-55 and retained them in West Pakistan in Pakistani currency and when they were subsequently remitted to India, the assessee received only Rs. 25 lakhs and Rs. 12,50,000 and thus suffered loss of Rs. 11 lakhs and Rs. 5,50,000 in the process of conversion on account of alteration in the rate of exchange. It is, therefore, not possible to accept the view of the High Court that no loss was suffered by the assessee on the remittance of the two sums of Rs. 25 lakhs and Rs. 12,50,000 from West Pakistan. This view which we are taking is clearly supported by the decision of this court in CIT v. Tata Locomotive and Engineering Co. Ltd. [1966] 60 ITR 405 (SC), which we shall discuss a little later. That takes us to the next and more important question whether the loss sustained by the assessee was a trading loss. Now, this loss was obviously not an allowable deduction under any express ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of devaluation of the Pakistani rupee and the act of devaluation was an act of sovereign power extrinsic to the business, the loss could not be said to spring from the business of the assessee. Whether the loss suffered by the assessee was a trading loss or not would depend on the answer to the question, whether the loss was in respect of a trading asset or a capital asset. In the former case, it would be a trading loss but not so in the latter. The test may also be formulated in another way by asking the question whether the loss was in respect of circulating capital or in respect of fixed capital. This is the formulation of the test which is to be found in some of the English decisions. It is, of course, not easy to define precisely what is the line of demarcation between fixed capital and circulating capital, but there is a well recognised distinction between the two concepts. Adam Smith in his Wealth of Nations describes "fixed capital" as what the owner turns to profit by keeping it in his own possession and "circulating capital" as what he makes profit of by parting with it and letting it change masters. "Circulating capital" means capital employed in the trading oper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the appellants' trading receipts for the purpose of computing their profits assessable to income-tax under Case I of Schedule D. The learned judge pointed out that (page 69) "the profit which arises in the present case is a profit arising directly from the business which had to be done, because ...... the business was conducted on a dollar basis and the appellants had, therefore, to buy dollars in order to make the advances against the goods as prescribed by the agreements. The profit accrued in this case because they had to do that, thereafter as a trading concern in this country re-transferring or re-exchanging into sterling." Since the dollars were purchased for the purpose of carrying on the business as sole commission agents and as an integral part of the activity of such business, it was held that the profit arising on re-transfer or re-exchange of dollars into sterling was a trading profit falling within Case I of Schedule D. This decision was accepted as a correct decision by the Court of Appeal in Davies v. Shell Co. of China Ltd. [1951] 32 TC 133; [1952] 22 ITR (Supp) 1 (CA). We may then refer to the decision of the Court of Appeal in Imperial Tobacco Co. v. Kelly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... free will, to sell those surplus dollars, if in that case the resulting profit should be regarded as income, whereas if the sale were a compulsory one the resulting profit would be capital. That is a distinction which, in my opinion, cannot possibly be made. To reduce the matter to its simplest elements, the appellant company has sold a surplus stock of dollars which it had acquired for the purpose of effecting a transaction on revenue account. If the transaction is regarded in that light, it seems to me it is precisely on all fours with the case of ally trader who, having acquired commodities for the purpose of carrying out a contract, which falls under the head of revenue for the purpose of assessment under Schedule D, Case I, then finds that he has bought more than he ultimately needs and proceeds to sell the surplus. In that case it could not be suggested that the profit so made was anything but income. It had an income character impressed upon it from the very first." This decision clearly laid down that where an assessee in the course of its trade engages in a trading transaction, such as purchase of goods abroad, which involves as a necessary incident of the transaction it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; deposits at a smaller cost in sterling than the amount it had realised by converting the deposits into sterling, was not a trading profit, but it was simply the equivalent of an appreciation in a capital asset not forming part of the assets employed as circulating capital in the trade." Since the court took the view that the deposits were in the nature of fixed capital, any appreciation in their value on account of alteration in the rate of exchange would be on capital account and that is why the court held that such appreciation represented capital profit and not trading profit. That takes us to the two decisions of this court which have discussed the law on the subject and reiterated the same principles for determining when exchange profit or loss can be said to be trading profit or loss. The first decision in chronological order is that reported in CIT v. Tata Locomotive and Engineering Co. Ltd. [1966] 60 ITR 405 (SC). There the assessee, which was a limited company carrying on business of locomotive boilers and locomotives, had, for the purpose of its manufacturing activity, to make purchases of plant and machinery in the United States. Tata Inc., New York, a company incorp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the answer to the question: "...depends on whether the act of keeping the money, i.e., $ 36,123.02, for capital purposes after obtaining the sanction of the Reserve Bank was part of or a trading transaction. If it was part of or a trading transaction then any profit that would accrue would be revenue receipt; if it was not part of or a trading transaction then the profit made would be a capital profit and not taxable. There is no doubt that the amount of $ 36,123.02 was a revenue receipt in the assessee's business of commission agency. Instead of repatriating it immediately, the assessee obtained the sanction of the Reserve Bank to utilise the commission in its business of manufacture of locomotive boilers and locomotives for buying capital goods. That was quite an independent transaction, and it is the nature of this transaction which has to be determined. In our view it was not a trading transaction in the business of manufacture of locomotive boilers and locomotives; it was clearly a transaction of accumulating dollars to pay for capital goods, the first step to the acquisition of capital goods. If the assessee had repatriated $ 36,123.02 and then after obtaining the sanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e old parity between Indian and Pakistani rupee ceased to exist. The exchange ratio between the two countries was, however, not determined until 27th February, 1951, when it was agreed that 100 Pakistani rupees would be equivalent to 144 Indian rupees. The assessee did not carry on any business in foreign currency in Pakistan and even after it was permitted to carry on business in Pakistan currency on 3rd April, 195 1, it carried on no foreign exchange business. The amount of Rs. 3,97,221, which was lying with the Karachi branch, remained idle there and was not utilised in any banking operation even within Pakistan. On July 1, 1953, the State Bank of Pakistan granted permission for remittance and two days later, the assessee remitted the amount of Rs. 3,97,221 to India. This amount, in view of the difference in the rate of exchange, became equivalent to Rs. 5,71,038 in terms of Indian currency and, in the process, the assessee made a profit of Rs. 1,73,817. The question arose in the assessment of the assessee whether this profit of Rs. 1,73,817 was a revenue receipt or a capital accretion. Ramaswami J., speaking on behalf of this court, pointed out that the amount of Rs. 3,97,221 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of alteration in the rate of exchange, would be a trading loss, but if, instead, these two amounts were held on capital account and were part of fixed capital, the loss would plainly be a capital loss. The question whether the loss suffered by the assessee was a trading loss or a capital loss cannot, therefore, be answered unless it is first determined whether these two amounts were held by the assessee on capital account or on revenue account or, to put it differently, as part of fixed capital or of circulating capital. We would have ordinarily, in these circumstances, called for a supplementary statement of case from the Tribunal giving its finding on this question, but both the parties agreed before us that their attention was not directed to this aspect of the matter when the case was heard before the revenue authorities and the Tribunal and hence it would be desirable that the matter should go back to the Tribunal with a direction to the Tribunal either to take additional evidence itself or to direct the ITO to take additional evidence and make a report to it, on the question whether the sums of Rs. 25 lakhs and Rs. 12,50,000 were held in West Pakistan as capital asset or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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