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TMI Blog1961 (8) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... nited States of America and meeting other expenses connected therewith. In connection with the survey and setting up of the factory of the assessee-company, representatives of Baldwin Locomotive Works, Philadelphia, U.S.A., used to visit India. The assessee made available funds to such representatives for the purpose of meeting their expenses in India. The assessee company was appointed as the sole selling agents of the Baldwin Locomotive Works for the sale of their products in India and in connection with the sale of the products of Baldwin Locomotive Works in India, the assessee had to incur expenses on their behalf in India. The funds so made available to the representatives of the Baldwin Locomotive Works and the expenses incurred by the assessee on behalf of the Baldwin Locomotive Works in India were reimbursed to the assessee by the Baldwin Locomotive Works of U.S.A. by paying the amounts due to the assessee's selling agents, Tata Inc., in New York. The amounts so paid by the Baldwin Company to the Tata Inc. with the previous permission of the Reserve Bank of India were retained in the assessee's account with the Tata Inc. for the purchase of capital goods. Now, as al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent in the U.S A. for capital purposes $30,282.96 $3,567.04 2.Amount reimbursed by Baldwin Locomotive Works against funds made available to its representatives in India $8,882.24 3.Commission actually received from Baldwin Locomotive Works retained in the U.S.A. $36,123.02 Total $48,572.30 On 16th of September, 1949, the pound sterling was devalued. Prior to that date the rate of exchange between rupee and dollar was ₹ 3.330 per dollar. On devaluation the rate became ₹ 4.775 per dollar. The result thus was the American goods became expensive than before. The Government of India also imposed restrictions on the import of goods from the U.S.A. It appears that this rendered, as the, statement of case would show, the further purchase of capital goods from the U.S.A. practically impossible. The assessee considering that in these circumstances it was not necessary to retain large amount of $48,572.30 in America applied to the Reserve Bank on 17th of December, 1949, for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made available in India to its representatives by the assessee, holding that these two sums were held by the assessee for capital purposes, that is, for the purchase of capital goods and hence any profit that arose as a result of its conversion into rupee currency on account of the appreciation of the dollar in relation to the rupee, must be held on capital account. The Tribunal, therefore, directed that portion of the sum of ₹ 70,147 attributable to the said two sums must be excluded for the purpose of computing the assessee's income. As regards the third sum of 36,123.02 dollars received by the assessee by way of commission from the Baldwin company upto 16th September, 1949, the Tribunal held that the benefit secured by the assessee in the process of converting those dollars into rupee currency should be brought to tax as revenue receipt. On an application made by the assessee under section 66(1) of the Indian Income-tax Act, to make a reference to this court, the Tribunal held that questions of law did arise and, has, therefore, submitted a statement of case raising the following two questions: 1.Whether on the facts and in the circumstances of the case, the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtue of sub-section (3) of section 4 of the Foreign Exchange Regulation Act (Act VII of 1947) bound to bring back that amount to India. It has accordingly brought that amount to India. In the process of exchange the assessee has benefited. The character of the said amount not having undergone any change till the time the said amount was repatriated to India, the profits made by the assessee company are liable to tax because it is an incidental income made by the company during the course of its business. The character of this amount is not the same as that of the sums of 3567.04 dollars and 8882.24 dollars. According to Mr. Joshi, the company was incorporated in the year 1945, the remittance of 33,850 dollars made in 1946 was made out of the capital of the company and out of that sum the amount of 3567.04 dollars is left. The initial character of that amount being capital, that character remained throughout till that sum was repatriated to India. The other amount of 8882.24 dollars represented the amount made available by the assessee-company to the representatives of Baldwin company in India and the aforesaid amount paid by the Baldwin company to the assessee company was only by w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed dealer without any delay. The assessee, however, had obtained the permission of the Reserve Bank to retain that amount in America and it has to be seen what is the effect of the permission granted and subsequent dealings of the assessee with those dollars. It is indeed true that the permission granted by the Reserve Bank for retention of any foreign exchange in a foreign country by itself cannot have the effect of turning the amount, which is a revenue receipt, into a capital receipt. But the permission granted by the Reserve Bank has to be taken in the context of the facts and circumstances leading to the grant of permission by the Reserve Bank. We have already reproduced the letter of the assessee-company of 26th October, 1948, by which the assessee asked the permission of the Reserve Bank to retain the amounts of commission received by it from Baldwin Company in America in the account opened by it with its purchasing agents Messrs. Tata Incorporated for the purposes detailed by it in its letter of 15th August, 1946. When the permission granted by the Reserve Bank is taken in the context of this letter, it becomes abundantly clear that the the assessee had, at the time it aske ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation along with other amounts in that account. That being the position on facts, in our opinion, the character assumed by this amount of fixed capital did not undergo any change till the time benefit accrued on this amount to the assessee company as a result of change in the exchange rate. An alternative argument was advanced before us by Mr. Joshi that the assessee company had, after the devaluation of the pound sterling, of its own accord decided to bring back the money to India and when the assessee company had taken the decision and brought back the amount to India, it had given up its idea of utilising this amount for capital purposes and, therefore, the character of this deposit as a fixed capital never remained. He referred us to the extract of the letter of the assessee company reproduced by the Tribunal in paragraph 6 of its appellate order. The extract reads as follows: As we anticipate that our disbursements in the United States in the next few months may not exceed $8,000.00 we desire to bring to India $ 40,000.00 out of the above balance (i.e. $48,572). We shall be glad if you will please accord your sanction for the same. This extract read by itself mig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rising as a result of devaluation in the process of converting these dollars into rupee currency in repatriating them to India was an accretion to its fixed capital and was not, therefore, liable to tax. The view taken by us finds support in the ratio of the decision reported in Davies v. Shell Company of China Ltd. [1952] 22 ITR (Suppl.) 1 (CA) The facts of this case are: The assessee company was a British company carrying on business of sale and distribution of petroleum products in China. It had employed a number of Chinese agents to whom petroleum products were supplied by the assessee company without receiving payment for the goods in advance. These agents, however, were required by terms of the contract to deposit with the company certain sums in Chinese dollars. The company was at liberty to use the Chinese dollars in any manner it liked. The company also was authorised to take out of this deposit any amount which might become due from the agents in the event of their default. The amount remaining due to the credit of the agents was repayable to them with interest at the determination of the agency. The company kept these Chinese dollars received by its Chinese agents in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to divest those deposits of the character which it seems to me they originally bore, that is to say, the character of loans by the agents to the company, given no doubt to provide the company with a security, but nevertheless loans. As loans it seems to me they must prima facie be loans on capital not revenue account; which perhaps is only another way of saying that they must prima facie be considered as part of the company's fixed and not of its circulating capital. As appears from what I have said above, the evidence does not show that there was anything in the company's mode of dealing with the deposits when received to displace this prima facie conclusion. (p. 26) The aforesaid observations indicate that in deciding whether a particular sum is part of a fixed capital of an assessee or his circulating capital, the crucial test to be applied is to ascertain the purpose to which the assessee has appropriated that amount. No doubt the initial character of the amount at the time of its receipt would be relevant in determining the issue. In the absence of any evidence to the contrary, the amount shall continue to bear the same character, but the subsequent Course of dea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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