9911796707
TMI Blog1981 (6) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... alance outstanding for purchase of capital goods 37,375 (iii) Loss on devaluation on balance outstanding for import of raw materials and components used for the purposes of the assessee's business 1,95,724 -------- 6,50,932 Deduct : Profit on devaluation on sterling bank balance 79,317 -------- Net loss 5,71,615 -------- The ITO, however, disallowed the entire devaluation loss claimed by the assessee-company. The assessee went up in appeal before the AAC. Now, so far as the second item, that is to say, loss on devaluation on balance outstanding for purchase of capital goods is concerned, this was disallowed by the I.T. authorities and has subsequently been upheld and no question has been directed on this account. The loss on devaluation on the balance outstanding for the import of raw materials and components used for the purposes of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the ITO was deleted. Being aggrieved by the aforesaid order, the Revenue went up in appeal before the Tribunal. After setting out the rival contentions and after referring to several authorities, the Tribunal was of the view that whether this loss could be allowed or not depended on whether this loss was due to a sovereign act of the State or whether this sprang directly from the carrying on, of the business and/or was incidental to it and whether it was not a loss sustained by the assessee even in some connection with the business. The Tribunal was of the view in that context that even if the loan was taken by the assessee in the running of the business and a certain amount of loan taken in sterling remained outstanding on the devaluation date, a loss would fall to the assessee on this amount as the owner of foreign exchange, to which all persons would be exposed on that date whether they did business, or not. That meant that this loss, even though it had some connection with the business was not a loss, according to the Appellate Tribunal, which sprang directly from the carrying on of the business or was incidental to it. In the premises the Tribunal was unable to agree with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. The user of a loan, which is not a trade debt, would not make it none the less capital. Therefore, it was stressed that between a borrower and the lender the relationship always remained the same irrespective of the manner in which the borrowed money was utilised by the borrower. It was, therefore, emphasised that different considerations might arise or might be applicable in the case of usual trade debts or what is known in common parlance as the current liabilities or outstandings. According to learned advocate for the Revenue, a loan can never be treated on revenue account and, therefore, any loss arising not in respect of dealing with a loan amount but loss because of devaluation or revaluation of the currency in which such loan was obtained and was to be repaid would be always on the capital account. In aid of this proposition, reliance was sought to be placed on the observations of the Court of Appeal of England in the case of Davies v. Shell Company of China Ltd. [1951] 32 TC 133; [1952] 22 ITR (Supp) 1. As this was a case upon which Revenue sought great reliance and as this case had been the subject-matter of interpretation by the Supreme Court on more than one occasion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding 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 and it was, therefore, not assessable to tax. Therefore, from the narration of events, it is apparent that the court proceeded on the basic assumption of fact that it was an appreciation of a capital asset which did not form part of the assets employed as circulating capital in the trade. We need not actually examine the details or the nature of the deposit made. But it may not be inappropriate to refer to certain observations of Lord justice Jenkins in the course of the judgment. There, Jenkins L.J. observed as follows: "The points to be noticed as to the character of the payment made by an agent under that form of agreement and as to the essential features of the bargain recorded by it are these: The sum paid is a deposit; it is to stand as security for, to put it shortly, the fidelity of the agent so that in the event of default by the agent it may be applied in discharge of sums due from him in respect of sales of petrol or the like. It is not however payment in advance because what it contemplates is that it shall rem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which involves, as a necessary incident of the transaction itself the purchase of currency of the foreign country concerned, then any profit resulting from an appreciation or loss resulting from a depreciation of the foreign currency embarked in the transaction as compared with sterling will prima facie be a trading profit or a trading loss for income-tax purposes as an integral part of the trading transaction. That concession or admission by Mr. Grant is amply justified by the cases to which we have been referred. There is the case of Landes Brothers v. Simpson [1934] 19 TC 62 (KB), which is a decision of my brother Singleton as a judge of first instance. There, the appellants, who carried on business as fur and skin merchants and as agents, were appointed sole commission agents of a company for the sale in British and elsewhere of furs exported from Russia on the terms, inter alia, that they should advance to the company a part of the value of each consignment. All the transactions between the appellants and, the company were conducted on a dollar basis and owing to fluctuations in the rate of exchange between the dates when advances in dollar; were made by the appellants to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn said that what was subsequently done with the deposits once they were received would not be material if their receipt was in origin properly to be regarded as a trading receipt. That, Sir Andrew Clark said, must determine the character of the profit made by reason of their repayment in depreciated Chinese dollars. The Lord justice agreed with that view and to put in the words of Lord justice Jenkins, it may not be inappropriate to refer to the observations made at p. 22 of [1952] 22 ITR (Suppl.) (Davies v. Shell Co. of China Ltd.), wherein it was observed as follows: As I have said, Sir Andrew Clark contends that that is an irrelevant consideration, and I agree with him, subject to this reservation : The company might conceivably have used these deposits in such a way as to mingle them with the capital employed in its trading in petrol and petroleum products. It might have invested the deposits in the purchase of petroleum, treating the depositors as trade creditors, the deposits as trade receipts, and repayments of deposits as trade outgoing. If that had been so then it might well have been said, it seems to me, that whatever the nature of the transaction was at the outset th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not on account of any goods supplied or services rendered by him in the course of its trade but simply by virtue of the fact that he had been appointed an agent of the company with a view to his trading on its behalf, and as a condition of his appointment had deposited with, or in other words, lent to the company the amount of his stipulated deposit. Therefore, this deposit was considered to be simpliciter a loan to the company and on that basis the Court of Appeal had arrived at the conclusion. The decision on this aspect was put by Lord justice in the following words at p. 26 of [1952] 22 ITR (Suppl) : "After paying the best attention I can to the arguments for the Crown and those for the respondent company, I find nothing in the facts of this case 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant to the assessment years 1957-58 and 1959-60 the assessee-company obtained permission of the Reserve Bank of Pakistan and remitted to India Rs. 25 lakhs and Rs. 12 1/2 lakhs respectively. The assessee claimed that on remittance the assessee-company suffered respectively a loss of Rs. 11 lakhs and Rs. 5 1/2 lakhs but the claims of the assessee-company were rejected by the Revenue and the Tribunal sustained the disallowance. On a reference, the High Court held that no loss was sustained by the assessee-company 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 the business of the assessee-company but was one caused by devaluation which was an act of the State. It was held by the Supreme Court, on appeal, while setting aside the decision of the High Court and remanding the case to the Tribunal, that the assesseecompany suffered a loss of Rs. 11 lakhs and Rs. 5 1/2 lakhs in the process of conversion on account of alteration in the rate of exchange and further that the question whether the loss suffered by the assessee-company was a trading loss or a capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese circumstances, they sell this surplus stock of dollars; and it seems to me quite impossible to say that the dollars have lost the revenue characteristic which attached to them when they were originally bought, and in some mysterious way have acquired a capital character. In my opinion, it does not make any difference that the contemplated purchases were stopped by the operation of Treasury or governmental orders, if that were the case; nor is the case affected by the fact that the purchase was under a Treasury requisition and was not a voluntary one. It would be fantastic result, supposing the company had been able voluntarily, at its own free will, to sell those surplus dollar 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or loss would be of capital nature. Now, in the present case, no finding appears to have been given by the Tribunal as to whether the sums of Rs. 25 lakhs and Rs. 12,50,000 were held by the assessee in West Pakistan on capital account or revenue account and whether they were part of fixed capital or of circulating capital embarked and adventured in the business in West Pakistan. If these two amounts were employed in the business in West Pakistan and formed part of the circulating capital of that business, the loss of Rs. 11 lakhs and Rs. 5,50,000 resulting to the assessee on remission of those amounts to India, on account 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 circums ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pay simple interest at 6 per cent. per annum on so much of the balance as remained due. The balance was also to be secured by hypothecation of all movable properties of the assessee-company. Daring the relevant accounting years the assessee-company paid interest on the balance outstanding and the question was whether the interest paid was allowable as a deduction under s; 10(2)(iii) or (xv) of the Indian I.T Act, 1922. It was held by majority of two learned judges, Shah and Sikri JJ., that the expression capital used in s. 10(2)(iii), in the context in which it occurred, meant money and not any other asset. There was in truth no capital borrowed by the assessee. An agreement to pay the balance of consideration due by the purchaser did not in truth give rise to a loan. Therefore, the claim for deduction of the amount of interest under s. 10(2)(iii) was not admissible. It was, however, held by the full court that the interest paid by the assessee was business expenditure and was allowable as a deduction under s. 10(2)(xv). The transaction of acquisition of assets was closely related to the commencement and carrying on of the assessee's business and the interest paid on the unpaid ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s perverse was also negatived. The second question in that reference was whether, on the facts and circumstances of the case, the Tribunal was right in holding that the amount of Rs. 2,83,614 was not deductible in computing the assessee's Profits and gains of the business. Dealing with this contention at p. 796 of the report the learned judge has set out the contentions raised on behalf of the assessee. On behalf of the assessee it was contended that the extra amount of Rs. 2,83,614 which the assessee had to provide as result of devaluation was in the nature of an ordinary business expenditure. It was as much an expenditure as postal charges which might have been incurred by the assessee if the amount was remitted by post for repayment of the loan. The assessee maintained its accounts on the mercantile system and it was, therefore, contended that the loss in any case did not arise in the year and particularly it was contended that the loan was to meet the income-tax liability and should be allowed. All these contentions were negatived. On the other hand, on behalf of the Revenue it was contended that the assessee did not incur any expenditure. Expenditure, according to learned advo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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