Judicial Analysis Court Copy Headnote Facts Arguments Court observation

1966 Supreme(SC) 11

SUPREME COURT OF INDIA
K. SUBBA RAO, J.C. SHAH AND S.M. SIKRI, JJ.
The Commissioner of Income-tax, Bombay City-1, Petitioner
Versus
The Tata Locomotive and Engineering Co., Ltd., Respondent.
Civil Appeal No. 236 of 1965.
Advocates appeared
Mr. A. V. Viswanatha Sastri, Senior Advocate, (M/s. N. D. Karkhanis, R. H. Dhebar and R. N. Sachthey, Advocates, with him), for Appellant; Mr. N. A. Palkhivala, 1507 Senior Advocate, (Mr. T. A. Ramachandran, Advocate, and M/s. J. B. Dadachanji, O. C. Mathur and Ravinder narain, Advocates of M/s. J. B. Dadachanji and Co., with him), for Respondent.

Advocates:
A.V.VISHWANATHA SASTRI, J.B.DADACHAN, N.A.PALKHIWALA, N.D.Karkhanis, O.C.MATHUR, R.H.Dhebar, R.N.SACH, Ravindra Narayan, T.A.Ramachandran

Profit made on realization of foreign currency kept or used on capital account is capital appreciation, even if the foreign currency was originally acquired as a revenue receipt.

Headnote:
INCOME TAX - Profit arising from devaluation of dollar currency - Whether taxable in the hands of assessee - Whether surplus or difference in dollar exchange account arising by reason of repatriation thereof as a result of devaluation was rightly taken as profit taxable.
Fact of the Case:

The assessee, Tata Locomotive and Engineering Co. Ltd., had an account with Messrs Tata Inc., New York, where they kept commission earned from Baldwin Locomotive Works. The assessee repatriated the dollars to India after devaluation of the pound sterling, resulting in a surplus of Rs. 70,147. The Income-tax Officer assessed the amount as profit arising incidentally to the assessee's business. The Appellate Assistant Commissioner upheld the assessment, except for a minor reduction. The Tribunal excluded profits attributable to amounts held for capital purposes but held that the profit on the commission amount was taxable as a trading profit.
Finding of the Court:

The High Court held that the commission earned was initially income, but when the assessee appropriated it for purchasing capital goods with the Reserve Bank's permission, it became fixed capital. The surplus arising from devaluation was an accretion to fixed capital and not taxable. The Supreme Court upheld the High Court's decision.
Issues: 1. Whether the surplus or difference arising from devaluation in the process of converting dollar currency in regard to the sum of $ 36,123/02 repatriated to India was profit which was taxable in the hands of the assessee? 2. Whether the said sum of $36,123/02 having been taxed in the relevant earlier years, the surplus or difference in dollar exchange account arising by reason of the repatriation thereof as a result of devaluation was rightly taken as profit taxable?
Ratio Decidendi: The court held that the act of keeping the money, i.e., $ 36,123. O2 for capital purposes after obtaining the sanction of the Reserve Bank was not part of or a trading transaction. Therefore, any profit that would accrue would be capital profit and not taxable.
Final Decision: The appeal was dismissed with costs.

Judgement

SIKRI, J. : This appeal by certificate granted by the High Court of Judicature at Bombay under S. 66-A (2) of the Indian Income Tax Act, 1922, hereinafter referred to as the Act, is directed against its judgment in a reference made to it by the Income-tax Appellate Tribunal. The following two questions were referred:

(1) Whether on the facts and in the circumstances of the case, the surplus or difference arising as a result of devaluation in the process of converting dollar currency in regard to the sum of $ 36,123/02 repatriated to India was profit which was taxable in the hands of the assessee?

(2) Whether the said sum of $36,123/02 having been taxed in the relevant earlier years, the surplus or difference in dollar exchange account arising by reason of the repatriation thereof as a result of devaluation was rightly taken as profit taxable?

2. The relevant facts and circumstances, as stated in the Statement of the case, are as follows: The respondent, Tata Locomotive and Engineering Co. Ltd., hereinafter referred to as the assessee, is a limited company registered under the Indian companies Act (VII of 1913), and has its registered office at Bombay. The main business of the assessee is the manufacture of locomotive boilers and locomotives. For the purpose of this manufacturing activity the assessee had to make purchases of plant and machinery, etc., in various countries including the U. S. A. The assessee appointed M/s. Tata Inc., New York, as its purchasing agent in the U. S. A. With the sanction of the Exchange Control Authorities a remittance of $33,850 was made in 1949 to Messrs Tata Inc., New York, for the purpose of purchasing capital goods from U. S. A. and meetting other expenses connected therewith.

2a. The assessee was also the selling agent of 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. These expenses were re-imbursed to the assessee by Baldwin Locomotive Works in the U. S. A. by paying the amount due to Messrs Tata Inc., New York. The amount so paid to Tata Inc. was retained in the assessee s account with Messrs Tata Inc. for purchase of capital goods.

3. As the sole selling agent, the assessee was entitled to commission from Baldwin Locomotive Works. The Commission payable to the assessee in dollars was not actually sent from U. S. A. to India, but with the sanction of the Exchange Control Authorities was made over to the assessee s purchasing agents, Messrs Tata Inc., New York. The reason why this was done was explained in the assessee s letter, dated october 26, 1948, to the Reserve Bank of India.

4. In it the assessee stated inter alia as follows:

"It would be more convenient if the amount of commission payable to us periodically be deposited into our account with our representative, Messrs. Tata Inc., New York, opened with reference to your letter EC, BY. 7031/74/46, dated 2nd October1946, as the same would go to reduce the amount of remittance to be made from here in recoupment of that amount from time to time. These amounts will be utilised solely for the purposes detailed in our letter to you TC-679, dated 15th August 1946."

The purposes referred to in the said letter of August 15, 1946, were purchase of capital goods. The amount received as commission was taxed in the relevant assessment years on the accrual basis and tax has been paid.

5. On September 16, 1949, there was a balance of $ 48,572/30 in the assessee s account with Messrs. Tata Inc., made up as under:

(1) Remittances from Bombay $ 33,850.00

Less : Dollars spent in U. S. A. for capital purpose $ 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 and retained in the U. S. A. $ 36,123.02

Total $ 48,572.30

On September 16, 1949

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