Judgment

P. N. BHAGWATI, J. :- These appeals by special leave are directed against a judgment of the Calcutta High Court answering the first question referred to it by the Tribunal in favour of the Revenue and against the assessee. There were in all five questions referred by the Tribunal but questions Nos. 2 to 5 no longer survive and these appeals are limited only to question No. 1. That question is in the following terms :

"Whether on the facts and in the circumstances of the case, the assessees claim for the exchange loss of Rs. 11 lakhs for the assessment year 1957-58 and Rs. 5,50,000/- for the assessment year 1959-60 in respect of remittances of profit from Pakistan was not allowable as a deduction?

Since there are two assessment years in regard to which the question arises, there are two appeals, one in respect of each assessment year, but the question is the same. We will briefly state the facts as that is necessary for the purpose of answering the question.

2. 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 7 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 Pakistani 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 agreement between India and Pakistan. It may be pointed out that for some time after the partition of India, there continued to be parity in the rate of exchange between India and Pakistan but on 18th Sept. 1949, on the devaluation of the Indian rupee, the rate of exchange was changed to 100 Pakistani rupees being equal to 144 Indian rupees and that was the rate of exchange at which the Pakistan profit was converted into Indian rupees for the purpose of inclusion in the total income of the assessee for the assessment year 1954-55. The rate of exchange was, however, once again altered when Pakistani rupee was devalued on 8th August, 1955 and parity between Indian and Pakistani rupee was restored. The assessee thereafter succeeded in obtaining the permission of the Reserve Bank of Pakistan to remit a sum of Rs. 25 lakhs in Pakistani rupees out of the Pakistani profit for the assessment year 1954-55 and pursuant to this permission, a sum of Rs. 25 lakhs in Pakistani rupees was remitted by the assessee to India during the accounting year relevant to the assessment year 1957-58. The assessee also remitted to India during the accounting year relevant to the assessment year 1959-60 a further sum of Rs. 12,50,000/- in Pakistani rupees out of the Pakistani profit for the assessment year 1954-55 after obtaining the necessary permission of the Reserve Bank of Pakistan. But by the time these remittances came to be made, the rate of exchange had, as pointed out above, once again changed to 100 Pakistan rupees being equal to 100 Indian rupees and the amounts received by the assessee in terms of Indian rupees were, therefore, the same, namely, Rs. 25 lakhs and Rs. 12,50,000. Now, the profit of Rs. 25 lakhs in terms of Pakistani rupees had been included in the total income of the assessee for the assessment year 1954-55 as Rs. 36 lakhs in terms of Indian rupees according to the then prevailing rate of exchange of 100 Pakistani rupees being equal to