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1985 Supreme(SC) 364
SUPREME COURT OF INDIA
V.D. TULZAPURKAR AND SABYASACHI MUKHARJI, JJ.
State Bank of India, Appellant
Versus
Commissioner of Income-tax, Ernakulam, Respondent.
Civil Appeal No. 596(NT) of 1974
Decided on 3-10-1985.
A.Subhashini, K.C.DUA, N.SUDHAKARAN, T.S.KRISHNAMURTHY IYER, V.GAURI SHANKAR
Headnote:
Income-tax Act, 1961 – Section 256(1) - Oral application - Appellant for substitution - Special leave against – Original appellant Bank of Cochin Ltd., has been amalgamated with the State Bank of India and on an oral application of the appellant for substitution and with the consent of the respondent, this application was allowed and the amendment was directed to be effected – Assessee, previously the Bank of Cochin Ltd., a banking company, as part of its banking business, had been purchasing cheques, payment orders, mail transfers, demand drafts, bills and other negotiable instruments drawn in foreign currencies and sometimes foreign currencies themselves from its clients – These foreign exchange assets were subsequently sold or encashed through the assessees correspondent-banks in the foreign countries concerned and the proceeds credited to the current account of the assessee with the correspondent-bank concerned –Held, It was held by this Court in Sutlej Cotton Mills, that where profit or loss arose to an assessee on account of appreciation or depreciation in the value of foreign currency held by him, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency was held by the assessee on revenue account or as a trading asset or as part of-circulating capital embarked in the business – But, if on the other hand, the foreign currency was held as a capital asset or as fixed capital, such profit or loss would be of capital nature – Important question to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee – In that context it is well settled that the way in which entries are made by the assessee in its books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss – Assessee might, by making entries which were not in conformity with the proper principles of accountancy, have concealed profit or showed loss and the entries made by him could not, therefore, be regarded as conclusive one way or the other – Appeal dismissed.
JUDGMENT
SABYASACHI MUKHARJI, J. :— The original appellant Bank of Cochin Ltd., has been amalgamated with the State Bank of India and on an oral application of the appellant for substitution and with the consent of the respondent, this application was allowed and the amendment was directed to be effected.
2. This appeal arises by special leave against the judgment and decision of the High Court of Kerala at Ernakulam dated 25th January, 1973 in Income-tax Reference No. 31 of 1971 (reported in 1973 Tax LR 11099).
3. The assessee, previously the Bank of Cochin Ltd., a banking company, as part of its banking business, had been purchasing cheques, payment orders, mail transfers, demand drafts, bills and other negotiable instruments drawn in foreign currencies and sometimes foreign currencies themselves from its clients. These foreign exchange assets were subsequently sold or encashed through the assessees correspondent-banks in the foreign countries concerned and the proceeds credited to the current account of the assessee with the correspondent-bank concerned. Consequent on the devaluation of the Indian rupee on 6th June, 1966, the amounts credited to the assessee in the foreign banks registered an increase of Rs. 4,65,515/-. The excess realisation on devaluation was treated by the Income-tax Officer as the income of the assessee during the accounting year ending 31st December, 1966, rejecting the assessees plea that the profit was in the nature of a windfall. There was an appeal from the said decision to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner rejected the assessees contention. There was a further appeal to the Appellate Tribunal. The Tribunal also did not accept the assessees submission. There was a further contention that as on the last day, 31st December, 1966, of the accounting year relevant to the assessment year 1967-68, the assessee had valued the Government securities held by it at the market price and as the market price of the securities on that date was less than the cost price, the difference amounting to Rs. 52,935/- was taken as loss arising from the valuation of the closing stock of securities. In the return filed for the assessment year 1967-68, a claim was made to deduct the above loss. As there. was no actual loss arising on the sale of securities and as there was no debit to the profit and loss account of the alleged loss and as the method of valuation adopted for this year was not in accordance with the method of accounting regularly employed by the assessee, the Income-tax Officer disallowed the loss. On appeal, the Appellate Assistant Commissioner as well as the Appellate Tribunal came to the same conclusion.
4. Under S. 256(1) of the Income-tax Act, 1961 (hereinafter called the Act), two questions were referred to the High Court
"(i) Whether, on the facts and in the circumstances of the case, the sum of Rs. 4,65,515/-, being profit arising on the devaluation of the Indian rupee on 6th June, 1966, was income chargeable to Income-tax?
(ii) Whether, on the facts and in the circumstances -of the case, the Appellate Tribunal was right in law in rejecting the assessees claim to deduct an amount of Rs. 52,935/- being loss arising on the valuation of closing stock of Government securities, in determining its total income for the assessment year 1967-68?"
5. The High Court answered the first question in favour of the revenue and against the assessee and the second question was answered against the revenue and in favour of the assessee.
6. At the outset it may be mentioned that the second question is no longer alive before us and the second contention therefore need not be considered.
7. The appeal is restricted as mentioned hereinbefore to the first question only. The High Court held that the assessee was doing banking business and as part of banking business it was purchasing cheques, payment orders, mail transfers, demand drafts and other negotiable instruments, drawn in foreign curren
