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HIGH COURT OF CALCUTTA
P. B. Mukharji, T. K. Basu
SUTLEJ COTTON MILLS LTD. - Appellant
Versus
COMMISSIONER OF INCOME-TAX - Respondent
Income-Tax Reference 128 Of 1966
Decided On : APRIL 29, 1970
INCOME TAX - Exchange loss - Whether exchange loss suffered by the assessee on account of devaluation of Pakistan currency is allowable as a deduction in computing the profits of the business under Section 10(1) of the Indian Income-tax Act, 1922 - Held, no.
Fact of the Case:
The assessee, a cotton mill company, had its head office in Calcutta and its cotton mills in West Pakistan. For the assessment years 1957-58 and 1959-60, the assessee claimed exchange loss of Rs. 11 lakhs and Rs. 5,50,000 respectively on remittances of profit from Pakistan. The Income-tax Officer disallowed the claims on the ground that they were purely hypothetical book losses. On appeal, the Appellate Assistant Commissioner upheld the order of the Income-tax Officer. The Tribunal also rejected the assessee's appeals and upheld the orders of the taxing authorities.
Finding of the Court:
The Tribunal held that there had been neither any loss nor any gain in exchange on the transfer of the amounts from Pakistan to India. The assessee's books of account in the head office in Calcutta showed the profits of Pakistan in rupees and the remittance from Pakistan had also been shown in rupees, without showing any loss in the process or due to the exchange fluctuation between the Pakistan rupee and the Indian rupee. The Tribunal found that the head office books of the assessee disclosed no loss in respect of the remittances from Pakistan.
Issues: 1. Whether, on the facts and in the circumstances of the case, the assessee's 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? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that law charges amounting to Rs. 1,170 and Rs. 3,573 incurred in respect of business profits tax appeals for the assessment years 1957-58 and 1959-60 were not allowable as deductions? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that law charges of Rs. 2,551 incurred for effecting changes in the existing managing agency agreement were not allowable as a deduction for the assessment year 1957-58? 4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that interest amounting to Rs. 5,236 paid on funds invested in shares which produced no dividend income was not allowable as a deduction for the assessment year 1957-58? 5. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that interest amounting to Rs. 10,671 disallowed in the assessments for the assessment years 1957-58 and 1958-59 on funds invested in shares was not allowable as a deduction in the assessment year 1959-60?
Ratio Decidendi: 1. The exchange loss suffered by the assessee on account of devaluation of Pakistan currency is not allowable as a deduction in computing the profits of the business under Section 10(1) of the Indian Income-tax Act, 1922, as it is not a loss or a business loss on the tests and principles laid down by the Supreme Court in Badridas Daga v. Commissioner of Income-tax and Commissioner of Income-tax v. Nainital Bank Ltd. 2. The law charges amounting to Rs. 1,170 and Rs. 3,573 incurred in respect of business profits tax appeals for the assessment years 1957-58 and 1959-60 are allowable as deductions under Section 10(2)(xv) of the Indian Income-tax Act, 1922, as they are expenses incurred for protecting the business. 3. The interest amounting to Rs. 5,236 paid on funds invested in shares which produced no dividend income is allowable as a deduction under Section 12(2) of the Indian Income-tax Act, 1922, as there was a dividend income or return from which this allowance could be made.
Final Decision: Question No. 1 is answered in favour of the revenue. Question No. 2 is answered in favour of the assessee and against the revenue. Question No. 3 is not answered. Question No. 4 is answered in favour of the assessee and against the revenue. Question No. 5 is not answered.
( 1 ) IN this statement of the case on the income-tax reference under Section 66 (1) of the Indian Income-tax Act, 1922, the following questions have been raised :" 1. Whether, on the facts and in the circumstances of the case, the assessee's 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 ?2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that law charges amounting to Rs. 1,170 and Rs. 3,573 incurred in respect of business profits tax appeals for the assessment years 1957-58 and 1959-60 were not allowable as deductions ?3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that law charges of Rs. 2,551 incurred for effecting changes in the existing managing agency agreement were not allowable as a deduction for the assessment year 1957-58 ?4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that interest amounting to Rs. 5,236 paid on funds invested in shares which produced no dividend income was not allowable as a deduction for the assessment year 1957-58 ?5. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that interest amounting to Rs. 10,671 disallowed in the assessments for the assessment years 1957-58 and 1958-59 on funds invested in shares was not allowable as a deduction in the assessment year 1959-60 ?
( 2 ) THE assessee has not pressed questions Nos. 3 and 5 as set out above. That position is accepted by the revenue. The court, therefore, will not record an answer on either of questions Nos. 3 and 5.
( 3 ) THE facts of the case are as follows : the assessee is Sutlej Cotton Mills Ltd. The statement of the case records that its head office is in Calcutta but its Cotton Mills are in West Pakistan. The assessment years are 1957-58 and 1959-60. The respective accounting years are the financial years ending on the 31st March, 1957, and the 31st March, 1959. The assessee claimed for these two years Rs. 11 lakhs and Rs. 5,50,000 as losses suffered in exchange on remittances of profits from Pakistan. In the accounting year ending on the 31st March, 1954, that is, for the assessment year 1954-55, the Pakistan profits of the assessee as assessed in Pakistan amounted to Rs. 1,68,97,232 at the official rate of exchange of 100 Pakistan rupees--144 Indian rupees prevailing at that time. For the purpose of the assessee's Indian assessment for 1954-55 the Pakistan profits were converted to a higher figure by adopting this exchange ratio and was included in the assessee's total income in India. During the accounting year for the assessment year 1957-58 the assessee obtained the permission of the Reserve Bank of Pakistan to remit Rs. 25,00,000 out of its Pakistan profits for the assessment year 1954-55 to India. But, then, at that time, the remittance was made on the then prevailing official exchange ratio which was 100 Pakistan rupees = 100 Indian rupees. The assessee, therefore, received in India Rs. 25 lakhs in Indian currency in exchange for Rs. 25 lakhs of Pakistan currency. The assessee claimed that as in its assessment for 1954-55 this amount of Rs. 25 lakhs (Pakistan) bad been included in the Indian total income of Rs. 36 lakhs (Indian), the assessee had suffered a loss of Rs. 11 lakhs when the amount was actually remitted from Pakistan to India. A similar claim for loss was made for the assessment year 1959-60 of Rs. 5,50,000 in respect of the transfer of Pakistan profits of the accounting year ending on the 31st March, 1955, to India. The claims for losses were disallowed in both the years by the Income-tax Officer who held the claims to be purely hypothetical book losses. On appeal, the Appellate Assistant Commissioner expressed the opinion that the losses claimed wer
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