Commissioner of Income-Tax, Mysore Vs.
The Canara Bank Ltd. [1966] INSC 220 (13 October 1966)
13/10/1966 RAMASWAMI, V.
RAMASWAMI, V.
SHAH, J.C.
KHANNA, HANS RAJ
CITATION: 1967 AIR 417 1967 SCR (1) 859
CITATOR INFO:
E&R 1979 SC 5 (9)
ACT:
Indian Income-tax Act, 1922, s.
10--Appreciation in value of money remitted from Pakistan to India after
devaluation of Indian Rupee in 1949--Amount of appreciation whether capital or
revenue receipt.
HEADNOTE:
The respondent bank had its head office at
Mangalore. It also opened a branch at Karachi in 1946. After the partition of
India in 1947 the currencies of the two countries continued to be at par until
there was a devaluation of the Indian Rupee in 1949. The new exchange ratio
between the two countries was not determined until February 27, 1951. On this
date it was agreed that a hundred Pakistani Rupees were equivalent to a hundred
and forty-four Indian Rupees. On the date of the devaluation of the Indian
Rupee the Karachi Branch of the Bank bad with it a sum of Rs. 3,97,221
belonging to its head office. Owing to the difficulties of the currency
situation it was impossible to remit the amount to the head office for quite a
long time. On July 1, 1953, the State Bank of Pakistan permitted its remittance
to India. In terms of Indian currency the said amount became equivalent to Rs.
5,71,038.
The appreciation in the value of the money
was claimed by the bank to be only a capital gain but the Income-tax Officer
disallowed the claim holding that the appreciation had resulted in a revenue
receipt. Appeals before the Assistant Commissioner and the Appellate Tribunal
were rejected. A reference was then made to the High Court.
According to the agreed statement of case the
amount of Rs. 3,97,221 was 'blocked' and 'sterilised' for the period from the
devaluation of the Indian Rupee up to the time of its remittance to India. The
High Court took the view that the appreciation of the value of the money did
not arise in the course of the trading operation of the Bank and was not
therefore taxable as a revenue receipt. The Commissioner of Income-tax appealed
to this Court.
HELD: The money in question changed its
character of stock-in-trade' when it was 'blocked' and 'sterilised'.
According to the finding of Tribunal it was
not utilised for any internal banking operations in Pakistan. The increment in
the value of the money owing to the exchange fluctuation was therefore rightly
treated by the High Court to be a capital receipt. [862 E] Case law referred
to.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 675 of 1965.
Appeal from the judgment and order dated
December 11, 1961 of the Mysore High Court in I.T.R.C. No. 13 of 1959.
R. M. Hazarnavis, R. Ganapathy lyer and R. N.
Sachthey, for the appellant.
A. K..Sen. G. L. Sanghi and B. R. Agarwal,
for the respondent.
860 The Judgment of the Court was delivered
by Ramaswami, J. This appeal is brought, by certificate, from the judgment of
the High Court of Mysore dated December 11, 1961 in Income Tax Reference Case
No. 13 of 1959. The respondent (hereinafter referred to as the 'Bank') is a
public limited company carrying on business of banking at it s head office in
Mangalore and its branches in various places. It opened one branch in Karachi
on November 15, 1946. After the partition of India in 1947, the currencies of
the two dominions of India and Pakistan continued to be at par until there was
a devaluation of the Indian Rupee on September 18, 1949. As Pakistan did not
devalue her rupee, the old parity of the Pakistan and Indian Rupee ceased to
exist. The exchange ratio between the two countries was not determined until
February 27, 1951. On this date it was agreed that a hundred Pakistani Rupees
were equivalent to a hundred and forty four Indian rupees. On the date of
devaluation of the Indian Rupee the Karachi Branch of the Bank had with it a
sum of Rs. 3,97,221/belonging to its head office. Owing to the difficulties of
the currency situation it was impossible to remit the amount to the head office
for quite a long time. On July 1, 1953, the State Bank of Pakistan permitted
its remittance to India. In terms of Indian currency the said amount became
equivalent to Rs.
5,71,038/-. Thus there was an appreciation of
the value of the amount remitted from the Karachi branch and the Bank made a
profit of Rs. 1,73,817/-. After making certain deductions, the head office of
the Bank transferred a sum of Rs. 1,70,746/- to its Contingencies Reserve
Account. In its return for the assessment year 1954-55, the Bank claimed that
this sum was a capital gain and was not taxable. By his order dated February 9,
1955 the Income-tax Officer rejected the claim holding that the said amount of
Rs.
1,70,746/- was a revenue receipt. The order
of the Income- tax Officer was affirmed by the Appellate Assistant Commissioner
in appeal. The Bank took the matter in further appeal to the Income-tax
Appellate Tribunal which rejected the appeal by its order dated November 23,
1956. At the instance of the Bank the Income-tax Appellate Tribunal referred
the following question of law for the determination of the High Court
"Whether the aforesaid exchange difference of Rs. 1,70,746/- is assessable
under any of the provisions of the Indian Income-tax Act?" By its order
dated December 11, 1961 the High Court reversed the finding of the Appellate
Tribunal and held that the exchange difference of Rs. 1,70,746/- was not
assessable to income-tax under any provision of the Indian Income-tax Act.
The question involved in this appeal is
whether the profit of the Bank on account of fluctuation of exchange arose in
the 861 course of trading operation of the Bank or whether it was incidental to
any such trading operation. If by virtue of exchange operations profits are
made during the course of business and in connection with business transactions,
the excess receipts on account of conversion of one currency into another would
be revenue receipts. But if the profit by exchange operations comes in, not by
way of business of the Bank, the profit would be capital profit. In the present
case, the High Court has found, after an analysis of the relevant facts, that
the appreciation of the money did not arise in the course of any trading
operation. In the year 1949 when there was a devaluation of the Indian rupee,
the Karachi branch of the Bank was not carrying on any business in foreign
currencies. It has been found by the Appellate Tribunal that until April 3,
1951 when the Bank was permitted to carry on business in Pakistan currency it
carried on no foreign exchange business. Even after such permission was granted
and even after the Bank obtained on April 25, 1953 a general licence to carry
on business in all foreign currencies the money of the head office was not used
for any business in foreign currencies. The appellate Tribunal has found that
the money was lying idle in the Karachi branch and it was not utilised in any
banking operation and the Karachi branch was merely keeping(, that money with
it for the purpose of remittance to India and awaiting permission of the State
Bank of Pakistan. The State Bank of Pakistan granted the permission on July 1,
1953 and the remittance actually took place two days later i.e., on July 3,
1953. It has been found by the appellate Tribunal that the sum of money was at
no material time employed, expended or used for any banking operation or for
any foreign exchange business. In the supplementary statement of the case the
appellate Tribunal stated that "during the period April 3, 1951 to April
25, 1953 there were dealings between India and Pakistan Offices of the Bank,
such as opening of letters of credit, issuing of drafts etc.", and
"that all these operations were effected in a new account which was opened
and the old balance of Rs.
3,97,221/- could not be utilised as per
instructions of the State Bank of Pakistan". According to the agreed
statement of the case the amount of Rs. 3,97,221/- was "blocked" and
"sterilised" for the period from the devaluation of the Indian rupee
upto the time of its remittance to India. In the context of these facts the
High Court took the view that the appreciation of the value of the money did
not arise in the course of the trading operation of the Bank and was not
therefore taxable as revenue receipt. On behalf of the appellant Mr. Hazarnavis
submitted that the appellate Tribunal was wrong in holding that there was
blocking or sterilisation of the amount. Learned Counsel said that the balance
sheets of the Revenue account of the Karachi branch would show that the amount
of Rs. 3,97,221/- was not lying idle in the Karachi branch but was utilised by
it for internal banking operations within Pakistan. We did not, however, permit
Mr. Hazarnavis to produce 862 additional evidence in this Court for controverting
the findings of fact reached by the appellate Tribunal. It is a matter of significance
that the original statement of the case dated May 15, 1957 and Supplementary
statement of the case dated August 14, 1959 were, both agreed statements.
Before the High Court also the findings of'
the appellate Tribunal were not challenged on behalf of the Commissioner of
Income-tax. On the other hand, it appears that it was conceded by the appellant
before the High Court that there was no evidence that the "blocked"
balance was, in fact, employed by the Karachi branch for the internal banking
operations in Pakistan or for its business in Pakistan and other foreign
currencies. It is therefore not permissible for the appellant at this stage to
go behind the two statements of the case and to challenge the findings of fact
contained therein. The argument was also stressed by Mr. Hazarnavis that the
money was a 'stock-in-trade' of the bank and an increment of Rs. 1,70,746/- due
to the fluctuation in the exchangerate must therefore be treated as incidental
to the business of the Bank. We shall assume in favour of the appellant that
the money was 'stock-in-trade' of the Bank.
But it does not necessarily follow that the
increment due to the fluctuation in the exchange rate was due to trading
operations in the carrying on of the banking business. On the contrary, it has
been found by the appellate Tribunal that the amount of Rs. 3,97,221/- was a
"blocked" and "sterilised" balance and the Bank was unable
to deal with that amount or use it for any banking purpose between September,
1949 and July, 1953 when it was finally remitted to India. In our opinion, the
money changed -its character of 'stock-in-trade' when it was 'blocked' and
'sterilised' and the increment in its value owing to the exchange fluctuation
must be treated as a capital receipt. It has also been found by the appellate
Tribunal that the said amount of Rs. 3,97,221/- was not utilised for internal
banking operations within Pakistan and it is hence not possible to draw an
inference that the Bank realised any profit in the carrying out of its business.
We accordingly hold that Mr. Hazarnavis is unable to make good his argument on
this aspect of the case and the High Court was right in reaching the conclusion
that the exchange difference of Rs.
1,70,746/- was not assessable to income-tax.
In the course of his argument Mr. Hazarnavis
relied upon the decision of the Court of Appeal in Imperial Tobacco Company v.
Kelly(1). In that case, a tobacco manufacturing company in England with a view
to buying tobacco leaf in the U.S.A.
during the leaf season, used to provide
itself with dollar currency in advance by purchasing the same beforehand. On
the outbreak of war, owing to Governmental restrictions the company had to
suspend its buying operations in U.S.A.
Later, the British Treasury requisitioned the
accumulated dollars and paid the company sterling in exchange.
(1) 25 T.C. 292.
863 The dollars in the meantime having
appreciated in value, the company got more sterling than what it originally
laid out.
It was held by the Court of Appeal that the
excess receipts were profits assessable to income-tax and the acquisition of
the dollars was the first step in the commercial transaction of the company.
The dollar was a 'commodity' of the company and it became a surplus stock to
the company's requirements on the restriction on purchase and original revenue
character would not be altered by the circumstance of the Governmental controls
requisitioning the dollars. Mr. Hazarnavis also referred to the decision in
Landes Brothers v. Simpson(1) where a similar view was taken. On the contrary,
Counsel for the respondent relied upon the decision in McKinlay (H. M.
Inspector of Taxes) v. H. T.
Jenkins & Son(2) Ltd. in which it was
held that the profit by exchange operations would be capital profit if the
profit did not come in by way of business but by means of an investment in
foreign currencies. In that case, a British company carrying on business in
marbles, bought Italian Libras in advance with which to pay in Italy for
marbles to be purchased there. But before the time came for purchase, finding
that the Lira had appreciated, it sold away the Liras at a profit, and bought a
second installment of Liras to fulfill its contract in time. It was held by
Rowlatt, J.
that the first installment of Liras should be
regarded as capital lying idle and that the conversion thereof was a
speculative transaction in capital. Reference was also made to the decision in
Davies v. The Shell Company of China(3) Ltd. But the decision in none of these
cases is exactly in point, for the material facts in the present case are
different. The question of law arising in the present case must be decided on
the particular facts and circumstances found by the appellate Tribunal.
For the reasons already expressed we hold
that the High Court has correctly answered the question referred to it and this
appeal must be dismissed with costs.
G.C.
Appeal dismissed.
(1) 19 T.C. 62.
(2) 10 T.C. 372.
(3) 32 T.C. 133.
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