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PETITIONER: STATE BANK OF INIDA

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, ERNAKULAM

DATE OF JUDGMENT31/10/1985

BENCH: MUKHARJI, SABYASACHI (J) BENCH: MUKHARJI, SABYASACHI (J) TULZAPURKAR, V.D.

CITATION:  1986 AIR  680            1985 SCR  Supl. (3) 694  1985 SCC  (4) 585        1985 SCALE  (2)921

ACT:      Income Tax  Act, 1961 - S.5 - Foreign exchange business Devaluation of  Indian  rupee  -  Appreciation  in  value  - Whether trading receipts and exigible to income tax.

HEADNOTE:      The assessee-Bank amalgamated with the appellant -Bank. As part  of its  banking  business  the  assessee  had  been dealing  in   foreign  exchange   .  Consequent   upon   the devaluation of  the Indian rupee the Amounts credited to the assessee in  the foreign  banks registered an increase. This excess realisation on Devaluation was treated by the Income- tax Officer  as income  of the  assessee rejecting  its plea that the profit was in the nature of a windfall.      The Income-tax  Officer’s order  was confirmed  by  the Appellate Assistant Commissioner, the Appellate Tribunal and in the reference by the High Court.      Dismissing the  appeal of the assessee to this Court on the  question:  Whether  the  excess  sum  realised  on  the devaluation of the Indian rupee on 6th June, 1966 was income chargeable to income-tax, ^      HELD :1.  The High  Court was right in holding that the appreciation in  value represented  trading receipts  of the assessee and, therefor,constituted ’revenue receipts’ in its hands which were chargeable to income-tax.[697 F]      Sutlej Cotton Mills Ltd. v. Commissioner of Income-tax, West Bengal,  116 I.T.R.  1 and  commissioner of  income-tax Bombay v.Mogul Line Ltd. Bombay, 46 I.T.R 590 relied upon.      2. If  the foreign  currency has  increased in value in terms of  Indian rupee  and that amount has been utilised by the assessee  in carrying on his business, it was incidental to the banking business.[700 A-B] . [70A A-B] 695 In the instant case the profit was due to the devaluation of the rupee  and was not due to any other business activities. This is  an incidental  income arising  from the carrying on the banking business. [698 D]      Imperial Tobacco  Company v.  Kelly, 25  Tax Cases 292, Commissioner of  Income-Tax Burma v. A.S.A. Concern Bassein, 5  I.T.R.   456  and   Punjab,  Co-operative  Bank  Ltd.  v. Commissioner of Income-Tax Punjab, 8 I.T.R. 635 relied upon.

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    3. 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. The  assessee might,  by making entries which were not in conformity  with the  proper principles  of  accountancy, concealed profit  or showed loss and the entries made by him could not,  therefore , be regarded as conclusive one way or the other. [699 C-D]      4. In  this case,  stock in  trade of  the assessee was foreign exchange.  From the  statements made  it is  evident that there was excess realisation of the foreign exchange in Indian rupee and the aseessee realised their value. Under s. 5 of  the Income  Tax Act,  1961, it would be, in case of an assessee who  was a  resident and  ordinarily a  resident of India,  assessable.  The  assessee  showed  this  amount  as appreciation on devaluation of the rupee. [697 G-H]

JUDGMENT:      CIVIL APPELLATE  JURISDICTION :  Civil Appeal  No.  596 (NT) of 1974.      From the  Judgement and  Order dated  25.1.1973 of  the Kerala High Court in Income Tax Reference No. 31 of 1971.      T.S. Krishnamoorthy  Iyer and  N.  Sudhakaran  for  the Appellant.      V. Gauri  Shankar, K.C.  Dua and Miss A. Subhashini for the Respondent.      The Judgement of the Court was delivered by      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. 696      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.      The assessee,  previously the  Bank of  Cochin Ltd.,  a barking 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 assessee’s correspondent-banks in  the foreign  countries concerned and the proceeds credited to the current account of the assessee with the  correspondent-banks 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 assessee’s 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  assessee’s contention.  There  was  a  further appeal to  the Appellate Tribunal. The Tribunal also did not accept  the  assessee’s  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

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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 1088 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 1088. On appeals,  the Appellate Assistant Commissioner as well as the Appellate Tribunal came to the same conclusion.      Under section  256(1)  Of  the  Income  Tax  Act,  1961 (hereinafter called  the ’Act’), two questions were referred to the High Court : 697           (i) whether,  on the facts and in the circumtances           of A  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 circumtances           of the  case, the  Appellate Tribunal was right in           law in rejecting the assessee’s 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?"      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.      At the  outset it  may be  mentioned  that  the  second question is  no  longer  alive  before  us  and  the  second contention is therefore need not be considered- D      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  order ,  mail transfers   demand drafts  and other negotiable instruments, drawn in  foreign currencies  and  sale  proceeds  of  these constituted trading  receipts. Consequent on the devaluation of the  Indian rupee,  the amount receivable by the assessee appreciated  in   its  value   and   this   represented   an appreciation in the value of the sale proceeds of the assets in which  the assessee  was dealing  in the  course  of  its business. Therefore,  the High Court was of the opinion that there was  no doubt that the appreciation in value amounting to  Rs.4,65,515  of  all  such  assets  represented  trading receipts of the assessee and, herefore, contstituted revenue receipts in its hands which were chargeable to income-tax.      Foreign exchange in this case was stock in trade of the assessee. It  is evident  from the statement made that there was excess  realisation of  the foreign  exchange in  Indian rupees and the assessee realised their value. If that is the position, then  under section 5 of the Income Tax Act, 1961, it would  be in  case of  an assessee who was a resident and ordinarily    resident  of India,  assessable. The  assessee showed  This   amount  of  Rs.4,65,515  as  appreciation  on devaluation of  the rupee.  It is  further recorded  in  the findings of the Income-tax Officer as follows: 698           "Shri V.O.  John, learned  Advocate for  the  bank           filed  its   objections  in   his   letter   dated

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         20.12.1967. He  stated "cheques,  payment  orders,           mail transfers,  demand  drafts,  bills  drawn  in           India and  other negotiable  instruments drawn  in           foreign currency  and sometimes  foreign  currency           itself are purchased from various parties and sent           to correspondent  banks in  foreign countries  for           credit of  our account  with them.  These  foreign           bank balances  are periodically  transferred  over           here and the process is repeated."           The buying and selling rates in respect of various           foreign currencies  underwent a change on 6.6.1966           when the  Indian rupee  was devalued.  The balance           standing to  the credit  of the  bank  in  various           foreign branches  like London,  New York,  Ottava,           Borlin " Sydney, Paris were transferred subsequent           to June,  1966 on various dates resulting, in huge           profit on  valuation  of  Rs.  4,65,515  as  noted           above. The advocate further pleaded "banks" normal           profit is the difference lv between the buying and           selling rates of foreign exchange."      Profit was  due to  the devaluation of the rupee on 6th June, 1966 and was not due to any other business activities. This is  an incidental  Income arising  from the carrying on the  banking   business.  See   in   this   connection   the observations in  Imperial Tobacco  Company v.  Kelly, 25 Tax Cases 292,  and Commissioner  of Income Tax, Burma v. A.S.A. Concern, Bassein,  5 I.T.R.456. Also see the observations of the Privy  Council in  the case  of Punjab Co-operative Bank Ltd. v. Commissioner of Income-tax, Punjab, 8 I.T.R. 635.      The Appellate Assistant Commissioner noted in his order that in  November, 1967  subsequent to the year in question, sterling was  devalued ant  the assessee bank had suffered a 1068 in  terms of  rupee in  respect of  their  holdings  in sterling. This  loss was  debited by  the  assessee  to  his profit    and    loss    account    and     claimed       as allowable     deduction     in    the   computation   of the assessee’s total  income for  the assessment  year  1968-69. Therefore, the  conduct and the treatment by the assessee of the result  of appreciation  or  depreciation  in  value  of sterling assets  held by  an assessee  who is a resident and ordinarily a  resident of India must be considered to be the income of  the  assessee  ancillary  or  incidental  to  the carrying on of the business of banking. 699      It was  held by  this Court in Sutlej Cotton Mills Ltd. v. A  Commissioner of  Income-tax, West Bengal, 116 I.T.R.1, 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 a trading profit or loss if  the foreign  currency was  held by  the asseesee 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  a capital nature.      The important  question to  be considered  is the  true nature of the transaction as whether in fact it had resulted in profit  or loss  to the  assesee. 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. The  assessee might,  by making  entries which were   in  conformity with  the proper  principles  of accountancy, concealed profit or showed loss and the entries

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made by  him could not, therefore, be regarded as conclusive one way or the other.      Commissioner of  Income-Tax Bombay  v. Mogul  Line Ltd. Bombay, 46  I.T.R. 590, was a case where it was held that if a foreign  fund of the assessee was allowed to remain unused where it  lay, the  mere circumtances  that there  had  been fluctuation in the currency resulting in appreciation of the fund in  terms of  the coin  of another  country  would  not result in  profit to  the owner of the fund. But if the fund is utilised  in the  course of  the business  for a  trading purpose, there would be realisation of the profit arising on devaluation and  the profit  would be  taxable. If,  on  the other hand,  the  fund  was  not  utilised  for  a  business operation or  for the  purposes of  trade, but  for  a  non- business  operation,  like  payment  of  income-tax  in  the foreign country,  there was  no profit and the difference in the exchange  value could  not be decoded to income-tax. The Division Bench  of the  Bombay High  Court further  observed that the  matter of  taxability could  not be decided on the basis of the entries which the assessee might choose to make in his account, but had to be decided in accordance with the provisions of  law. What  would determine  the taxability 18 not whether  the assessee  has shown  a particular item as a profit or  loss in the accounting year, but whether the said item could  be regarded either as a profit or loss under the provisions of the Act. But as the court emphasized 700 that if the foreign currency has increased in value in terms of Indian  rupee and  that amount  has been  utilised by the assessee in  carrying on  his business  as precisely  is the case here,  i.e. the  increased amount  has  been    it  was incidental to the banking business.      For the  reasons aforesaid,  the answer  given  by  the Kerala High  Court in  the impugned  judgment  under  appeal against the assessee and in favour of the revenue was right. The appeal accordingly fails and is dismissed with costs. A.P.J.                                     Appeal dismissed. 701