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PETITIONER: COMMISSIONER OF INCOME-TAX, BOMBAY CITY

       Vs.

RESPONDENT: TATA LOCOMOTIVE & ENGINEERING CO., LTD.

DATE OF JUDGMENT: 13/01/1966

BENCH: SIKRI, S.M. BENCH: SIKRI, S.M. SUBBARAO, K. SHAH, J.C.

CITATION:  1966 AIR 1506            1966 SCR  (3) 235  CITATOR INFO :  E&R        1979 SC   5  (3,8)

ACT: Income Tax-Commission received in U.S.A.-Kept in U.S.A.  for buying  capital goods with sanction of  Reserve  Bank-Amount later  repariated-surplus  in rupees due  to  devaluation-If capital or revenue receipt.

HEADNOTE: The  assessee  was  a limited company  with  its  registered office at Bombay.  Its main business was the manufacture  of locomotive boilers and locomotives, and for that purpose the assessee  had to make purchases of plant and  machinery,  in various   countries  including  the  U.S.A.   The   assessee appointed M/s.  Tata Inc., New York, as its purchasing agent in  the  U.S.A. The assessee was also the selling  agent  of Baldwin  Locomotive  Works, U.S.A., for the  sale  of  their products  in  India,  and  the  commission  payable  to  the assessee  as their sole selling agent was made over  to  the assessee’s purchasing agent in Now York with the sanction of the  Reserve  Bank and for the purchase  of  capital  goods. This  amount was taxed in the relevant assessment  years  on the  accrual basis and the  ix was paid.  On 16th  September 1949,  the  pound  sterling was devalued  and  the  rate  of exchange  between  rupee and dollar which was Rs.  3.33  per dollar  before  devaluation,  became Rs.  4.775  per  dollar thereafter,  On  ’hat  date, there  was  in  the  assessee’s account  with  the  purchasing agent a sum  of  $  36,123.02 representing the commission received from Baldwin locomotive Works.  With the permission of the Reserve Bank this sum was repatriated to India in 1950 and the change in the  exchange rate  gave  these to a surplus in  rupees.   The  Income-tax Officer,   the  Appellate  Assisant  Commissioner  and   the Appellate Tribunal held that this surplus amount was  liable to  tax.  The High Court, on a reference, held that the  sum was not taxable in the hands of the assessee. In appeal to this Court, it was contended that the  assessee was  liable  3 tax because; (i) if the commission  bad  been allowed  to remain in the J.S.A. up to 16th  September  1949 and  had  been repatriated on 17th September,  the  assessee would  have been liable to tax and therefore the  Permission

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of the Reserve Bank and the decision of the assessee to hold to  buy capital goods did not make any difference; and  (ii) the  fact hat the assessee credited the rupee equivalent  of the  sum in his books and paid tax on the basis  of  accrual did not also make any difference to the ssessee’s liability. HELD:The High Court was right in deciding in favour  of the assessee. The assessee’s liability to tax would depend on whether  the ’act  of  seeping  the  money  for  capital  purposes  after obtaining  the sanction of he Reserve Bank was part of or  a trading  transaction.   The amount no doubt, was  a  revenue receipt  in  the assessee’s business of  commission  agency. But  instead  of repatriating it immediately,  the  assessee obtained  the  sanction of the Reserve Bank to  utilize  the commission  for  buying  capital  goods,  and  that  was  an independent transaction.  It was not a 236 trading  transaction but was a transaction  of  accumulating dollars  to  pay for capital goods, the first  step  to  the acquisition   of   capital  goods.  if  the   assessee   had repatriated  the amount and then, after obtaining the  sanc- tion  of  the Reserve Bank, remitted it to  the  U.S.A.  any profit made on devaluation would only be a capital profit. . therefore,  the fact that the assessee kept the money b e  n the   U.S.A.   did  not  make  any  difference   under   the circumstances. [241 B-P]

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 236 of 1965. Appeal from the judgment and order dated August 30, 1961. of the  Bombay  High Court in Income-tax Reference  No.  12  of 1959. A.   V. Viswanatha Sastri, N. D. Karkhanis, R. H. Dhebar and R.   N. Sachthey, for the appellant. N.   A Palkivala, T. A. Ramachandran, J. B. Dadachanji, O.   C. Mathur and Ravinder Narain            for the respondent. The Judgment of the Court was delivered by Sikri,  J.  This appeal by certificate granted by  the  High Court of Judicature at Bombay under s. 66-A(2) of the Indian Income Tax Act, 1922, hereinafter referred to as the Act, is directed  against its judgment in a reference made to it  by the  Income-Tax  Appellate  Tribunal.   The  following   two questions were referred               (1)Whether   on  the  facts  and   in   the               circumstances  of  the case,  the  surplus  or               difference arising as a result of  devaluation               in  the process of converting dollar  currency               in regard to the sum of $36,123/02 repatriated               to  India was profit which was taxable in  the               hands of the assessee ?               (2)Whether  the said sum of $36,123/02  having               been taxed in the relevant earlier years,  the               surplus  or  difference  in  dollar   exchange               account arising by reason of the  repatriation               thereof as a result of devaluation was rightly               taken as profit taxable ? The  relevant  facts  and circumstances, as  stated  in  the Statement of the Case, are as follows : The respondent, Tata Locomotive and Engineering Co. Ltd., hereinafter referred to as  the assessee, is a limited company registered under  the Indian  Companies Act (VII of 1913), and has its  registered office at Bombay.  The main business of the assessee is  the manufacture of locomotive boilers and locomotives.  For  the

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purpose  of this manufacturing activity the assessee had  to make  purchases  of plant and machinery,  etc.,  in  various countries including the U.S.A. The assessee 2 3 7 appointed  M/s Tata Inc., New York, as its purchasing  agent in  the  U.S.A. With the sanction of  the  Exchange  Control Authorities  a  remittance of $33,830 was made  in  1949  to Messrs.   Tata Inc., New York for the purpose of  purchasing capital  goods  from the U.S.A. and meeting  other  expenses connected therewith. The  assessee was also the selling agent of Baldwin  Locomo- tive Works, for the sale of their products in India, and  in connection  with  the  sale  of  the  products  of   Baldwin Locomotive Works in India the assessee had to incur expenses on  their behalf in India.  These expenses were  re-imbursed to the assessee by Baldwin Locomotive Works in the U.S.A. by paying the amount due to Messrs.  Tata Inc., New York.   The amount  so paid to Tata Inc. was retained in the  assessee’s account  with  Messrs.  Tata Inc. for  purchase  of  capital goods. As the sole selling agent the assessee was entitled to  com- mission from Baldwin Locomotive Works.  The commission  pay- able  to the assessee in dollars was not actually sent  from the  U.S.A. to India, but with the sanction of the  Exchange Control   Authorities  was  made  over  to  the   assessee’s purchasing agents, Messrs.  Tata Inc., New York.  The reason why  this  was done was explained in the  assessee’s  letter dated October 26, 1948, to the Reserve Bank of India.  In it the assessee stated, inter alia, as follows :               "It would be more convenient if the amount  of               commission  payable  to  us  periodically   be               deposited   into   our   account   with    our               representative, Messrs.  Tata Inc., New  York,               opened  with reference to your  letter  FC.BY.               7031/74/46  dated  2nd October, 1946,  as  the               same   would  go  to  reduce  the  amount   of               remittance to be made from here in  recoupment               of  that  amount  from time  to  time.   These               amounts  will  be  utilised  solely  for   the               purposes detailed in our letter to you  TC-679               dated 15th August, 1946." The  purposes referred to in the said letter of  August  15, 1946, were purchase of capital goods. . The amount  received as commission was taxed in the relevant assessment years  on the accrual basis and tax has been paid. On September 16, 1949, there was a balance of $48,572/30  in the  assessee’s account with Messrs.  Tata Inc. made  up  as under      (1) Remittances from Bombay                $33,850-00 Less : Dollars spent in the U.S.A. for capital  $30,282.  96      purposes                                                 $3,567.04 238 (2)  Amount reimbursed by Baldwin Loco-          $8,882.24 motive Works against funds made available to its representatives in India (3)  Commission actually received from Baldwin  Locomotives Works and retain-             $36,123. ed in the U.S.A. TOTAL                                            $48, 572.30 On  September  16, 1949, the pound  sterling  was  devalued. Prior to the devaluation the rate of exchange between  rupee and  dollar was Rs. 3.330 per dollar and on devaluation  the rate  became Rs. 4.775 per dollar.  The result was that  the assessee  found it more expensive to buy American goods  and

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as the Government of India also imposed some restrictions on imports from the U.S.A., the assessee decided to  repatriate the dollars and for the purpose applied to the Reserve  Bank of  India on December 17, 1949.  The Reserve Bank  of  India gave  permission  and a sum of $40,000  was  repatriated  to India.  Under similar circumstances in October, 1950, a  sum of  $9,500  was  repatriated  to  India.   Though  the   two remittances  from the U.S.A. to India of $40,000 and  $9,500 fell  into  different accounting years, the  case  proceeded before  the  Income-tax authorities as well  as  before  the Tribunal  on  the  footing  that  the  two  remittances   be considered as falling in the accounting year ended March 31, 1950 for the purpose of the appeal before the Tribunal.  The remittances  of $49,500 includes the sum of $48,572/30  that was  held  by  the assessee on  September  16,  1949.   This repatriation of the sum of $48,572/30 gave rise to a sum  of Rs.  70,147 as surplus in the process of  converting  dollar currency into rupee currency. The Income-tax Officer assessed the amount of Rs. 70,147  on the  ground  that it represented profits that arose  to  the assessee  "incidentally  to its carrying on  the  business". The Income-tax Officer observed :               "Whether  the funds were sent to America  with               the object of purchasing of capital  equipment               or   for  the  purchase  of  stores,  or   for               reimbursement  of  revenue  expenditure  there               need not be distinction that only such portion               of  the profits arising on funds remitted  for               revenue expenditure only has to be treated  as               revenue  and the balance should be treated  as               capital." The Appellate Assistant Commissioner substantially  affirmed the odrer of the Income-tax Officer except that he reduced                             239 the  amount  by  Rs. 6,894.  He was of  the  view  that  the permission of the Reserve Bank by itself did not convert the true  nature of the amount lying there.  He was  further  of the   view  that  the  amounts  available   for   remittance consisting  of  the  commission  and  the  reimbursement  of expenses  by Baldwin Locomotive Works were acquired  in  the ordinary  course of business of the sole selling  agency  of Baldwin  Locomotive  Works,  and,  therefore.  any  exchange profit  on  such  amounts which formed part  of  the  assets employed as circulating capital in trade did arise  directly in  the  course of business and formed part of  the  trading receipts. The  Tribunal held that the sums of $3,567/04 and  $8,882/24 included in the sum of $48,572/30 were held by the  assessee for  capital purposes and hence any profit that arose to  it as a result of its conversion into rupee currency on account of  appreciation  of the dollar, in relation to  the  rupee, must  be  held  on capital account  and,’  accordingly,  the Tribunal  excluded’ profits attributable to  these  amounts. But  regarding the sum of $36,123/02 the Tribunal held  that it  would not be justified in coming to the conclusion  that there   was  any  constructive  remittance,  first  in   the direction the U.S.A. to India and then of an equivalent  sum from  India to the U.S.A. It further held that  "the  amount was  earned as commission.  It was received in  dollars  and was retained in that form for the changed purpose under  the authority  of the Reserve Bank of India.  When  the  Company found  that the purpose for which it was to be used  failed, viz.,  acquisition of capital equipment etc.,  it  requested the  Reserve Bank of India to permit it to bring  to  India, vide  assessee’s  letter dated 17-12-1949  where  it  sought

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Reserve  Bank’s  permission to bring $40,000  to  India  and referred to in paragraph above.  This permission was granted by  the Reserve Bank.  Dollars were changed into rupees  and money   received  here.   Hence  before  there  was   actual remittance  of $40,000 from the U.S.A. to India,  there  was reconversion, the purpose having failed, of the sum if there was initial conversion as contended by Mr. Chokshi." In  the alternative,  the  Tribunal  held  that  "as  and  when  the commission  was earned in dollars, the Company did bring  it into  its  account books in the rupee currency at  the  then prevailing  rate  of  exchange  but  the  commission  amount physically remained in the U.S.A. and when occasion arose to bring  it  physically to India it had to be  converted  into rupee   currency   and  this  conversion   was   necessarily incidental to the asssessee’s business as selling agents  of the foreign entity the Baldwins.  Hence whatever the  profit the  Company made on such exchange of the commission  earned by it in the course of its 2 4 0 selling agency business must be brought to tax as a  trading profit  made  by  it  incidentally in  the  course  of  that business." The  High Court answered the two questions in the  negative. It held that although the character of the commission earned was  at the inception that of income, but when  the  assesee appropriated that sum for the specific purpose of purchasing capital  goods  with the permission of the Reserve  Bank  of India, the initial character of this sum underwent a  change and  it  assumed  the  character of  fixed  capital  of  the Company.  This character was retained right up to  September 16,  1949 when the pound sterling was devalued, and  it  did not  undergo  any change till the benefit  accrued  on  this amount to the assessee company as a result of change in  the exchange  rate.  The High Court further held that "there  is no  evidence  in  this case nor a finding  recorded  by  the Tribunal  that the assessee company had at any time  decided not  to utilise these amounts for the purpose of  purchasing capital goods, and, therefore, repatriated these amounts  to India." The High Court further held that the sum of $36,123- 02  was "part of its fixed capital and remained so till  the date it was repatriated to India.  The surplus or difference arising  as  a  result  of devaluation  in  the  process  of converting these dollars into rupee currency in repatriating them to India was an accretion to its fixed capital and  was not, therefore, liable to tax." The High Court felt that the ratio  of  the decision in Davies v. The  Shell  Company  of China(1) supported the view it had taken. The  learned counsel for the revenue, Mr. A.  V.  Viswanatha Sastri, contends that if the commission had been allowed  to remain  in the U.S.A. up to September 16, 1949, and  it  had been  repatriated on September 17, 1949, the assessee  would have been liable to tax on the profits received as a  result of devaluation.  He says that if this is so, the  permission of the Reserve Bank and the decision of the Company to  hold it  to buy capital goods does not make any  difference.   He further  says that the fact that the assessee  credited  the rupee  equivalent of this sum in his books and paid  tax  on the  basis  of accrual does not also make,  any  difference. The learned counsel for the assesee, Mr. Palkhiwala, on  the other  hand  contends that the assessee is not a  dealer  in foreign  exchange  and it had not acquired or  held  foreign exchange for revenue purposes or for purposes incidental  to trading operations.  He says that "when foreign currency  is kept  or  used on capital account e.g.  to  acquire  capital assets, and not as circulat-

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(1)  22 I.T.R. Supp. 1. 2 4 1 ing  capital,  the  profit made on  realisation  is  capital appreciation, even though the foreign currency may have been originally acquired as a revenue receipt." A number of cases have been cited before us, but it seems to us  that the answer to the questions depends on whether  the act  of  keeping  the money,  i.e.  $36,123-02  for  capital purposes  after obtaining the sanction of the  Reserve  Bank was part of or a trading transaction.  If it was part of  or a  trading  transaction then any profit  that  would  accrue would be revenue receipt; if it was not part of or a trading transaction  then the profit made would be a capital  profit and  not  taxable.   There is no doubt that  the  amount  of $36,123.02 was a revenue receipt in the assessee’s  business of  commission  agency.  Instead of  repatriating  it  imme- diately  the assessee obtained the sanction of  the  Reserve Bank   to  utilise  the  commission  in  its   business   of manufacture of locomotive boilers and locomotives for buying capital  goods.  That was quite an  independent  transaction and  it  is the nature of this transaction which has  to  be determined.  In our view it was not a trading transaction in the  business  of  manufacture  of  locomotive  boilers  and locomotives;  it was clearly a transaction  of  accumulating dollars  to  pay for capital goods, the first  step  to  the acquisition   of  capital  goods.   If  the   assessee   had repatriated $36,123.02 and then after obtaining the sanction of  the Reserve Bank remitted $36,123.02 to the U.S.A.,  Mr. Sastri does not contest that any profit made on  devaluation would have been a capital profit.  But, in our opinion,  the fact  that the assessee kept the money there does  not  make any  difference especially, as we have pointed out, that  it was  a new transaction which the assessee entered into,  the transaction  being the first step to acquisition of  capital goods. In  the  view we have taken it is really  not  necessary  to discuss cases cited at the Bar because none of the cases are exactly  in point.  In our view the High Court was right  in answering the questions in the negative.  In the result  the appeal fails and is dismissed with costs. Appeal dismissed. 243