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PETITIONER: COMMISSIONER OF INCOME-TAX, MYSORE

       Vs.

RESPONDENT: THE CANARA BANK LTD.

DATE OF JUDGMENT: 13/10/1966

BENCH: RAMASWAMI, V. BENCH: 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’.

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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.

JUDGMENT: 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

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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

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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

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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 instalment of  Liras to fulfil its contract in time.  It was held by Rowlatt,  J. that  the  first instalment 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. 864