Income-tax---

----Income---Income or capital---Foreign exchange---Amount held for purpose of investment in foreign country---Repatriation of amount---Excess received due to devaluation of Indian rupee---Amount received was of capital nature.

If on account of exchange fluctuations profits arise in the course of business transactions, the excess receipts on account of conversion of one currency into another would be revenue or business receipts. But if such profit does not come in by way of the business of the assessee, the profit would be capital. The true test is not the nature of the fund but the operation regarding the fund.

The assessee-company was holding certain shares in limited companies in the United Kingdom by way of investment from the year 1947 after obtaining the approval of the Reserve Bank of India. Dividend income on these shares was kept by the assessee company in a current account in the United Kingdom. The accumulation in the current account was utilised by the assessee-company for the purchase of rights shares after obtaining the approval of the Reserve Bank of India. The balance of the accumulated amount in the current account was invested by the assessee-company in call deposits in banks in the United Kingdom when the balance in the current account became sufficiently large. The interest received on the call deposits was also credited to the current account arid utilised for investment in rights shares. This procedure had been followed by the assessee-company right from the year 1947, till 1966. For the assessment year 1967-68 for which the previous year was the calendar year 1966, the assessee was compelled' to repatriate the balance in the above current account as well as ' in the call deposit account to India at the instance of the Reserve Bank of India. The assessee, accordingly, repatriated in October 1966, a sum of pounds 11,969.4.10 lying in the call deposit account and a sum of pounds 1,457.12.5 lying in its current account to India. The rupee had been devalued in June 1966. As a result, on repatriation of the above amounts in October, 1966, a higher sum in terms of Indian rupees was received by the assessee-company. The gain on repatriation was assessed as the income of the assessee and this was confirmed by the Tribunal. On a reference:

Held, that the profit had accrued to the assessee not in the course of any trading activity or on money held for the purpose of trade but on account of appreciation in the value of the amount which was held for the purpose of investment. Hence, this accretion was capital in nature.

CIT v. Canara Bank Ltd. (1967) 63 ITR 328 (SC); CIT v. Tata Locomotive and Engineering Co. Ltd. (1966) 60 ITR 405 (SC); Dilip Kumar Roy v. CIT (1974) 94 ITR 1 (Bom.); Indo-Burma Petroleum Co. Ltd. v. CIT (1982) 136 ITR 251 (Cal.); Parimisetti Seetharamamma v. CIT (1965) 57 ITR 532 (SC) and Sutlej Cotton Mills Ltd. v. CIT (1979) 116 ITR 1 (SC) ref.

Soli Dastur with Aashish Ponda instructed by Mulla and Mulla and Craigie Blunt and Caroe for the Assessee.

Dr. V. Balasubramaniam with J.P. Deodhar for the Commissioner.

JUDGMENT

MRS. SUJATA V. MANOHAR, C.J.---This reference pertains to the assessment year 1967-68. The assessee-company was holding certain shares in limited companies in the United Kingdom by way of investment from the year 1947 after obtaining the approval of the Reserve Bank of India. Dividend Income on these shares was kept by the assessee-company in a current account in the United Kingdom. The accumulation in the current account was utilised by the assessee-company for the purchase of rights shares after obtaining the approval of the Reserve Bank of India. The balance of the accumulated amount in the current account was invested by the assessee-company in call deposits in banks in the United Kingdom when the balance in the current account became sufficiently large. The interest received on call deposits was also credited to the current account and utilised for investment in rights shares. This procedure had been followed by the assessee-company right from the year, 1947, till 1966.

For the assessment year 1967-68 for which the previous year was the calendar year 1966, the assessee was compelled to repatriate the balance in the above current account as well as in the call deposit account to India at the instance of the Reserve Bank of India. The assessee accordingly repatriated in October, 1966, a sum of pounds 11,969.4.10 lying in the call deposit account and a sum of pounds 11,457.12.5 pounds lying in its current account to India.

The rupee had been devalued in June. 1966. As a result, on repatriation of the above amounts in October 1966, a higher sum in terms of Indian rupees was received by the assessee-company. The amount gained on repatriation of the opening balances was as follows:

??????????????????? ?????????????????????????????????????????????Rs.

(a) Call deposit account??????????? 84,435.58

(b) Current account????????????????? 74,910.77

During the relevant previous year, the opening balance as on January 1, 1966, in the call deposit, account in England was 11,041.14.8 pounds and the opening balance in the current account was 9,795.18.6 pounds. During the previous year, the assessee received the following further amounts by way of dividend which were credited to these accounts:

(a) Call deposit account ?????????? pounds 927.10.2

(b) Current account????????????????? pounds 280.11.4

The amount gained on repatriation of the additions made during the previous year to the call deposit account and the current account was as follows:

??? Rs.

(a) Call deposit account??????????? 5,489.57

(b) Current account????????????????? 7,839.61

The total gain, therefore, on repatriation was Rs.1,72,676.

???????????????????? The Income-tax Officer taxed the entire amount of Rs.1,72,676 as the income of the assessee-company rejecting the assessee's contention that the said surplus represented a capital receipt not liable to be included in the total income. On appeal, the Commissioner of Income-tax held on the facts that the shares were held by the assessee in the United Kingdom on investment account, negative the finding of the Income-tax Officer that the assessee-company was a dealer in shares. The Commissioner of Income-tax further held that there was no dispute that the accumulation of funds in the foreign country was not as a result of realisation of those investments but it represented the accumulation of dividend income from those shares. He however, held that the profit arising as a result of appreciation in the value of foreign currency held by the assessee-company on conversion into Indian currency was liable to be assessed as revenue income of the assessee and hence confirmed the finding of the Income-tax Officer. On further appeal, the Tribunal held that the surplus had arisen on account of the assessee's income by way of dividend abroad. If, therefore, confirmed the order of the Commissioner of Income-tax (Appeals). From the above findings of the Tribunal, the following question of law has been referred to us under section 256(1) of the Income Tax Act, 1961:

"Whether, on the facts and in the circumstances of the case, the sum of Rs.1,72,676 being the surplus arising on repatriation of the opening balance standing to the credit of the current account and call deposit account, and the accretions during the year to the current and call deposit account were in law capital receipts not liable to tax?"??

In order to answer this question it is necessary to bear in mind that 't both the Commissioner of Income-tax (Appeals) as well as the Tribunal have held that the assessee held share in foreign companies as investments right from the years 1947 to 1966. Both found as a fact that these holdings had accumulated on account of receipt of either tight shares or bonus shares issued from time to time. The dividend income, which was earned from such foreign shares was accumulated by the assessee-company in the United Kingdom and was kept in banks as set out earlier. The amounts so accumulated in foreign banks have been used by the assessee-company for the purpose of augmenting its investment by purchase of rights shares. The amounts so accumulated for investment purposes have been brought back to India at the instance of the Reserve Bank of India during the relevant previous year. On account of devaluation of the rupee in the relevant previous year. the assessee has received in India Rs.1,72,676 extra, that is to say, over and above the book figures. We have to consider whether this represents a revenue receipt or a capital receipt. If it is the former it will have to be treated as the income of the assessee-company liable to tax under the Income Tax Act, 1961. In this connection, it is necessary to note that in view of the facts as found it is clear that the amounts which were lying in the banks in the United Kingdom were not trading assets of the assessee?company. Nor were these amounts used by the assessee-company for any trading purpose. The amounts were held for the purpose of making investments.

In the case of CIT v. Tata Locomotive and Engineering Co. Ltd. (1966) 60 ITR 405, the Supreme Court considered the case of an assessee which had remitted to its agent in the United States of America a sum of U.S.$33,850 as also $36,123 for the purchase of capital goods there. The Indian rupee was devalued on September 16, 1949. As a result, the assessee found it more expensive to buy American goods and, therefore, repatriated the dollars retained in the United States to India. This resulted in surplus, on account of devaluation of the rupee. The Supreme Court held that the fund, which was held by the assessee was for the acquisition of capital goods. The surplus attributable was capital accretion and not profit taxable in the hands of the assessee. Making a distinction between capital receipt and revenue receipt, the Supreme Court said (at page 410):

"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."

A similar stand has been taken by the Supreme Court in the case of CIT v. Canara Bank Ltd. (1967) 63 ITR 328. The Supreme Court in that case was concerned with the Canara Bank Ltd. which had certain amounts lying at its Karachi branch in Pakistan. The bank did not carry on any business in foreign currency and even after it was permitted to carry on business in Pakistan currency, it carried on no foreign exchange business. The amount to question, was lying idle in the Karachi branch and was-not utilised in any banking operation. On repatriation of this amount to India, in view of the differences in the value of Indian and Pakistan currencies during the relevant previous years the assessee-company made a profit of Rs.1,73,817. The question was whether this was a revenue receipt of the assessee. The Supreme Court, on examination of facts, held that the appreciation in the value of the money did not arise in the course of any trading operation. Since the assessee was a bank, the Supreme Court said that even assuming that the amount was originally a stock-in-trade of the assessee-company it was blocked and sterilised and the bank was unable to withdraw that amount. Hence, the amounts ceased to be its stock-in-trade. The increase in it value due to exchange fluctuation was a capital receipt.

In the case of Sutlej Cotton Mills Ltd. v. CIT (1979) 116 ITR 1, the Supreme Court once again considered a similar question. The Supreme Court said that where profit or loss arise 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 trading profit or loss if the foreign currency is held b), the assessee on revenue account or as a trading asset or as part of its circulating capital used in the business. If, on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature. It also said that for the purpose ascertaining whether the currency was held for the purpose of trade or as circulating capital the entries, which have been made in the books of account were not conclusive. What was necessary to consider was the true nature of the transaction. The Supreme Court on the facts before it said that whether the loss which was suffered by the appellant on account of fluctuation in the exchange rate was a trading loss or .a capital loss could not be answered unless it was first determined whether the amounts which were held in foreign currency were held by the assessee on capital account or on revenue account. It remanded the matter to the Tribunal for deciding this question.

These decisions have been considered by the Calcutta High Court in the case of Indo-Burma Petroleum Co. Ltd. v. CIT (1982) 136 ITR 251. Sabyasachi Mukharji, J. (as he then was) after considering the above judgments has said that if on account of exchange fluctuations profits arise in the course of business transactions, the excess receipts on account of conversion of one currency into another would be revenue or business receipts. But if such profit does not come in by way of business of assessee, the profit would be capital. The true test is not the nature of the fund, but the operation regarding the fund. The Calcutta High Court has analyzed the above decisions of the Supreme Court, and, in particular, the decision of the Supreme Court in the case of Sutlej Cotton Mills Ltd. (1979) 116 ITR 1. We, however, need not examine the judgment of the Supreme Court in Sutlei Cotton Mills' case (1979) 116 ITR 1 at any length because in the present case, the facts as found are very clear. They show that the amount was held by the assessee-company for the purpose of investment only and was not utilised for any business transaction. This amount when repatriated to India had resulted in a receipt of an additional amount over and above its book value by the assessee on account of devaluation of the rupee which took place in the relevant previous year prior to such repatriation. Looking to these facts, it is clear that the profit has accrued to the assessee not in the course of any trading activity or on money held for the purposes of trade but on account of appreciation in the value of the amount, which was held for the purpose of investment. Hence, this accretion is capital in nature. It cannot be considered as a revenue receipt. ??????????

It was also pointed out by Mr. Dastur, learned counsel for the assessee that all receipts in the hands of the assessee are not taxable as income automatically. If the Revenue wants to bring any receipt to tax as income, the Revenue should establish that it is by way of income. In support of this contention, he relied upon a decision of the Supreme Court in the case of Parimisetti Seetharamamma v. CIT (1965) 57 ITR 532 and a decision of this Court in Dilip Kumar Roy v. CIT (1974) 94 ITR 1. We need not go into this question in view of our above findings.

In the premises, the question which is referred to us is answered in the affirmative and in favour of the assessee.

In the circumstances, there shall be no order as to costs.

M.B.A./1567/FC???????? ???????????????????????? ????????????????????????????????????????????????Reference answered.