Full Judgment Text
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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
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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
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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
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(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
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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.
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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.
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