1. The question stated for our decision at the instance of the Commissioner is :
'Whether on the facts and in the circumstances of the case the amount of Rs. 95,148 representing the loss on conversion of the unmerited profit in Pakistan from Pakistani rupee to Indian rupee was an allowable loss in the assessments ?'
2. The question arises under the following circumstances :
3. Mehboob Productions Private Ltd. of Bombay carries on the business of film production in Indian and earns profits by distributing the films for exhibition in different parts of India and Pakistan. The assessment year with which we are concerned is 1956-57, the account year ending on 30th September, 1955. In the relevant year of account the assessee had a distribution office at Karachi in the name of Mehboob Pictures. The distributors used to regularly send statements of accounts and as the statements were received by the assessee in India the profit or loss was accounted for in the books of the assessee. The accounts used to be shown in the Indian books after converting from Pakistani currency into Indian currency at the ten prevailing rate of exchange.
4. As stated in the question referred we are concerned with a sum of Rs. 95,148, claimed by the assessee as loss in exchange in the profit and loss account. How this amount arose is shown in the accounts of the assessee. In the year of account the assessee had to this credit in Karachi with its the account year 1st October to September 30, 1955, the Government of Pakistan devalued its currency with the result that the amount which the assessee was to receive in India in terms of Indian rupees was less. In terms of Indian rupees after the devaluation of the Pakistani currency, the amount came to Rs. 2,04,955 and the assessee accordingly revalued it in its books in India. The difference between the amount as expressed in Indian currency before and after the devaluation is the amount which the assessee now claims as loss in the year of account and that amount is the sum of Rs. 95,148. The assessee claimed that this amount was a loss which it sustained as a result of the devaluation of the Pakistani currency some time on 31st July, 1955. Prior to the devaluation the income earned by the assessee through its distributors Mehboob Pictures, in Karachi in Pakistani currency was being accounted for in its books of account in India in Indian currency at the official exchange rate, the official exchange rate then being 100 Pakistani rupees equal to 144 Indian rupees, but upon the devaluation by Pakistan the ratio was that 100 Pakistani rupees became equal to 100 Indian rupees.
5. The Income-tax Officer rejected the assessee's claim on the short ground that the loss could only arise to the assessee when the moneys were actually remitted to India. What he said was : 'The assessee has to receive still the same amount in terms of Pakistani rupees. So long as the amount lying with the Pakistan distributor is not actually remitted to Indian the question of loss does not arise'. Therefore, he held that the assessee-company had not actually suffered by loss by reason of the devaluation by the Pakistan Government.
6. In appeal the Appellate Assistant Commissioner confirmed the conclusion of the Income-tax Officer but furrow totally different reasons. He took the view that the so-called loss which the assessee had sustained did not amount to a loss of profit or of any trading the assessee was not entitled to claim the amount as a business loss. The Appellate Assistant Commissioner after going through the accounts also fund that portions of the amount lying to the credit of the assessee in Karachi had been remitted to the assessee from time to time and that the entire profits which the assessee had earned during certain years had been fully remitted to India and what remained at the time of devaluation was only the profit of the year 1951-52. His finding was :
'As I have made clear above the profits earned during 1952-53, 1953-54 and even part of 1954-55 were fully remitted to India. It was only the balance of 1951-52 that remained in Pakistan.'
7. As regards this amount of the balance at Karachi, he held :
'By devaluation that took place on 31st July, 1955, the value of this asset in terms of Indian rupees depreciated by a sum of Rs. 95,160. Depreciation in the value of an asset cannot be called a trading loss. This loss was certainly connected with the business of the appellant but was not incidental to the appellant's business.'
8. The Appellate Assistant Commissioner also held that the amount could not be treated as a bad debt, because even if the entire amount due in Pakistan rupees was remitted to India by the Pakistan Party the loss would still be there and no part of it would be legally enforceable against the Pakistan party. He concluded that the amount of Rs. 95,148 (the figure of Rs. 95,160 which he has mentioned is an error) would represent the capital loss of the assessee.
9. When the assessee went up to the Tribunal in appeal the Tribunal in appeal the Tribunal reversed the decisions of the Income-tax Officer and the Appellate Assistant Commissioner not upon the points which either of them had made in their orders but upon a wholly different point. The Tribunal looked into the accounts of the assessee and found that in the past, whenever profits were earned by or accrued to the assessee from conversion of Pakistani currency into Indian currency the assessee had officer' the profits for taxation and had been actually taxed upon it. The Tribunal therefore, felt that when the assessee had incurred a loss also upon conversion of Pakistani currency into Indian currency as a result of the devaluation by the Pakistan Government the assessee was entitled to claim that loss as a business loss. What the Tribunal stated in paragraph 3 was :
'As the official rate then was 100 Pakistani rupees for 144 Indian rupees, the difference was treated as an income and taxed in its hands. It is thus stated that, since the profits were being taxed similarly the loss which has now occasioned to the assessee on the depreciation of the Pakistani money should be allowed. The assessee had been following this method of accounting in the past and this method of book-keeping as reflecting its true profits was accepted by the department. We do not see why when the assessee revalued the unmerited amounts from Pakistan in its books of account on the devaluation of the Pakistan currency, the same treatment should not be meted out to it.'
10. They therefore, held that the authorities below had no jurisdiction in not giving due allowance to the assessee for the amount of the loss. A decision of this court in Commissioner of Income-tax v. Mogul Line Ltd. now reported in : 46ITR590(Bom) , was cited before them but they distinguished it by holding that the fact in that case were different.
11. It is from this order that the question which we have stated has been referred for our decision. On behalf of the commissioner counsel has urged that the amount which was credited in the accounts of the assessee's agent at Karachi were undoubtedly at one time profits earned by the assessee but those profits had been taken into account and the assessee had been assessed upon them and for a long period after the assessments were completed and the amounts had borne tax, the amount was allowed by the assessee to lie with Mehboob Pictures his Karachi agent. The amount therefore had ceased to partake of the nature of business profits which character it once certainly enjoyed and can no only be treated as capital in the hands of the assessee. The assessee's books of account are maintained on a mercantile basis and it had on receipt of advice from its Pakistan agent credited those amounts in its accounts as received by it. Therefore they had ceased to partake of the nature of business profits and must be held to be the capital asset of the assessee.
12. To this contention Mr. Mehta, on behalf of the assessee, has made a twofold answer. First and foremost Mr. Mehta has submitted that the contention on behalf of the department is wholly unjust. The department had, when the exchange ratio resulted in profits to the assessee accepted the difference and taxed the assessee upon those profits and now when as a result of the devaluation, the assessee has sustained a loss, the department has turned round and taken the point that this was not a business loss. The stand of the department, says counsel, is inequitable and unjust. Apart from that counsel has urged that really the amount standing to the credit of the assessee with their distributing agents in Karachi was in the nature of business profits and treated by the assessee as either business profits or as business asset. If therefore such a business asset under went a diminution in value the assessee could claim it as a loss in business to the extent of the diminution. Alternatively, counsel has urged that if relief cannot be granted under this head then the assessee was entitled to claim it as if it were a bad debt and counsel urged that it would fulfil all the requirements of section 10 (2) (xi) of the Income-tax Act.
13. When the matter had come before us on a previous occasion after the parties were partly heard we felt that the decision of the question raised would be considerably affected by the question as to what was the relationship between the assessee on the one hand and Messrs. Mehboob Pictures of Karachi on the other and what was the legal status of the latter and so with the consent of the parties we called for a supplementary statement of the case. In the supplementary statement, the Tribunal has now clarified the position. The firm of Messrs. Mehboob Pictures at Karachi is no more than a propriety concern belonging to Mahomed R. Khan. We are informed that he is the brother of Mr. Mehboob R. Khan, a director of the assessee, Mehboob Productions Private Ltd. The assessee is a private limited company registered in India and their business relations with Mehboob Pictures were governed by the two agreements dated 1st June, 1949, and 14th March, 1952. The effect of these two agreements may be summed up by saying that Messrs. Mehboob Pictures at Karachi were the distributing agents of the assessee. The relationship thus between the assessee and Mehboob Pictures at Karachi was that of principal and agent. That is what the Tribunal in its supplementary statement of the case has also stated.
14. Now, in the first place, we may say at once that the reasons which impelled the decision of the Tribunal do not commend themselves to us. The Tribunal took up a position which is not found mentioned in the orders of either of the two authorities below. What it said was that when the exchange ratio between India and Pakistan was favourable to the assessee and as a result of that favourable ratio the assessee made profits and offered those profits for taxation, the department accepted the position and taxed those profits. Therefore, when the exchange ratio became unfavourable to the assessee and it sustained a loss as a result of the unfavourable ratio that loss must also be necessarily allowed to the assessee. As an argument of equity the argument is undoubtedly attractive, but as is well known there is no equity about a tax and equitable considerations are completely out of place in considering matters under the Indian Income-tax Act so long as the provisions of law are clear. In our opinion, a consideration that, in the past, profits arising in favour of the assessee had been taxed is an irrelevant consideration upon the question arising before us. That also answers the point taken by Mr. Mehta regarding the injustice of the departmental stand.'Income-tax legislation knows nothing of hardship.'
15. The true ratio, it seems to us, is to consider the nature of the amount standing to the credit of the assessee in the books of Mehboob Pictures at karachi. On the one hand it has been urged that it is nothing more than a capital asset. That is the stand of the department. On the other hand, it has been urged that it was in the nature of an amount of business profits or a business asset or at any rate in the nature of a debt due from a debtor to the assessee who was a creditor and that in either case if the amount under went diminution in value, that amount was claimable by the assessee as a loss.
16. It is no doubt true that the entire amount standing to the credit of the assessee in the books of their Pakistan agent was initially earned by the assessee as their profits from their trading in Pakistan. Perhaps, the truer position would be that part of it represented its initial outlay and part only was profits, but, in any case, the assessee had taken it into account as a business profits and had paid tax upon it, but after it was assessed in the respective years 1952-53, 1953-54 and 1954-55, the amount continued to remain in Pakistan and it may be that, for reasons beyond the control of Mehboob Pictures, it could not be remitted to the assessee in India.
17. The assessee, however, had 'received' the amounts as shown by his books of account. The assessee whose books of account are maintained on the mercantile system has made entries in each year of account showing the receipt of that amount by him after converting it from Pakistan currency into Indian currency. Once the assessee received that amount and offered it to tax, we do not see how it can continue to bear the character of business profits after the amount came to be taxed. In this respect, a finding of fact which the Appellate Assistant Commissioner gave and which we have reproduced above verbatim is important. What the Appellate Assistant Commissioner has found is that the profits earned during the assessment years 1952-53, 1953-54 and even part of 1954-55 were fully remitted to India and it was only the balance of the year 1951-52 that remained in Pakistan in the year of account. It is a little difficult to see how the profits earned in 1951-52 could still stand as business profits long after the amount had borne tax and been assessed by the department. The debit balance in India standing to the debit of Mehboob Pictures in the books of account of the assessee was therefore clearly an asset of the assessee like any other asset. It can be a business asset or a capital asset. When the devaluation took place on the 31st July, 1955, it was that asset which underwent a diminution in value (we advisedly do not use the word 'depreciation' because it tends to convey a different meaning) and the question is whether that diminution in value of the asset can possibly be said to result in a business loss.
18. There is no evidence whatever that the amount standing to the debit of Mehboob Pictures in the assessee's account books was an amount which the assessee utilised or even intended to utilise for the purposes of business in Karachi, despite the fact that the assessee had several opportunities of proving that fact. On the other hand, what appears to be the case is that an amount initially earned as profits by the assessee, which had once been assessed and borne tax, was merely lying with their distributing agent in a foreign country as an asset of the assessee. In our opinion, it cannot partake of the nature of a business asset and, on the other hand, could only be held to be an asset of a capital nature.
19. The principle governing cases like this was adverted to the decision of this court in Commissioner of Income-tax v. Mogul Line Ltd. the principle was thus stated by the Division Bench (to which my learned brother was a party) :
'But, in order to see whether such a profit has resulted in a given case must be determined by considering the purpose for which and the manner in which the asset has been utilised. It is undisputed that if the foreign there has been a fluctuation in the currency resulting either in appreciation or depreciation of the fund in terms of the coin of another country will not result either in profit or loss to the fund-holder. If the fund is utilised in the course of trade for a trading purpose, there can be no doubt that there would be realisation of the profit on exchange, and the profit would be taxable. If, on the other hand, the fund is used not for a business operation or for the purpose of trade, but for a non-business operation, there may not be a taxable profit arising on its utilisation.'
20. That was a case where, no doubt, as the Tribunal has said, the facts were different, but the principle is still applicable. That is also a case where the Division Bench was concerned with the taxation of profits, but the same principle would apply where the question is of a business loss. As the Division Bench has pointed out, it is only if it is shown that the fund is utilised or to put the case as favourably to the assessee as possible - intended to be utilised in the course of trade or for a trading purpose, can it be said that there would be a realisation of profit or loss on exchange and the profit or loss would be taken into account on taxation, but, as we have pointed out in the present case, there is not an iota of evidence or any other material from which we can conclude in the present case that this amount was held on behalf of the assessee for purposes of their business. It had long before ceased to partake of the nature of business profits and, in our opinion, can only be treated as a capital asset.
21. This disposes of the first argument advanced on behalf of the assessee. Mr. Mehta urged that there is no finding given by any of the authorities that this amount which was held on behalf of the assessee was not a trading asset. He urged that it was owned by a company which was doing business in Pakistan and the company could have no other intention but to utilise it for purpose of business. In our opinion, the mere fact that it was held on behalf of a company doing business would not be decisive of the fact that it was a business asset, for a company doing business can as well hold a capital asset in a foreign country. It would have been open to the assessee to have established that they utilised or intended to utilise this amount standing to their credit in Pakistan for the purposes of their business, but, in our opinion, they have failed to do that. On the other hand, even in their books of account these amounts have been shown as assets in the balance-sheet. These entries can only indicate that they were capital assets of the assessee.
22. Then we turn to consider the other leg of the argument on behalf of the assessee that alternatively this amount should be allowed to the assessee as a deduction on account of bad debt. The contention is that Mehboob Pictures at Karachi were no more than the debtors of the assessee-company and the amount standing debited to their name in the assessee's books showed the relationship of debtor and creditor between Mehboob Pictures and the assessee and due to the devaluation of Pakistan currency that debt underwent a diminution. To the extent of the diminution, therefore, the debt became bad and was legitimately written off by the assessee.
23. We have already referred to the two contracts which were produced on behalf of the assessee and the conclusion which the Tribunal came to as regards the two contracts is stated in the supplementary statement. They found that Mehboob Pictures, Karachi, were merely the distributing agents of the assessee. That is also not disputed before us. The relationship being that of principle and agent, there was no question, in the first place of any debt as such being owned to the assessee. The amount was in the hands of the agent of the assessee and held by the agent for the benefit of his master or the principle. The agent admittedly has not repudiated his agency so as to give rise to a cause of action to sue him for the return of the money. Apart from that, the other consideration that seems to us crucial is that in fact the 'debt' (assuming it is a 'debt') has never become 'Bad' in the commercial sense. The 'debt' due to the assessee was the amount held in Karachi in terms of Pakistan currency and it is that very 'debt' which the agent is still willing and able to pay to the assessee. If, however, due to fluctuation in the exchange ratio between the two countries, the 'debt' underwent a diminution, it can by no stretch of imagination be said to have become bad. If due to supervening causes such as devaluation the amount receivable by the assessee has become less in value than the amount he would have been previously entitled to, that will still be the same 'debt'. The only result of devaluation by Pakistan is that, one and the same 'debt' is now worth less to the assessee in India than it was before devaluation. It can hardly therefore be said that this was in the nature of a bad debt. The 'debt' has not become bad but its value in the hands of the assessee has been reduced. We are unable to sustain the claim to have this amount deducted under the provisions of section 10 (2) (xi) of the Income-tax Act.
24. Some reference was made in the course of the argument to the decision of the Supreme Court of India in Commissioner of Income-tax v. Tata Locomotive and Engineering Co. Ltd. on the first point argued before us, as to whether this was a business asset of the assessee. The case referred to, however, is completely distinguishable upon the facts. In that case, the important fact was what the assessee, Tata Locomotive and Engineering Co. Ltd., had retained an amount which they had received from their selling agent, Baldwin Locomotive Works, in reimbursement of the expenses and towards commission for the purchase of capital goods in America. Thus, that amount, upon the special facts in that case, was earmarked for the purchase of capital goods and therefore, that amount could not be held to be in the nature of a business asset. That fact serves to distinguish that case from the present one. We have already said that the reasons which prevailed with the Tribunal do not commend themselves to us. We would rather prefer the view taken by the Appellate Assistant Commissioner, which, in the circumstances of the case, is correct view.
25. In the result, we must answer the question referred in the negative. The assessee shall pay the costs of the Commissioner.
26. Question answered in the negative.