Somnath Iyer, J.
1. The question presented by this case, stated under section 66(1) of the Income-tax Act, is the assessability to income-tax of profits arising from fluctuations in the exchange rates of foreign currency.
2. The assessee, which will be referred to as the bank, is a bank called the Canara Bank Limited, with its head-office in India and its branches in various places including one opened in Karachi before it became, in the year 1947, part of the Dominion of Pakistan, on the partition of India. Even after such partition, the currencies of the two Dominions on India and Pakistan were at par until there was a deflation of the Indian rupees on September 18, 1949. Pakistan not having devalued her rupee, there was the inevitable disturbances of the parity between the currencies of the two countries and, for various reasons, the exchange ratio between the two currencies was not determined until February 27, 1951, on which date it was agreed that a hundred Pakistan rupees were equivalent to a hundred and forty-four Indian rupees.
3. On the date of the regulation of the Indian rupee, the Karachi branch had with it Rs. 3,97,221 belonging to the head-office and difficulties created by the currency situation made its remittance to the head-office impossible for quite a long time. Its remittance was permitted by the State Bank of Pakistan only on July 1, 1953, and when so remitted, it appreciated in value in terms of Indian currency and the equivalent sum received in India was Rs. 5,71,038. The bank thus made a profit of Rs. 1,73,817 and, after making certain deductions, the head-office of the bank transferred a sum of Rs. 1,70,746 to its contingency reserve account and, in its return of income for the assessment year 1954-1955, claimed that sum as a non-taxable capital gain. That claim failed before the Income-tax Officer and the Appellate Assistant commissioner. The Income-tax Appellate Tribunal, which dismissed the further appeal to it, has referred to us the following question :
'Whether the aforesaid exchange difference of Rs. 1,70,746 is assessable under any of the provisions of the Indian Income-tax Act ?'
4. The money remitted to India by the Karachi branch became, according to the agreed statements of the case, 'blocked' and 'sterilised' after the devaluation of the Indian rupee, and before its remittance to India and although the bank obtained on April 3, 1951, a licence from the Reserve Bank of India to carry on business in Pakistan currency and a more comprehensive licence on April 25, 1953, to carrion business in all foreign currencies, it was not employed for any of those purposes. The material portion of the additional statement of the case reads :
'...... The Reserve Bank of India gave to the bank licence on April 3, 1951, to deal in Pakistan rupees but that by itself was not enough to authorize the remittance to the aforementioned amount of Rs. 3,97,221 because from the Pakistan end it could not be remitted.....
On April 25, 1953, the Reserve Bank granted permission to the assessee to deal in all foreign currencies. During the period April 3, 1951, to April 25, 1953, the bank was authorized to deal only in Pakistan rupees. During this period, there were dealings between the Indian and Pakistani offices of the bank, such as opening of letters of credit, issuing of drafts, etc. 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. A copy of the letter covering the instructions is annexure 'Y' hereto forming part of the case. Only in July, 1953, the Pakistan Government permitted the remittance of the said funds of Rs. 3,97,221. The profits on foreign exchange transactions after May, 1951, when the bank really began the exchange business were duly taken in the profit and loss account and assessed. A copy of the letter permitting the remittance is annexure 'Z' hereto forming part of the case. Between April 25, 1953, and July 1, 1953, though the bank had authority to deal in all foreign currencies, the bank did not have any transaction in any other currency except that of Pakistan.
.....As stated earlier, the old balance of Rs. 3,97,221 was sterilised and the profits or losses of transactions from May 1, 1951, were treated separately.
.... The only permission on July 1, 1953, that was given was to remit the blocked fund of Rs. 3,97,221.'
5. The relevant portion of the earlier statement of the case is :
'The balance in the books of the aforesaid Karachi branch in favor of the head-office of the assessee bank in September, 1949, when the above currency situation arose was Rs. 3,97,221. For the reasons aforesaid this amount became blocked and remittance thereof was prohibited. The aforesaid balance was carried down at the same figure of Rs. 3,97,221 till 1951.
In 1951, India ultimately agreed to recognise Pakistan currency at nevertheless, the remittances of the aforesaid blocked balance was still prohibited by Pakistan.
On July 1, 1953, the State Bank of Pakistan gave permission to the assessee to remit the aforesaid balance of Rs. 3,97,221 Pakistan rupees to India and, under this permission, the full amount was remitted soon after at Rs. 5,71,038 at the ruling rate of exchange on the date of remittance...........'
6. At one stage, before us, it was suggested on behalf of the department that it was not improbable that the blocked balance was in fact employed by the Karachi branch for its banking operations in Pakistan or for its business in Pakistan and other foreign currencies permission by the two licences obtained by its, but it had to be admitted that, there was no evidence. That any such thing was done is not if either of the two agreed statements of the case and it is clear that the attempt now made to step out of the agreed statements to raise a new question of fact cannot succeed.
7. It will be seen from a letter addressed by the State Bank of Pakistan to the Karachi branch on May 2/3, 1953, that, at that stage, there was also an interdict placed in respect of the blocked balance. That letter reads :
Canara Bank Ltd.,
Please note that the amount in Indian rupees overdrawn from your head-office account is not to be adjusted without our prior approval.
(Sd.) N. M. Uqaili,
8. It may be possible to say that what was forbidden by the State Bank was the remittance of the amount to India. But, however that may be, it is clear from the agreed statements submitted to us that that sum of money lay dormant with the Karachi branch either because it did not or could not throw it into its business.
9. The substance of the question to be decided is whether the profit made by the bank is a revenue receipt or a capital gain. Under the provisions of the Income-tax Act, capital gains made after March 31, 1946, were taxable until the levy was in effect abolished by the Indian Finance Act, 1949, with effect from April 1, 1948. The revival of that levy by Finance (No. 3) Act, 1956, which substituted for the old section, section 12B in the form in which it now stands, again makes from April 1, 1957, certain capital gains part of the taxable quantum. So, if the nature of the profit in this case which was made during the interregnum when no tax was payable on capital gains is a capital receipt, tax on it would not be eligible.
10. The Income-tax Appellate Tribunal thought that the appreciation in value of the money sent to India resulted in an accretion to the stock-in-trade of the bank and that, therefore, a taxable profit and not a capital gain was realized in the normal course of business. This is what it said :
'From the nature of the banking business done by the assessee during the year 1953, it will be idle to contend that its business did not include foreign exchange business too and that the various balances held abroad form part of its normal stock-in-trade. Any accretion thereto during the year, be it a windfall, has to be only a part of its trading profit.
7. Looking at the matter in 1949 when the Karachi balance got blocked up, the balance arose only in the course of its normal banking business to deal in money in Pakistan; part of its head-office stock-in-trade was transferred to Pakistan for trade. If in the course of years this stock appreciated in value - it may be without anything done by the assessee but purely by fortuitous factors - the appreciation is the assessee's income; it is part of the assessee's banking business to take risks and the profit or loss on the risks is as much a profit of the business as the interest income'.
11. That it was enough for the accretion to be a taxable profit if the asset which appreciated in value was at some stage part of the stock-in-trade of the assessee and that it was unnecessary for the accretion to arise by any activity on the part of the assessee was how the Tribunal understood the law. The Income-tax Officer and the Appellate Assistant Commissioner whose findings were affirmed by the Income-tax Appellate Tribunal made the same approach to the question before them. The Income-tax Officer said this :
'Now it cannot be denied that it is part of a bank's business to deal in funds, money being in fact the stock-in-trade of such an institution. Nor do I think it can be gainsaid that operations on the currency exchange are indisputably bound up with the affairs of a bank which has anything to do with transactions in countries other than its own. In this particular case, the funds which gave rise to the profits mentioned above came into the possession of the assessee bank in the usual course of its business, as stock-in-trade, and it follows therefrom as night the day (to be literary for once) that such profits, made in essence by the appreciation in value of stock-in-trade, are taxable'.
12. The Appellate Assistant Commissioner observed :
'I regret I cannot concede any of the arguments advanced on behalf of the appellant because, first of all, the bank cannot escape the fact that cash is its stock-in-trade. Due to some reason or another, there was appreciation in value of this stock-in-trade. Appreciation in value of stock-in-trade is definitely not capital. Secondly, it was not a mere book adjustment entry in the head-office books of the Pakistan branch account. Actually, cash was received in Indian rupees, increased by that amount of Rs. 1,70,746. Further, at the time when the block fund was released and increased, Indian rupees were received in India, I may add, that the appellant obtained licence for dealing in foreign currency and so the last argument of lack of exchange licence also has no force. In these circumstances, the currency forming stock-in-trade, its appreciation for whatever reasons it may be, would be business profit and taxable.'
13. It will at once be clear that what everyone who decided this tax controversy did was to first address himself to the question whether the asset which appreciated in value was at some point of time part of the stock-in-trade of the bank. Having reached the conclusion that it was, all of them thought that any accretion to it by whatever process, whether or not any exertion of the bank was responsible for it, was indubitably a revenue accretion.
14. A good part of the argument before us covered the question whether the asset which appreciated in value was the stock-in-trade of the bank, although the view pressed on us for the bank was that the material question was whether the accretion was produced by a business activity of the bank.
15. It is obvious that the Income-tax Appellate Tribunal, like the Appellate Assistant Commissioner and the Income-tax Officer, in founding its decision upon its view that there was an accretion to the bank's stock-in-trade, depended on the distinction made in decided cases between fixed capital and circulating capital and on the dictum that while accretions to fixed capital are capital accretions, those to circulating capital are taxable revenue accretions. The investigation made to ascertain the quality of the asset is intelligible. It is manifest that the Tribunal, when it described the asset as the stock-in-trade of the bank, thought that that asset was part of the bank's circulating capital.
16. The steps by which the Tribunal reached the conclusion that the accretion in this case was taxable are these. It first made the assumption that all moneys held by a bank in its foreign branches form part of its stock-in-trade. It then made the deduction that the sum of Rs. 3,97,221 returnable by the Karachi branch to the head-office was a balance 'which arose in the course of the normal business of the bank to deal in money in Pakistan'. On these premises, it finally concluded that even if that balance appreciated in value 'by fortuitous factors' without anything being done by the bank, contributing to such appreciation, to the extent of the appreciation, a taxable profit had been realised.
17. I would say that it is not right to think that all monetary wealth of a bank is its circulating capital or stock-in-trade. Bankers are, it is true, traders in money and in an important sense its manufacturers. It should also be admitted that a bank is an institution possessing the power of regulating money and therefore has great significance in the economic world. Its principal business being the channeling of money into the hands of spenders, its stock-in-trade must ordinarily be money in a state of liquidity. Unless considerable sums of money are kept ready by a bank, so that there may be a supply by the bank to its customers in measures depending upon the monetary habits of the public, no bank can justify its existence or serve the purpose for which it exists. Money is therefore an important asset of a bank and its business consists of its flux and reflex from the bank and to it. In that sense the principal stock-in-trade or circulating capital of a bank is money used or expended for its banking operation. Though the standard assets of a commercial bank do not consist merely of money but are also composed of overdrafts, loans, bills discounted, investments and cash, money is one of its standard and important assets. But that does not mean that all the money of a bank represents its stock-in-trade or constitutes its circulating capital. It may not, for example, be possible to say that cash reserves held under a legal obligation form even in the ordinary sense its circulating capital.
18. Every commercial bank must obviously have a sufficiently adequate cash base with which it can pay its depositors and carry on its banking operations and, for that purpose, it would be necessary for a commercial bank to have cash either in its tills or in its strong room or standing to its credit at other banks. Such moneys employed for banking operations would clearly belong to the category of circulating capital. But it could be inaccurate to say that every cash asset of a bank is necessarily its circulating capital or stock-in-trade. As in all other cases, it should be equally true in the case of a bank that its circulating capital according to its legal concept consists only of those assets used or expended for banking operations.
19. But the criterion applied by the Tribunal was not whether the accretion was to an asset employed in a banking operation but whether the asset which appreciated in value 'arose' in the course of business. It is not easy to understand why the Tribunal addressed itself to the question how the asset arose. The material question was how the accretion arose.
20. If the head-office sent funds to the Karachi branch as it must have done for the banking operations of the branch and if at one stage a sum of Rs. 3,97,221 was to the credit of the head-office in the sense that amount had to be returned to the head-office, it may not follow that sum of money 'arose' in the course of banking operations. Out of the funds sent by the head-office to the branch for its business, what was returnable to the head-office may have fluctuated from time to time, such fluctuation depending upon the remittances and receipts, to and from the head-office, but that does not mean that the sum of money ascertained to be payable to the head-office in 1949 'arose' in the course of business or that a circulating capital or stock-in-trade to that extent came into existence by that process.
21. Now, all that we know from the case stated is that the balance in the books of the Karachi branch to the credit of the head-office on September 18, 1949, was Rs. 3,97,221 and how that sum of money became payable is not explained. Nor was any elucidation made of that matter in this court. Even if we should be prepared to hold that sum of money became payable by the branch office to the head-office, in the normal course of business, the fact that we can come to that conclusion cannot materially help the determination of the assessability of the accretion to it. All that we might be able to say is that at the point of time when that sum of money became returnable to the head-office in India, it was part of the stock-in-trade of the bank.
22. That quality of the asset was, however, considered by the Tribunal to be conclusive of the matter and the correctness of that postulate is what we should examine.
23. The law on the question whether an accretion to the value of an asset is a capital or revenue accretion is too long and too well established. The principle expounded in the decided cases is that the mere fact that the asset of a trader increases in value will not attract income-tax even if a profit is thereby made and that income-tax is not payable merely because a person makes a profit. If there is an accretion to the value of an asset belonging to a trader, the fact that there is a realised increment in the value of the article will not by itself be conclusive of the question whether the realisation is taxable. The argument that a realisation which is only an accretion to the value of the asset, is not taxable, is equally unavailable. The real test is whether the profit through an accretion to the value of the asset was produced by 'an act done in what is truly the carrying on or carrying out of a business'. This principle was initiated in the leading case of Californian copper Syndicate v. Harris (Surveyor of Taxes) in which the enunciation of Lord Justice clerk at page 165 of the report, which has been recognised as stating the law correctly and accurately, reads :
'It is quite a well settled principle in dealing with questions of assessment of Income Tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than be originally acquired it at, the enhanced price is not profit in the sense of Schedule D of the Income Tax Act of 1842 assessable to Income Tax.
But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business.
What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being - Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making ?'
24. This exposition was affirmed in a judgment of the Privy council in commissioner of Taxes v. Melbourne Trust Limited which Lord Dunedin said that the principle by which the assessability of a realised surplus has to be determined was correctly stated in the Scottish case, Californian Copper Syndicate v. Harris.
25. In Rees Roturbo Development Syndicate Ltd. v. Ducker, Rowlatt J. observed at page 378 :
'Now Income Tax is not attracted by the mere circumstance that there is a profit; because the profit may be a mere accretion of the value of the article, and the profit may not accrue in the course of any trade at all. On the other hand the circumstance that the profit is due to an accretion in the value of the article does not negative the application of Income Tax, because the accretion of value to the article may have been the very thing that a trade within Case I was established to secure. In that case you have a trade which is going to be in articles with a view to securing the accretion of value to those articles, and the accretion of value does not negative the incidence of Income Tax'.
26. When the decision of Rowlatt J. in that case was reversed by the Court of Appeal, and from the decision of the Court of Appeal the matter went up to the House of Lords, Lord Buckmaster, at page 398, pointed out that the enunciation of the law made by Rowlatt J. was 'open to very little criticism'. At page 397, he observed :
'My lords, I think it is undesirable in these cases to attempt to repeat in different words a rule or principle which has already been found applicable and had received judicial approval, and I find that in the case of the Californian Copper Syndicate v. Harris, which is reported in Volume V, Tax Cases, page 159, it is declared that in considering a matter similar to the present the test to be applied is whether the amount in dispute was 'a gain made in an operation of business in carrying out a scheme for profit-making'. That principle was approved in a judgment of the Privy Council in the case of The Commissioner of Taxes v. Melbourne Trust Ltd., reported in  Appeal Cases, page 1001, and it is, I think, the right principle to apply.'
27. This statement of the law was again followed with approval by the Privy Council in the case of Commissioner of Taxes v. British Australian Wool Realization Association Ltd.
28. In Dunn Trust Ltd. v. Williams Vaisey J., referring to the principle enunciated by Lord Justice Clerk in Californian Copper Syndicate v. Harris said at page 485 :
'The law upon this matter is of course free from doubt, and I think the locus classicus upon this point is the opinion of the Lord Justice Clerk, in the case of Californian Copper Syndicate (Limited and Reduced) v. Harris, which is reported in 5 Tax Cases 159, at page 165, where the Lord Justice Clerk says.....'
29. The principle expounded in these cases, therefore, is that enhanced values are liable to be assessed only where a profit arises out of an act done in what is truly 'the carrying on or the carrying out of a business'. The application of that principle has been simplified by Rowlatt J. whose exposition was declared to be 'open to very little criticism' by the House of Lords in Rees Roturbo Development Syndicate Ltd. v. Ducker. What Rowlatt J. said would make an accretion taxable was the existence of a trade established to secure such accretion, in the course of which the accretion is made. In other words, an accretion of value by itself is not a taxable accretion unless the accretion to the asset is the very thing that the trade is established to secure. At page 379 of the Rees Roturbo Development Syndicate case, he said :
'.... if you get an accretion of value of property which arises in the course of trade which it is the object of the trade to secure, of course it is a trade profit,.....'
30. This being the law about accretions, it follows that an accretion will not fall within the words 'profits and gains' occurring in section 10 of the Income-tax Act, unless it arises in the course of a trade carried on with the desire to secure such accretion.
31. Whether an accretion was realised in the course of a trade carried on with the object of securing such increment in the value of the asset employed for that purpose is a question to which the answer must depend on the particular facts of each case. It would be a fruitless endeavour to search the decided cases for any infallible test for deciding the vexed question whether a receipt is of an income or capital nature, since no case in which a decision was reached whether a receipt was income or capital, prescribes any conclusive test of universal or general application.
32. The determination of the assessability of an accretion to a trader's asset has sometimes been made to rest on the character of the asset, the enquiry made to rest on the character of the asset, the enquiry made being whether the asset, when it appreciated in value, was fixed capital or circulating capital. The ascertainment of the character of the asset became the basis of the conclusion that the accretion is or is not a revenue receipt. The adoption of this test in some of the cases appears to have influenced the Tribunal to enquire into the character of the asset in this case and, having reached the conclusion that it was part of the circulating capital on September 18, 1949, it proceeded to make the further deduction that for whatever reason that circulating capital increased in value in 1953, that increase was a revenue receipt. What prompted the view that the asset was circulating capital in 1949 was that it, 'arose', according to the Tribunal, in the usual course of business.
33. I should say that the reasoning suffers from excessive simplification. In proceeding to address itself in the manner in which it did, to the abstract determination of the question whether the asset was at some stage circulating or fixed capital, the Tribunal, it seems to me, employed a test which can disengage attention from the real issue and deflect the enquiry. The principle that an accretion to a circulating capital or to its stock-it-trade or to trading assets is taxable at the hands of the recipient of that asset was not, I think, correctly comprehended or applied by the Tribunal.
34. The expressions 'circulating capital' and 'fixed capital' do not carry with them a meaning of general application. The legal concept of circulating capital is not the same as its economic concept or the concept of the accountant. The distinction made by economists in classifying assets which have an element of permanence about them or which have a longer economic service as capital assets and those whose economically useful life is shorter as circulating capital does not assist the determination of a tax controversy. The same should be said of the concept of the modern accountant who treats all assets liquidated within a period of twelve months as circulating capital. The real distinction between circulating capital and fixed capital accepted by the courts is that pointed out by Lord Haldane in John Smith & Son v. Moore in which he adopted the definition by Adam Smith in his book on the Wealth of Nations, who described fixed capital as what the owner turns to profit by keeping it in his own possession and circulating capital as what he makes profit of by parting with it and letting it change masters. This is what he said at page 282 of the report :
'My Lords, it is not necessary to draw an exact line of demarcation between fixed and circulating capital. Since Adam Smith drew the distinction in the Second Book of his Wealth of Nations which appears in the chapter on the Division of Stock, a distinction which has since become classical, economists have never been able to define much more precisely what the line of demarcation is. Adam Smith described fixed capital as what the owner turns to profit by keeping it in his own possession, circulating capital as what he makes profit of by parting with it and letting it change masters. The latter capital circulates in this sense'.
35. An equally clear elucidation was made in Van den Berghs Ltd. v. Clark in which Lord Macmillan said at page 443 :
'I have not overlooked the criterion afforded by the economists' differentiation between fixed and circulating capital which Lord Haldane invoked in John Smith & Son v. Moore ( 2 A. C. 13) and on which the Court of Appeal relied in the present case, but I confess that I have not found it very helpful. Circulating capital is capital which is turned over and in the process of being turned over yields profits or loss. Fixed capital is not involved directly in that process, and remains unaffected by it'.
36. In Karanpura Development Co. Ltd. v. Commissioner of Income-tax, their Lordships of the Supreme Court adopted the same definition. This is what they said :
'But whatever 'income' may include or mean, it is, however, clear that it does not include fixed capital or the realising of fixed capital by turning it into some other form of capital or money. Fixed capital is something which the owner keeps in his possession but turns to profit; circulating capital, however, is turned over in the process of profit-making'.
37. These definitions of circulating capital make it impossible for anyone to assert that a trader's assets can always be placed at any given point of time in two compartments, the fixed capital in one and circulating capital in the other. To think that the assets of a trader are always capable of physical division into two groups, one constituting circulating capital and the other fixed capital, regardless of the activity or purpose in or for which these assets are employed and without reference to whether they were or were not employed for a trading operation, would be to ignore the attributes of circulating capital as contrasted with those of fixed capital assigned to them by courts.
38. What I have said receives support from the following words of Rowlatt J. in Rees Roturbo Development Syndicate case found at page 379 of the report :
'In one sense the words 'capital asset' are words of art, because you do not have one set of assets representing capital and another set of assets representing income, of course; but what is meant by the phrase 'capital asset' is that this is an asset which represents fixed capital as opposed to circulating capital, that is to say, that this is an article which is possessed by the individual in question, not that he may turn it over and make a profit by the sale of it to his advantage but that he may keep it and use it and make a profit by its use.'
39. If what makes an asset a circulating capital is, as stated by Adam Smith, what earns a profit by its being parted with and by its being allowed to change masters, and, according to Lord Macmillan, what is turned over and yields a profit or loss in that process, it follows that if an asset is not parted with and is not allowed to change masters and is not turned over to yield a profit or loss in the process of being turned over, it would not acquire the character of circulating capital. It is the parting with of the asset and the act by which it is allowed to change masters and the process by which it is turned over, in consequence of which it yields profits or losses, which makes the asset circulating capital. No asset of a trader can, therefore, become circulating capital unless the asset is subjected to such treatment and, for the purpose of deciding a claim to income-tax, there can be no other principle. Whether the asset which has yielded a profit was so turned over or parted with or was allowed to change masters is, therefore, what should be examined in each case.
40. That that is how the assessability of a profit should be determined is what was explained in Reynolds and Gibson v. Crompton.
41. In that case, there was a sale of cotton in the year 1920 by a firm to a company for a sum of Pounds 200,000, out of which a sum of Pounds 174,600 remained unpaid and due in 1938. This debt was treated by the seller as a bad debt to the extent of Pounds 50,000. A new firm took over the assets of the old firm which had sold the cotton and, in that transaction, the debt due by the company was valued at Pounds 124,600 and was assigned to the new firm for that price. In 1946, the debt was paid in full by the company to the new firm which thus made a profit of Pounds 50,000.
42. The determination of the Special Commissioners was that the profit was a revenue receipt and, therefore, taxable. In the High Court, Roxburgh J. upheld that determination. But, in the Court of Appeal, that decision was reversed and the realisation was held to be not taxable. Jenkins L. J., at page 303, observed :
'But for my part I do not think the importation into the case of the somewhat debatable distinction between fixed and circulating capital really contributes anything to the solution of the question in issue. After all, if I understand the cases correctly, 'circulating capital' is simply an expression used to denote capital expended in the course of the trade with a view to disposal at a profit of the assets produced or acquired by means of such expenditure, and represented at different stages of its career by cash, assets into which the cash has been converted, and debts owing from customers to whom those assets have been sold. It follows that to describe the sum of Pounds 124,600 expended by firm No. 3 in the present case on the acquisition of the debt of Pounds 174,600 owing to firm No. 2 as circulating capital is really to beg the question, since the Pounds 124,600 was circulating capital employed in firm No. 3's trade if but not unless the acquisition of the debt was an operation of firm No. 3's trade.
The question therefore still remains to be answered : Was the purchase of the debt in question a purchase in the course of the new trade which firm No. 3 is treated as having set up, with the result that the profit of Pounds 50,000 accruing through the ultimate payment of the debt in full was a profit of that trade For this purpose, firm No. 3 must be regarded as a complete stranger to firm No. 2, purchasing the assets and undertaking the liabilities of firm No. 2 with a view to setting up a new business of the same kind on its own account'.
43. He said at page 304 :
'Now, I think, we have nothing upon the face of this case to show that in a trade of buying and selling there was income or gain made by this company upon which the assessment is made......
The present case as I see it is one in which quote firms Nos. 3 and 4 the profit did not, in the words of Rowlatt J., 'accrue in the course of any trade at all'.'
44. The observations of Rowlatt J. on which Jenkins L. J. depended is that found in Rees Roturbo Development Syndicate case.
45. In the further appeal to the House of Lords, the decision of the Court of Appeal was affirmed landlord Normand, at page 310 of the report, stated :
'No exertions of trading were employed in the collection and the profit was not a profit of the business carried on by firms Nos. 3 and 4 as cotton brokers;....'
46. Lord Reid, at page 312 of the report, said :
'I venture to think that some unnecessary difficulty has been introduced into this case by the respondents' original contention that the debt was part of the fixed assets of the new firm and was never part of its circulating capital. If circulating capital means no more than capital expended in the course of a firm's trade or capital represented by a trading asset, then to enquire whether this debt or the money spent to acquire it was circulating capital or fixed capital is only to enquire in a circuitous way whether the acquisition of this debt by the new firm was a trading operation or not. But if the term circulating capital is used in any other sense, then to enquire whether this debt or to money spent to acquire it was circulating capital or not is likely to be misleading because it may divert attention from the real issue. In the same way I doubt whether it is helpful to put the question whether the debt was a capital or a revenue asset. If by a revenue asset is meant something of which the proceeds on realisation must be treated as a trading receipt (anything else being a capital asset) then one comes back to the same question whether the acquisition and realisation of the asset are or are not trading operations. But if the terms 'capital asset' and 'revenue asset' are used in any other sense, again the use of these terms may be misleading'.
47. The emphasis should be, as I have already stated, on the realisation by a trading operation and it is only if there is a trading operation, which produces a realisation, that it can be said that the asset so employed in that trading operation was circulating capital.
48. Instead of asking itself whether the profit in this case was made in the course of a trading operation, the Tribunal proceeded to enquire whether the asset which produced the profits was the stock-in-trade of the bank or, in other words, its circulating capital, as if the bank has always a class of assets which can be identified as circulating capital without reference to any trading operation in which those assets were involved.
49. That the fear entertained by Lord Reid about the danger of being misled by the use of the term 'circulating capital' in a sense other than that circulating capital is capital expended in the course of trade, discarding the importance of the element of a trading operation, was not groundless, is clearly demonstrated by what the Tribunal did in this case.
50. Now, in this case, when it received the appreciated blocked balance at Mangalore, the bank did make a gain. If that gain was realised through a trading operation, it was taxable income. The Tribunal has not found for us that the realisation in the present case was made by any act done by the bank in what is truly 'the carrying on or the carrying out' of its business. The Tribunal did not have any doubt that the realisation was fortuitous. But, in its opinion, the appreciation in value of the asset, which it considered to be the stock-in-trade of the bank in the year 1949 was for that reason taxable income. It is clear from the case stated that the Tribunal did not find it possible to think that any act done by the bank in the carrying on or the carrying out of its business contributed to the bank in the carrying on or the carrying out of its business contributed to the accretion. It did not find that the sum of money which was made available to the Karachi branch for its banking operation was an asset intended to be employed by that branch with the object that there should be an accretion to it by exchange fluctuations or by a trade in foreign currencies. At the stage when that sum of money became immobilised at Karachi in 1949, it was with the Karachi branch, not because it was the desire or the object of the bank that it should increase in value by any banking operations in foreign exchange business but only for its remittance to the head-office in India. It was not until April 3, 1951, that the bank could commence business in Pakistan currency and it was not again until April 25, 1953, that it was permitted to carry on business in all foreign currencies. But, even after the bank was permitted to carry on business in Pakistan currency in April, 1951, the fact as found for us by the Tribunal is that the sum of Rs. 3,97,221 belonging to the head-office 'could not be utilised' for such business until it was remitted to India.
51. It is not in the case stated - and no such argument was advanced by Mr. Government Pleader - that after September 18, 1949, the blocked balance, as the Tribunal calls it, was utilised by the bank at any time for any banking operation. On the contrary, it is stated that although the Reserve Bank permitted the bank on April 3, 1951, to carry on business in Pakistan rupees that asset was not and could not be utilised even for that business. That the position did not change even after a general licence was granted to the bank on April 25, 1953, to carry on general business in foreign exchange is also found for us.
52. The finding of the Tribunal that the blocked balance became 'sterilised' is to my mind a statement of great import and demonstrates that that asset, even if it was circulating capital before it became sterilised, was lifted out of the circulating capital and became barren and unproductive. That sum of money which became isolated in that way from the normal circulating capital of the bank and became a different and distinct kind of asset could not retain the character of circulating capital, if such was its original character, after it became an asset which the bank was unable to harness for its trade and lay dormant awaiting the permission of the State Bank of Pakistan for its remittance to the head-office in India. If there was an unforeseen appreciation of its value after all banking operations with its assistance were either discontinued or became impossible, the accretion to it, after it became divested of its character as a circulating capital, which it was understood to be, cannot be fixed on the ground that the asset was at some anterior point of time, circulating capital.
53. As explained by Romer L. J. in Golden Horse Shoe (New) Ltd. v. Thurgood, the determination whether a particular asset belongs to the category of fixed capital or to the category of circulating capital does not in any way depend upon the nature of the asset in fact or in law and so an asset in certain circumstances may be circulating capital and fixed capital in certain other circumstances, the determining factor being the nature of the trade in which the asset is employed. This is what he said at page 300 of the report :
'Unfortunately, however, it is not always easy to determine whether a particular asset belongs to the one category or the other. It depends in no way upon what may be the nature of the asset in fact or in law. Land may in certain circumstances be circulating capital. A chattel or a chose in action may be fixed capital. The determining factor must be the nature of the trade in which the asset is employed. The land upon which a manufacturer carries on his business is part of his fixed capital. The land with which a dealer in real estate carries on his business is part of his circulating capital. The machinery with which a manufacturer makes the articles that he sells is part of his fixed capital. The machinery that a dealer in machinery buys and sells is part of his circulating capital, as is the coal that a coal merchant buys and sells in the course of his trade. So, too, is the coal that a manufacturer of gas buys and from which he extracts his gas'.
54. If, therefore, the determining factor is the character of the trade in which the asset is employed and, therefore, an asset, if employed in a particular trade becomes circulating capital and if employed in another is fixed capital, it must logically follow that the same asset in the course of the same trade may change its character in accordance with the purpose for which it is employed. If a land with which a dealer in real estate carries on his business is circulating capital, if he carries on a business with that land, whereas the land upon which a manufacturer carries on his business is his fixed capital, it should follow that if a dealer carrying on his business in the sale and purchase of lands converts one of those lands for the purpose of carrying on a different business on that land, that land would cease to be circulating capital and becomes his fixed capital. The same result should follow if the dealer decides to segregate that land from his business operations and decides not to use it for the purpose of his business in the sale and purchase of lands or, under pressure of external circumstances, he is unable to employ it for any such business. I can conceive of no principle on the basis of which it should be held that even in those circumstances, that land must still be treated as the circulating capital of the dealer. If it is not the nature of the asset in fact or in law, which determines whether it belongs to the category of circulating capital or not, it should be equally true that the fact that an asset was circulating capital at some stage cannot compel the conclusion that for that reason and for that reason alone it continues to belong to the category of circulating capital, even if its employment in the trade in which it had been formerly employed discontinues.
55. How we should understand the pronouncement of Romer L. J. is that no asset by its own nature can claim the status of fixed or circulating capital and that its character entirely depends upon what is done with it by the trader. If, therefore, what controls the character of an asset is the nature of the trade in which it is employed, the discontinuance of the employment of an asset in a trade should have, in relation to that asset, consequences similar to those ensuing from the abandonment of the trade or its conversion into a different trade.
56. It should, therefore, follow that the endeavour of the Tribunal to deduce the assessability of the accretion from the character of the asset in the year 1949 was not a useful path of investigation.
57. In A. H. Wadia v. Commissioner of Income-tax, their Lordships of the Federal Court made it clear that the crucial question in a case like the present one is whether the income on which the tax is claimed arose from an asset which continued to be and retained the character of a trading asset when it yielded a profit and that the onus of establishing that fact was on the department.
58. The assessee in that case was the Gwalior Durbar which derived income from properties purchased in execution sales held for the recovery of amounts due under mortgage decrees obtained against its mortgagors, who had failed to repay the amounts advanced in the course of the money-lending transactions of the Durbar. The income so derived, it was held, was not assessable in the absence of a finding that those properties, after their purchase, continued to be part of the assets of the money-lending assets of the Durbar. Kania. J., delivering the majority judgment, said this at page 76 of the report :
'From this recital it only appears that the original money-lending transactions consisted of advancing loans on mortgages. They had come to an end with the sale of the properties under the directions of the court. The purchase by the Durbar of these properties can be either a continuation of the money-lending transactions, coupled with the desire at a proper time to sell the properties and realise the amounts lent, or retaining the properties as investment, like other properties purchased by the Durbar in British India. The fact that the properties are left in the hands of the Durbar, in my opinion, leads to no conclusion one way or the other. This is not a case where a money-lender sets apart a specified sum for his business and continues to keep an account of the properties as a part of the same business. The question whether the properties so left in the hands of the Durbar form part of his money-lending business or not is a conclusion to be drawn from the evidence led before the taxing authorities. The recital of facts by the Commissioner, quoted above, over blocks his duty to determine whether these properties retain the character of assets in the money-lending business. If that is not done, the income of these properties does not come under the Government Trading Taxation Act and the Durbar is not liable. Under the circumstances of this case, I am unable to accept the view of the high court that the burden of proof is on the Durbar to establish that the properties had been taken out of the money-lending business. In the absence of a finding by the Commissioner that these properties form part of the trading assets of the Durbar the assessment cannot be upheld and the answer of the court should be that the Durbar is not liable in respect of the income of these properties for the year of assessment'.
59. What I have said so far is to point out that what was overlooked by the Tribunal was that no asset of a trader which is not turned over and yields in the process of such turning over a profit or loss can be classified as circulating capital and that it was not therefore possible for it to call the sum of money returnable to the head-office of the bank as its stock-in-trade or circulating capital and that it was not therefore possible for it to call the sum of money returnable to the head-office of the bank as its stock-in-trade or circulating capital of the year 1949 or to ignore the effect of its subsequent sterilisation.
60. I should now turn to the real issue presented by this case from which the Tribunal allowed its attention to be diverted by the application of a misleading criterion. Since in a case like this, where the question is whether an accretion to a trader's asset is or is not a revenue receipt, the determining factor is a trading operation, which was referred to by Lord Justice Clerk as an act done in what is truly the carrying on or carrying out of a business, as explained by Lord Reid in Reynolds and Gibson v. Crompton, to enquire first without reference to a trading operation, whether that asset which appreciated in value was circulating capital, as the Tribunal did, is to pursue a circuitous investigation which can produce imperfect results.
61. On the question whether the accretion in this case was yielded by a business operation by the bank, the effect of the Tribunal's finding is that it was not. In its view, that accretion was produced 'without anything being done by the assessee but purely by fortuitous factors. The Appellate Assistant Commissioner thought that 'due to some reason or another, there was appreciation in value'. It has, therefore, not been found for us by the Tribunal that the accretion arose by the employment or use of the money returnable to the head-office, in a business operation of the bank, with the object that sum of money should increase in value. If, without recording a finding to that effect, it was not possible for the Tribunal to reach the conclusion that the accretion was a taxable revenue receipt, that conclusion which it reached on the slippery foundation that the asset which produced the accretion was the stock-in-trade or circulating capital of the bank in the year 1949, would be bereft of a valid ground to sustain it. If, as stated by the Tribunal, purely fortuitous factors produced the accretion, the obvious implication of that statement is that the accretion did not arise out of any act done by the bank in carrying out a profit-making scheme. If that was how the accretion came into existence, the Tribunal was left without any ground to sustain the claim of the department to impose a tax on it.
62. I do not think that the Tribunal could have decided that the accretion arose from a trading transaction. It was right in its belief that unforeseen and fortuitous causes produced the accretion. In the year 1949, when there was a devaluation in the Indian rupee, the Karachi branch was not carrying on any business in foreign currencies. The sum of money belonging to the head-office which had been sent to it for its business was not intended to be employed by anyone at that stage to be used or expended in any banking operation in foreign currencies. It was not the object of the bank to throw that sum of money into any such business so that its value may increase. Indeed, until April 3, 1951, when it was permitted to carry on business in Pakistan currency, it carried on no foreign exchange business. Even after it was so permitted and even after it obtained on April 25, 1953, a general licence to carry on business in all foreign currencies, the money of the head-office was not and could not be expended or used, as the Tribunal has found, for either of those two kinds of businesses. It was lying idle without the bank being able to embark it in any banking operation and the Karachi branch was keeping that sum of money with it only for the purpose of its remittance to India, awaiting the permission of the State Bank of Pakistan, without which such remittance was not possible. If, eventually, its remittance was permitted on July 1, 1953, and thereafter it was so remitted two days later on July 3, 1953, it becomes perfectly manifest that sum of money was at no material stage employed, expended or used for any banking operation or for any foreign exchange business. What was done with that money by the Karachi branch during all the time was only to retain it in its custody intact until it was returned to the head-office through the Reserve Bank of India. It handed over to the Reserve Bank of India 3,97,221 Pakistan rupees and the Reserve Bank of India handed over to the head-office of the assessee bank 5,71,039 Indian rupees. The source of the appreciation of the money of the head-office, it is clear, cannot therefore be traced to any trading transaction of the bank. The devaluation of the Indian rupee which the bank could never have foreseen was entirely responsible for the unexpected appreciation and the bank having at no time sought or desired such appreciation by any endeavour made by it in the carrying on of its banking business, it should be said that the Tribunal took an entirely correct view of the matter when it thought that fortuitous circumstances, unaided by any act done by the bank, produced the accretion. That finding, in the circumstances of this case, should, I think, displace its somewhat inconsistent conclusion that the accretion was a revenue receipt and, therefore, taxable.
63. If it can be said that the accretion in this case was income, it should also be possible to say that if the bank had sent funds to the Karachi branch before the devaluation of Indian currency for the purpose of banking operations and that branch never commenced its business, the accretion to those funds for which no business exertion on the part of the bank made any contribution, is also income on which the department could claim income-tax, after the movement of those funds back to India. I am not prepared to think and it seems to me that the proper view to take would be that the enhancement of the value of those assets, which were not used or expended in any banking operation, cannot be on revenue account and if that view be correct, there would be small reason for thinking that the appreciation in the present case in which the asset was immobilised, although for a different reason, making it impossible for the bank to do anything with it in the course of its business is nevertheless income.
64. We were asked to say that there was some trading operation in respect of the asset of the head-office which would impress upon the accretion to it the character of a revenue accretion. We were asked to view the movement of the fund to the Karachi branch when it was opened as an act done in the carrying on and the carrying out of the bank's business and that, when that fund was expended or used by the Karachi branch for its banking operations, it became the circulating capital of the bank. Since the sum of Rs. 3,97,221 represented what was payable by the Karachi branch to the head-office in the year 1949, out of the funds which had been made available to that branch, it was argued that that sum of money was the aggregate of the funds which must have been employed at one stage or the other for the business of banking and had become the circulating capital.
65. It was similarly suggested that the movement of that fund back to India in the year 1953 was also an act done in the course of a banking operation since there was an obligation on the part of the Karachi branch to return it to the head-office and that, if such movement produced an accretion, it was a revenue accretion.
66. I take the view that when the bank moved a fund to Karachi for its banking business, such fund constituted no more than part of a trade structure. The movement of the fund was really from one part of the bank to another, since the Karachi branch was as much the bank as its head-office. The head-office and the branches of a bank being parts of the same unit, the movement of an asset from the head-office to a branch or back would resemble its movement from one part of the bank premises to another. Such movement would not make the asset when so moved a trade receipt but can only be an activity in the creation of the bank's trade structure or an act relating to it. The accumulated funds moved from the head-office in this case which amounted to Rs. 3,97,221 in the year 1949, unless expended for a trading transaction, formed only part of such trade structure. The remittance of that sum of money to the head-office from which it came cannot be a trading transaction, since no one can say that there was a trade between the head-office and its branch. It is equally difficult to call it an act done in carrying out a scheme of profit-making. By the remittance, nothing more was done than to move again an asset of the bank which was in one part of it to another.
67. Among the decisions which afford examples of cases in which an exchange profit has or has not been held to be a trading profit, I should now refer to an interesting trilogy. In Mckinlay v. H. T. Jenkins & Son Limited, one of the terms of the contract under which a company of marble merchants agreed to sell marble to a contractor was that a sum of Pounds 20,000, part of the purchase price, should be paid in advance. The company received that sum of money in advance. Since the marble to be supplied by it had to be purchased in Italy on some future date that sum of money was invested in lire at a favorable rate. But, before the company found it necessary to purchase the marble, the lire had risen as against sterling and that opportunity was seized by the company to make a quick profit by selling the lire. The company again purchased lire for the purchase of the marble for which they paid less than the sum at which they sold the lire when they made their exchange profit. Rowlatt J. held that the profit was not a revenue profit but capital and the reason he gave in support of his view was that, since the foreign currency was bought purely as a speculation and not as consumable stock, any profit made was in the nature of an appreciation consumable stock, any profit made was in the nature of an appreciation of a temporary investment and was therefore a capital profit. But, he proceeded to observe thus, at page 405 :
'It was, as I say, a mere appreciation of something which they had got in hand, and I think the Commissioner were bound to hold (because I see no evidence at all to the contrary) that it was not merged in a business of the Company. It may be that, if the Company were seeking to declare a dividend, nobody could say it was ultra vires to treat this advantage as a divisible sum. Their capital was intact; they had cash; they had put it into an article of commerce; they had got it out again; they had got all the cash they ever had, and more cash, and as far as I understand it there would be no objection to their treating that as a divisible profit as a matter of Company Law. But I do not think that affects the case I have got to decide. I have to decide whether they made this profit in the way of their business, as a profit of their trade, or not, and I frankly say that I do not see how it really can be agreed that it was.'
68. The next case to which I should refer is Imperial Tobacco Co. (of Great Britain and Ireland) Ltd. v. Kelly. Before referring to the facts of that case, I should mention that Lord Greene M. R. in his judgment expressed his unwillingness to discuss the correctness of the decision of Rowlatt J., but thought that decision rested upon its own particular facts.
69. Now, the facts of the tobacco case are these : An English company which carried on business of tobacco manufacture, maintained a large buying organisation in the United States where it purchased the tobacco required by it. The purchases and the expenses of this organisation were met by the purchase of dollars in the united Kingdom through the company's bankers who remitted them to the company's accounts in the United States. The company used to accumulate a large holding of dollars each year before the purchasing season commenced and never purchased dollars for any speculative sales. When the war broke out in September, 1939, the company stopped at the request of the Treasury all purchases of tobacco in the United States, with the result that it had with it a holding of dollars which it had accumulated between January and August, 1939. On September 30, 1939, the company was required under the Defence (Finance) Regulations 1939 to sell its surplus dollars to the Treasury and, owing to the rise which had occurred in the dollar exchange, the sale resulted in a profit which was included in the assessments made upon the company to income-tax. The company's contention that the profit realised was not a profit of its trade was negatived by the Court of Appeal on the ground that the purchase of the dollars was made for the purchase of tobacco which admittedly was the trading activity of the company, and that the realised appreciation as a consequence of the compulsory sale to the Treasury was a revenue receipt which was ascribable to a trading activity. Lord Greene M. R., at page 300 of the report, pointed out that, when the company purchased dollars, it provided itself with a commodity which it proposed to exchange for leaf tobacco and that if that commodity which become surplus to the requirement of the company was realised and such realisation resulted in a profit, the realization was a trading receipt and not a capital gain. This is what he said :
'To reduce the matter to its simplest elements, the Appellant Company has sold a surplus stock of dollars which it had acquired for the purpose of effecting a transaction on revenue account. If the transaction is regarded in that light, it seems to me it is precisely on all fours with the case of any trader who, having acquired commodities for the purpose of carrying out a contract, which falls under the head of revenue for the purpose of assessment under Schedule D, Case I, then finds that he has bought more than he ultimately needs and proceeds to sell the surplus. In that case it could not be suggested that the profit so made was anything but income. It had an income character impressed upon it from the very first.'
70. The Master of Rolls referred to George Thompson & Co. Ltd. v. Commissioners of Inland Revenue, as an authority for the proposition. In that case, a company carrying on business as ship owners, merchants, shipbrokers, freight contractors and carriers, having a surplus of coal for which it had no immediate use, sold such surplus at a profit. Rowlatt J. observed at page 1102 :
'On the facts I think this is simply a case of a person who is bound to buy a certain amount of consumable stores, who over buys and is lucky enough to dispose of those consumable stores which he has got in the way of his business in relief of his business at a profit, or whatever way in which you like to put it. He has simply got out of it, and not only escaped the expense, but there is something put in his pocket for it in the way of his business. I think the whole of it comes in.'
71. At page 302 of the report, the Master of Rolls proceeded to observe :
'Leaving that on one side, and taking Mckinlay's case by itself, I call attention to the fact that the circumstances there were very different to the circumstances in the present case. In the present case the intention with which the dollars were bought was as I have stated; and that intention persisted.'
72. The ratio destined of the Tobacco case was, firstly, that the acquisition of the American dollars was an acquisition for the purpose of a trading transaction; secondly, that the intention to effect a transaction on revenue account with those dollars 'persisted' until their sale; and, thirdly, that there was a sale, although under compulsion, of that commodity. I do not, therefore, find it possible to say that in the case before us, in which the facts are somewhat different, we can come to the conclusion which the Master of Rolls found possible.
73. The Master of Rolls who found it unnecessary to discuss whether the Marble case was as much an acquisition for the purpose of effecting a transaction on revenue account as the acquisition of the American dollars was in the Tobacco case. Just as there was a sale of American dollars, though under pressure, there was a sale of the lire and in both cases there was a profit. If the profit by the sale of lire was not income, it should follow that the profit by the sale of American dollars was likewise not income. But, the master of Rolls thought that the circumstances in the Marble case were somewhat different and that the Tobacco case had to be decided upon its own particular circumstances and that is what I would also say about both of them.
74. But, in his judgment in the Coal case, Rowlatt J. said something about his decision in the Marble case which is not without meaning. In support of his decision in the Marble case that the profit made by the exchange fluctuations was not income, this is what he said at page 1102 :
'The case which does bear rather an interesting affinity to this case is the Marble case, but there the way I looked at it - I do not think the case was appealed - was simply this, that they had some capital lying idle, and they embarked upon an exchange speculation'.
75. If Rowlatt J. considered the fact that the capital was lying idle when a profit was made out of it, as material, it seems to me that I should treat the immobilisation of the fund in the case before us as equally material.
76. The last case in this group is Davies v. Shell Company of China Ltd. In that case, a British company, which sold and distributed petroleum products in China, made a practice of requiring its agents to deposit with the company a sum of money, usually in Chinese dollars, which was repayable after the termination of the agency. The company had left on deposit with banks in Shanghai amounts approximately equal to the agency deposit, but, as a result of the hostilities between Chine and Japan, the company transferred those sums to the United Kingdom and deposited the sterling equivalents with its parent company, which acted as its banker. When there was a subsequent depreciation of the Chinese dollar with respect to sterling, the agency deposits eventually repaid in Chinese currency were much less than the sums held by the company to meet the claims and a substantial profit accrued to the company. The Special Commissioners found that the exchange profit was a capital profit, not subject to income-tax and that decision was affirmed by the Court of Appeal.
77. The ratio disdained of that case was that the taking of the deposits by the company was not a transaction in its trade but was only a necessary step in establishing the structure which was required to carry on the business in petroleum products. But Jenkins L. J. said that if the deposits had been used by the company in such away as to mingle them with the capital employed in its trading in petroleum products, such use might have impressed the deposits with the character of a trade receipt and made them part of the company's circulating or trading capital, thus emphasising upon the use of the deposits as the determining factor. In one part of his judgment, he supported the criticism of the way in which the Special Commissioners viewed the matter when they based themselves on the distinction between circulating and fixed capital and said at page 154 :
'I have some sympathy with Sir Andrew Clark's criticism, for to label the agents' deposits as 'fixed capital' and to regard that as determining the matter to some extent involves begging the question, inasmuch as 'circulating capital' simply means capital employed in the trading operations of the business and the dealings with it comprise trade receipts and trade disbursements, while fixed capital simply means capital not so employed in the business, though it may be used for the purposes of the business, as a factory is used for the purposes of a manufacturing business, but does not constitute capital employed in the trading operations of the business'.
78. Among the three cases to which I have referred, the nearest approach to my mind is the Petroleum case. But, I am sure that our decision in the case before us must depend upon its own facts as stated by their Lordships of the Supreme Court in Senairam Doongarmall v. Commissioner of Income-tax in which it was observed :
'We have so far shown the true ratio of each case cited before us, and have tried to demonstrate that these cases do no more than stimulate the mind, but none can serve as a precedent, without advertise to its facts. The nature of the business, or the nature of the outlay or the nature of the receipt in each case was the decisive factor, or there was a combination of these factors. Each is thus an authority in the setting of its own facts'.
79. We were referred by Mr. Government leader, in his support, to four cases. The first of them is Westminster Bank Ltd. v. Osler. The Westminster Bank Ltd., who were the appellants in that case and who held large sums invested in National War bounds, in answer to an offer by the Lords Commissioners of His Majesty's Treasury, surrendered their National War Bonds in exchange for a new security and thereby increased the value of their invested funds by a sum of Pounds 144,750. The question was whether the bankers had realised a taxable profit and the House of Lords said they did. It was contended in that case and, according to Lord Buckmaster, it was a plausible argument, that unless an item taken in exchange was sold or taken out of the business, no tax was eligible. Referring to this contention, Lord Buckmaster observed :
'I appreciate the strength of this argument, and I am not surprised at the perplexity in which the judges have found themselves; but the wholly different character of the business, the uncertainty of values in dealing with a trader's stock, and the probability that articles exchanged in the way of trade would prima facie be of equal commercial value render the analogy unsound. The exchange effected in the present case was in fact the exact equivalent of what would have taken place had instructions been given to sell the original stock and invest the proceeds in the new security. The investment represented by the original War Bonds came to an end as soon as the new securities were taken in its place, when a new venture was begun in relation to the new holding and the fact that this transformation took place by the process of exchange does not in my opinion avoid the conclusion that there has been what is described as a realisation of the security. This view is, I think, supported by the authority of this House'.
80. The decision in the above case, it appears, depended entirely upon the view taken that the profit arose from the termination of an old venture and the profit arose from the termination of an old venture and the beginning of a new one - a perfectly clear trading operation. The essence of the transaction, according to Lord Buckmaster, was that there was in effect a sale of the original stock and an investment in a new security.
81. In Punjab Co-operative Bank Ltd. v. Commissioner of Income-tax, a bank to meet the withdrawals by its depositors sold its shares and investments and it was held that the profits arising from such sales were assessable to income-tax as profits of the banking business and the reason for that conclusion was that what was done by the bank was a normal step in carrying on the banking business. But, at page 236 of the report, Viscount Maugham observed :
'It is well established, to cite the exact words used in Californian Copper Syndicate v. Harris, that enhanced values obtained from realisation or conversion of securities may be so assessable where is done is no merely a realization or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business.'
82. In Landed Brothers v. Simpson the assessee's who were appointed sole agents of a company for the sale in Britain and elsewhere of furs exported from Russia, agreed to advance to the company a part of the value of each consignment. All the transactions between the assessee's and the company were conducted on dollar basis and owing to the fluctuations in the rate of exchange between the dates when advances in dollars were made by the assesses to the company against goods consigned and the dates when the assessee recouped themselves for the advances, on the sale of the goods, a profit accrued to the assesses on the conversion of repaid advances into sterling. Singleton J. came to the conclusion that a profit was earned in the course of trade and that it was taxable. It is clear that the stress of the decision in that case was on the fact that it was a necessary part of the assessee's business to pay in advance in dollars a part of the value of each consignment.
83. In Commissioner of Income-tax v. A. S. A. Concern, Bassein, the assessee who resided in Burma and who carried on a money-lending business at Saigon made a profit which diminished in value by a variation in the rate of exchange. The assessee's contention that the taxable profit should be reduced by the loss on exchange fluctuations succeeded.
84. The decision in each of these four cases depended upon the conclusion reached that the facts and circumstances in each of them made it clear that the source of the profit was an act done in the carrying on of a business. In this case, I do not find it possible to come to that conclusion. The difficulties presented by this case are, in my opinion, so formidable that the conclusion that the bank realised a profit by an act done in what is truly the carrying on or carrying out of a business becomes impossible. Although, ordinarily, it might have been possible to come to the conclusion that the cash asset of a bank which is generally expended for the realisation of a profit produces a revenue exertion' when it appreciates in value in the course of banking operations, what makes that conclusion difficult in the present case is the sterilisation of that cash asset and the undisputed fact that it was not used at any material stage in a banking operation.
85. I would, therefore, answer the question referred to us in favor of the bank. My answer is that the exchange difference of Rs. 1,70,746 is not assessable under any of the provisions of the Indian Income-tax Act.
86. The bank is entitled to the costs of this reference. Advocate's fee Rs. 250.
87. Order accordingly.