1. At the instance of the assessee, the Income-tax Appellate Tribunal (Hyderabad Bench) has referred to this court under section 66(1) of the Indian Income-tax Act, 1922, the question 'whether on the facts and in the circumstances of the case, the sum of Rs. 1,92,136 is liable to be taxed ?'
2. The facts of this case concisely put are as follows : The assessee is a private limited liability company carrying on business in assembling and overhauling different types of aircraft. The dispute in this case relates to its assessment in the assessment year 1950-51, the relevant accounting period being the year ended March 31, 1950. In the course of its business the assessee undertook to repair and overhaul at its Bangalore factory the aircrafts belonging to Messrs. Saudi Arabian Airlines and Messrs. Arabian American Oil Co. In respect of those contracts, the said two clients of the assessee had to pay their dues in dollars to the company's bank in America.
3. On September 19, 1949, the Indian rupee was devalued and, at that time, the assessee held with its bankers in the U. S. A. a sum of $1,98,202'75. These dollars were originally valued in the books of the assessee at the old rate of exchange, i.e., Rs. 3'33 per dollar. On account of devaluation of the rupee, the exchange rate was fixed at Rs. 4'75 per dollar. Consequent upon that, when the dollar balances were valued at the new rate of exchange there was an appreciation in their rupee value to the extent or Rs. 2,80,639. The Income-tax Officer held that the gain in question is liable to tax. He rejected the assessee's contention that the same was exempt from tax under section 4(3)(vii) as the accretion in question was a mere windfall. It was also contended before the Income- tax Officer without success that it was unfair to tax the company on a mere book entry.
4. Those very contentions were raised before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that the accretion in question was a casual and non-recurring one and that the same was due to a fortuitous circumstance but since at its inception the ' receipts' arose from business and the same was intended to be utilised for the assessee's business, he held that section 4(3)(vii) is inapplicable to the facts of the case. But, he granted a reduction in the sum of Rs. 88,503 observing as follows :
'The matter cannot, however, rest there. At my instance the company has since given the value of its ascertained and outstanding dollar liabilities as on September 19, 1949, the crucial date. They amounted to $ 62,326 and had actually been discharged and paid after September 19, 1949. Just as the dollar assets held on that date appreciated owing to devaluation, these dollar liabilities too appreciated for the same reason. It is only proper, therefore, that the assessment is restricted to the appreciation on the excess of the assets over the liabilities as on September 19, 1949. In other words, the addition is reduced by Rs. 88,503.'
5. The assessee took up the matter in appeal to the Tribunal. The contentions noticed earlier were repeated before the Tribunal with no better success.
6. The only question for consideration is whether the amount in dispute can be said to fall within the exemption provided in section 4(3)(vii) of the Indian Income-tax Act, 1922, as it stood on the relevant date. In order to come within that exemption, the assessee has to establish : (1) the 'receipts' in question were casual and non-recurring in nature; and (2) the same did not arise from business. As regards the first requisite, i.e., the 'receipts' being casual and non-recurring in nature, there was no dispute before us. The finding of the Tribunals below on that point was accepted by the department as correct. Before us the controversy centered round the question whether those 'receipts arose from business'. It was not disputed that if those receipts are held to have arisen from business it would be chargeable to tax, despite the fact that they were casual and non-recurring 'receipts'. That question is no more open to dispute in view of the decision of the Supreme Court in Raghuvanshi Mills Ltd. v. Commissioner of Income-tax. Therein the court observed :
'It is true the Judicial Committee attempted a narrower definition in Commissioner of Income-tax v. Shaw Wallace & Co., by limiting income to 'a periodical monetary return 'coming in' with some sort of regularity, or expected regularity, from definite sources' but, in our opinion, those remarks must be read with reference to the particular facts of that case. The non-recurring aspect of this kind of receipt was considered by the Privy Council in The King v. B. C. Fir & Cedar Lumber Co. and we do not think their Lordships had in mind a case of this nature when they decided Shaw Wallace and Company's case.'
7. Hence the real question for decision in this case is whether those receipts 'arose from business'. 'Business' is defined in section 2(4) as including 'any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.' Even a single transaction may constitute 'business' under the definition; it is not essential that there should be a series of transactions.
8. As held by the Tribunals below, the assessee's dollar holdings in America were partly built up by 'receipts' received from its clients and partly by remittances made by the assessee to its bankers at America. The holdings in question were utilised in the course of the business of the assessee, either for the payment of the salaries of the American technicians who were working in the assessee's factory in Bangalore or for purchasing spare parts. Therefore, it cannot be denied and it is not denied that the 'receipts' as such arose from business. Thus far, it is clear. But what is contended on behalf of the assessee is that though the dollar holdings in question were built up in the course of business, its appreciation in value in terms of Indian rupee cannot be said to be 'receipts arising from business.' It was urged on behalf of the assessee that we should differentiate between the dollar receipts as such and its appreciation in terms of Indian rupee. On the other hand, it was contended on behalf of the department that the essence of the matter is the nature of the 'receipts'; if those 'receipts' had appreciated in value and thus resulted in gain or profit to the assessee, that gain or profit must go with the 'receipts'.
9. Though at one stage there was controversy between the parties as to whether the accretion to the value of the dollars in question is capital accretion or revenue accretion that controversy was not pursued. In this court the assessee took the stand that though the accretion in question is an accretion to the revenue assets of the company, the same having not been produced by 'an act done in what is truly the carrying or carrying out of a business' is exempt from tax.
10. The contention of Sri K. R. Ramamani, the learned counsel for the assessee, that we should differentiate between the value of dollars in terms of Indian rupee when they were originally received and their appreciated value has no justification in the language of section 4(3)(vii). That provision concerns itself with the source of the acquisition and not with the later fluctuations in the value of the 'receipts'; it only deals with 'receipts' and it has nothing to do with the subsequent change in the value of the 'receipts'. For the purpose of that provision the increase in the value of the 'receipts'. For the purpose of that provision the increase in the value of the 'receipts' is an irrelevant circumstance; it has to be considered as a part and parcel of the 'receipts'. Once the 'receipts' are held to have arisen from business, there can be no exemption under section 4(3)(vii).
11. The contention advanced on behalf of the assessee while highlighting the casual and non-recurring aspect of the 'receipts' completely overlooked the other requisite that the 'receipts' in question should not have arisen from business. Section 4(3)(vii) as noticed earlier lays down two conditions to entitle the exemption provided therein. When a claim for exemption is made, the authorities will have to ask themselves only two questions, viz. : (1) whether the 'receipts' in question arose in the course of business; and (2) were they casual and non-recurring in nature. Hence, we are unable to accede to the contention of the learned counsel for the assessee that we should draw a line between the 'receipts' proper and the accretion thereto.
12. Assistance had been sought by the counsel on either side from decided cases. But no case directly bearing on the point under consideration was brought to my notice. The cases read to us, at any rate some of them, were of considerable assistance but not one of them dealt with the problem that we are called upon to deal with. The learned counsel for the assessee strongly relied on the decision of this court in Canara Bank Ltd. v. Commissioner of Income-tax. I do not think that the ratio of that decision is of any assistance in our present task. That was a case where the assessee bank had remitted some money to its Karachi branch prior to partition. After partition, the bank desired to close its banking activities in Pakistan and repatriate its capital to India. But the Pakistan Government did not give the necessary permission. Therefore, the funds in possession of the branch at Karachi became sterilised. It could repatriate the capital in question only on July 1, 1953. But in the interval, there was devaluation of the Indian rupee on September 18, 1949, as a result of which the blocked capital appreciated in value in terms of Indian rupee. The question that primarily came up for decision in that case was whether the accretion in question was an accretion to the capital assets of the bank or whether it was an accretion to the revenue assets of the bank. This court came to the conclusion that the amount remitted to Karachi, because of the changed circumstances, became dead capital. Consequently, the appreciation in value of that capital must be deemed to be an accretion to the capital assets of the bank. The ratio decided of that case is not applicable to the facts of the present case. It is true that in the course of the judgment, the learned judges (my learned brother was a member of that Bench) incidentally considered the question whether the accretion was produced by any business activity of the bank. The observations made in that connection must be read in the context in which they were made.
13. I have not thought it necessary to refer to all the decisions cited at the Bar. I shall only refer to such of them as are relevant for our present purpose. The learned counsel for the assessee has placed strong reliance on the decision in McKinlay v. H. T. Jenkins and Sons Ltd. case. In that case, one 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 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 favourable 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 a 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 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 Commissioners 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 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 if 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 effect 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 argued that it was.'
14. Superficially looked at, there is no doubt the assessee can draw some support from this decision.
15. The scope of the rule laid down in McKinlay's case came up for consideration by Rowlatt J. himself in George Thompson and Co. Ltd. v. Commissioners of Inland Revenue. He justified that decision on the ground that it dealt with the case of 'a speculation'. This is what the learned judge said in that connection :
'The case which does bear rather an interesting affinity to this case is the marble case (McKinlay v. H. T. Jenkins and Son Ltd., 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. They bought the lire as a speculation, not as consumable stores, or anything of that sort, but they simply bought them as a speculation rather than keep the money in the bank. That is how I looked at it, and I do not think it bears any affinity to this case where, as I say, the essence of it is that they were buying the most important of all consumable stores which, in the way of their business strictly regarded, they had to buy.'
16. The McKinlay's case figured prominently in In re Imperial Tobacco Co. (of Great Britain and Ireland) Ltd.'s case. In that case the appellant company carried on business of tobacco manufacturers, for which large quantities of tobacco leaf were purchased in the United States, where the company maintained a large buying organization. To finance the purchases and the expenses of that organisation the company bought dollars in the United Kingdom through its bankers who remitted them to banking accounts of the company in the United States, and it was the practice of the company to accumulate a large holding of dollars each year before the leaf season commenced. The company never bought dollars for the purpose of resale as a speculation. On the outbreak of war, in September, 1939, the appellant company, at the request of the Treasury, stopped all further purchases of tobacco leaf in the United States, and as a result, the company had on hand a holding of dollars which had been accumulated between January and August, 1939. On 30th September, 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 for the company. This profit was included in assessments upon the company to income-tax under Schedule D, Case 1, and to National Defence Contribution. On appeal to the Special Commissioners, the company contended that, in the events which had happened, the profit was realised appreciation of a temporary investment in foreign currency and not a profit of its trade. The Commissioners found that the profit from the sale of dollars to the Treasury had been correctly brought into the computation of the profits of the company's trade and dismissed the appeals.
17. Before the King's Bench. strong reliance was placed on behalf of the assessee on the decision of Rowlatt J. in Mckinlays's case. Macnaghten J. referred to the decision of Rowlatt J. in George Thompson & Co. Ltd.'s case and observed at page 298 :
'In my opinion, so far from Jenkin's case being an authority for the contention put forward by the appellant, the judgment of the learned judge. in that case, as in the case of George Thompson & Co. Ltd., supports the decision of the Special Commissioners that the profit made by the company on the compulsory sale of its surplus dollars to the British Treasury must be included in the computation of the profits of its trade.'
18. The assessee took up the matter in appeal to the Court of Appeal and the Court of Appeal affirmed the decision of Macnaghten J. Lord Greene M. R., who delivered the judgment of the Bench, observed thus :
'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.
If authority be required for that proposition, it is to be found in the case of George Thompson & Co. Ltd. v. Commissioner of Inland Revenue. That was a case where a company which had acquired a stock of coal for its normal operations found, for reasons which are not material, that it no longer required that stock; and, accordingly, it sold it. Rowlatt J. held, affirming the decision of the Commissioners, that the transaction of selling the coal which was no longer required was a transaction on revenue account. It seems to me, if I may say so, that that decision was manifestly right.'
19. Dealing with Mckinlay's case, this is what his Lordship observed :
'Rowlatt J.'s own view of his decision in that case, and the grounds of it, are referred to by him in Thompson's case. In Thompson's case Rowlatt J. said that Mckinlay's case was decided by him on the footing that the original purchase of the hire had been 'a speculation'.
It is, perhaps, fair to say that the case stated in Mckinlay's case does not appear to contain any basis for a finding that the original purchase was a speculation. It does not appear that that was the intention of the original purchase, so far as the case stated shows. But, however that may be, that was Rowlatt J.'s own view; and on that basis, in my opinion, no criticism could be made of the decision in Mckinlay's case.
Leaving that on one side, and taking Mckinlay's 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.'
20. The Imperial Tobacco Company's case has great affinity to the present case. The only other English case brought to our notice which has some bearing on the point in issue is Landes Brothers v. Simpson. In this case the assessee, who carried on business as fur and skin merchants and as agents, were appointed sole commission agents of a company for the sale, in Britain and else where, of furs exported from Russia, on the terms, inter alia, that they should advance to the company a part of the value of each consignment; all the transactions between the appellants and the company were conducted on a dollar basis, and, owing to fluctuations in the rate of exchange between the dates when advances in dollars were made by the appellants to the company against goods consigned and the dates when the appellants recouped themselves for the advances on the sale of the goods, a profit accrued to the appellants on the conversion of prepaid advances into sterling. It was held that the exchange profits arose directly in the course of the appellants' business with the company and formed part of the appellants' trading receipts for the purpose of computing their profits assessable to income tax under Case 1 of Schedule D.
21. Some assistance can also be taken from the decision of the Privy Council in Punjab Co-operative Bank Ltd.'s case. In that case, what happened was that the assessee bank had sold some securities in order to meet demands made on it. The sale of the securities resulted in profit. It was held that the profit in question was liable to tax. Viscount Maugham, speaking for the Judicial Committee, put the matter this way :
'In the ordinary case of a bank, the business consists in its essence of dealing with money and credit. Numerous depositors place their money with the bank often receiving a small rate of interest on it. A number of borrowers receive loans of a large part of these deposited funds at somewhat higher rates of interest. But the banker has always to keep enough cash or easily realisable securities to meet any probable demand by the depositors. No doubt there will generally be loans to persons of undoubted solvency which can quickly be called in, but it may be very undesirable to use this second line of defence. If as in the present case come of the securities of the bank are realised in order to meet withdrawals by depositors, it seems to their Lordships to be quite clear that this is a normal step in carrying on the banking business, or, in other words, that it is an act done in 'what is truly the carrying on' of the banking business. This, it appears to their Lordships, is the more appropriate and satisfactory ground for dealing with the question arising in the present case.'
22. This decision shows that the expression 'arising from business' found in section 4(3)(vii) should not be construed narrowly.
23. Various other English decisions have been read to us, but on issues not ad idem with the one we are concerned in this case. To my mind they do not throw any light on the point on which our decision is called for. They can only stimulate the mind, but cannot serve as precedent. In this connection the observations of the Supreme Court in Senairam Doongarmall v. Commissioner of Income-tax are pertinent. This is what Hidayatullah J., who delivered the judgment of the Court, said :
'Now, it is necessary to point out that the English cases were decided under a different system of taxation, and must be read with care. A case can only be decided on its own facts, and the desire to base one's decision on another case in which the facts appear to be near enough, sometimes leads to error. It is well to remember the wholesome advice given by Lord Dunedin in Green v. Glicksten & Son Ltd. In these Income Tax Act cases one has to try, as far as possible, to tread a narrow path, because there are quagmires on either side into which one can easily be led...''
24. In another portion of the judgment, the learned judge observed :
'It is thus obvious that though the English cases may be of some help in an indirect way by focusing one's attention on what is to be regarded as relevant and what rejected, they cannot be regarded in any sense as precedents to follow.'
25. These observations are equally true in the present case.
26. For the reasons mentioned above. I think the question referred to us must be answered in favour of the revenue and against the assessee. My answer to the question referred is that on the facts and in the circumstances of the case, the sum of Rs. 1,92,136 is liable to be taxed. Assessee shall pay the costs of the revenue. Advocate's fee Rs. 250.
Iqbal Husain, J.
27. I agree.
28. Question answered in the affirmative.