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FabIndia Overseas (P.) Ltd. Vs. Inspecting Assistant - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Delhi
Decided On
Judge
Reported in(1985)11ITD278(Delhi)
AppellantFabIndia Overseas (P.) Ltd.
Respondentinspecting Assistant
Excerpt:
.....something more than what it would have got otherwise, would not transform the accretion into a trading profit unless the holding or the dealing in foreign exchange of the particular currency was the trading activity of the assessee concerned. in the light of this test, mr. ganeshan has argued that since the invoice bills were raised by the assessee in foreign exchange and the amount in question was recovered by the bank concerned from the buyer in foreign currency, the appreciation of the currency at the time of conversion or repatriation to india has nothing to do with the trading activity of the assessee inasmuch as the assessee was not a dealer in foreign exchange. the profit or the excess amount realised arose on account of the assessee holding the said currency and it arose at.....
Judgment:
1. The assessee in appeal is Fabindia Overseas (P.) Ltd., a company incorporated under the Companies Act, 1956. The year of assessment involved is 1980-81, for which the previous year ended on 31-12-1979.

As in the past, in the year under consideration, the assessee carried on the business of export of handloom products besides marginal domestic sales.

2 to 10. [These paras are not reproduced here as they involve minor issues.) 11. As already stated, the assessee carries on the business of export of handloom products. Admittedly, the value of the goods exported is first calculated in rupees for the purposes of crediting the sales in the books of account of the assessee, though the export invoices are in the relevant foreign currency of the country, to which the goods are exported. The export invoices are then sent through banking channels for realisation of the price of the goods exported from the buyers.

Naturally, the buyers pay the money to the bank concerned in the relevant foreign exchange and after transmission from the collecting bank, the amount mentioned in the invoice bills is received by the assessee through banking channels in India in rupees, that amount being credited to the assessee's account in India. Due to exchange fluctuation, the amount finally received in rupees may be in excess or short of the amount shown by the assessee in its, books at the time of the despatch of the goods. In the year under consideration, the assessee, however, had a net surplus of Rs. 4,04,972. The assessee for the first time raised a contention before the Commissioner (Appeals), based on the ratio of the decision of the Calcutta High Court in the case of Indian Leaf Tobacco Development Co. Ltd. v. CIT [1982] 137 ITR 827, that the said net surplus of Rs. 4,04,972 was a capital receipt not chargeable to tax. The Commissioner (Appeals), after referring to the ratio of the decision of the Calcutta High Court and distinguishing it and relying on the ratio of the decision of the Delhi High Court in the case of Fabindia v. CIT [1981] 130 ITR 143 and of the Kerala High Court in M. Shamsuddin & Co. v. CIT [1973] 90 ITR 323, has held that the decision of the Delhi High Court in Fabindia's case (supra) was on all fours to the present case and so the said net surplus of Rs. 4,04,972 was revenue and not capital receipt by observing as under: The only difference in the facts is that whereas in the case decided by Delhi High Court, the exchange fluctuation was on account of an act of the Government, namely, the devaluation of the Indian rupee, in the assessee's case it is on account of normal market and economic forces which govern the exchange rates between different currencies. This, in my view, would not make any material difference so long as the profit is arising during the course of normal carrying on of trading activities and is directly or indirectly linked with the normal trading or business activity of the assessee.

What the assessee credited in the sales account, represented the expected sale price in Indian rupees, which was expected to be realised from foreign buyers. The amount which has actually been realised, on the other hand, represents the actual sale price of goods realised in respect of export sales. The difference between the two amounts, which though attributable to fluctuations in exchange rates, is nothing else but an integral part of the sale proceeds of the goods exported. It is, therefore, not possible to de-link it from the rest of the sale proceeds and to treat it as a separate entity which has nothing to do with the trading activity of the assessee. The assessee's real profit from export can only be worked out by taking into account the actual sale price realised in rupees and the actual cost. I, therefore, find myself unable to accept the finding of the Calcutta High Court that the chunk of profits, which is attributable to exchange fluctuations, is a capital receipt, which has no connection with the trading activity of the assessee and which does not arise from such activity.

12. In the appeal before the Tribunal, the representative for the assessee, Mr. Ganeshan took us through the decision of the Calcutta High Court in Indian Leaf Tobacco Development Co. Ltd.'s case (supra).

According to Mr. Ganeshan, the decision of that case squarely applied in the present case before the Tribunal. The said Calcutta High Court decision in Indian Leaf Tobacco Development Co. Ltd.'s case (supra), according to Mr. Ganeshan, lays down that where a surplus arises due to a fluctuation in the exchange rate, the true test to find out if such surplus is assessable is to find out if it arose out of any trading activity. It must be a result of a trading activity of the assessee or it must arise or result from the trading activity of the assessee.

Merely because the holder of a currency gets something more than what it would have got otherwise, would not transform the accretion into a trading profit unless the holding or the dealing in foreign exchange of the particular currency was the trading activity of the assessee concerned. In the light of this test, Mr. Ganeshan has argued that since the invoice bills were raised by the assessee in foreign exchange and the amount in question was recovered by the bank concerned from the buyer in foreign currency, the appreciation of the currency at the time of conversion or repatriation to India has nothing to do with the trading activity of the assessee inasmuch as the assessee was not a dealer in foreign exchange. The profit or the excess amount realised arose on account of the assessee holding the said currency and it arose at the time when the foreign currency was realised from the buyers and so it was capital and not a revenue receipt The tests, according to Mr.

Ganeshan, to be considered are: (1) whether the accretion or the profit of the excess amount realised is as a result of any trading activity of the assessee; (2) since there is a profit in the present case, when did this profit arise; and (3) is it at the time of appreciation or depreciation of the currency or at the time of conversion or repatriation.

13. These arguments are controverted by the departmental representative, who has urged that the decision in the case of Indian Leaf Tobacco Development Co. Ltd. (supra) is distinguishable on facts.

The case over there proceeded on the findings categorically recorded by the Tribunal that the amount of the profit in question represented profit on exchange. It was not a profit due to fluctuation or escalation of price in respect of export sales. The present case, according to the departmental representative, was a case of profit due to fluctuation or escalation in respect of price of export sales. The decisions of the Kerala High Court in M. Shamsuddin & Co.'s case (supra) and of the Delhi High Court in Fabindia's case (supra) were on all fours.

14. We have given consideration to the above arguments. In M.Shamsuddin & Co.'s case (supra), the facts are that for cashew kernels exported by the assessee-firm and in respect of forward contracts, price used to be fixed in dollars and, at the time of payment, the assessee would receive the rupee equivalent of the price, as in the present case. On account of such receipt by the assessee after the devaluation of the Indian currency on 6-6-1966, the asses3ee earned a profit of Rs. 2,54,862, which the assessee claimed was a receipt of a casual nature. The tax authorities and the Tribunal held that the amount was taxable revenue receipt. The Kerala High Court has upheld the decision of the Tribunal by holding that the result of devaluation was that the assessee became entitled to receive a larger price in terms of rupees for his goods and that was directly in the course of the trade and constituted a trading profit.

15. In Fabindia's case (supra), the facts before the Delhi High Court were that the assessee in the accounting period relevant to the assessment year 1967-68 exported cloth to England and America. The exported goods having been valued at 723 to England and $ 1561 to the United States of America before 6-6-1966. On that date, the Indian rupee was devalued. The result was that the company received in terms of rupees a sum of Rs. 26,757 as the price of the goods sold by it instead of Rs. 16,998, which it would have received had there been no devaluation. The tax authorities and the Tribunal had held that the excess amount realised was not a capital receipt, but taxable revenue receipt. The Tribunal for coming to the said conclusion had observed that the surplus or excess was an integral part of the sale transactions which was a routine day to day operation of the carrying on of the assessse's business. It had nothing to do with the permanent framework or the fixed apparatus or the structure of the assessee's business. The assessee then took the matter to the Delhi High Court who have agreed with the Tribunal by observing that the excess amount received by the assessee was the excess price received by it in respect of the sale of its stock-in-trade. It was an integral part of the routine operations of the assessee's business. It is not the assessee's case that this amount had been segregated or that it had been sterilised or utilised in any other manner such as, for example, for capital investment or otherwise. Recently, in the case of Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1, the Supreme Court, after reviewing the earlier decisions, has summarised the position thus: The law [is]...well settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business....

16. Keeping in mind the ratio of the above decisions, let us come to the present case. The lie in a very narrow compass. The main business of the assessee is to export handloom products. The assessee, while exporting the goods, records in its books the sale price in rupees.

Since the goods are exported, the assessee draws invoice bills in the foreign currency of the country to which the goods are exported. The invoices are sent to the banking channel for realisation from the buyers concerned. After recovery from the buyers, the amount is held by the banking channel on behalf of the assessee as a trading asset or as part of the circulating capital embarked in the day-to-day business carried on by the assessee. The amount of the invoice bills is ultimately received by the assessee in rupees. The amount so received is credited in the books of the assessee, resulting in the above profit of Rs. 4,04,972. Since the above profit has arisen to the assessee on account of the appreciation in the value of the foreign currency held by it on conversion into another currency, such profit is the trading profit, because the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business, as laid down by the Supreme Court in the case of Sutlej Cotton Mills Ltd. (supra). The profit in question has, therefore, been correctly held by the Commissioner (Appeals) to be taxable revenue receipt and not capital receipt.

17. We now come to the decision of the Calcutta High Court in the case of Indian Leaf Tobacco Development Co. Ltd. (supra). There, the High Court has clearly recorded at the end of pages 836 and 837 that "We must emphasise that in this case the Tribunal has categorically made a finding that the amount represented profit on exchange. It is not a profit due to fluctuation or escalation of price in respect of the export sales." The decision by the High Court has, therefore, been rendered in the light of those facts. The facts in the present case, as brought out above, are entirely different. They are similar to those, which were before the Kerala High Court in M. Shamsuddin & Co.'s case (supra) and Delhi High Court in Fabindia's case (supra). It may be interesting to mention at this stage that their Lordships of the Calcutta High Court in Indian Leaf Tobacco Development Co. Ltd.'s case (supra), at page 842, have distinguished the decision of the Kerala High Court in the case of M. Shamsuddin & Co. (supra), after recording the facts in that case, which are similar to the facts in the appeal before us, the Calcutta High Court next recorded the decision of the Kerala High Court in M. Shamsuddin & Co.'s case (supra) and then distinguished that decision by observing as under: ...On a reference, the High Court, agreeing with the Tribunal, held that as a result of the devaluation the assessee became entitled to receive a larger price in terms of rupees for his goods and that was directly in the course of the trade and constituted a trading profit. We must first emphasise that this was, as we have indicated, a profit due to an escalation of price and the realisation of an enhanced price, and was not a profit on exchange, as has been found in the instant case before us. Furthermore, the Division Bench of the Kerala High Court relied mainly on the ratio of the Mysore High Court in the case of Hindustan Aircraft Ltd. v. CIT [1963] 49 ITR 471, a decision which we have discussed in the decision of the Indo-Burma Petroleum Co. Ltd. v. CIT [1982] 136 ITR 251 (Cal.).

Reliance was also placed on the decision in the case of CIT v. Universal Radiators [1979] 120 ITR 906 (Mad.). There the Court treated the enhanced price as really, in the facts found by the court, a profit due to escalation of price and not as a profit on exchange as such. Further, it appeared that this question was not specifically adverted to by the Court." As already stated above, the present case before us is like the one before the Kerala High Court in M. Shamsuddin & Co.'s case (supra), namely, one pertaining to profit due to an escalation of price and the realisation of an enhanced price and was not a profit on exchange, as before the Calcutta High Court in Indian Leaf Tobacco Development Co.

Ltd.'s case (supra).

18. We may also add that the Calcutta High Court in Indian Leaf Tobacco Development Co. Ltd.'s case (supra) has also distinguished the decision of the Delhi High Court in Fabindia's case (supra) by observing that: Reliance was also placed on the observations of the Delhi High Court in the case of Fabindia v. CIT [1981] 130 ITR 143. There also the Court treated the excess amount as a business profit and assessable as such. But this question was not directly adverted to. (p. 842).

19. To sum up, the short question to be addressed by us, in the present case, is as to whether the profit in the present case, which has arisen to the assessee on account of appreciation in the value of the foreign currency held by it on conversion into other currency, would be treated as trading profit if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business, as laid down by the Supreme Court in the case of Sutlej Cotton Mills Ltd. (supra). Keeping in mind that test, if we come to the facts of the present case, the profit in question is taxable revenue receipt because the foreign currency was held by the assessee on revenue account or a trading asset or as part of the circulating capital embarked in the business and not on capital account. The order of the Commissioner (Appeals), in this behalf, is, therefore, correct.


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