1. The Tribunal has made a reference under s. 256(1) of the I. T. Act, 1961, regarding two questions for our opinion. Those two questions are :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the receipt of Rs. 8,19,495 was not a causal receipt exempt under section 10(3) of the Income-tax Act 1961
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the unabsorbed depreciation relating to Indian business amounting to Rs. 5,16,795 having been allowed as set off against the Pakistan income of Rs. 11,85,892 in the assessment year 1965-66 and the order allowing the set-off having become final, it could not be carried forward and allowed as a set-off against the Indian income for the assessment year 1967-68 ?'
2. The assessed company has its head office at Delhi and branches at Delhi, Kanpur and Bombay, and also a branch at Lyallpur in Pakistan. the company was manufacturing vegetable ghee, oil cakes and also some other products. In this assessment year, some deoiled cakes were exported to Hungary under a contract. The Indian rupee was devalued on June 6, 1966. The contact price was fixed in Indian rupees at Rs. 43 per 1,000 Kg. f.o.b., Bombay. So, the company should not have received any extra amount as a result of devaluation. However, some negotiations took place leading to an increased price being paid by the Hungarians. The increased amount was Rs. 8,19,495. According to the assessed, it was a windfall and was to be exempted as a casual receipt under s. 10(3) of the I.T. Act, 1961. This contention was rejected on the ground that the receipt was directly connected with the export. It was, thereforee, not treated as a pure business receipt resulting from the export. The other point involved in the reference is the question of unabsorbed depreciation which stood in the accounts of the assessed at Rs. 5,16,795 in the assessment year 1965-66 (after rectification). This amount has been disallowed on the ground that it was set-off in the 1965-66 assessment year. We have the assessment order for 1965-66 as one of the annexures. It shows that there was some profit in the Pakistan business which amounted to Rs. 11,85,992. On the other hand, there was a loss in India which was the unabsorbed depreciation of Rs. 5,16,795. The amount shown in the assessment order was Rs. 3,22,476 (before rectification). The net world income was assesse at Rs. 8,63,516. As the Pakistan income was to be kept in abeyance under the D.I.T. Agreement between India and Pakistan, the assessed was not actually required to pay tax in India. The second question turns on whether there was a set-off of the unabsorbed depreciation against the Pakistan income by reason of this order.
3. If we take the first question first, it can at once be said that we do not find any reason to differ form the Tribunal's view that the extra amount of Rs. 8,19,495 is business income and not a casual receipt. A reference was made by the Tribunal to the Supreme Court's decision in CIT v. Canara Bank Ltd. : 63ITR328(SC) . In that case, the court drew a distinction between an appreciation of blocked and an appreciation of the stock-in-trade. The amount which was sterilised and lying idle in the Karachi branch of the bank, prior to devaluation, could not be treated as stock-in-trade and, hence, the increase in its value was treated as a capital receipt.
4. In the present case, the increase is a direct result of negotiations between the assesse and the Hungarian party. The Hungarians decided in pay an extra amount on account of devaluation. It is, thereforee, a business receipt. A similar case is Shree Hanuman Trading Co. v. CIT : 125ITR1(Ker) . Another case decided by this High Court is Fabindia v. CIT : 130ITR143(Delhi) , where the assessed was exporting cloth to foreign countries and received an extra amount on account of devaluation of the rupee. We agree with the view expressed in those cases and accordingly answer the first question referred to us in the affirmative, in favor of the Department and against the assessed.
5. The second question raises a somewhat complex problem. When the assessed's income was determined in the year 1965-66, the ITO determined the Pakistan income at Rs. 11,85,992, and also determined the Indian loss, which was the unabsorbed depreciation at Rs 3,22,476. It is agreed that this amount of Rs. 3,22,476 eventually became Rs. 5,16,795 as a result of rectification. The question is whether this amount of Rs. 5,16,795 is to be carried forward to other years or is to be treated as adjusted against the surplus Pakistan income in 1965-66. According to the authorities below, the amounts was adjusted and so there was nothing to carry forward to 1966-67 or 1967-68. It may here be noted that in the order of the AAC, the following passage is to be found :
'The appellant lastly claimed that the ITO has erred in not mentioning in the assessment order, the allowance of depreciation and the carry forward loss to the subsequent years. The ITO has not also disallowed the appellant's claim for bringing forward the loss and depreciation from the past years. This point will accordingly be considered when the appellant has income against which the losses can be set off.'
6. Thus, the point for decision is whether there was a set off of the law in the assessment year 1965-66, or whether the loss was to be carried forward till it could be adjusted against some surplus income. The learned counsel for the assessed brought to our notice, a reported case decided in this court, where the facts are in parallel to those involved in the present case. In Mahalaxmi Sugar Mills Co. Ltd. v. CIT : 94ITR592(Delhi) , the assessed company (in that case) had incurred a business loss of Rs. 20,30,006 and Rs. 9,11,728 in the assessment years 1956-57 and 1957-58, but had made capital gains of Rs. 5,120 and Rs. 50,895. This was the Indian income, In respect of shares in a Pakistan company, it had received net dividends of Rs. 2,30,832 and Rs. 2,27,472 in these two years. It was held that the profits of the Pakistan company were wholly taxable in Pakistan under the Avoidance of Double Taxation Agreement between India and Pakistan and the dividend was also taxed by the Pakistan authorities at rates higher than those prevailing in India at the time. The question before the court was whether in computing the total world loss under s. 24(1) of the Indian I.T. Act, 1922, the capital gains and the dividends from the Pakistan company were to be deducted.
7. The court held that in order to determine the net loss, the capital gains were to be set off against the business loss. In other words, as far as the Indian loss was concerned, the business loss was to be adjusted against the capital gains to determine the net loss.
8. On the other hand, it was held that the loss sustained by the assessed could only be set off against the income which was assessable to tax and not income which was not assessable to tax. The Court, thereforee, held that the Pakistan income, i.e., the dividends in Pakistan, was not to be set off against the business loss. This was the interpretation arrived at by the court from construing the D.I.T. Agreement between India and Pakistan.
9. That was a case in which the net loss was to be determined. Even if the whole of the Pakistan income had been set off, there would still be some loss because the Pakistan income was certainly less that the total business loss in India. But the court held that no part of the Pakistan income was to be adjusted. We find very little to distinguish the said judgment from the facts of the present case, except that here the Pakistan income is more than the Indian loss. If there is to be no set off as held by this court, then the whole of the loss has to be carried forward.
10. A number of other cases were cited before us, but we think the matter is concluded as far as we are concerned by this court's previous judgment.
11. It was next urged that this question should have been urged in appeal by the assessed in the assessment year 1965-66 and could not be raised in 1966-67 or 1967-68. The argument is that the amount was set off in 1965-66. We do not find any positive words in the assessment order of 1965-66 showing that there was set off. The total net income was determined by adding the Pakistan income and subtracting the Indian loss, but that does not necessarily mean that the Indian loss cannot be carried forward. In the AAC's order for 1966-67, the assess had raised this question and that officer had stated that this matter should be raised when there is a profit against which a set-off can be allowed. That is one view of the matter. However, in western India Oil Distributing Co. Ltd. v. CIT : 126ITR497(Bom) , there was a similar case of unabsorbed depreciation which had not been set off. The court held that the unabsorbed depreciation relating to assessment years 1943-44 to 1953-54 could be set off against the income arising the assessment years 1959-60 to 1962-63, but not against the income for the assessment year 1954-55, when the assessment was in respect of income from 'Other sources'. It was also stated in this judgment that in case the ITO did not allow a carry forward of the unabsorbed depreciation, this did not debar the assess from raising the question in some subsequent year. We think that if there is any doubt about the matter, this judgment should help the assessed. On principle, there seems to be no difficulty. The assessed had unabsorbed depreciation which was standing in its accounts. Normally, this depreciation had to be set of against income. It could not be set off against the Pakistan income in Pakistan because under the Avoidance of Double Taxation Agreement, the Pakistan income had to be assessed Pakistan and the Indian income had to be assessed in India. In other words, when the assessed was assessed in 1965-66 in India there was a loss against which no set off could be allowed and when it was assessed in Pakistan, there was a profit against which the Indian unabsorbed depreciation could not be set off. So, the assessed obtained no advantage of the unabsorbed depreciation either in India or in Pakistan. This was the case also in Mahalaxmi Sugar Mills Co. Ltd. : 94ITR592(Delhi) , decided earlier by this court. In that case, the Pakistan income was assessed at full rates in Pakistan without allowing any set off of the business loss in India. The whole purpose of the agreement was to treat the two incomes as separate for the purposes of taxation. In other words, the Pakistan income was to be assessed in Pakistan without taking the Indian income into consideration and the Indian income was to be taxed in India without taking the Pakistan income in consideration. That is the interpretation of the agreement accepted by this court. We find no reason to differ from the same and, accordingly, we answer the second question referred to us in the negative, in favor of the assessed and against the Department. We hold that the unabsorbed depreciation was not set off against the a Pakistan income and nor did the order become final and, hence, the set off can be allowed in the assessment year 1967-68.
12. As both parties have partly succeeded and party failed, we leave them to bear their own costs.