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M. ShamsuddIn and Co. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberIncome-tax Reference No. 51 of 1970
Judge
Reported in[1973]90ITR323(Ker)
ActsIncome Tax Act, 1961 - Sections 256(1)
AppellantM. ShamsuddIn and Co.
RespondentCommissioner of Income-tax
Appellant Advocate K.V.R. Shenoi,; P.K. Kurien,; V. Desikan and;
Respondent Advocate P.A. Francis and; P.K. Ravindranatha Menon, Advs.
Cases ReferredHindustan Aircraft Ltd. v. Commissioner of Income
Excerpt:
- .....which arose as a consequence of the devaluation has arisen during the course of the trade and is a trading profit inasmuch as the amount represents part of the sale proceeds. it may be that the increase in the sale price was occasioned by the devaluation which has nothing to do with the trade. but, the result of the devaluation was that the assessee became entitled to receive a larger price in terms of rupees for his goods and that is directly in the course of the trade and constitutes a trading profit. a similar question arose before the mysore high court in hindustan aircraft ltd. v. commissioner of income-tax, [1963] 49 i.t.r. 471 (mys.) in that case the assessee, a private limited company which was carrying on business in assembling and overhauling aircraft, undertook in the course.....
Judgment:

Viswanatha Tver, J.

1. The following question has been referred to this court under Section 256(1) of the Income-tax Act, 1961, by the Appellate Tribunal, Cochin Bench;

'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in law in holding that the amount of Rs. 2,54,862.19 represents income derived by the assessee in the course of trade?'

2. The facts are as follows : The assessee, a firm of four partners, owns cashew factories and exports cashew kernels to foreign countries, mostly to U.S.A. The assessee also has forward transactions of sale with some of the foreign buyers. The invoice price of the exports is fixed between the parties in terms ot dollars. For the forward contracts of sale also, the price is stipulated in terms of dollars. At the time of payment the assessee receives the rupee equivalent of the price in dollars.

3. The Indian currency was devalued on June 6, 1966. As on that date, the assessee had to receive the value of exports made immediately before that date. The assessee had also entered into certain forward contracts with foreign buyers before June 6, 1966, for the sale of cashew kernels, and the value of these goods also had to be received after the date of the devaluation. The rupee equivalent of the price in dollars, in respect of the above transactions, was received by the assessee after the date of the devaluation and consequently it was received at the post devaluation rate. In this process the assessee earned a profit of Rs. 2,54,862 being the appreciation in the exchange value of the price in dollars, in terms of the Indian rupee.

4. The assessee claimed before the Income-tax Officer that this profit which arose due to devaluation, was income of a casual nature and not taxable. The Income-tax Officer held that the devaluation profit srose out of the trading activities of the assessee and, therefore, it cannot be considered as a casual receipt or as a capital receipt as the amount received represented the value of the goods that the assessee had exported to foreign buyers. In the result, he brought to tax the above amount of Rs. 2,54,862 as business income of the assessee. This decision of the Income-tax Officerwas confirmed in appeal and in second appeal. It is, thereafter, that the assessee applied for reference and the above question has been referred for decision by this court.

5. In our opinion, the assessee's contention cannot be accepted. The income which arose as a consequence of the devaluation has arisen during the course of the trade and is a trading profit inasmuch as the amount represents part of the sale proceeds. It may be that the increase in the sale price was occasioned by the devaluation which has nothing to do with the trade. But, the result of the devaluation was that the assessee became entitled to receive a larger price in terms of rupees for his goods and that is directly in the course of the trade and constitutes a trading profit. A similar question arose before the Mysore High Court in Hindustan Aircraft Ltd. v. Commissioner of Income-tax, [1963] 49 I.T.R. 471 (Mys.) In that case the assessee, a private limited company which was carrying on business in assembling and overhauling aircraft, undertook in the course of its business to repair and overhaul at its Bangalore factory the aircraft belonging to Messrs. Saudi Arabian Airlines and Arabian American Oil Company. These companies had to pay their dues to the assessee-company in dollars. On September 19, 1949, the Indian rupee was devalued and the exchange rate was fixed at Rs. 4.75 per dollar. The previous rate of exchange was Rs. 3.33 per dollar. After devaluation, when the dollar balances were re-valued at the new rate of exchange, there was an appreciation in the rupee value to the extent of Rs. 2,80,639. The question that arose for consideration was whether this was income liable to tax or whether it was merely a casual receipt outside the purview of taxation. The Mysore High Court held that it was not sufficient for the assessee to succeed to establish that the receipts were casual and non-recurring. The assessee had further to show that the receipt did not arise from the business. The court held that the expression ' arising from business ' should not be construed narrowly and the exchange profits which arose directly in the course of the assessee's business form part of the assessee's trading profit. The facts here are similar and the principle in the decision applies with equal force here.

6. The assessee contended that the decision of the Supreme Court in Commissioner of Income-tax v. Tata Locomotive and Engineering Co. Ltd., [1966] 60 I.T.R. 405; [1966] 3 S.C.R. 235(S.C.) must be held to have impliedly overruled the decision of the Mysore High Court referred to earlier. In the Supreme Court case the question arose this way. The assessee-company carrying on the business in the manufacture of locomotives had to make purchases of plant and machinery from U.S.A. For this purpose the assessee remitted to its agents in U.S.A. large amount with the sanction of the exchange control authorities. Some amounts due to them from other business transactions in America were also diverted and formed part of the remittance for the purchase of the plants and machineries. The pound sterling find with it the Indian rupee were devalued in September, 1949, and the assessee found it very expensive to buy the American goods and so. with the permission of the Reserve Bank of India, withdrew a large part of its remittances made to America. By reason of the devaluation at the current exchange rate the rupee equivalent of the dollars was much higher than what had been remitted, and the surplus was treated by the Income-tax Officer as profits arising to the assessee in carrying on its business. The Supreme Court held that the act of retaining the moneys in U.S.A. for capital purposes after obtaining the permission of the Reserve Bank of India was not a trading transaction in the business of manufacture of locomotive boilers and locomotives and it Was only a transaction of accumulating dollars to pay for capital goods; The surplus attributable to the devaluation was, therefore, held to be a capital accretion and not a profit taxable in the hands of the assessee. The facts here are entirely different from the facts in the above case. Here the assessee, trading in the goods supplied, got an appreciated value as price of the goods on account of the devaluation. It is certainly a receipt arising from the business and therefore is a trading receipt liable to be assessed as trading profits in the hands of the assessee. Therefore, the Supreme Court decision does not in any way change the principle to be applied to the facts of this case. The principle to be applied in this case is the same as the principle that was applied by the Mysore High Court in Hindustan Aircraft Ltd. v. Commissioner of Income-tax, and hence the income-tax authorities were right in assessing this profit arising out of the devaluation as trading profit in the hands of the assessee.

7. We, therefore, hold that the Tribunal was right in its conclusion. The question referred is answered in the affirmative and against the assessee. The respondents are entitled to their costs from the assessee.

8. A copy of this judgment shall be forwarded to the Appellate Tribunal, Cochin Bench, as required by law.


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