1. The assessee in this case is a partnership firm of three equal partners carrying on business in the export of lungies and kylis in the Malaysian Federation through its branch at Penang. The assessee purchases goods in India and exports them to be sold by its branch at Penang. The head officer of the assessee in India makes out the invoices in the name of the Penang branch for the exports in terms of rupee currency and receives remittances from the Penang branch in the same currency. The Penang branch, however, maintains its accounts in terms of Malaysian dollars, which is the local currency in Penang. What the Penang branch does is to enter the cost of the goods received from India in terms of dollars. After sales in Malaysia, which yields Malaysian dollars, the Penang branch makes remittances to the head officer in India after converting the dollars into rupees.
2. During the period January 31, 1966, to March 18, 1966, the assessee sent from its head office in India to the Penang branch goods, valued in terms of rupee currency, at Rs. 2,52,570. In terms of Malaysian currency, the value amounted to 1,62,957.47 Malaysian dollars at the then prevailing rate of exchange between the Indian rupee and the Malaysian dollar. On June 6, 1966, the Indian rupee was devalued. This meant that as against the earlier ratio of Rs. 155 for every 100 Malaysian dollars, the rate of exchange was altered to Rs. 250 for every 100 Malaysian dollars. The Penang branch remitted Rs. 2,52,570 to the assessee's head office sub-sequent to June 6, 1966. This meant that the Penang branch was able to save 59,455 Malaysian dollars in the transaction which would otherwise have had to be remitted to the head office if the Indian rupee had not been devalued.
3. While closing the accounts for the year ended April 30, 1967, and making out its trading results in the Penang branch as well in the Penang branch as well in the head office, the assessee showed separately the amount of Rs. 1,44,845 as exchange profit, representing the rupee equivalent of 59,455 Malaysian dollar. Instead of bringing this amount to the profit and loss account, however, the assessee straightaway carried the amount to the capital accounts of its three partners, dividing the amount equally among them.
4. In the assessee's assessment for the relevant assessment year 1967-68, the ITO treated this sum of Rs. 1,44,845 as part of the assessee's taxable trading profits. The assessee claimed that the amount was a mere windfall or casual receipt, and not liable to be assessed as part of its taxable income. On appeal by the assessee from the order of assessment, the Tribunal did not agree with the view of the ITO that the sum of Rs. 1,44,845 represented the trading profits of the assessee. At the same time, the Tribunal also did not accept the assessee's contention that the amount of exchange increment of Rs. 1,44,845 was a mere windfall, not liable to be taxed under the I.T. Act. The Tribunal took a third position. According to the Tribunal, this amount represented short term capital gains. The Tribunal directed the ITO to modify the assessment on this basis.
5. The Department have now come on a reference to this court having obtained a stated case from the Tribunal on the following question of law :
'Whether, on the facts and in the circumstances of the case, the sum of Rs. 1,44,845 or any other sum could be treated as revenue or, in the alternative, as short term capital gains or is not taxable altogether ?'
6. It was contended for the assessee that this sum represented the saving of Malaysian dollars which was possible because of the fortuitous circumstance of the devaluation of the Indian rupee. It was, accordingly, urged that the amount should be regarded as a mere casual receipt. It was further urged that this casual receipt could not be related to any business of the assessee. The assessee's business, it was pointed out, was only as a dealer in lungies and kylis. We were reminded that the assessee is by no means a dealer in foreign exchange. It was, accordingly, submitted that the amount in question should be regarded as a pure windfall, wholly out side the pale of taxation of income.
7. On the other hand, Mr. A. N. Rangaswami, learned standing counsel for the Revenue, contended that the handling of Malaysian dollars was inextricably linked up with the assessee's course of trade, which consisted of export of handloom cloth to Penang for sale and realisation in terms of Malaysian dollars. In this kind of trade, according to the learned standing counsel, gains as well as losses due to fluctuations in foreign exchange were inevitable by products or side effects of the business. The learned standing counsel pointed out that the very course of dealings between the assessee's head office conducting its business with concomitant foreign exchange consequences. Learned counsel submitted that in such a kind of business, it was not necessary that the assessee should indulge in regular dealings in foreign exchange in order that exchange losses or exchange gains may be regarded as part and parcel of its trading results. It was submitted that even though the particular gain of Rs. 1,44,845 in the year of account was the result of a fortuitous circumstance, namely, the devaluation of the Indian rupee, it can by no means be regarded as a windfall, since the receipt was a necessary incident of the very nature and character of the assessee's business.
8. We accept the contentions put forward by Mr. Rangaswami for the Department as well founded. Exchange fluctuations being reflected in the trading results has now become a normal incident of exporters and importers, commercial houses and multi nationals engaged in international trade and commerce. International barter has almost gone out of existence. Even where foreign trade is conducted in terms of bilateral trade agreements between countries, the transactions are done only in terms of one or the other of the currencies of the world. Although currency blocs had come into existence subsequent to World War II like the dollar area and the sterling area, and efforts were made to bring about stability in exchange rates between world currencies, the trends in international trade as well as the independent monetary policies pursued by the various countries got reflected in fluctuations in the rates of exchange. Since, however, goods and merchandise had to be purchased and sold across national frontiers only in terms of currencies of one or the other of the parties, losses or profits of one or the other of the parties resulted as much from exchange fluctuations, as from the course of trade itself.
9. The facts and circumstances in the present case only reflect the general tendencies and trends in international trade which we have briefly referred to. We, therefore, agree with the ITO that this sum of Rs. 1,44,845 arises out of and is itself part of the assessee's regular trading transactions. This conclusion of ours rules out, at once, both the assessee's theory that the amount represents a windfall or a casual receipt and the Tribunal's theory that it represents a short term capital gain. The assessee's theory is wrong, because there is nothing casual about the receipt. Even if the amount of Rs. 1,44,845 representing an exchange profit had arisen from an unexpected or unforeseen circumstances of the devaluation of the Indian rupee, it cannot escape taxation. For, under s. 10(3) of the I.T. Act, 1961, even casual receipts will not be excluded from the application of the I.T. Act if they constitute receipts arising from business or from the exercise of a profession or occupation. There can be no doubt in this case that, but for the transactions of exports from the assessee's head office in India to its branch in Penang, there could not have been any possibility of this exchange profit arising at all. It follows, therefore, that even as a casual receipt, the amount has to be subjected to income tax.
10. The Tribunal's view that the amount represents short term capital gain is again based on the artificial segregation of this amount of Rs. 1,44,845 from the rest of the trading receipts of the assessee. The Tribunal, in their order, proceeded on the footing that the Penang branch had been accumulating a stock of dollars which, by reason of the devaluation of the rupee, had produced this gain of Rs. 1,44,145. According to the Tribunal, any stock of accumulation of dollars must be regarded as a separate capital fund, constituting a capital asset in itself. This conclusion of the Tribunal is palpably unsupported by any material on record. There was a course of dealings between the assessee's head office and the Penang branch which reflected in a running account between the two, and there were also dealings in the Penang branch itself, related to the account maintained at that place. There is nothing to show that the assessee's Penang branch set apart every now and then an amount of Malaysian dollars and built out of the accumulations a Malaysian dollar fund, keeping it as a separate and distinct asset, unconnected with the business in lungies and kylis. The only special treatment which the assessee gave was in not carrying the amount of Rs. 1,44,845 into its trading and profit and loss account, but in straightaway carrying it to the capital accounts of the partners and crediting each of the partners with an equal share therein. It is, however, trite law that the character either of a receipt or of an outgoing or loss in a business is not concluded, or even indicated, by the way in which the book keeper deals with them in the writing up of the accounts. We are satisfied that in this case neither the assessee nor its Penang branch did, or could, treat the excess of dollars which emanated owing to the devaluation of the rupee, as a capital gain derived from any short term capital assets.
11. Of the decisions cited at the Bar we need refer only to the decision of the Supreme Court in Sutlej Cotton Mills Ltd. v. CIT : 116ITR1(SC) . In that case, an Indian company, having its head office in Calcutta, ran a cotton mill in West Pakistan, The assessee made huge profits which were converted at the prevailing rate of exchange into Pakistan rupees. However, in the conditions created by the devaluation of the Pakistan rupee, there was a loss resulting to the assessee. The question was, whether the loss in foreign exchange owing to devaluation of the Pakistan rupee was an allowable business loss. In the accounts of the assessee, the loss was debited as a loss in the capital account. The Supreme Court held that the way in which the entries are made by the assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. The court further observed that where profit or loss arises to an assessee on account of an appreciation or depreciation in the value of foreign currency held by him, on conversion into another currency, such profit or loss would ordinarily be a trading profit or trading loss if the foreign currency is held by the assessee on revenue account. If, on the other hand, the foreign exchange is held by the assessee as a capital asset, any profit or loss on realisation would be of a capital nature. The ultimate decision of the Supreme Court in that case, however, was to remit the matter for a fuller investigation into the facts.
12. The view we have earlier expressed on the facts of this case is in accord with the approach which the Supreme Court has enunciated in their judgment to be the correct one. We have pointed out that the assessee has not purported to hold Malaysian dollars as a separate fund so as to enable it to deal with those dollars as a capital asset. We have referred to the course of trade as well as the course of monetary dealings between the assessee's head office and its Penang branch. We have referred to the circumstances in which the devaluation of the Indian rupee had reflected itself in the position of remittances of the Penang branch to the assessee's head office in India, as well as their quantum. We have also made reference to the fact that apart from the year end adjustment of the amount of Rs. 1,44,845 in the capital account of the partners, no attempt has been made even in a book keeping manner to deal with the exchange profit either as a capital accretion, or as a capital gain.
13. Our answer to the question of law, therefore, is that the amount of Rs. 1,44,845 was rightly regarded in the order of assessment as a receipt of a revenue nature from the assessee's business, taxable as such. Since the Department has succeeded in its reference, the assessee shall pay the costs. Counsel's fee Rs. 500. Costs one set.