1. In this reference under Section 256(1) of the I.T. Act, 1961, the following two questions have been referred :
'(1) Whether the Tribunal was right in law in holding that the devaluation surplus earned by the assessee consequent to the settlement of the claim by the insurance company is not assessable as revenue receipt for the assessment year 1967-68 ?
(2) Whether the Tribunal was right in holding that the profit earned by the assessee on account of devaluation of Indian currency was not in the course of carrying on the business or incidental to the business '
2. The assessee is a registered firm carrying on business in the manufacture of radiators for automobiles. It entered into a contract with M/s. Associated Metal Mineral Corporation, New York, for the purchase of 32 tonnes of electrolytic copper ingot bars for re-rolling them into strips and sheets. The goods were to be shipped before August, 1965, at the latest. The assessee opened a letter of credit in favour of the American seller in the Bank of Baroda at Coimbatore. On August 12, 1965, the shipment was made by the American suppliers on board S. S. Express, and the ship was expected to be in Bombay on or about September 21, 1965. Hostilities opened between India and Pakistan and the vessel was seized by the Government of Pakistan towards the end of September, 1965. The assessee and its clearing agents took up the matter with the insurance company. After some correspondence, the insurance company in New York accepted liability and issued a draft for U. S. $45,825 on October 19, 1966. This amount was credited to the assessee's account in the Bank of Baroda. As a result of the devaluation of the Indian rupee on June 6, 1966, the equivalent of U. S. $45,825, in Indian currency came to Rs. 3,43,556 as against Rs. 2,00,164 which would be the equivalent prior to the devaluation. The difference between the two amounts came to Rs. 1,43,392 and this amount was brought to tax in the hands of the assessee as profit arising out of devaluation and as the business income of the assessee.
3. The Bssessee appealed to the AAC who held that since the devaluation surplus was a profit springing directly or indirectly from the business itself and/or incidental to it, it had to be taken as a trading receipt. The assessment was, therefore, confirmed.
4. The assessee took the matter on appeal to the Tribunal and the Tribunal held that when the vessel carrying the goods was impounded by the Pakistan authorities, the character of the goods changed and they became sterilised and ceased to be the stock-in-trade of the assessee and that, therefore, the amount was a capital receipt. It was also held that the profit on account of devaluation did not arise directly from the assessee's normal business and the profit was not a business profit. The sum of Rs. 1,43,392 was, therefore, excluded from the assessment. The CIT has brought the matter on reference on the questions extracted already.
5. The facts clearly go to show that the assessee wanted to import copper ingots as raw material for manufacture of radiators. If the assessee had got the goods imported into India and had sold them at a higher rate, which would have increased as a result of the devaluation, then there can be no dispute that the assessee would be liable to tax on the difference between the sale price and the cost. If the assessee had received the same amount as damages for any breach of contract, then also the amount would have been assessable in its hands as revenue receipt. If the goods had been lost in the sea while in transit, and if the insurance company paid the amount, then also the receipt would be on revenue account. The question is whether an insurance receipt consequent on loss of goods by seizure makes any difference.
6. The only manner in which the learned counsel for the assessee is trying to establish that the receipt was capital in nature, was that the goods had been confiscated and that, therefore, there was no stocksin-trade or raw material with reference to which the amount was received. It is this aspect which requires to be considered in the light of the decisions, bearing on the point, which were brought to our notice. Prima facie, the nature or character of an insurance receipt cannot change merely because the loss in this case arose by confiscation.
7. In CIT v. Tata Locomotive and Engineering Co. Ltd. : 60ITR405(SC) , the Supreme Court considered the assessability of the difference as a result of devaluation. In that case, commission had been earned in the United States. This amount was retained there for purchase of plant and machinery or other capital goods. There was a devaluation and the assessee found it more expensive to buy American goods and as there were restrictions on imports from the United States, the assessee with the permission of the Reserve Bank, repatriated the amount remitted abroad. This resulted in a surplus in terms of Indian currency and the question was whether the surplus was liable to be taxed in India. The Supreme Court pointed out that the answer to the question depended on whether the act of keeping the money for capital purposes after obtaining the sanction of the Reserve Bank was part of or a trading transaction, affected its character and if so, whether any profit that accrued would be a revenue receipt. If it was not part of or a trading transaction, the profit made would be a capital profit and not taxable. On the facts of that particular case it was found that the money ceased to have anything to do with the trading account after the sanction was obtained from the Reserve Bank of India to be utilised for certain capital purposes, and that, therefore, the transaction was taken to be one on capital account.
8. In the present case, the transaction is on revenue account, because the amount of profit arose to the assessee on account of a transaction with respect to raw materials. There is no capital element in the transaction. The profit would, therefore, be on revenue account.
9. However, the learned counsel for the assessee relies strongly on a decision of the Supreme Court in CIT v. Canara Bank Ltd. : 63ITR328(SC) . In that case, the assessee, a bank, opened a branch in Karachi. There was devaluation of the Indian rupee on September 18, 1949. The bank had a sum of Rs. 3,97,221 at the Karachi branch belonging to its head office. Pakistan did not devalue its currency. The bank did not also carry on any business in foreign currency even after it was so permitted to do. There was a finding by the Appellate Tribunal that the money had been lying idle in the Karachi branch and had not been utilised in any banking opera-tion even within Pakistan. The State Bank of Pakistan, which corresponds to the Reserve Bank of India, granted permission for remittance on July 1, 1953, and two days later the bank remitted the amount to India. In view of the difference in values of the currencies, a sum of Rs. 1,73,817 was received in excess, and the attempt of the income-tax authorities was to tax this amount as profit. It was held that even assuming that the amount held in Pakistan was originally stock-in-trade, when it was blocked and sterilised and the bank was unable to deal with it, it ceased to be its stock-in-trade and the increase in its value owing to exchange fluctuation was a capital receipt. After discussing the facts and assigning reasons for coming to the conclusion, the Supreme Court noticed certain decisions cited before it and at the end of the judgment, observed (p. 333) :
' The question of law arising in the present case must be decided on the particular facts and circumstances found by the Appellate Tribunal.'
10. The facts found were, that the amount could not be dealt with by the assessee, that the assessee was not a dealer in exchange and that the amount had been blocked and sterilised. Further, in this case, there was no loss of the money. The same fund became available to the assessee after the restriction was removed. There is no such sterilisation or blocking here, to apply the same principle.
11. There is one particular aspect to be borne in mind in these days of increasing international trade. The devaluation was a rare event in earlier days after the Second World War. But, in these days, devaluation or revaluation in currencies is a matter of everyday event in many currencies of the world. Except with reference to absolutely capital payments or receipts, the surplus or the deficiency as a result of the devaluation or revaluation on trading transactions cannot but be on revenue account. Any other conclusion would result in trading profits being left out of assessment.
12. In Sutlej Cotton Mills Ltd. v. CIT : 116ITR1(SC) , the Supreme Court considered a case where a company in India had a cotton mill in West Pakistan where cotton fabrics were manufactured and sold. Large profits were made in the financial year 1953-54, and as converted at the then prevailing rate of exchange the profits came to Rs. 1,68,97,232. Subsequently, Pakistan devalued its rupee and, thereafter, during the financial years 1956-57 and 1958-59, the assessee obtained the permission of the Reserve Bank of Pakistan and remitted to India certain amount. The assessee claimed that on remittance it had suffered certain losses ; but the claim was rejected by the income-tax authorities and the Tribunal. On reference, the High Court held that no loss was sustained by the assessee on remittance of the amount from Pakistan and that in any event, the loss could not be said to be a business loss. On appeal, the Supreme Court, after discussing the cases, enunciated the principle to be applied in such cases in the following words (p. 13):
' The law may, therefore, now be taken to be 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. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature.'
13. On the particular facts of the above case, the Supreme Court found it necessary to remand the matter to the Tribunal so that the Tribunal could consider the matter afresh in the light of the law as enunciated above as well as the facts that might be gathered in the course of the remand.
14. Therefore, so long as the profit accruing to the assessee had its origin on revenue account, the assessee would be liable to be taxed, unless its origin was snapped as in the case of CIT v. Tata Locomotive and Engineering Co. Ltd. : 60ITR405(SC) .
15. Learned counsel for the assessee relied also on Addl. CIT v. Chettinad Corporation (P.) Ltd. : 112ITR898(Mad) . In that case, the assessee was carrying on business in Ceylon and was taxed on the profits in Ceylon. The amount realised in Ceylon as profits could not be remitted into India on account of the restrictions imposed by the authorities in Ceylon. After removal of the restrictions, the assessee remitted the amount to India and received a larger amount on account of devaluation during the accounting years relevant for the assessment years 1967-68 and 1968-69. This court held that the profit in question had accrued to the assessee prior to the devaluation and had also been taxed and that the appreciation of the amount was due entirely to the external cause, viz., the devaluation of the Indian rupee. The excess arising out of the devaluation was, therefore, held to be capital receipt and not a revenue receipt. The facts were found to be similar to or identical with those in CIT v. Canara Bank Ltd. : 63ITR328(SC) . We have already discussed how the principle of the decision in the Canara Bank's case : 63ITR328(SC) cannot be applied to the present case, and, therefore, no further discussion is necessary for distinguishing Chettinad Corporation's case : 112ITR898(Mad) . Seizure of goods and their appropriation by the enemy is not the same as blocking or sterilisation of the amount temporarily. The above decision cannot be of any assistance to the assessee here.
16. There is a later decision of this court in S. G. R. Subramania lyer v. CIT : 116ITR746(Mad) , in which a similar point came to be considered. The assessee in that case had placed an order with an American firm for supply of pesticides of particular purity. As the goods were found to be sub-standard, the consignment was returned to the supplier. The bank, with whom the letter of credit had been opened, had paid an amount of Rs. 24,300 being the actual value of the goods and the consignor refunded the amount in dollars. Due to the devaluation which had taken place in the meanwhile, the rupee equivalent was higher and the 'assessee receivedan extra amount of Rs. 16,534. The claim of the assessee was that this surplus did not arise in the coarse of its business, but was the outcome of an entirely different transaction and hence not exigible to tax. This claim was negatived by the income-tax authorities as well as the Tribunal. This court also held that the surplus amount was received by the assessee while receiving the refund of the value of the pesticides and hence the receipt of the amount was an integral part of its business. The surplus was held to be exigible to tax.
17. Learned couasel for the assessee drew our attention to the finding in the present case to the effect that the assessee had received the excess amount on account of fortuitous circumstances which were casual and nonrecurring and that the profit on devaluation did not arise directly in the course of the assessee's normal business. These are not findings of fact so that they are beyond the scope of any examination by this court. The Tribunal is wrong in taking the view that profits on account of devaluation did not ariss directly in the course of the assessee's normal business. The remittance from India through the Bank of Baroda by opening the letter of credit was at its origin in the ordinary course of business. The amount was paid to the foreign company as price of the goods out of the proceeds of the letter of credit. The Tribunal is wrong in its assumption that the amount had never been paid for the purchase of the contracted goods. The ITO has found that the goods had been paid for by the Bank of Baroda. There is no material brought on record by the Tribunal to say that this finding of the ITO was in any manner wrong. As the foreign vendor had already been paid off and as the goods were despatched only after the payment by the operation of the letter of credit, the assessee had to claim the amount from the insurance company. The seizure of the goods by Pakistan is of the same nature as loss of goods in transit. In these circumstances, the whole transaction is part and parcel of the business carried on by the assessee and cannot be described as extraneous to it.
18. In fact, the Calcutta High Court dealt with a similar question in Calcutta, Jute Agency (P.) Ltd. v. C1T : 117ITR741(Cal) . In that case, the agent of the assessee contracted for purchase of jute in London from Pakistan in 1965. Hostilities broke out between India and Pakistan and the contract could not be performed. There was devaluation of the Indian rupee in June, 1966, and by reason of the unoperated letter of credit the agent received Rs. 1,52,710 in excess over the amount originally deposited in Indian rupees. The taxability of the surplus was the subject-matter of controversy in that case. The Calcutta High Court pointed out that money lying in the foreign country was indubitably part of the circulating capital of the assessee and that the fund had not changed its character at the material time. It was meant to be used for a particular purpose and the fact that the purpose was frustrated, by itself could not change the character of the fund. The accretion to the fund resulted in a profit to the assessee in its business, though the accretion might have been caused by an external factor like devaluation. Though the fund became frozen or immobilized, the nature and character of the fund had not changed and its mobility or immobility was considered to be irrelevant. Therefore, the sum of Rs. 1,52,710 was held to be assessable in the hands of the assessee.
19. Except for the difference that in the above case the same amount that was deposited by the assessee was paid back to him, while in the present case, the loss of goods in transit by enemy seizure was compensated by the insurance company, there is no difference in the facts which would affect the principle applicable to the case. The principle applied by the Calcutta High Court would, in our opinion apply here also.
20. The result is that the questions referred to us have to be and are answered in the negative and in favour of the revenue. The revenue will be entitled to its costs. Counsel's fee Rs. 500.