VARADARAJAN J. - This tax case arises out of a reference made by the Income-tax Appellate Tribunal, Madras Bench, under section 256(1) of the Incometax Act, 1961, at the instance of the revenue. The question referred for the opinion of this court is this :
'Whether, on the facts and in the circumstances of the case, it has been rightly held that the surplus realised by the assessee in remitting the monies to India from it Ceylon branch due to devaluation of Indian currency was capital receipt but not revenue profit for the assessment years 1967-68 and 1968-69 ?'
The Income-tax Officer declined to accept the claim of the respondent-assessee put forward in its return that the sum of Rs. 1,10,909 relating to the assessment year 1967-68, and the sum of Rs. 3,79,185 relating to the assessment year 1968-69 were capital receipts and not business profits and he included that amount in the total income of the assessee for assessment. The assessee was carrying on business in Ceylon where it had a branch, but its financial control was being controlled by the head office at Madras.
The assessees case was that the profits originally received in the branch in Ceylon could not be repatriated to this country from Ceylon due to the policy of the Ceylon Government in the relevant years and these amounts became receivable in excess of the original profits which could not be repatriated in view of the subsequent remittance to this country after devaluation of the Indian rupee and, therefore, the difference being the appreciation brought about by the devaluation of the Indian rupee, was only capital receipt and not revenue receipt. The assessees appeal before the Appellate Assistant Commissioner failed, as the Appellate Assistant Commissioner agreed with the Income-tax Officer and held that the extra amount received by the assessee due to the devaluation was business profit, and he confirmed the order of the Income-tax Officer.
The facts are these : The profits of the years ending March 31, 1964, and March 31, 1965, earned in the branch in Ceylon could not be remitted to the assessees head office in India from Ceylon until September 30, 1965, due to the moratorium or ban imposed by the Ceylon Government on remittances from August, 1964. Remittances had been made by the Ceylon branch after the moratorium or ban was removed, starting from May 25, 1966. But the devaluation of the Indian rupee took place on June 6, 1966. Consequent on the devaluation, the head office at Madras received from the Ceylon branch a larger sum, the difference being Rs. 4,90,094 made up of Rs. 1,10,909 relating to the accounting year corresponding to the assessment year 1967-68 and Rs. 3,79,185 relating to the accounting years corresponding to the assessment year 1968-69. These amounts had been described in the balance-sheets of the assessee as on March 31, 1967, and March 31, 1968, as 'surplus'.
The Tribunal, on appeal by the assessee, found that the amounts were surplus in relation to the remittances from the Ceylon branch to the head office at Madras and held that the surplus sprang directly from an outside body due to devaluation after the profits had already accrued as early as 1963 and 1964 and had also been taxed and it had, therefore, become part of the assessees capital. The Tribunal was thus of the opinion that the amount was capital receipt and accordingly allowed the appeal and directed the Income-tax Officer to modify the assessment by treating the amount as capital receipt.
The learned counsel for the revenue relied upon two decisions of the Kerala High Court in support of her contention that the difference arising out of the the larger amount due to devaluation must be treated as revenue receipt. The first of those decisions is of a Bench in M. Shamsuddin & Co. v. Commissioner of Income-tax : 90ITR323(Ker) . There the assessee, a firm, owned cashew factories and exported chashew kernel to foreign countries, mostly to U.S.A. and also had forward transactions of sale with some of the foreign buyers. The invoice price of the exports had been fixed between the parties in terms of dollars, even for the forward contracts of sale. At the time of the payment, the assessee received the rupee equivalent of the price in dollars. The Indian currency was devalued on June 6, 1966. As on that date the assessee had to receive the value of the exports made immediately before that date. The assessee had also entered into certain forward contracts with foreign buyers before that date for the sale of cashew kernels and the value of those goods had also to be received after the date of devaluation. The rupee equivalent of the price in dollars was received by the assessee after the devaluation and consequently it was received at the post devaluation rate. In that process, the assessee earned a sum of Rs. 2,54,862 being the appreciation in the exchange value of the price in dollars in terms of the Indian rupee. The learned judges have observed thus(page 325) :
'The assessee contended that the decision of the Supreme Court in Commissioner of Income-tax v. Tata Locomotive and Engineering Co. Ltd. : 60ITR405(SC) 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 the U.S.A. For this purpose the assessee remitted to its agents in the U.S.A. large amounts with the sanction of the exchange control authorities. Some amounts due to them from other business transaction in America were also diverted and formed part of the remittance for the purchase of the plants and machineries. The pound sterling and 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 the 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 : 49ITR471(KAR) , 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'
The second decision relied upon by the learned counsel for the appellant is also o a Bench of the Kerala High Court in Bank of Cochin Ltd. v. Commissioner of Income-tax : 94ITR93(Ker) where the assessee, a banking company, as part of its banking business had been purchasing cheques, payment orders, mail transfers and other negotiable instruments drawn in foreign countries and sometimes foreign currencies themselves from its clients. Those foreign exchange assets were subsequently sold or encased through the assessees correspondent-banks in the foreign countries, and the proceeds were credited to the current account of the assessee with the correspondent-banks concerned. Consequent on the devaluation of the Indian rupee on June 6, 1966, the amounts credited to the assessee in the foreign banks increased to the extent of Rs. 4,65,515. That excess realisation on devaluation was treated by the Income-tax Officer as the income of the assessee during the account year ending December 31, 1966, rejecting the assessees contention that the profit was in the nature of a windfall. On appeals, the Appellate Assistant Commissioner and the Appellate Tribunal also came to the same conclusion. The learned judges observed (pages 97, 98) :
'The assessee has repeated his contention before this court that the excess realisation of Rs. 4,65,515 on devaluation cannot be treated as a revenue receipt but only as a casual receipt in the nature of a windfall by virtue of the devaluation. The business of the assessee being a banking business and as part of its banking business it was purchasing cheques, payment orders and mail transfers, demand drafts, bills and other negotiable instruments drawn in foreign currencies, the sale proceeds of these constitute trading receipt. Consequent on the devaluation of the Indian rupee the amount receivable by the assessee appreciated in value and this represents an appreciation in the value of the sale proceeds of the assets in which the assessee was dealing in the value of its business. There could, therefore, be no doubt that the appreciation in value amounting to Rs. 4,65,515 of all such assets represents part of the trading receipts of the assessee, and, therefore, constituted revenue receipts in its hands. The decision of the Supreme Court in Commissioner of Income-tax v. Canara Bank Ltd. : 63ITR328(SC) , which was relied on by the assessee in support of its contention that the excess realisation of devaluation is of a casual and non-recurring nature does not really help the assessee. In that case, an amount of Rs. 3,97,221, which was originally the stock-in-trade. of the bank held in the Karachi branch, was blocked and sterilised and the bank was unable to deal with that amount and so it ceased to be its stock-in-tread. The increase in its value owing to its exchange fluctuation was held to be a capital receipt. In arriving at the conclusion their Lordships adverted to the general principles that govern cases of this nature. Their Lordships observed thus :
The question involved in this appeal is whether the profit of the bank on account of fluctuation of exchange arose in the course of trading operations of the bank or whether it was incidental to any such trading operation. If by virtue of exchange operations profits are made during the course of business and in connection with business transactions, the excess receipts on account of conversion of one currency into another would be revenue receipts. But if the profit by exchange operations comes in, not by way of business of the bank, the profit would be capital profits.
Applying this principle the Supreme Court held in that case that the amount of Rs. 3,97,221 was a blocked and sterilised balance and that it was at no material time employed, expended or used for any banking operation or any foreign exchange business and so it has changed its character as stock-in-trade and the increment in its value owing to the exchange fluctuation must be treated as a capital receipt. In this case the bills of exchange and other foreign currencies never ceased to the stock-in-trade at the time when devaluation of the Indian rupee was announced and, therefore, the appreciation in the value of the sale proceeds of these assets which was the stock-in-trade of the assessee represented the trading receipts of the assessee only. The principle of the decision of this court in M. Shamsuddin and Co. v. Commissioner of Income-tax : 90ITR323(Ker) is also applicable to the facts of this case. In the light of these decisions and the finding of fact arrived at by the Tribunal the conclusion that this sum of Rs. 4,65,515 constituted the business income in the year of account has to be sustained. :
We are of the opinion that the two decisions referred to above are not applicable to the facts of the present case, the excess arising out of the devaluation had been received directly as a result of the business transaction in those cases whereas in the present case the profit had been received in 1963 and 1964, prior to the devaluation of the rupee on June 6, 1966, and had also been taxed and the amount could not be remitted to India from the assessees branch in Ceylon due to the policy of the Ceylon Government which was in force until August, 1964, and the appreciation of the amount by the two sums aggregating to Rs. 4,90,094 was due entirely to an external cause, namely, devaluation of the Indian rupee.
On the other hand, the learned counsel for the assessee relied upon the decision of the Supreme Court in Commissioner of Income-tax v. Canara Bank Ltd. : 63ITR328(SC) . In that case, the Canara Bank, the respondent, had opened a branch in Karachi in 1946. After the partition of India in 1947, the currencies of the two Dominions of India and Pakistan continued to be at par until devaluation of the Indian rupee was effected on September 18, 1949. On that date, the Canara Bank had a sum of Rs. 3,97,221 at its Karachi branch belonging o its head office. The parity between the Indian rupee and the Pakistan rupee ceased to exist as Pakistan did no devalue its currency. The exchange ratio between the two counties was not determined until February 27, 1951. The bank did not carry on any business in foreign currency and even after it was permitted to carry on business in Pakistan currency on April 3, 1951, it carried on no foreign exchange business. The Appellate Tribunal found that the money was lying idle in the Karachi branch and was not utilised in any banking operation even within Pakistan. The State Bank of Pakistan granted permission on July 1, 1953, and two days thereafter the Karachi branch remitted the amount to India and in view of the difference in value of the currencies of the two countries, its head office in India received an excess sum of Rs. 1,73,817. The learned judges of the Supreme Court observed (pages 331 and 332) :
'On behalf of the appellant, Mr. Hazarnavis submitted that the Appellate Tribunal was wrong in holding that there was blocking or sterilisation of the amount. Learned counsel said that the balance-sheets of the revenue account of the Karachi branch would show that the amount of Rs. 3,97,221 was not lying idle in the Karachi branch but was utilised by it for internal banking operations within Pakistan. We did not, however, permit Mr. Hazarnavis to produce additional evidence in this court for controverting the findings of fact reached by the Appellate Tribunal. It is a matter of significance that the original statement of the case dated May 15, 1957, and the supplementary statement of the case dated August 14, 1959, were both agreed statements. Before the High Court also, the findings of the Appellate Tribunal we not challenged on behalf of the Commissioner of Income-tax. On the other hand, it appears that it was conceded by the applicant before the High Court that the was no evidence that the blocked balance was, in fact, employed by the Karachi branch for the internal banking operations in Pakistan or for its business in Pakistan and other foreign currencies. It is, therefore, not permissible for the appellant at this state to go behind the two statements of the case and to challenge the findings of fact contained therein. The argument was also stressed by Mr. Hazarnavis that the money was stock-in-trade of the bank and on increment of Rs. 1,70,746 due to the fluctuation in the exchange rate must, therefore, be treated as incidental to the business of the bank. We shall assume in favour of the appellant that the money was stock-in-trade of the bank. But it does not necessarily follow that the increment due to the fluctuation in the exchange rate was due to trading operations in the carrying on of the banking business. On the contrary, it has been found by the Appellate Tribunal that the amount of Rs. 3,97,221 was a blocked and sterilised balance and the bank was unable to deal with that amount or use it for any banking purpose between September, 1949, and July, 1953, when it was finally remitted to India. In our opinion, the money changed its character of stock-in-trade when it was blocked and sterilised and the increment in its value owing to the exchange fluctuation must be treated as a capital receipt.'
The facts of the present case are more or less similar to those in the above case which was before the Supreme Court and the decision of the learned judges of the Supreme Court will have to govern this case. The learned counsel for the assessee sought to rely upon the decision of a Bench of the Kerala High Court in Commissioner of Income-tax v. Union Engineering Works : 105ITR311(Ker) , where the assessee-firm carried on business of manufacturing and selling tea-chest fittings and battery cover. For the accounting year relevant to the assessment year 1968-69, the assessee imported tin sheets from London. But when the goods arrived it was found that more than half of the quantity was rusty. The goods had been insured with an insurance company in London. The assessee entered into an agreement with the insurer whereby it had agreed to accept the rusty sheets at a discount. In accordance with the agreement, the insurer issued a cheque draw n in favour of the assessee on a bank in London. Within a fortnight of the receipt of the cheque the rupee was devalued and the assessee realised an excess amount of Rs. 13,455.75. On the question whether this amount was a casual and non-recurring receipt, the learned judges have observed (page 314) :
'In the instant case, the profit, as found by the Tribunal, was not a receipt arising from business; not was it, as admitted on both sides, capital gains. This was part of the compensation received by the assessee from the insurer for damage caused to its goods. The claim for compensation for damage caused to the goods had been settled with the insurer and the sum so settled did not include any excess profit. The excess profit arose entirely due to the devaluation. This excess amount was in the nature of a windfall, being the unexpected fruit of devaluation, and it cannot, therefore, be regarded as a receipt arising from business though it may be said in a sense to be receipt in the course of business. We hold that the Tribunal had correctly held that the sum of Rs. 13,455.75 received by the assessee was not a receipt arising from its business, within the meaning of section 10(3)(ii) of the Income-tax Act, 1961.'
We are inclined to rest out decision on the decision of the Supreme Court referred to above, namely, Commissioner of Income-tax v. Canara Bank Ltd. : 63ITR328(SC) . Accordingly, we hold that the excess amount arising out of the devaluation of the Indian rupee was capital receipt but not revenue profit for the assessment year 1967-68 and 1968-69, and answer the question referred to us against the revenue and in favour of the assessee. The revenue shall pay the costs of this reference to the assessee. Advocates fee Rs. 500. A copy of our opinion, signed by the Registrar, will be forwarded to the Income-tax Appellate Tribunal with the seal of this court.