Sabyasachi Mukharji, J.
1. In this reference under Section 256(2) of tbe I.T. Act, 1961, as directed by this court, the Tribunal has referred the following three questions for the assessment year 1967-68 :
'1. Whether, on the facts and in the circumstances of the case, the findings of the Tribunal as to the nature, object and purpose of the fund of the assessee held in the U.K. in Pound Sterling were based on no evidence and/or were perverse ?
2. Vhether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the profit arose in respect of the amount of 1,796 which was not remitted in India ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 1,68,157 had been eorrectly taxed as part of the assessec's trading profits?'
2. In order to appreciate these questions, it will be necessary to refer to certain facts as mentioned in the statement of case. But we will refer to certain summary of facts, because there is some suggestion by learned advocate for the assessee that the statement of case does not correctly summarise all the essential ingredients of the findings or of the facts admitted- It appears that during the year 1950, the assessee-company had received a sum of Rs. 97,01,124 from the Govt. of the U.K. by way of ex gratia grant, for the rehabilitation of its war-damaged industry in Burma. This amount was credited, according to the statement of case, to its capital reserve account. Learned advocate for the assepsee stresses the point that it was held as fixed assets. This reserve, subject to certain subsequent adjustments, had been permanently reflected in the company's investments in U.K. Govt. securities, B.O.C. (1954) shares and U.K. Municipal Corportion deposits. Subsequently, the company's investments in 2,01,886 shares of B.O.C. (1954) were disposed of indifferent years and the whole amount thereof was paid by the Government of Burma through B.O.C. in the U. K. The realisation was always treated for tax purposes as on capital account. The dividends received from B.O.C. shares as well as the profit from Burma operations were always repatriated to India and the Reserve Bank had never allowed to repatriate them to the U.K. According to the assessee, it had plans to invest these moneys in various capital projects in the U.K. as part of its expansion scheme and, therefore, these were kept, inter alia, in U.K. Govt. securities, Municipal Corporation deposits, etc., after obtaining the Reserve Bank of India's approval from time to time, pending finalisation of the negotiations. The company wrote on December 26, 1963, to the Ministry of Finance, Govt. of India, for retention of certain amounts in the U.K. In view of a certain controversy, though an extract of that letter has been set out in the statement of case, it is desirable to set out the said letter in extenso which appears at page 10 of the Paper Book being annex. 'A' to the statement of case. The said letter, as stated hereinbefore, was dated December 26, 1963, and was addressed to the Secretary, Department of Economic Affairs, Ministry of Finance, Govt. of India, New Delhi. It stated as follows:
'BALANCE HELD IN THE U. K.: We refer to the correspondence and discussions between us resting with our letter of 29th May, 1963, reference GM/7(IDIL). Your decision on the main subject under discussion was communicated to us by the Reserve Bank, and the amount of 2,02,000 sought to be utilised by us was duly remitted to India and reported to the Reserve Bank.
We have still to receive the Government's decision in regard to the two outstanding matters detailed in our letter under reference and in this connection we have now reported the receipt of the sum of 260,141,13'! 1 in the U.K. in full and final settlement of the proceeds of shares in the Burma Oil Company (1954) Ltd. and fixed assets of the Indo-Burma Petroleum Company Ltd. which were transferred to the Burma Government on 1st January, 1963, in accordance with the agreement between the Oil Companies and the Revolutionary Government of the Union of Burma. The sum received also includes interest on the balance due up to date of payment and completes the financial aspect of the December, 1962, agreement. A further agreement was concluded on 28th November, 1963, in Rangoon and a copy of this is attached hereto and has also been supplied to the Reserve Bank. This has no further rights or obligations under these agreements. We shall, therefore, be obliged if you will let us have your formal approval to these transactions which have now been completed.
You will recall from our earlier correspondence and discussions that we requested favourable consideration to our request to exchange sterling funds for shares in another rupee company and permit the company to use the sterling.
We gave our reasons for requesting special consideration in a Note with our letter of 29th May, 1963.
Our position, now that we have received the final settlement for our Burma assets, is that we wish to utilise the proceeds in whatever way will benefit the Company to the greatest extent possible. We are considering a number of projects, none of which has yet reached a stage where we can place a definite proposal before you; until such time as we are in a position to do so, we request your approval to retain the capital sum now received in the U.K. on term deposit. We would remit the interest after the U.K. tax as and when received.
Our grounds for requesting special consideration are that these funds have their origin outside India, prior to the passing of the Foreign Exchange Regulation Act, 1947. The Company has for many years carried on business outside India (in Burma, Pakistan and the U.K.) and is therefore, of an international nature rather than a purely Indian concern. The investment in the Burma Oil Company (1954) Ltd. and in trading in Burma have yielded considerable sums in foreign exchange by remittance of dividends, profits and capital and India has benefited therefrom.
For a number of years we have pursued a policy of investment of surplus funds in Indian industry and this policy is being continued; in fact, we have nearly completed negotiations for investment of a substantial sum in three new industrial ventures. Other projects are under consideration. We are, therefore, contributing to the industrial expansion of India.
Steel Brothers and Company Limited wish to maintain and, if possible, extend the international character of its subsidiary company, the Indo-Burma Petroleum Company Ltd., and while investing its funds in India in new industries, also wish to take advantage of possibilities for investment outside India using funds released from the Burma Steel Brothers and Company Limited which have world-wide connections, particularly in the Middle East, East Africa and Canada, and through these connections are in a favourable position to arrange worthwhile investment of the funds of the subsidiary. The benefit of such investments would, of course, accrue to India in the form of dividends in foreign currency.
We shall be much obliged if you will give our request your favourable consideration and permit us to retain this sum of 250,141,13.11 in the U.K. until we are able to present our firm proposals for your consideration.'
3. Out of the various projects, only the company's scheme for drilling operations was ultimately approved and finalised and for this the company obtained the Reserve Bank's approval to retain a sum of 1,50,000 in the U. K. for the purpose of finalising this project entirely out of the funds lying in the U.K. As the company's total funds in the U.K. was much higher, the Reserve Bank from time to time instructed it to repatriate funds to India which the Reserve Bank considered as surplus and this was duly effected by the company. As a result of these instructions, the company repatriated 20,204 being the balance fund lying in the U.K. as on 30th June, 1966, after retaining the moneys for commitments for U K. drilling and meeting expenses for Burma Denial Suits. The above amount was repatriated to India in July, 1966, shortly after the devaluation of the Indian Rupee in June, 1966. The assessee, as a result of the remittance and on account of the devaluation, realised an extra sum of Rs. 1,88,157 in terms of Indian currency. In fact, as per details furnished by the assessee, it is seen that it had earned an extra profit of Rs. 2,03,300 on account of devaluation from the funds lying in current accounts with the banks and deposits with the Municipal Corporation. The whole of this amount was originally offered for tax in the return filed by the assessee. Subsequently, a revised return was filed in which the company offered to tax only Rs. 35,143 as revenue profit and the balance of Rs 1,68,157 was offered as capital gains. The ITO treated the above amount of Rs. 1,68,157 also as a profit on revenue account on the ground that it consisted of various remittances made from India to the U.K. which remained unutilised in the assesscc's business there.
4. In appeal, the AAC confirmed the order of the ITO.
5. The assessee, thereafter, went up in appeal before the Tribunal. It was contended on behalf of the assessee that the above amount was not taxable at all. According to the assessee, the assessee had, in fact, committed a mistake even in offering the amount for capital gains tax. The assessee's contention was that the above amount received as compensation for the assessee's Burma business represented its fixed capital and that it was never treated on revenue account. In this connection, reliance was placed on the decisions of the Supreme Court in the case of CIT v. Tata Locomotive and Engineering Co. Ltd, : 60ITR405(SC) and CIT v. Canam Bank Ltd. : 63ITR328(SC) , the two decisions, which we shall have occasion to deal with in detail later. On behalf of the revenue, on the other hand, reference was made to the older of the Tribunal in the assessee's own case relating to the assessment years 1957-58 to 1960-61, 1964-65 and 1965-66, and it was urged that the assessee was held there to be carrying on the prospecting business and mining for oil in the U.K. only as a business proposition and, therefore, the above operations formed part of its ordinary manufacturing activities. It was next argued that if this was the position held by the Tribunal and that was taken into consideration, there was no difficulty in holding that the funds retained by the assessee in the U.K. meant for its prospecting for oil activities, were also for its ordinary trading and manufacturing activities being on revenue account and, therefore, the profit arising therefrom was liable to tax as revenue profit. It was also contended that the assessee-company itself was not sure of its position, inasmuch as it had initially offered the entire surplus for tax while subsequently the offer remained for a part of the amount only and the balance was offered for capital gains tax. Relying on the decision of the Supreme Court in the case of CIT v. Tula Locomotive and Engineering Co. Lid. : 60ITR405(SC) , it was urged on behalf of the revenue that after obtaining the sanction of the Reserve Bank the sum was retained as part of the trading transaction. On the other hand, if it was not a part of trading transaction, then the profit made would be capital profit and not taxable. According to the Revenue, in the case of the assessee, the retention of money in the U.K. was clearly to carry on its normal activities of prospecting for oil and, therefore, the act of keeping the money was a part of the trading transaction. According to the Revenue, the aforesaid decision clearly established that it was so. Then on behalf of the Revenue reliance was placed on the balance-sheet of the company for the year under reference and it was pointed out that the deposits with the Municipal Corporation in the U.K. appeared under the head 'Current Assets, Loans and Advances', on its assets side which too showed that the funds in the U.K. were held not as fixed capital but as its circulating capital by the assesssee-company. It was submitted that according to the assessee's own letter dated 26th December, 1963, the above funds were not earmarked for the purpose of any capital activity of the assessee or for any capital investment of the company as the company was still at the stage of considering a number of projects, none of which had yet reached a stage where it could place a definite proposal before the Govt. of India.
6. After considering the rival contentions, the Tribunal in its order held as follows :
' 7. We have considered the facts of the case and the submissions placed before us on behalf of both the above parties. In our opinion, the amount is liable to tax as revenue receipt. As pointed out by the learned departmental representative the business of the assessee has been held by the Appellate Tribunal in the earlier years as prospecting for oil. The assessee had been holding its funds in the U.K. for the purpose of its above business only though it was unable to formulate any definite project. Out of the various projects its scheme for drilling operations was ultimately approved and finalised for which the company obtained the approval of the Reserve Bank to retain a sum of 1,50,000 in the U.K. This in our opinion was also part of or a trading and manufacturing transaction of the assessee. The principle laid down by the Supreme Court in the case of CIT v. Tala Locomotive and Engineering Co. Ltd, : 60ITR405(SC) is, therefore, clearly applicable to this case. In the cited case it was held by the court that if the act of keeping the money was part of or a trading transaction of the assessee then any profit that would accrue would be revenue receipt. In the present case, as we have pointed out above, the act of keeping the money in the U.K. by the assessee throughout was a part of or a trading or manufacturing transaction of the assessee and, therefore, the profit accruing on the remittance of a part thereof is a revenue receipt. The fact that the origin of the moneys was by way of compensation for its industry in Burma or for its fixed assets, in our opinion, cannot affect the purpose for which the money was subsequently kept or retained in the U.K. The two things arc quite independent and separate of each other. In the case of Canara Bank Ltd. : 63ITR328(SC) it was found by the Appellate Tribunal that certain funds of the assessee were blocked or sterilized and the assessee being a banking concern was unable to deal with that amount or use it for any banking purposes. On these facts, it was held that the appreciation of the money did not arise in the course of any trading operation. Contrary to that, in the case before us, the funds were utilised by the assessee-company by way of investments in certain realisable securities and there was no question of their blocking up or sterilization. Even otherwise, as pointed out by the departmental representative, the assessee-company has been holding the various deposits in the Municipal Corporation in the U.K. as its 'current assets, loans and advances' which itself negatives any contention that they were held on any capital account or were invested in fixed assets. We are, therefore, of the considered opinion that the assessee's funds in the U.K. formed part of its circulating capital and, therefore, the profit arising therefrom was revenue receipt liable to be taxed under the Income-tax Act. In view of our this finding we do not find any force in the contention of the assessee that a part of the profit arising on the amount of 1,796 that was spent in the U.K. towards drilling expenses could not be taxed as that amount was not remitted to India. We, therefore, uphold the order of the Appellate Assistant Commissioner and confirm the addition.
8. We now take up the departmental appeal being ITA No. 5250. The two contentions raised in this appeal relate to the allowances of depreciation in respect of direct drilling expenses incurred by the assessee in the U.K. and the expenditure incurred in the construction of driveways, compound walls, etc., on the footing that they should be classified as 'buildings'. As pointed out by the Appellate Assistant Commissioner both these points are already covered by the decision of the Tribunal dated 27th May, 1970, in ITA Nos. 17131 to 17134 and 20117 and 20116 of 1966-67 relating to the assessment years 1957-58 to 1960-61, 1964-65 and 1965-66 in the case of the assessee itself. Respectfully following the above order of the Tribunal, we uphold the order of the Appellate Assistant Commissioner and reject the department's contention.'
7. Upon this, there was an application for reference under Section 256(1) of the I.T. Act, 1961. Learned advocate for the assessee took us through the questions posed in that application. We are of the opinion that after the reference has been ordered by this court it is not necessary for us to go into this aspect of the matter. Learned advocate for the assessee also drew our attention to certain observations made in the order rejecting the application under Section 256(1) of the I.T. Act, 1961, in support of his argument that in its rejection order the Tribunal was more anxious to uphold its conclusion on the appellate order rather than to go into the question whether the questions sought for were questions of law or not. We are again of opinion that it is not necessary for our present purpose to deal with that question. We will proceed on the basis of the facts as found and/or admitted before the Tribunal and before the revenue authorities. In those circumstances, the three questions indicated hereinbefore have been referred to this court as directed by an order under Section 256(2) of the I.T. Act, 1961.
8. Before we proceed further it may be necessary to summarise some of the basic facts which have been either admitted before the Tribunal or found by the Tribunal or the revenue authorities and about which there was not much dispute. On this aspect, both sides agree that the following were the material facts.
9. The assessee was a subsidiary of Steel Brothers of the United Kingdom. It is a company resident in India. On behalf of the assessee, as a part of the background of the case, it was stated that the company was incorporated at a time when Burma was part of India. It owned certain oil fields in Burma and carried on the business of prospecting for, winning and trading in oil. The said oil fields were destroyed by the Japanese occupation of Burma during the years 1939 to 1945 World War. The immediately preceding fact, stated hereinbefore, was not, however found by the Tribunal or admitted before the Tribunal but it is apparent that this must be the position. During the year 1950, the company received a sum of Rs. 97,01,124 from the U.K. Govt. by way of ex gratia grant for the rehabilitation of its war-damaged industry in Burma. It may incidentally be mentioned that Rs. 97,01,124 was equivalent to 7,27,584. This amount was credited to the assessee's capital reserve account. This reserve, subject to certain subsequent adjustments, had been permanently reflected in the company's investments which had been held as assets, such as, investments in the U.K. Govt. securities, Burma Oil Co. (1954) Ltd. shares--there were 2,01,886 shares of the book value of Rs. 72,36,640 and the U.K. Municipal Corporation deposits. After the destruction of its oil fields in Burma, these sums could not be made use of by the assessee. It could not also embark on the production of oil in India because that was not open to private enterprises. Learned advocate for the assessee asserted before us that the assessee had to look for an activity elsewhere. In 1956, the company had entered into an arrangement with Steel Brothers Ltd. for prospecting for oil in the U.K. The assessee's scheme for drilling operations was approved and finalised and for this the company had obtained the Reserve Bank's approval to retain a sum of 1,50,000 in the U.K. for the purpose of finalising this project entirely out of the funds lying in the U.K.; expenditure on such operations commenced from the assessment year 1957-58. As the company's total funds in the U.K. was much higher, the Reserve Bank from time to time instructed the assessee to repatriate funds to India which the Reserve Bank considered as surplus and this was duly effected by the assessee. The assessee had requested the government to allow exchange of such surplus funds for shares in another rupee company and permit the company to use the sterling. The assessee-company had given its reasons for requesting the special consideration in a note with its letter dated 29th May, 1963. On the government's decision being communicated to it by the Reserve Bank, the assessee-company by its letter dated 26th December, 1963, informed the government that the amount of 202,000 sought to be utilised by the company had been duly remitted to India and reported to the Reserve Bank. This letter we have set out hereinbefore. The assessee had also reported the receipt of the sum of 260,141 13 Section 11 d. in the U.K. in full and final settlement of the proceeds of shares of B.O.C. (1954) Ltd. and the fixed assets of the company which were transferred to the Burma Govt. on 1st January, 1963, which completed the financial aspect of an agreement of December, 1962, between the Oil Companies and the Revolutionary Govt. of the Union of Burma. By its letter dated 26th December, 1963, to the Govt. of India the company had asked for their formal approval of the transaction which had then been completed and had stated that it had received the final settlement of its Burma assets it wished to utilise the proceeds in whatever way it would benefit the company to the greatest extent possible. The company stated that it was considering a number of projects, none of which had reached the stage where it could place a definite proposal before the government and until such time as it was in a position to do so, it requested the government's approval to retain the capital sum then received in the U.K. on term deposit. The company explained in its said letter that it had nearly completed negotiations for the investment of a substantial sum in three new industrial ventures and while investing funds in India in new industries it also wished to take advantage of the possibilities for investment outside India using funds realised from Burma. No approval for such retention of funds in the U.K. appears to have been given by the government. At the relevant time the assessee had funds totalling 74,468 in short-term deposits with Colchester and Hawick Borough Councils. Out of this a sum of 52,881 was retained in the U.K. for incurring drilling and prospecting expenses representing the unspent balance of the sum approved for such expenditure by the Reserve Bank and a further sum of 1,383 was retained for the estimated expenditure to be incurred for Denial Suits, this also having been approved by the Reserve Bank. The balance amount of 20,204 was to be repatriated to India and it was so repatriated in July, 1966, shortly after the devaluation.
10. As mentioned hereinbefore 52,881 together with 1,383 mentioned before along with 20,204 made up the total sum of 74,468. On 6th June, 1966, the rupee was devalued from Re. I equal to 1 sh. 5'31/32 d. to Rs. 21 = 1. So, the amount 22,000 under pre-devaluation rate amounted to Rs. 2,93,843.47 and on the basis of post-devaluation rate it would amount to Rs. 4,62,000 and thus there was an excess of Rs. 1,68,156.50 as a result of devaluation. This is the amount which is really the bone of contention in this reference, as to whether this should be taxable or not, as we shall presently note.
11. To continue with the narration of the facts admitted or found, it may be stated that a part of the said excess which is related to the amount of 1,796 22,000 minus 20,204) which was not remitted to India but retained in the U.K. as a part of the fund approved for expenditure there, was under consideration. Another question which is involved here is whether the appreciation in the value of this sum should be treated as profit or not. This expenditure on prospecting and drilling of oil in the U.K. was claimed by the assessee as an allowable expenditure in the assessments for the assessment years 1957-58 to 1960-61, 1964-65 and 1965-66. But the revenue had taken the view that such expenditure could not be allowed as a permissible deduction in computing the assessee's income from the then existing business of marketing petroleum products. The Tribunal, however, held that the assessee had entered into arrangement for prospecting for oil as a part of this project and carrying on of business which was being previously carried on by it. The Tribunal took the view that there was no commencement of a fresh activity by the assessee when it entered into an arrangement with Steel Brothers Ltd. But the Tribunal had held that the expenditure on the drilling operations constituted capital expenditure and had ordered the allowance of depreciation on such expenditure. The assessee's accounts for the year ended 31st December, 1966, showed a credit of Rs. 2,03,300 on account of devaluation profit from the funds lying in current account with the banks and deposits with the Municipal Corporation in the U.K. The assessee admitted Rs. 35,143 to be taxable as revenue profit and claimed Rs. 1,68,157 as capital profit. The ITO, as we have mentioned before, held the amount of Rs. 1,68,157 to be a revenue receipt liable to tax. The AAC directed the allowance of depreciation on the expenditure incurred on drilling operations in the U.K. in view of the Tribunal's order on this very point for the earlier years. But he held that the fund repatriated to India was nothing but a part of the circulating capital which was found in surplus in the United Kingdom. He, therefore, held that the ITO had rightly assessed the amount of Rs. 1,68,157.
12. On the ITO.'s appeal against the order of the AAC, the Tribunal upheld the directions of the AAC and, on the assessee's appeal, the Tribunal found: (a) that the assessee had been holding its funds in the U.K. for the purpose of its business of prospecting for oil only, (b) that the assessee's drilling operations in the U.K. was a part of the trading or manufacturing transaction of the assessee, (c) that the funds were utilised by the assessee-company by way of investments in certain realisable securities and there was no question of their blocking up or sterilisation, (d) that the assessee-company had been holding the various deposits in the Municipal Corporation in the U.K. as its current assets, loans and advances which itself negatived any contention that these were held on any capital account or were invested in fixed assets, (e) that the assessee's funds in the U.K. formed part of its circulating capital and, therefore, the profit arising therefrom was revenue receipt liable to be taxed, (f) that the amount of Rs. 1,68,157 was liable to tax as revenue receipt, and (g) that there was no force in the assessee's contention that the part of profit arising on the amount of 1,796 which was not remitted to India could not be taxed.
13. As we have mentioned hereinbefore, on the aforesaid basis, though three questions have been referred to this court, all the three questions are really inter-linked. On the first question, we have set out the facts hereinbefore. On behalf of the assessee, it was urged that though the amounts were lying in the U.K. these were frozen in the sense that these could not be utilised save and except with the permission and upon the conditions imposed by the Reserve Bank. The assessee-company was not free to use it for any purpose it liked. It was, secondly, urged that this amount, as would be clear from the narration of facts hereinbefore, represented the compensation or ex gratia payment on account of the loss of the fixed assets of the assessee in Burma and, therefore, there was no change, by holding this amount invested in the manner that the assessee did, in the character of this amount, that is to say, compensation in lieu of fixed asset. According to learned advocate for the assessee, the Tribunal also failed to take into consideration that the remittance of certain amounts that was made to India was not out of the amount which was held as fixed asset. As we have mentioned before, the Tribunal observed that the act of keeping the money in the U.K. by the assessee throughout was a part of or a trading or manufacturing activity of the assessee and, therefore, the profit accruing on the remittance or a part thereof was a revenue receipt. But, according to learned advocate for the assessee, there was a confusion. The remittance was not made out of the compensation or ex gratia payment received for the fixed asset in Burma. The Tribunal had further observed that the origin of moneys was by way of compensation for its industry in Burma or for its fixed asset but that did not, according to the Tribunal, affect the purpose for which the money was subsequently kept and retained in the U.K. In this connection, learned advocate for the assessee drew our attention to several provisions of the Foreign Exchange Regulation Act, 1973, as also to the relevant provision of the previous Act, the sum and substance of which was that the assessee was not free either to deal with the money, or to change the securities save and except with the permission of the Reserve Bank and upon the terms and conditions imposed by the Reserve Bank. From that point of view, it could not be termed to be held on revenue account, nor could it be treated as circulating capital because circulating capital in contradistinction to the fixed capital was a capital which the assessee was free to utilise to earn profits ; this amount, which was held in the U.K., according to the assessee could not, and, in our opinion rightly, be treated as free asset or liquid asset. This position would be clear if we refer to this aspect which was adverted to by the Supreme Court in a similar situation in the decision in the case of CIT v. Canara Bank Ltd. : 63ITR328(SC) , where, for our present purpose, it is material to refer to the observations appearing at pages 331-332 of the report, where similar types of moneys in Pakistan were treated by the Supreme Court as blocked asset. Learned advocate for the revenue sought to urge before us that the Tribunal had considered all aspects of the matter and the view taken by the Tribunal that these were easily convertible assets to be utilised by the assessee was a possible conclusion. Therefore, it was not open to the assessee to contend that these assets were frozen assets which were not to be held on revenue account. He, however, urged that there was nothing on record to indicate that the attention of the Tribunal was drawn to the provisions of the Foreign Exchange Regulation Act, 1973, or to the similar provisions of the previous Act and the Tribunal had no occasion to consider the effect of those provisions, to which our attention was drawn on behalf of the assessee at this stage of reference. Therefore, it was urged that this was not the question which the Tribunal had occasion to discuss and we should not entertain this argument at this stage out of the order of the Tribunal. It is true, reading the order of the Tribunal, as it appears, that there was no specific mention of any provision of any section either of the Foreign Exchange Regulation Act, 1973, or its previous provisions, but it is apparent that both the Tribunal as well as the parties were proceeding on the basis that the dealing with this amount required the permission of the Reserve Bank. Indeed, the Tribunal has, on more than one occasion in its order, referred to the fact that these amounts were held and when remitted were remitted with the permission of and on the conditions imposed by the Reserve Bank. Therefore, these amounts could not be remitted without the permission of the Reserve Bank, a fact upon which all parties proceeded. If that is so, then whether a particular section of any particular Act was drawn attention to or not, in our opinion, is not very material. The basic fact remains that these amounts lying in the U.K. were not easily encashable or intended easily to be utilised by the assessee, save and except with the permission of the Reserve Bank. If that is the position, then, not having taken this aspect into consideration, in our opinion, the Tribunal had committed an error, which a man of prudence, in law, could not have arrived at, and if that is the position, then such a finding could properly be characterised as a perverse finding in law.
14. Moreover, there is another aspect of the matter which has to be borne in mind. The Tribunal seems to have proceeded on the basis that certain amounts of money were in fact remitted to India. Indeed, that is so. But the amount of money which was remitted to India and the sums out of which that was remitted and the conditions on which the said sums were remitted to India had not been properly appreciated by the Tribunal. The Tribunal had also referred to the fact that in its balance-sheet the assessee had treated its deposit with the Municipal Corporation in the U.K. under the head ' Current assets, loans and advances '.
15. It was treated by the assessee, according to the Tribunal, as current assets--a point upon which the learned advocate for the revenue also relied heavily before us. It was also submitted that this practice or the procedure followed by the assessee was in consonance with Spicer & Pegler's Book Keeping and Accounts and our attention was drawn to certain principles enunciated therein.
16. The true nature of an amount must be found out by discovering the true nature of the amount in question and if the consequences of the funds being not permitted to be utilised save and except with the permission of the Reserve Bank make the funds sterilized or blocked, as was adverted to by the Supreme Court in the case of Canara Bank referred to hereinbefore, then the fact that the assessee had treated this amount as current assets on revenue account or the fact that the assessee offered a part of the amount on revenue account for assessment would not be decisive or conclusive. In support of this proposition reliance may be placed on the observations of the Supreme Vurt in the case of CIT v. India Discount Co. Ltd, : 75ITR191(SC) , and on the observations of Bhagawati J. in the decision in the case of Sutlej Cotton Mills Ltd. v. CIT : 116ITR1(SC) , a decision with which we shall have to deal in greater detail later on, on various aspects. For the reasons, as we have indicated before, in our opinion, the Tribunal committed an error of law in its finding, an error which resulted in an erroneous finding, which can be properly described as a perverse finding in law. In the premises, question No. I must be answered in the affirmative and in favour of the assessee.
17. But this finding by itself would be of little academic interest. This finding or this question is really a step into the other main question, viz., question No. 3, that is to say, whether the sum of Rs. 1,68,157 had been correctly taxed as part of the assessee's trading profits We now proceed to deal with this aspect of the matter.
18. We have set out the reasons and the basis on which the Tribunal came to the finding that the amount in question was taxable. We have also set out the origin of this amount On behalf of the assessee, it was contended that the Tribunal proceeded on the basis that as the said amount had been held to be circulating capital, any profit or accretion resulting therefrom would be in the nature of a revenue transaction and if profit accrued out of such transaction, such profit would be taxable on revenue account. The distinction, as we have mentioned before, between circulating capital and fixed capital is well known in law and in economics. Adam Smith in 'Wealth of Nations' described 'fixed capital' as for the owner's profit by keeping it in his own possession and 'circulating capital' as that he makes profit out of it by parting it and letting it circulate. 'Circulating capital', therefore, means capital employed in the trading operations of the business and dealings which comprise of trading receipts and trading disbursements, while 'fixed capital' means capital not so employed in the business; though it may be utilised for the purpose of manufacturing business, yet does not constitute capital employed in the trading operations. (See, in this connection, the observations in the case of Golden Horse Shoe (New] Ltd. v. Thurgood  18 TC 280 (CA)).
19. The fundamental point that rfquires consideration in this question is whether this money was utilised for earning profit, as such, which resulted in the sum of Rs. 1,68,157. There was, according to learned advocate for the assessee, no dealing in foreign exchange by the assessee. The accretion happened merely because the money was there. Now, this aspect raises several questions, viz., is the accretion or the profit or the excess amount realised as a result of any trading activity of the assessee Secondly, if it is profit then when did this profit arise Is it at the time of appreciation or depreciation of the currency, that is to say, at the time of devaluation or otherwise or is it at the time of conversion by repatriation In this connection, it may be instructive to refer to certain decisions, both English and Indian, which, in our opinion, have dealt with this question precisely. Reference may be first made to the decision in the case of Californian Copper Syndicate Ltd. v. Harris (Surveyor of Taxes)  5 TC 159. There, the company was formed for the purpose of, inter alia, acquiring and reselling mining property after acquiring and working various property. It used to resell the whole to a second company after receiving payment in fully paid shares of the latter company. It was held that the difference between the purchase price and the value of the shares for which the property was exchanged was profit assessable to income-tax. There, at page 165 of the report, Lord Justice Clerk observed that it was quite a well-settled principle in dealing with questions of assessment of income-tax, that where the owner of an ordinary investment chose to realise it, and obtained a greater price for it than he originally acquired it at, then the enhanced price was not profit in the sense of Schedule D of the I.T. Act, 1842, (of England), assessable to income-tax. But the Lord Justice went on to observe that it was also equally well established that enhanced values obtained from realisation or conversion of securities might be so assessable where what was done was not merely a realisation or change of investment but an act done in what was truly the carrying on or carrying out of a business. The Lord Justice further observed that the simplest case was that of a person or association of persons buying and selling lands or securities speculatively in order to make gain, dealing in such investments as a business, and thereby seeking to make profits. The learned judge, then, observed that what was the line that separated the two classes of cases might be difficult to define and each case should be considered according to its facts; the question to be determined being--was the sum of gain that had been made a mere enhancement of value by realising a security, or was it a gain made in an operation of business in carrying out a scheme for profit making Therefore, applying the said principle, the first thing that we have to find out, is: whether this sum of Rs. 1,68,157 was an amount which was realised in the course of dealing in the foreign exchange It is true that even if the said foreign exchange had been held on account of revenue purposes the enhanced value was obtained not because of any activity of business carried on by the assessee but because of the purely extraneous factor of devaluation. This principle referred to hereinbefore was reiterated again in the decision in the case of McKinlay v. H. T. Jenkins & Son Ltd.  10 TC 372 (KB). There, under an agreement dated the 8th March, 1921, for the supply of a quantity of marble by a Torquay Company of marble and stone merchants to certain building contractors, the contractors had agreed, on receipt of a guarantee for the fulfilment of the contract, to advance 20,000 of the price, percentage deductions being made from the amount due on each consignment of marble until the advance had been repaid. On the 17th March, 1921, the 20,000 was paid to the company and was credited to an account at a London bank in the joint names of nominees of an insurance company, acting as guarantor, and of the Torquay Company, the nominee of the latter being its con-rolling shareholder. In anticipation of the required marble being purchased in Italy--though not till the autumn of 1921--the company at once arranged for the conversion of the greater part of the 20,000 into lire at 103 to the , and a lira account in the same joint names was opened. In May, 1921, the lira had appreciated in value, and, as the money was not yet required by the Torquay Company, its nominee, on the 25th May, 1921, without the company's knowledge or authority, but with the consent of the nominee of the insurance company, directed the sale of the balance of the lira joint account. At 72 to the , the lire realised . 22,870 (for which a further account in the joint names was opened), a profit on their original purchase price, (103 to the ) of 6,707, which was received by the Torquay Company. The lire were subsequently repurchased for the purposes of the contract for 19,386, which was allowed as a deduction from the company's profits for income-tax purposes. In computing the company's profits for purposes of assessment to income-tax for the year 1922-23 the said sum of 6,707 arising from the exchange transaction was included as a profit, but the Special Commissioners on appeal decided that it was not a profit assessable to income-tax. It was held that the sum of 6,707 was not a profit arising out of the contract for the supply of marble, but was merely an appreciation of a temporary investment, and was not assessable to income-tax as part of the profits of the company's trade. There, Rowlatt J., dealing with this question, had observed at pages 404-405 of the report as follows :
'Now the question is whether the advantage which they got from executing three changes of currency, instead of only one--that is what it comes to--is taxable profit, and the Commissioners have held that it is not. The Commissioners have really said that they considered the evidence and the arguments, and held that no part of the sum was a profit assessable to Income Tax. I wish they had not put it like that. I had several times--in this Paper, three times, I think--asked them not to do it, and other courts have asked them not to do it; it is rather more satisfactory, in fact, much more satisfactory, if they state what view of the facts they take, and then one can see what view of the facts they take. The arguments on the part of the company which they give effect to are these :
(a) it was no part of the company's business to speculate in exchanges;
(b) the said sum of 6,707 was not a profit arising from the Company's trade or business, but was a capital appreciation of a temporary investment;
(c) the said sum of 6,707 was a casual profit and the company was not assessable to Income Tax in respect thereof. It is true, as the Attorney-General says, that to say that a thing is a casual profit does not mean that in every case it is not assessable to Income Tax, because it may mean that it is only an isolated instance of what, nevertheless, is in itself a profit, such as writing one book for reward, or something of that sort. But in this connection what is meant is that the contention was quite obviously that, it being an appreciation of an object bought, it was an isolated appreciation of that object, and was not merged in a trade, because, as the first contention showed, it was no part of the Company's business to speculate in the exchanges. That is what it means, and the Commissioners have given effect to those arguments. I think that this appeal fails, but I do not want to put it upon the ground that the Commissioners have decided it in point of fact, and that I cannot go beyond that. Whether that would be right or not, I do not pause to consider, but I think that from every point of view their decision was perfectly right, and I do not think they could very well have decided the other way, if I may go as far as that. It seems to me that this profit out of the change from currency to currency three times does not touch the question of what the profit on the contract was at all. The profit on the contract is the difference between the sum they received and what it cost them to supply the marble, and this intermediate use that was made of the sum which they happened to have because they had got this contract has nothing to do with the profits of the contract, I think, at all. It was an accident that this sum can be identified, as I have already explained, as coming from the contract, but it has nothing to do with the profit of the contract. If that is so, what is it It seems to me it is the mere appreciation of an investment into which they had put their money temporarily; an appreciation of something, if you like to look at it one way, that they had bought forward, because they would want it later, namely, the lire; a temporary appreciation of which they took advantage. If you look at it the other way, it was a profit which they had made by, buying forward, instead of waiting until they had to provide the money : I do not think it has anything to do with the profit of the contract itself. It was, as I say, a mere appreciation of something which they had got in hand, and I think the Commissioners were bound to hold (because I see no evidence at all to the contrary) that it was not merged in a business of the Company. It may be that; if the Company were seeking to declare a dividend, nobody could say it was ultra vires to treat this advantage as a divisible sum. Their capital was intact; they had had cash; they had put it into an article of commerce ; they had got it out again they had got all the cash they ever had, and more cash and as far as I understand it there would be no objection to their treating that as a divisible profit as a matter of Company Law, But I do not think that affects the case I have got to decide. I have to decide whether they made this profit in the way of their business, as a profit of their trade, or not, and I frankly say that I do not see how it really can be argued that it was. '
20. In the case of George Thompson & Co. Lid. v. IRC  12 TC 109J, Rowlatt J. observed as follows :
' Really what Sir Leslie has to contend for is that when they found that this coal was not wanted, and so disposed of it, the whole coal transaction disappeared ab initio--that is what it seems to me is the difficulty--from their operations as a shipowning company. On the facts I cannot look at it in that way. As I say it depends just how you look at the facts. On the facts I think this is simply a case of a person who is bound to buy a certain amount of consumable stores, who over-buys and is lucky enough to dispose of those consumable stores, which he has got in the way of his business in relief of his business at a profit, or whatever way in which you like to put it. He has simply got out of it, and not only escaped the expenses, but there is something put in his pocket for it in the way of his business, I think the whole of it comes in. That is my straight-forward view, I think, on the facts. I think no other question is involved.
The case which does bear rather an interesting affinity to this case is the marble case 10 TC 372, but there the way I looked at it--I do not think the case was appealed--was simply this, that they had some capital lying idle, and they embarked upon an exchange speculation. They bought the lire as a speculation, not as consumable stores, or anything of that sort, but they simply bought them as a speculation rather than keep the money in the bank. That is how I looked at it, and I do not think it bears any affinity to this case where, as I say, the essence of it is that they were buying the most important of all consumable stores which, in the way of their business strictly regarded, they had to buy.'
21. This question was analysed in great detail in the case of Canara Bank Ltd. v. CIT : 47ITR529(KAR) , which ultimately went to the Supreme Court and was affirmed : 63ITR328(SC) . But before I deal with the Supreme Court decision, it may be instructive to refer to the decision of the Mysore High Court which is reported in : 47ITR529(KAR) . There what happened was that the assessee, a bank, with its head office in India had branches in various places including one opened in Karachi before it became a part of the Dominion of Pakistan in 1947. Even after the partition, the currencies of the two Dominions of India and Pakistan were on par till 1949. There was devaluation of the Indian rupee on September 18, 1949. Pakistan not having devalued her rupee, there was a disturbance of the parity between the currencies of the two countries. The exchange ratio between the two countries was not determined until February 27, 1951, on which date it was agreed that a hundred Pakistan rupees were equivalent to a hundred and forty-four Indian rupees. On the date of devaluation of the Indian rupee, the Karachi branch of the assessee had with it Rs. 3,97,221 belonging to the head office. The difficulties created by the currency situation made its remittance to the head office impossible for a long time. Remittance was, however, permitted by the State Bank of Pakistan on July 1, 1953, and when the amount was remitted, an amount had appreciated in value in terms of Indian currency and the equivalent sum received in India was Rs. 5,71,038. The assessee thus made a profit of Rs. 1,73,817 and, in its return of income for the assessment year 1954-55, claimed this sum as a non-taxable capital gain. The I.T. authorities held that the amount of Rs. 3,99,221 lying in the Karachi branch was the stock-in-trade of the bank and was, as such, the circulating capital and not fixed capital and the sum of Rs. 1,20,746, being an accretion to the stock-in-trade, was a revenue gain and not a capital gain. It was found as a fact by the Tribunal, the court noted, that the Karachi branch was not in a position to use and had not in any way used this amount for banking transactions and that the amount was blocked or sterilised in the circumstances of that case. The Mysore High Court held that the mere fact that the asset had increased in value would not attract income-tax even if a profit was thereby made. The real test was whether the profit, though the accretion to the value of the stock-in-trade was produced in what was truly 'the carrying on or carrying out of a business'. The increment in this case was not due to any act of carrying on or carrying out of the business of the bank and the amount in question was, therefore, according to the Mysore High Court, a capital gain not assessable to income-tax. The Division Bench had, further, occasion to consider that it was impossible to assert that a trader's assets could always be placed at any given point of time in two compartments, fixed capital in one and the circulating capital in the other. To think that the assets of a trader were always capable of physical division into two groups, one constituting circulating capital and the other fixed capital, regardless of the activity or purpose in or for which those assets were employed and without reference to whether they were or were not employed for trading operations would be to ignore the attributes of circulating capital as contrasted with those of fixed capital. Further, circulating capital might change its character, according to the Division Bench, and become fixed capital under certain circumstances. After discussing the relevant decisions, the Division Bench of the Mysore High Court observed at p. 537 as follows:
'The law on the question whether an accretion to the value of an asset is a capital or revenue accretion is too long and too well established. The principle expounded in the decided cases is that the mere fact that the asset of a trader increases in value will not attract income-tax even if a profit is thereby made and that income-tax is not payable merely because a person makes a profit. If there is an accretion to the value of an asset belonging to a trader, the fact that there is a realised increment in the value of the article will not by itself be conclusive of the question whether the realisation is taxable. The argument that a realisation which is only an accretion to the value of an asset, is not taxable, is equally unavailable. The real test is whether the profit through an accretion to the value of the asset was produced by 'an act done in what is truly the carrying on or carrying out of a business '.'
22. For this proposition, the Division Bench referred to the leading case of Californian Copper Syndicate Ltd. v. Harris (Surveyor of Taxes)  5 TC 159 (C of Exch) which we have discussed hereinbefore and two other cases where the said principle was applied. Then the Division Bench observed that whether the accretion was realised in the course of a trade carried on with the object of securing the said increment in the value of the asset employed for that purpose, was the question, to which an answer should always depend in the particular facts of each case. The Division Bench further observed that the assessability of an accretion to a trader's asset had sometimes been made to rest on the character of the asset, the enquiry made being whether the asset, when it appreciated in value, was a fixed capital or circulating capital. The Division Bench, however, was of the opinion that the fact that the ascertainment of the character of the asset became the basis of the conclusion that the accretion was or was not a revenue receipt. The adoption of this test in some of the cases appeared to have influenced the Tribunal in that case. But this enquiry into the character, according to the Division Bench, suffered from oversimplification, The true test was whether the accretion arose as a result of any trading operation carried on by the assessee not on the nature of the asset and the Division Bench in that case found that it was not possible to hold that the accretion had occurred as a result of any operation carried on by the assessee. This decision, as we have mentioned before, was affirmed by the Supreme Court in the case of CIT v. Canara Bank Ltd, : 63ITR328(SC) . There, the Supreme Court observed at page 332 as follows :
'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 lluctuation 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 Ks. 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 bet-ween 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. It has also been found by the Appellate Tribunal that the said amount of Rs. 3,97,221 was not utilised for internal banking operations within Pakistan and it is hence not possible to draw an inference that the bank realised any profit in the carrying out of its business. We accordingly hold that Mr. Hazarnavis is unable to make good his argument 'on this aspect of the case and the High Court was right in reaching the conclusion that the exchange difference of Rs. 1,70,746 was not assessable to income-tax.'
23. Incidentally, it may be mentioned that this was a decision rendered by a Bench composed of three learned judges of the Supreme Court and it was held, as it was necessary to hold in that case, that the fact of appreciation of the money did not arise in the course of any trading operation and assuming the amount, with which the Supreme Court was concerned, was originally the stock-in-trade, when it was blocked and sterilised by the bank, the assessee was unable to deal with that amount. It ceased to be the stock-in-trade and the increase in its value, because of the fluctuation in the rate of exchange, was a capital receipt. It was further observed that if by virtue of exchange operations profits were made during the course of the business and in connection with business transactions, the excess receipts on account of conversion of one currency to another would be revenue receipts, but if the profit arises by virtue of exchange operations) and not by way of business of the asseasee, it would be a capital receipt. If that ratio is applied to the facts of this case, then, in our opinion, there is no finding that this appreciation in value, even if the money in respect of which the appreciation accrued was held on revenue account, was as a result of any operation arising out of or in the course of the business of the assessee. It is nobody's case that the assessee carried on any business or dealt in foreign exchange, in the facts of the case, even if the amount held in foreign currency had been held on revenue account. In this connection reference must necessarily be made, as indeed, reliance was strongly placed on behalf of the revenue on the decision of the Supreme Court in the case of Sutlej Cotton Mitts Ltd. v. CIT : 116ITR1(SC) . In that case, the assessee-company which had its head office in Calcutta had a cotton mill situate in West Pakistan where it manufactured and sold cotton fabrics. During the financial year ending 31st March, 1954, relevant to the assessment year 1954-55, the appellant made large profits amounting to Indian Rs. 1,68,97,232 converted at the then prevailing rate of exchange--100 Pakistani rupees equal to 144 Indian rupees. On 8th August, 1955, Pakistan devalued its rupee restoring the parity between the Indian rupee and the Pakistani rupee. Thereafter during the accounting periods relevant to the assessment years 1957-58 and 1959-60, the assessee had obtained the permission of the Reserve Bank of Pakistan and remitted to India Rs. 25 lakhs and Rs. 12 lakhs, respectively. The assessee claimed that on remittance the assessee had suffered respectively a loss of Rs. 11 lakhs and Rs. 5 1/2 lakhs but the claim was rejected by the department and the Tribunal sustained the disallowance. On reference the Calcutta High Court held that no loss was sustained by the assessee on the remittance of the amounts from West Pakistan, and, in that event, the loss could not be said to be a business loss, because it was not a loss arising in the course of the business of the assessee but was one caused by devaluation which was an act of the State. The Supreme Court in such a situation remanded the case to 'the Tribunal and while remanding held that the assessee had suffered a loss of Rs. 11 lakhs and Rs. 5 1/2 lakhs in the process of conversion on account of alteration in the rate of exchange. The question, whether the loss suffered by the assessee was a trading loss or a capital loss could not be answered unless it was first determined whether the two amounts of Rs. 25 lakhs and Rs. 12 1/2 lakhs were held by the assessee on capital account or on revenue account, and since the Tribunal had not enquired into this, the matter had to be remitted to the Tribunal to determine whether the amounts were held in West Pakistan as a capital asset or as a trading asset and then whether the loss suffered by the assessee was a trading loss or a capital loss. Now, so far as this decision was concerned with the question of loss in a business, which was connected with the business, the ratio of the said decision does not affect us and would not be applicable tothe facts of this case. But that does not conclude the question involved inthis case. Mr. Justice Bhagwati, delivering the judgment of the SupremeCourt, after referring to several decisions, observed at pages 13-14 ofthe report as follows :
'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 a fixed capital, such profit or loss would be of capital nature. Now, in the present case, no finding appears to have been given by the Tribunal as to whether the sums of Rs. 25 lakhs and Rs. 12,50,000 were held by the assessee in West Pakistan on capital account or revenue account and whether they were part of fixed capital or of circulating capital embarked and adventured in the business in West Pakistan. If these two amounts were employed in the business in West Pakistan and formed part of the circulating capital of that business, the loss of Rs. 11 lakhs and Rs. 5,50,000 resulting to the assessee on remission of those two amounts to India, on account of alteration in the rate of exchange, would be of a trading loss, but if, instead, these two amounts were held on capital account and were part of fixed capital, the loss would plainly be a capital loss. The question whether the loss suffered by the assessee was a trading loss or a capital loss cannot, therefore, be answered unless it is first determined whether these two amounts were held by the assessee on capital account or on revenue account or, to put it differently, as part of fixed capital or of circulating capital. We would have ordinarily, in these circumstances, called for a supplementary statement of case from the Tribunal giving its finding on this question, but both the parties agreed before us that their attention was not directed to this aspect of the matter when the case was heard before the revenue authorities and the Tribunal and hence it would be desirable that the matter should go back to the Tribunal with a direction to the Tribunal either to take additional evidence itself or to direct the ITO to take additional evidence and make a report to it, on the question whether the sums of Rs. 25 lakhs and Rs. 12,50,000 were held in West Pakistan as capital asset or as trading asset or, in other words, as part of fixed capital or part of circulating capital in the business. The Tribunal will on the basis of this additional evidence and in the light of the law laid down by us in this judgment, determine whether the loss suffered by the asscssee on remittance of the two sums of Rs. 25 lakhs and Rs. 12,50,000 was a trading loss or a capital loss. '
24. The aforesaid observation of Mr. Justice Bhagwati requires a little closer scrutiny. It was observed, as we have mentioned before, that 'where profit or loss arises to an assessee on account of appreciation or depreciation (underlined by us) in the value of foreign currency held by him, on conversion into another currency (underlined by us), 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'. There are two aspects which, it may be specifically pointed out, do not seem to have been urged before the Supreme Court whether, it is a profit which arose on appreciation or depreciation at that point of time or is it a profit which arose on conversion of the currency into another currency The moment a currency is devalued or revalued there is an appreciation or depreciation. At that point of time there is no question of conversion. Sometimes the conversion takes place later on. At what point of time the profit should be computed and to which year would that profit or loss be attributed, that aspect the Supreme Court has not clarified. The second aspect that requires consideration and upon which stress was laid in this case was that where a profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency, then such profit should be attributable either to capital or revenue, if the amount was held either as capital or as revenue. Now, in so far as it held that merely the character of the asset would be decisive, this aspect of the decision, in our opinion, with great respect, runs counter to the ratio of the decision of the Supreme Court in the case of Canara Bank : 63ITR328(SC) , where the exact point was in dispute and the relevant passage we have quoted hereinbefore. We must hesitate to observe that this observation of the Supreme Court in the subsequent case was an observation of a general nature and was not necessary for the purpose of determining the actual point involved before the Supreme Court. The point involved before the Supreme Court was the allowability of a particular loss. It is well settled that a loss may be allowable in a business, even though the loss is not occasioned by the carrying on of the operation by the assessee. No assessee carries on business for making losses, but losses are incidental to or arise in the course of the business. But the assessee carries on business for making profit. Therefore, profit being taxable must arise out of or in the course of the activity of the assessee. It would not be sufficient if it was merely connected with the business of the assessee. In this connection, reference may be made to be observations of the Supreme Court in the case of Badridas Daga v. CIT : 34ITR10(SC) as well as the observation of the Bombay High Court in the case of Pohoomal Bros. v. CIT : 34ITR64(Bom) . Now, this point is exactly with the ratio of the Supreme Court decision in the case of Canara Bank : 63ITR328(SC) , which is a decision mentioned by us hereinbefore and rendered by three learned judges.
25. In so far as the decision of the Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT : 116ITR1(SC) relating to the profit runs counter to those observations, we must adhere to the decision of the larger Bench. In this connection, reference may be made to the decision of Bhagwati J. in the case of Mathtlal v. Radhe Lal, : 1SCR127 , whereat page 1601, Bhagwati J., observed that in the case of contradictory decision of the Supreme Court, an earlier decision of a larger Bench that a later decision of a smaller Bench should be adhered to. This principle was further affirmed by the Supreme Court in the case of State of U.P. v. Ram Chandm Trivedi, : (1977)ILLJ200SC , where the Supreme Court observed that even in cases where a High Court found any conflict between the views expressed by larger and smaller Benches of that court, it could not disregard the views expressed by the larger Bench. The proper course for a High Court in such a case, the Supreme Court observed, was to try to find out and follow the opinion expressed by the larger Benches of the Supreme Court in preference to those expressed by smaller Benches of the court, which practice had hardened as it is, into a rule of law, and was followed by the Supreme Court itself. As it has been categorically held by the Supreme Court in the case of Canara Bank : 63ITR328(SC) that 'if by virtue of exchange operations profits are made during the course of a 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 assessee, the profit would be capital ' ; in this case there being no finding by the Tribunal that Rs. 1,68,1:7 came in by way of any business operation of the assessee, this view of the Supreme Court must be adhered to and if that ratio is applied, in our opinion, the sum of Rs. 1,68,157, in the facts and circumstances of the case, cannot be said to be revenue profit. Incidentally, we must further observe that in the decision in the case of Sittlej Cotton Mills Ltd. : 116ITR1(SC) reference was made and reliance was placed by the learned judge in the case of Canara Bank Ltd. : 63ITR328(SC) but such reference was made and reliance was placed not on this proposition and this aspect of the decision was not adverted to in the case of Sutlej Cotton Mills : 116ITR1(SC) . In this connection, reference was made to several decisions of the High Court which we must also notice.
26. Reliance was placed on the decision of this court in the case of Khandelwal Brothers Pvt. Ltd. v. CIT : 117ITR452(Cal) . There it was held that in order to determine whether a surplus arising from exchange fluctuations was taxable as income or not in any particular case, the facts had to be carefully considered and there was no general principle which could be applied to all cases. Sen J., observed that the following salient facts of that case had been found by the Tribunal, (a) the foreign exchange was originally accumulated from receipts on account of commission from an American company; (b) the assessee became entitled to receive that amount by October, 1949, i. e., in the assessment year 1950-51 ; (c) in the very same year there was an adjustment in this account and over $ 5,000 were adjusted against expenses incurred during the period prior to devaluation, that is, prior to September, 1949 ; (d) the amount standing to the credit of another company merged in this account in the assessment year 1952-53 ; (e) thereafter there were more or less continuous operations in this account by way of adjustments, payments and receipts up to the year 1965-66 when finally the balance in this account was adjusted against the amount payable to the American company on the transaction relating to black pepper. There reliance was placed on the .decision in the case of CIT v. Tata Locomotive and Engineering Co. Ltd. : 60ITR405(SC) , which case was found to be clearly applicable to those facts and on that basis the court observed that it could not be contended that the surplus could arise only on repatriation and in that case the surplus had accrued to the assessee in the year when the Reserve Bank sanctioned the adjustment of the account. Unrepatriated dollars which accumulated to the credit of the assessee in a foreign country were trading assets or commodity of the assessee. This finding was arrived at in the facts of that case which are not necessary for us to discuss in detail for our present purpose.
27. Reliance was also placed on a decision in the case of Calcutta Jute Agency (P) Ltd. v. CIT : 117ITR741(Cal) . There, on the facts of the case, the court found that the surplus in the hands of the assessee was inextricably connected with its business and in that background, following the principles followed in the case of Tata Locomotive & Engineering Co. Ltd. : 60ITR405(SC) , the court held that the sum was assessable. The true test is not the nature of the fund, but the operation regarding the fund, in our opinion.
28. Reliance was also placed on the decision in the case of Bestobett India Ltd. v. CIT : 117ITR789(Cal) . As the facts of that case were different and the ratio we are following is in consonance with the decision of the Supreme Court, it is not necessary for us to discuss that decision in detail.
29. Reliance was also placed on the decision of the Supreme Court in the case of CIT v. Tata Locomotive & Engineering Co. Ltd. : 60ITR405(SC) , where it was held that tbe act of retaining the moneys in the U.S.A. for capital purposes after obtaining the sanction of the Reserve Bank was not a trading transaction in the business of manufacture of locomotive hollers and locomotives, with which the assessee was concerned ; it was clearly a transaction of accumulating dollars to pay for capital goods, the first step to the acquisition of capital goods. The surplus attributable to $ 36,123 was a capital accretion and not a profit taxable in the hands of the assessee. We are not concerned with this controversy whether any loan was attributable on capital account or not.
30. In this connection, reference may also be made to an unreported decision given by us in I.T. Reference No. 127 of 1977, Union Carbide India Ltd. v. CIT, judgment delivered on 28-4-1980 [since reported in : 130ITR351(Cal) . There, the question involved was different. The main question was whether the Tribunal was justified in holding that the increase in liability of Rs. 1,75,99,854 due to devaluation was not deductible in computing the assessee's business income. Having regard to the ratio of the decision in the case of Tata Locomotive & Engineering Co. Ltd. : 60ITR405(SC) , referred to hereinbefore, we came to our conclusion with which the present controversy is not concerned.
31. In that view of the matter, on the facts found, we are of the opinion that question No. 3 must be answered in the negative and in favour of the assessee.
32. The last question that remains to be dealt with is question No. 2. That question was about the money, being 1,796, which was not remitted in the circumstances mentioned hereinbefore. On this aspect, our attention was drawn to the decision of the Bombay High Court in the case of CIT v. Mogul Li$e Ltd. : 46ITR590(Bom) , where it was held that if a foreign fund of the assessee was allowed to remain unused where it lies, the mere circumstance that there has been fluctuation in the currency resulting in an appreciation of the fund in terms of the coin of another country would not result in a profit to the owner of the fund. But if the fund was utilised in the course of business for a trading purpose there would be a realisation of the profit arising on devaluation and the profit would be taxable. If, on the other hand, the fund was not utilised for a business operation, or for the purposes of trade, but for a non-business operation like payment of income-tax in the foreign country, there was no profit and the difference in the exchange value could not be assessed to income-tax. In the instant case, this fund of 1,796 being allowed to bo retained, for expenditure for business purposes, therefore, in our opinion, the ratio of the decision of the Bombay High Court upon which reliance was placed by the assessee could not be made applicable. The Bombay High Court further observed that the matter of taxability could not be decided on the basis of the entries which the assessee might choose to make in his accounts, but had to be decided in accordance with the provisions of law. What would determine taxability was'not whether the assessee had shown a particular item as profit or loss in the accounting year, but whether the said item could be regarded as profit or loss under the provisions of the I.T. Act. If the sura was allowed to be retained for the expenditure of the business of the assessee, then, in our opinion, if accretion had resulted therefrom, then it should be assessable.
33. The same principle was more or less reiterated by the Mysore High Court in the case of Hindustan Aircraft. Lid. v. CIT : 49ITR471(KAR) .
34. The decision of the Karnataka High Court in the case of Ibcon P. Ltd. v. CIT : 119ITR519(KAR) , also strengthens this concl'usion.
35. The Madras High Court, in the case of CIT v. Universal Radiators : 120ITR906(Mad) , more or less reiterated the same principle.
36. In that view of the matter and in view of the findings of fact made by the Tribunal, in our opinion, as the sum was utilised in the U.K. for business purposes and the value of that sum had increased in the Indian rupee term, the Tribunal was right in holding that the amount was a profit, even though it was not remitted to India. The question No. 2 must, therefore, be answered in the affirmative and in favour of the revenue.
37. In the facts and circumstances of the case, parties will pay and bear their own costs.
Sudhindra Mohan Guha, J.
38. I agree.