Appeal No 236 of 1965
Appeal from the judgment and order dated August 30 1961
of the Bombay High Court in Income tax Reference No 12 of 1959
A V Viswanatha Sastri N D Karkhanis R H Dhebar and R N Sachthey for the appellant
N A Palkivala T A Ramachandran J B Dadachanji O C Mathur and Ravinder Narain for the respondent
The Judgment of the Court was delivered by Sikri J
This appeal by certificate granted by the High Court of Judicature at Bombay under section 66 A2 of the Indian Income Tax Act 1922 hereinafter referred to as the Act is directed against its judgment in a reference made to it by the Income Tax Appellate Tribunal
The following two questions were referred 1Whether on the facts and in the circumstances of the case the surplus or difference arising as a result of devaluation in the process of converting dollar currency in regard to the sum of 3612302 repatriated to India was profit which was taxable in the hands of the assessee  2Whether the said sum of 3612302 having been taxed in the relevant earlier years the surplus or difference in dollar exchange account arising by reason of the repatriation thereof as a result of devaluation was rightly taken as profit taxable  The relevant facts and circumstances as stated in the Statement of the Case are as follows  The respondent Tata Locomotive and Engineering Co Ltd hereinafter referred to as the assessee is a limited company registered under the Indian Companies Act VII of 1913 and has its registered office at Bombay
The main business of the assessee is the manufacture of locomotive boilers and locomotives
For the purpose of this manufacturing activity the assessee had to make purchases of plant and machinery etc in various countries including the USA
The assessee 2 3 7 appointed Ms Tata Inc New York as its purchasing agent in the USA With the sanction of the Exchange Control Authorities a remittance of 33830 was made in 1949 to Messrs Tata Inc New York for the purpose of purchasing capital goods from the USA and meeting other expenses connected therewith
The assessee was also the selling agent of Baldwin Locomo tive Works for the sale of their products in India and in connection with the sale of the products of Baldwin Locomotive Works in India the assessee had to incur expenses on their behalf in India
These expenses were re imbursed to the assessee by Baldwin Locomotive Works in the USA by paying the amount due to Messrs Tata Inc New York
The amount so paid to Tata Inc was retained in the assessee s account with Messrs Tata Inc for purchase of capital goods
As the sole selling agent the assessee was entitled to com mission from Baldwin Locomotive Works
The commission pay able to the assessee in dollars was not actually sent from the USA to India but with the sanction of the Exchange Control Authorities was made over to the assessee s purchasing agents Messrs Tata Inc New York
The reason why this was done was explained in the assessee s letter dated October 26 1948 to the Reserve Bank of India
In it the assessee stated inter alia as follows  It would be more convenient if the amount of commission payable to us periodically be deposited into our account with our representative Messrs Tata Inc New York opened with reference to your letter FCBY
70317446 dated 2nd October 1946 as the same would go to reduce the amount of remittance to be made from here in recoupment of that amount from time to time
These amounts will be utilised solely for the purposes detailed in our letter to you TC 679 dated 15th August 1946
 The purposes referred to in the said letter of August 15 1946 were purchase of capital goods
The amount received as commission was taxed in the relevant assessment years on the accrual basis and tax has been paid
On September 16 1949 there was a balance of 4857230 in the assessee s account with Messrs Tata Inc made up as under 1 Remittances from Bombay 33850 00 Less  Dollars spent in the USA for capital 30282
96 purposes 356704 238 2 Amount reimbursed by Baldwin Loco 888224 motive Works against funds made available to its representatives in India 3 Commission actually received from Baldwin Locomotives Works and retain 36123
ed in the USA TOTAL 48 57230 On September 16 1949 the pound sterling was devalued
Prior to the devaluation the rate of exchange between rupee and dollar was Rs 3330 per dollar and on devaluation the rate became Rs 4775 per dollar
The result was that the assessee found it more expensive to buy American goods and as the Government of India also imposed some restrictions on imports from the USA the assessee decided to repatriate the dollars and for the purpose applied to the Reserve Bank of India on December 17 1949
The Reserve Bank of India gave permission and a sum of 40000 was repatriated to India
Under similar circumstances in October 1950 a sum of 9500 was repatriated to India
Though the two remittances from the USA to India of 40000 and 9500 fell into different accounting years the case proceeded before the Income tax authorities as well as before the Tribunal on the footing that the two remittances be considered as falling in the accounting year ended March 31 1950 for the purpose of the appeal before the Tribunal
The remittances of 49500 includes the sum of 4857230 that was held by the assessee on September 16 1949
This repatriation of the sum of 4857230 gave rise to a sum of Rs 70147 as surplus in the process of converting dollar currency into rupee currency
The Income tax Officer assessed the amount of Rs 70147 on the ground that it represented profits that arose to the assessee incidentally to its carrying on the business
The Income tax Officer observed  Whether the funds were sent to America with the object of purchasing of capital equipment or for the purchase of stores or for reimbursement of revenue expenditure there need not be distinction that only such portion of the profits arising on funds remitted for revenue expenditure only has to be treated as revenue and the balance should be treated as capital
 The Appellate Assistant Commissioner substantially affirmed the odrer of the Income tax Officer except that he reduced 239 the amount by Rs 6894
He was of the view that the permission of the Reserve Bank by itself did not convert the true nature of the amount lying there
He was further of the view that the amounts available for remittance consisting of the commission and the reimbursement of expenses by Baldwin Locomotive Works were acquired in the ordinary course of business of the sole selling agency of Baldwin Locomotive Works and therefore
any exchange profit on such amounts which formed part of the assets employed as circulating capital in trade did arise directly in the course of business and formed part of the trading receipts
The Tribunal held that the sums of 356704 and 888224 included in the sum of 4857230 were held by the assessee for capital purposes and hence any profit that arose to it as a result of its conversion into rupee currency on account of appreciation of the dollar in relation to the rupee must be held on capital account and  accordingly the Tribunal excluded  profits attributable to these amounts
But regarding the sum of 3612302 the Tribunal held that it would not be justified in coming to the conclusion that there was any constructive remittance first in the direction the USA to India and then of an equivalent sum from India to the USA
It further held that the amount was earned as commission
It was received in dollars and was retained in that form for the changed purpose under the authority of the Reserve Bank of India
When the Company found that the purpose for which it was to be used failed viz acquisition of capital equipment etc
 it requested the Reserve Bank of India to permit it to bring to India vide assessee s letter dated 17 12 1949 where it sought Reserve Bank s permission to bring 40000 to India and referred to in paragraph above
This permission was granted by the Reserve Bank
Dollars were changed into rupees and money received here
Hence before there was actual remittance of 40000 from the USA to India there was reconversion the purpose having failed of the sum if there was initial conversion as contended by Mr Chokshi
 In the alternative the Tribunal held that as and when the commission was earned in dollars the Company did bring it into its account books in the rupee currency at the then prevailing rate of exchange but the commission amount physically remained in the USA and when occasion arose to bring it physically to India it had to be converted into rupee currency and this conversion was necessarily incidental to the asssessee s business as selling agents of the foreign entity the Baldwins
Hence whatever the profit the Company made on such exchange of the commission earned by it in the course of its 2 4 0 selling agency business must be brought to tax as a trading profit made by it incidentally in the course of that business
 The High Court answered the two questions in the negative
It held that although the character of the commission earned was at the inception that of income but when the assesee appropriated that sum for the specific purpose of purchasing capital goods with the permission of the Reserve Bank of India the initial character of this sum underwent a change and it assumed the character of fixed capital of the Company
This character was retained right up to September 16 1949 when the pound sterling was devalued and it did not undergo any change till the benefit accrued on this amount to the assessee company as a result of change in the exchange rate
The High Court further held that there is no evidence in this case nor a finding recorded by the Tribunal that the assessee company had at any time decided not to utilise these amounts for the purpose of purchasing capital goods and therefore repatriated these amounts to India The High Court further held that the sum of 36123 02 was part of its fixed capital and remained so till the date it was repatriated to India
The surplus or difference arising as a result of devaluation in the process of converting these dollars into rupee currency in repatriating them to India was an accretion to its fixed capital and was not therefore liable to tax
 The High Court felt that the ratio of the decision in Davies vs The Shell Company of China1 supported the view it had taken
The learned counsel for the revenue Mr A V Viswanatha Sastri contends that if the commission had been allowed to remain in the USA up to September 16 1949 and it had been repatriated on September 17 1949 the assessee would have been liable to tax on the profits received as a result of devaluation
He says that if this is so the permission of the Reserve Bank and the decision of the Company to hold it to buy capital goods does not make any difference
He further says that the fact that the assessee credited the rupee equivalent of this sum in his books and paid tax on the basis of accrual does not also make any difference
The learned counsel for the assesee Mr Palkhiwala on the other hand contends that the assessee is not a dealer in foreign exchange and it had not acquired or held foreign exchange for revenue purposes or for purposes incidental to trading operations
He says that when foreign currency is kept or used on capital account eg to acquire capital assets and not as circulat 1 22 ITR Supp
1 2 4 1 ing capital the profit made on realisation is capital appreciation even though the foreign currency may have been originally acquired as a revenue receipt
 A number of cases have been cited before us but it seems to us that the answer to the questions depends on whether the act of keeping the money ie 36123 02 for capital purposes after obtaining the sanction of the Reserve Bank was part of or a trading transaction
If it was part of or a trading transaction then any profit that would accrue would be revenue receipt if it was not part of or a trading transaction then the profit made would be a capital profit and not taxable
There is no doubt that the amount of 3612302 was a revenue receipt in the assessee s business of commission agency
Instead of repatriating it imme diately the assessee obtained the sanction of the Reserve Bank to utilise the commission in its business of manufacture of locomotive boilers and locomotives for buying capital goods
That was quite an independent transaction and it is the nature of this transaction which has to be determined
In our view it was not a trading transaction in the business of manufacture of locomotive boilers and locomotives it was clearly a transaction of accumulating dollars to pay for capital goods the first step to the acquisition of capital goods
If the assessee had repatriated 3612302 and then after obtaining the sanction of the Reserve Bank remitted 3612302 to the USA Mr Sastri does not contest that any profit made on devaluation would have been a capital profit
But in our opinion the fact that the assessee kept the money there does not make any difference especially as we have pointed out that it was a new transaction which the assessee entered into the transaction being the first step to acquisition of capital goods
In the view we have taken it is really not necessary to discuss cases cited at the Bar because none of the cases are exactly in point
In our view the High Court was right in answering the questions in the negative
In the result the appeal fails and is dismissed with costs
Appeal dismissed


Summary:
The assessee was a limited company with its registered office at Bombay
Its main business was the manufacture of locomotive boilers and locomotives and for that purpose the assessee had to make purchases of plant and machinery in various countries including the USA The assessee appointed Ms Tata Inc New York as its purchasing agent in the USA
The assessee was also the selling agent of Baldwin Locomotive Works USA for the sale of their products in India and the commission payable to the assessee as their sole selling agent was made over to the assessee s purchasing agent in Now York with the sanction of the Reserve Bank and for the purchase of capital goods
This amount was taxed in the relevant assessment years on the accrual basis and the ix was paid
On 16th September 1949 the pound sterling was devalued and the rate of exchange between rupee and dollar which was Rs 333 per dollar before devaluation became Rs 4775 per dollar thereafter On hat date there was in the assessee s account with the purchasing agent a sum of  3612302 representing the commission received from Baldwin locomotive Works
With the permission of the Reserve Bank this sum was repatriated to India in 1950 and the change in the exchange rate gave these to a surplus in rupees
The Income tax Officer the Appellate Assisant Commissioner and the Appellate Tribunal held that this surplus amount was liable to tax
The High Court on a reference held that the sum was not taxable in the hands of the assessee
In appeal to this Court it was contended that the assessee was liable 3 tax because i if the commission bad been allowed to remain in the JSA up to 16th September 1949 and had been repatriated on 17th September the assessee would have been liable to tax and therefore the Permission of the Reserve Bank and the decision of the assessee to hold to buy capital goods did not make any difference and ii the fact hat the assessee credited the rupee equivalent of the sum in his books and paid tax on the basis of accrual did not also make any difference to the ssessee s liability
HELDThe High Court was right in deciding in favour of the assessee
The assessee s liability to tax would depend on whether the act of seeping the money for capital purposes after obtaining the sanction of he Reserve Bank was part of or a trading transaction
The amount no doubt was a revenue receipt in the assessee s business of commission agency
But instead of repatriating it immediately the assessee obtained the sanction of the Reserve Bank to utilize the commission for buying capital goods and that was an independent transaction
It was not a 236 trading transaction but was a transaction of accumulating dollars to pay for capital goods the first step to the acquisition of capital goods
if the assessee had repatriated the amount and then after obtaining the sanc tion of the Reserve Bank remitted it to the USA any profit made on devaluation would only be a capital profit
therefore the fact that the assessee kept the money b e n the USA did not make any difference under the circumstances
241 B P