Case: Commissioner Of Income-Tax, Mysore Vs. The Canara Bank Ltd

agreed statement of the case the amount of Rs. 3,97,221 was "blocked" and "sterilised" for the period from the devalution of the Indian rupee upto the time of its remittance to India. In the context of these facts the High Court took the view that the appreciation of the value of the money did not arise in the course of the trading operation of the Bank and was not, therefore taxable as revenge receipt. On behalf of the appellant Mr. Hazarnavis submitted that the appellate Tribunal was wrong in holding that there was blocking or sterilisation of the amount. Learned Counsel said that the balance sheets of the Revonue account of the Karachi branch would show that the amount of Rs. 3,97,221 was not lying idle in the Karachi branch but was utilised by it for internal banking operations within Pakistan.We did not, however, permit Mr. Hazarnavis to produce additional evidence in this Court for controverting the findings of fact reached by the appellate Tribunal. It is a matter of significance that the original statement of the case, dated May 15, 1957 and supplementary statement of the case, dated August 14, 1959 were both agreed statements. Before the High Court also the findings of the appellate Tribunal were not challenged on behalf of the Commissioner of Income-tax. On the other hand, it appears that it was conceded by the appellant before the High Court that there was no evidence that the "blocked" balance was, in fact, employed by the Karachi branch for the internal banking operations in Pakistan or for its business in Pakistan and other foreign currencies. It is therefore not permissible for the appellant at this stage to go behind the two statements of the case and to challenge the findings of fact contained therein.The argument was also stressed by Mr. Hazarnavis that the money was a stock-in-trade of the bank and an increment of Rs. 1,70,746 due to the fluctuation in the exchange rate must therefore be treated as incidental to the business of the Bank. We shall assume in favour of the appellant that the money was stock-in-trade of the Bank.But it does not necessarily follow that the increment due to the fluctuation in the exchange rate was due to trading operations in the carrying on of the banking business. On the contrary, it has been found by the appellate Tribunal that the amount of 14. 3,97,221 was a blocked" and "sterilised" balance and the Bank we unable to deal with that amount or use it for any banking purpose between September 1941 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 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.3. In the course of his argument Mr. Hazarnavis relied upon the decision of the Court of Appeal in Imperial Tobacco Co. v. Kelly, (1944) 25 Tax Cas 292. In that case, a tobacco manufacturing company in England with a view to buying tobacco leaf in the U.S.A. during the leaf season, used to provide itself with dollar currency in advance by purchasing the same beforehand. On the outbreak of war, owing to Governmental restrictions the company had to suspend its buying operations in U.S.A. Later, the British Treasury requisitioned the accumulated dollars and paid the company sterling in exchange. The dollars in the meantime having appreciated in value, the company got more sterling than what it originally laid down. It was held by the Court of Appeal that the excess receipts were profits assessable to income-tax and the acquisition of the dollars was the first step in the commercial transaction of the company. The dollar was a commodity of the company and it became a surplus stock to the companys requirements on the restriction on purchase and its original revenue character would not be altered by the circumstance of the Governmental controls requisitioning the dollars. Mr. Hazarnavis also referred to the decision in Landes Brothers v. Simpson, (1935) 19 Tax Cas 62, where a similar view was taken. On the contrary, Counsel for the respondent relied upon the decision in McKinlay (H. M. Inspector of Taxes) v. H. T. Jenkins and Son, Ltd., (1926) 10 Tax Cas 372, in which it was held that the profit by exchange operations would be capital profit if the profit did not come in by way of business but by means of an investment in foreign currencies. In that case, a British company carrying on business in marblas, bought Italian Liras in advance with which to pay in Italy for marbles to be purchased there. But before the time came for purchase, finding that the Lira had appreciated, it sold away the Liras at a profit, and bought a second instalment of Liras to fulfil its contract in time. It was held by Rowlatt, J. that the first instalment of Liras should be regarded as capital lying idle and that the conversion thereof was a speculative transaction in capital. Reference was also made to the decision in Davis v. The Shell Co. of China. Ltd., (1952) 32 Tax Cas 133. But the decision in none of these cases is exactly in point, for the material facts in the present case are different. The question of law arising in the present case must be decided on the particular facts and circumstances found by the appellate Tribunal.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]If by virtue of exchange operations profits are made during the course of business and in connection with business transactions, the excess receipts on account of conversion of one currency into another would be revenue receipts. But if the profit by exchange operations comes in, not by way of business of the Bank, the profit would be capital profit. In the present case, the High Court has found, after an analysis of the relevant facts, that the appreciation of the money did not arise in the course of any trading operation. In the year 1949 when there was a devaluation of the Indian rupee, Karachi branch of the Bank was not carrying on any business in foreign currencies. It has been found by the Appellate Tribunal that until April 3, 1951 when the Back was permitted to carry on business in Pakistan currency it carried on no foreign exchange business. Even after such permission was granted and even after the Bank obtained on April 25, 1953 a general licence to carry on business in all foreign currencies the money of the head office was not used for any business in foreign currencies. The appellate Tribunal has found that the money was lying idle in the Karachi branch and it was not utilised in any banking operation and the Karachi branch was merely keeping that money with it for the purpose of remittance to India and awaiting permission of the State Bank of Pakistan. The State Bank of Pakistan granted the permission on July 1, 1953 and the remittance actually took place two days later, i.e., on July 3, 1953. It has been found by the appellate Tribunal that the sum of money was at no material time employed, expanded or used for any banking operation or for any foreign exchangedid not, however, permit Mr. Hazarnavis to produce additional evidence in this Court for controverting the findings of fact reached by the appellate Tribunal. It is a matter of significance that the original statement of the case, dated May 15, 1957 and supplementary statement of the case, dated August 14, 1959 were both agreed statements. Before the High Court also the findings of the appellate Tribunal were not challenged on behalf of the Commissioner of Income-tax. On the other hand, it appears that it was conceded by the appellant before the High Court that there was no evidence that the "blocked" balance was, in fact, employed by the Karachi branch for the internal banking operations in Pakistan or for its business in Pakistan and other foreign currencies. It is therefore not permissible for the appellant at this stage to go behind the two statements of the case and to challenge the findings of fact containedshall assume in favour of the appellant that the money was stock-in-trade of the Bank.But it does not necessarily follow that the increment due to the fluctuation in the exchange rate was due to trading operations in the carrying on of the banking business. On the contrary, it has been found by the appellate Tribunal that the amount of 14. 3,97,221 was a blocked" and "sterilised" balance and the Bank we unable to deal with that amount or use it for any banking purpose between September 1941 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 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.