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

1. This appeal is brought, by certificate, from the judgment of the High Court of Mysore, dated December 13, 1961 in Income-tax Reference Case No. 113 of 1959. The respondent (hereinafter referred to as the Bank) is a public limited company carrying on business of banking at its head office in Mangalore and its branches in various places. It opened one branch in Karachi on November 15, 1946. After the partition of India in 1947 the currencies of the two dominions of India and Pakistan continued to be at par until there was a devaluation of the Indian Rupee on September 18, 1949. As Pakistan did not devalue her rupee, the old parity of the Pakistan and Indian Rupee ceased to exist. The exchange ratio between the two countries was not determined until February 27, 1951 On this date it was agreed that a hundred Pakistani Rupees were equivalent to a hundred and fortyfour Indian rupees. On the date of devaluation of the Indian Rupee the Karachi Branch of the Bank had with it a sum of Rs. 3,97,221 belonging, to its head office. Owing to the difficulties of the currency- situation it was impossible to remit the amount to the head office for quite a long tune. On July 1, 1953, the State Bank of Pakistan permitted its remittance to India. In terms of Indian currency the said amount became equivalent to Rs. 5,71,038. Thus there was an appreciation of the value of the amount remitted from the Karachi branch and the Bank made a profit of Rs. 11,73,817. After making certain deductions, the head office of the Bank transferred a sum of Rs. 1,70,746 to its Contingencies Reserve Account. In its return for the assessment year 1954-55, the Bank claimed that this sum was a capital gain and was not taxable. By his order, dated February 9, 1955 the Income-tax Officer rejected the claim holding that the said amount of Rs. 1,70,746 was a revenue receipt. The order of the Income-tax Officer was affirmed by the Appellate Assistant Commissioner in appeal. The Bank took the matter in further appeal to the Income-tax Appellate Tribunal which rejected the appeal by its order dated November 23, 1956. At the instance of the Bank the Income-tax Appellate Tribunal referred the following question of law for the determination of the High Courtthe aforesaid exchange difference of Rs. 1,70,746 is assessable under any of the provisions of the Indian Income-tax Actits order, dated December 11, 1961 the High Court reversed the finding of the Appellate Tribunal and held that the exchange difference of Rs. 1,70.746 was not assessable to income-tax under any provision of the Indian Income-tax Act.

Reasoning: 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.