STATE BANK OF INDIA vs. COMMISSIONER OF INCOME TAX, ERNAKULAM

A B c D E F G H 694 STATE llAlil OF DlDIA Vo COMMISSIONER OF IN<DlE Ult, EllNWII AM ocroBER 31, 1985 (V.D. TlJLZAPUR!<AR AND SABYASACHI MllKHABJI, JJ,] Income Tax Act, 1961 ~ s.5 - Foreign exchange bueineae - Devaluation of Indian rupee - Appreciation in value - Whether trading receipts and exigible to income tell· The aaaeaaee-Banlr. was l!l!llllpmated with the appellat-luk. Al part of its banking bueineaa the aaae11ee bad been d•lfna in foreign eschange. Conaequant upon the devaluation of the Indian rupee the 811lOUOts credited to the uaeoaee in the foreip hanlta regiatered an increaae. Thia ezceas realiution on devaluation waa treated by the IDCOme-tax Officer aa income of the um•ru rejecting it• plea that the profit waa in the nature of a windfall, The Inc~ Officer'a order war confirmed by the Appellate Alriatant Coamd.Hioner, the Appelhte Tribunal. and in the reference by the High Court. Di811lia1ing the appeal of the aa1ea1ee to thia Court on the question; Whether the exceaa 1um realiaed on the devaluation of the Indian rupee on 6th June, 1966 wu incme charaeal>le to iacme-t.u:, BEUi : 1. The High Court wu right in holdill& that the appreci.ation in value represented tradina receipt• of the uaeosee and, thenfore, COD1tituted 'revenue receipt•' in ita hands which were chargeable to ~. [697 F) Sutlej Cotton Milla Ltd. Vo ,.,_,,111oner of Iw-'fa. 'lleet lleDgal, 116 I.T,Jl, 1 and c-iuioaer of Tnc<r Tm< ..-, 'l'o lll>pl Lhae Ltd. Boabay, 46 I,T,Jl, 590 relied upon. 2, If the foreign currency has increaaed in vilue in teru of Indian rupee and that 8lll0unt has been utiliaed by the uau1ee in carrying on hia business, it was incidental to the blnkfna busineu. [700 A-B]

s.B. I. v. c. I. T. [SABYASACHI MUKHARJI, J,] 695 In the instant case the profit was due to tbe devaluation of the rupee and waa not due to my other busineae activities. This is an incidental inco• arisiug from the carryiug on the banltiug business. [698 D] lloperlal Tobacco· Cozpouy v. lelly, 25 Tax Casu 292, Cmnluiooer of Inc Tu: l!an=a Vo A.&.A. Cancem ll<o•MiD, 5 I.T.R. 456 and Punjab Ccr-operat:be lllmk LU. v. Cmn!BBfC!l!er of ~. Punjab, 8 I,T.R. 635 relied upon.

696 SUPREME COURT REPORTS [1985] SUPP.3 s.c.R. A This appeal arises by special leave against the judgment and decision of the High Court of Kerala at Ernakulam dated 25th January, 1973 in Income Tax Reference No. 31 of 1971. The assessee, previously the Bank of Cochin Ltd., a banking company, as part of its banking busines·s, had been purchasing B cheques, payment orders, mail transfers, demand drafts, bills and other negotiable instrtunents drawn in foreign currencies and sometimes foreign currencies themselves from its clients. Titese foreign exchange assets were subsequently sold or encashed through the assessee 1 s correspondent-banks in the foreign countries concerned and the proceeds credited to the current account of the assessee with the correspondent-banks concerned. c Consequent on the devaluation of the Indian rupee on 6th June, 1966, the amounts credited to the assessee in the foreign banks registered an increase of R5.4,65,5!5. The excess realisation on devaluation was treated by the Income-tax Officer as the income of the assessee during the accounting year ending 31st December, 1966, rejecting the assessee's plea that the profit was in the nature of a windfall. There was an appeal from the said decision D to the Appellate Assistant Conmissioner. The Appellate Assistant Commissioner rejected the assessee' s contention. There was ·a further appeal to the Appellate Tribunal. The Tribunal also did not .3ccept the assessee's submission. There was a further contention that as on the last day, 31st December, 1966, of the accounting year relevant to the assessment year 1967-68, the E assessee had valued the Government securities held by it at the market price and as the market price of the securities on that date was less than the cost price, the difference amounting to Rs. 52, 935 was taken as loss arising from the valuation of the closing stock of securities. In the return filed for the assessment year 1967-68, a claim was made to deduct the above F loss. As there was no actual loss arising on the sale of securities and as there was no debit to the profit and loss account of the alleged loss and as the method of valuation adopted for this year was not in accordance with the method of accounting regularly employed by the assessee, the Income-tax Officer disallowed the loss. On appeals, the Appellate Assistant G Commissioner as well as the Appellate Tribunal came to the same conclusion. H Under section (hereinafter called the High Court : 256(1) of the Income Tax Act, 1961 the 'Act'), two questions were referred to s.s.r. v. c.1.1. [SABYASACHI MUI<HARJI, J.] 697 "(i) Whether, on the facts and in the circumstances of A the case, the sum of Rs. 4,65,515, being profit arising on the devaluation of the lnaian rupee on 6th June, 1966, was income chargeable to income-tax? (ii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in B rejecting the assessee's claim to deduct an amount of Rs. 52,935 being loss arising on the valuation of closing stock of Government securities, in determining its total incou.e for the assessment year 1967-68?" The High Court answered the first question in favour of the c revenue and against the assessee and the second question was answered against the revenue and in favour of the assessee. At the outset it may be mentioned that the second question is no longer alive before us and the second contention is therefore need not be considered. D

The appeal is restricted as mentioned hereinbefore to the first question only. The High Court held that the assessee was doing banking business and as part of banking business it was purchasing cheques, payment orders, mail transfers, demand drafts and other negotiable instruments, drawn in foreign currencies and E sale proceeds of these constituted trading receipts. Consequent on the devaluation of the Indian rupee, the amount receivable by the assessee appreciated in its value and this represented an appreciation ie the value of the sale proceeds of the assets in which the assessee was dealing in the course of its business. Therefore, the High Court was of the opinion that there was no doubt that the appreciation in value amounting to Rs.4,65 1515 of F all such assets represented trading receipts of the assessee and, therefore, constituted revenue receipts 1.n its hands which were chargeable to income-tax. Foreign exchange in this case was stock in trade of the assessee. It is evident from the statement made that there was G excess realisation of the foreign exchange in Indian rupees and the assessee re&lised their value. If that is the position, then under section 5 of the Income Tax Act, 1961, it would be in case oi an assessee who was a resident and ordinarily a resident of India, assessable. 'Ihe assessee showed this amount of Rs.4,65,515 as appreciation on devaluation of the rupee. It is further recorded in the findings of the Income-tax Officer as follows: H

B c JJ E F G H 698 SUPREME COURT REPORTS [1985] SUPP.3 s.c.R. "Shri v.o. John, learned Advocate for the bank filed its objections in his letter dated 20.12.1967, He stated 11cheques, payment orders, mail transfers, demand drafts, bills drawn in India and other. negotiable instruments drawn in foreign currency and sometimes foreign currency itself are purchased from various parties and sent to correspondent banks in foreign countries for credit of our account with them. These foreign bank balances are periodically transferred over here and the process is repeated." The buying and selling rates in respect of various foreign currencies underwent a change on 6.6.1966 when the Indian rupee was devalued. The balance standing to the credit of the bank in various foreign branches like London, New York, Ottava, Borlin, Sydney, Paris were transferred subsequent to June, 1966 on various dates resulting, in huge profit on valuation of Rs. 4,65,515 as noted above. The advocate further pleaded "banks" normal profit is the difference between the buying and selling rates of foreign exchange. 11 Profit was due to the devaluation of the rupee on 6th June, 1966 and was not due to any other business activities. This is an incidental income arising from the carrying on the banking business, See in this connection the observations in Imperial Tobacco Cooipany v. Kelly, 25 Tax Cases 292, and Comciissioner of Income TaK, Bunia v. A.S,A. Cow:etu, Baseein, 5 I.T.R.456, Also see the observations of the Privy Council in the caee of Punjab Co-operative Bani< Ltd. v. Comnissioner of ~-tax, Punjab, 8 I,T,R, 635, The Appellate Assistant Collllllissioner noted in his order that in November, 1967 subsequent to the year in question, sterling was devalued and the assessee bank had suffered a loss in terma of rupee in respect of their holdings in sterling. This loss was debited by the assessee to his profit and loss account and claimed as allowable deduction in the computation of the assessee's total income for the assessment year 1968-69. There- fore, the conduct and the treatment by the assessee of the result of appreciation or depreciation in value of sterling assets held by an assessee who is a resident and ordinarily a resident of India must be considered to be the income of the assessee ancillary or incidental to the carrying on of the business of banking.

s.B.I. v. c.I.1. [SABYASACHI hUK!iAR.Jl, J.] 699 It was held by this Court in Sutlej Cotton Mills Ltd. v. A C<mnissioner of Income-Tax, West llengal, 116 I.1.1\, 1, that where profit or loss arose to an assessee on account of appreciation or depreciation in the value of foreign currency held by him, on conversion into another currency, such profit ·or loss would ordinarily be a trading profit or loss if the foreign currency was held by the assessee on revenue account or as a trading asset h or as part of circulating capital embarked in the business. But, if on the other hand, tbe foreign currency was held as a capital asset or as fixed capital, such profit or loss would be of a capital nature. 'Ihe important question to be considered is the true nature C of the transaction and whether in fact it had resulted in prof it or loss to the assessee. In that context it is well-settled that the way in which entries are made by the assessee in its books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. 'Ihe assessee might, by making entries which were not in conformity with the proper t principles of accountancy, concealed profit or showed loss and the entries made by him could not, therefore, .be regarded as conclusive one way or the other. C<mnissioner of Income-Tax Banbay v. b>gul Lille Ltd. Bombay, 46 I.T .R. 590, was a case where it was held that if a foreign fund of the assessee was allowed to remain unused where it lay, the mere circumstances that there had been fluctuation in the currency resulting in appreciation of the fund in terms of the coin of another country would not result in profit to the owner of the fund. But if the fund is utilised in the course of the business for a trading purpose, there would be 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-bus~ness operation, like payment of income-tax in the foreil',n country, there was no profit and the difference in the exchange value could not be assessed to incollie-tax. The Division Bench of 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 account, but had to be decided in accordance with the provisions of law. What would determine the taxability is not whether the assessee has shown a particular items as a profit or loss in the accounting year. but whether the said item could be regarded either as a profit or loss under the provj.sions of the Act. J:,ut as the court emphasised E F G H

A B c 700 SUFREME CCURT REPORTS [1985] SLPP.3 s.c.R. that if the foreign currency has increased in value in terms of Indian rupee and that amount haS been utilised by the assessee in carrying on his business as precisely is the case here, i.e. the increased an.cunt has been utilised by repatriation, it was incidental to the banking business.

For the reasons aforesaid, the answer given by the Kerala High Court in the in;pugned jud5n.ent under appeal against the asses see and in favour of the revenue was right. The appeal

accordingly fails and is dismissed with costs. A.P ,J. Appeal dismissed. ,,