SUTLEJ COTTON MILLS LTD vs. COMMR. OF INCOME TAX, WEST BENGAL, CALCUTTA

CIVIL APPEAL No. 1847/1972Supreme Court[1979] 1 S.C.R. 97627 September 1978Bench: 2 JudgesAuthor: P.N. BHAGWATI, V.D. TULZAPURKAR B17 pages
AI SummaryRemanded

What did the Supreme Court hold?

The Tribunal held that the assessee did suffer a loss on the remittance of Rs. 25 lakhs and Rs. 12,50,000. The fact that no loss was reflected in the books of account was not determinative, as the actual conversion at a different exchange rate resulted in a shortfall. The Tribunal further held that the loss would be a trading loss if the foreign currency was held on revenue account, as a trading asset, or as part of circulating capital embarked in the business. Conversely, if the foreign currency was held as a capital asset or fixed capital, the loss would be of a capital nature. Since the Tribunal had not made a finding on whether these amounts were held on capital or revenue account, or as fixed or circulating capital, the case was remanded to the Tribunal. The Tribunal was directed to take additional evidence to determine this crucial aspect and then decide whether the loss was trading or capital, in light of the law laid down. The High Court's order was set aside.

What were the facts?

The assessee, Sutlej Cotton Mills Ltd., with its Head Office in Calcutta, operated a cotton mill in West Pakistan. For the assessment year 1954-55, profits earned in West Pakistan were included in the assessee's total income in Indian rupees at the then prevailing exchange rate. In August 1955, the Pakistani rupee was devalued, restoring parity with the Indian rupee. Subsequently, the assessee remitted profits from West Pakistan to India. In assessment years 1957-58 and 1959-60, the assessee claimed losses of Rs. 11 lakhs and Rs. 5,50,000, respectively, arising from the conversion of these remitted Pakistani profits into Indian rupees due to the altered exchange rate. The Income Tax Officer and the Tribunal disallowed these claims. The High Court upheld the Revenue's view, holding that no loss was sustained and, in any event, it was not a business loss but a consequence of an act of State.

What were the issues?

1. Whether the assessee suffered a loss on the remittance of Rs. 25 lakhs and Rs. 12,50,000 from West Pakistan to India, considering the change in the exchange rate due to devaluation. 2. Whether any loss sustained by the assessee was a trading loss deductible under Section 10(1) of the Income Tax Act, 1922, or a capital loss. Assessee's Contentions: The assessee contended that a loss was indeed suffered due to the conversion of Pakistani currency to Indian currency at a less favourable exchange rate upon remittance. The assessee argued that this loss arose in the course of business operations and should be allowed as a deduction. Revenue's Contentions: The Revenue argued, and the High Court agreed, that no loss was sustained by the assessee on remittance. Furthermore, even if a loss was incurred, it was not a business loss as it arose from devaluation, an act of State, and not directly from the carrying on of the assessee's business or incidental to it.

Which sections of the Income-tax Act were involved?

Section 10(1)

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A B c 976 SUTLEJ COTTON MILLS LTD. V- COMMR. OF INCOME TAX, WEST BENGAL, CALCUTTA September 27, 1978 [P. N. BHAGWATI AND V. D. TULZAPURKAR, JJ.] Income Tax Act, 1922-Secs. 10(1), 10(2)-Loss occasioned on account' of devaluation-Whether deductible as revenue expenditure-Circulating capi- tal and fixed capital.

The assessee is a Limited Company having its Head Office in Calcutta~ It has inter alia a Cotton !\fill situated in West Pakistan where it carries on business of manufacturing and selling cotton fabrics.

For the- accounting year relevant to the assessment year 1954-55, the assessee made a large profit in the unit in \\-'est Pakistan. The Pakistan profit, according to the D official rate of exchange, which was then prevalent, namely, 100 Pakistani rupees being equal to 144 Indian rupees amounted to Rs. 1,68,97,232 in terms of Indian rupees.

Since the assessee was taxed on accrual basis, the sum of Rs. 1,68,97,232 representing the Pakistani profit was included in the total income of the 'assessee for the assessment year 19"54-55\. and the assessee was taxed accordingly after giving double taxation relief in accordance with the bila

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