COMMISSIONER OF INCOME-TAX, MYSORE vs. THE CANARA BANK LTD.

CIVIL APPEAL No. 675/1965Supreme Court[1967] 1 S.C.R. 85913 October 1966Bench: 3 JudgesAuthor: J.C. SHAH, V. RAMASWAMI, VISHISHTHA BHARGAVA A B5 pages
AI SummaryDismissed

What did the Supreme Court hold?

The Supreme Court held that the High Court was correct in its conclusion that the exchange difference of Rs. 1,70,746/- was not assessable to income-tax. The Court reasoned that while the money might have been considered 'stock-in-trade' of the bank, its character changed when it was 'blocked' and 'sterilised' and could not be utilized for any banking operations or foreign exchange business between September 1949 and July 1953. The increment in its value due to exchange fluctuation was therefore a capital receipt. The Court affirmed the finding of the Appellate Tribunal that the amount was not utilized for internal banking operations within Pakistan, and thus, no profit was realized in the carrying out of the bank's business. The Court dismissed the revenue's appeal, upholding the High Court's decision that the exchange difference was not taxable.

What were the facts?

The respondent, Canara Bank Ltd., had its head office in Mangalore and a branch in Karachi. Following the partition of India in 1947, the currencies of India and Pakistan remained at par until the Indian Rupee was devalued in September 1949. The exchange ratio between the two currencies was fixed in February 1951, with 100 Pakistani Rupees equivalent to 144 Indian Rupees. On the date of devaluation, the Karachi branch held Rs. 3,97,221 belonging to the head office. Due to currency difficulties, remittance was delayed until July 1953. Upon remittance, the amount in Indian currency became Rs. 5,71,038, resulting in an appreciation of Rs. 1,73,817. The Bank claimed this as a capital gain, but the Income-tax Officer treated it as a revenue receipt. Appeals to the Assistant Commissioner and the Appellate Tribunal were unsuccessful. The High Court, however, ruled in favor of the Bank, holding the appreciation was not taxable as revenue. The Commissioner of Income-tax appealed this decision.

What were the issues?

1. Whether the exchange difference of Rs. 1,70,746/- is assessable under any of the provisions of the Indian Income-tax Act, 1922? (Question of law) Assessee's Contention: The appreciation in the value of money due to exchange fluctuation was a capital gain and not a revenue receipt. The amount was 'blocked' and 'sterilised' and not utilized for any trading operations or banking business. Revenue's Contention: The Appellate Tribunal was wrong in holding that there was blocking or sterilisation of the amount. The balance sheets of the Karachi branch showed that the amount was utilized for internal banking operations within Pakistan. The increment due to exchange rate fluctuation should be treated as incidental to the business of the Bank. The revenue relied on cases like Imperial Tobacco Company v. Kelly and Landes Brothers v. Simpson.

Which sections of the Income-tax Act were involved?

Section 10

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:l A B c D E F COMMISSIONER OF INCOME-TAX, MYSORE v. THE CANARA BANK LTD.

October 13, 1966 (J.C. SHAH, V. RAMASWAMI AND V. BHARVAGA, JJ.)

Indian Income-tax Act, 1922, s. 10-Appreciatkm in value of m.<mrJ remitted from Pakistan to India after devaluation of Indian Rupee hr 1949-Amount of appreciation whether capital or revenue receipt.

The respondent bank had its head office at Mangalore. It also opened a branch at Karachi in 1946. After the partition of India in 1947 the curiencies of the two countries continued to be at · par until there was a devaluation of the Indian Rupee in 1949. The new exchange ratio between the two countries was not determined until February 27, 1951. On this date it was agreed that a hundred Pakistani Rupees W•Te equh-alent to a hundred and forty-four Indian Rupees.

On the dale of the devalua- tion 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 ditli- culties of the currency situation it was impossible to remit the amount to the head effice for quite a long time. On July 1, 1953, the State Bank of Pakistan . permitted its remittance to India. In te

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