COMMISSIONER OF LNCOME-TAX, BOMBAY CITY vs. TATA LOCOMOTIVE & ENGINEERING CO., LTD.
What did the Supreme Court hold?
The Supreme Court held that the High Court was correct in deciding in favour of the assessee. The crucial factor was the nature of the transaction involving the commission amount. While the commission itself was a revenue receipt, the assessee, with the Reserve Bank's sanction, utilized it for an independent transaction: accumulating dollars to pay for capital goods, which was the first step towards acquiring capital assets. This was not considered a trading transaction in the context of the assessee's business. The Court reasoned that if the assessee had repatriated the amount and then re-remitted it to the USA for capital goods, any profit on devaluation would have been capital profit. Therefore, the act of keeping the money in the USA for this specific capital purpose did not alter its character from capital to revenue. The surplus arising from devaluation was an accretion to capital and not taxable. The appeal was dismissed.
What were the facts?
The assessee, Tata Locomotive & Engineering Co. Ltd., a Bombay-based company manufacturing locomotive boilers and locomotives, appointed Tata Inc., New York, as its purchasing agent in the USA. The assessee also acted as a selling agent for Baldwin Locomotive Works, USA. Commission earned from Baldwin Locomotive Works was remitted to Tata Inc., New York, with the Reserve Bank of India's sanction, to be used for purchasing capital goods. This commission was taxed on an accrual basis. On September 16, 1949, the pound sterling was devalued, changing the rupee-dollar exchange rate. At that time, $36,123.02, representing commission, was held by Tata Inc. This amount was later repatriated to India in 1950, resulting in a surplus in rupees due to the devaluation. The Income-tax Officer, Appellate Assistant Commissioner, and Appellate Tribunal held this surplus taxable. The High Court, however, ruled it was not taxable.
What were the issues?
1. Whether, on the facts and in the circumstances of the case, the surplus or difference arising as a result of devaluation in the process of converting dollar currency in regard to the sum of $36,123.02 repatriated to India was profit which was taxable in the hands of the assessee, under Section 66-A(2) of the Indian Income Tax Act, 1922? 2. Whether the said sum of $36,123.02 having been taxed in the relevant earlier years, the surplus or difference in dollar exchange account arising by reason of the repatriation thereof as a result of devaluation was rightly taken as profit taxable? Assessee's contentions: The assessee argued that it was not a dealer in foreign exchange and had not acquired or held foreign exchange for revenue purposes or for purposes incidental to trading operations. When foreign currency is kept or used on capital account, profit made on realization is capital appreciation, even if the foreign currency was originally acquired as a revenue receipt. Revenue's contentions: The revenue contended that if the commission had remained in the USA until after devaluation and was then repatriated, the assessee would have been liable to tax. Therefore, the Reserve Bank's permission and the assessee's decision to hold it for capital goods did not alter the taxability. The fact that the assessee credited the rupee equivalent in its books and paid tax on accrual also did not affect its liability.
Which sections of the Income-tax Act were involved?
Section 66-A(2)
AI-generated summary — verify with the full judgment below
• c D 1 E F G \ H COMMISSIONER OF lNCOME-TAtX, BOMBAY CITY v. TATA LOCOMOTIVE & ENGINEERING CO., LTD.
Jqnuary 13, 1966 [K. SUBBA RAO, J.C. SHAH ANDS. M. SIKRI, JJ.J Income Tux-Conimission received in U.S.A.-Kept in U.S.A. for buying capital goods with sanction of Reserve Bank-Amount later repa- cr;attd-Surplus in rupees due to devaluation-If capital or rtv,,nue receipt.
The assessee was a limited company with its registered office _at Bombay.
Its main business was the manufacture of locomotive boilers and locomotives, and for that purpose the assessee had to make purchases of plant and machinery, in various countries including the U.S.A.
The .. sessee appointed M/s. Tata Inc., New York, as its purchasing agent in the U.S.A.
The assessee was also the selling agent of Baldwin Loco- motive Works, U.S.A., for the sale of their products in India, and the commission payable to the assessee as their sole selling agent was made over to the assessee's purchasing agent in Now York with the sanction of the Reserve Bank and for the purchase of capital goods. This amount was taxed in the relevant assessment years on the accrual basis and the tax was paid. On 16th S
The order continues below.
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