BANK OF COCHIN LTD Vs. CIT KERALA

JUDGEMENT

(1.) TWO questions have been referred to this Court for decision which are as follows; " (i) Whether, on the facts and in the circumstances of the case, the sum of Rs. 4,65,515 being profit arising on the devaluation of the Indian rupee on 6th June, 1966, was income chargeable to Incometax? (ii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law is 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 income for the assessment year 1967 68?"

(2.) THE assessee is a banking company and, as part of its banking business, has been purchasing cheques, payment orders, mail transfers, demand drafts, bills and other negotiable instruments drawn in foreign currencies and, sometimes, foreign currencies themselves from its clients. THEse foreign exchange assets are subsequently sold or encashed through the assessee's correspondent-banks in the foreign countries concerned and the proceeds credited to the current account of the assessee with the correspondent-banks concerned. THEse bank balances are periodically transferred to India. During the accounting year ending 31-12-1966 Indian rupee was devalued on 6th June, 1966. At the time of the devaluation the assessee's accounts with the the correspondent-backs in foreign countries stood credited with the sale proceeds of negotiable instruments and foreign currencies, as mentioned above. Consequent on devaluation the value of these, in terms of the indian rupee, registered a substantial increase to the extent of Rs. 4,65,515/ -. This excess realisation on devaluation was treated by the income-tax Officer as the income of the assessee during the accounting year, the assessee claimed that the profit derived on the devaluation of the Indian rupee was in the nature of a wind fall, that it had nothing to do with the business carried on by it and that it was solely due to an act of the government in fixing the value of the Indian rupee in terms of the foreign currencies and in the circumstances the profit was not liable to tax. This was not accepted by the Income-tax Officer and he assessed this excess realisation of Rs. 4,65,515/- as income from the business. THE assessee appealed to the appellate Assistant Commissioner. He also came to the conclusion that the appreciation in the value of the foreign exchange assets represented a profit arising to the assessee in the course of its trade and therefore confirmed the income-tax Officer's order treating it as part of the assessee's income from the business. Aggrieved by the order of the Appellate Assistant Commissioner the assessee filed a second appeal before the Appellate Tribunal. It was contended there that the appreciation in the value of its foreign exchange holdings, did not represent a trading profit and the assessee relied on the decision of the Supreme Court in Commissioner of Incometax, Mysore v. Canara bank Ltd. (63 ITR. 328) to support its stand THE Tribunal after considering the evidence in the case and the contention put forward by the assessee, came to the conclusion that the above decision of the Supreme Court did not apply to the facts of this case. In that case the appreciation in value was in respect of assets which were blocked and sterilised and with which the bank was unable to deal and consequently it had ceased to be its stock-in-trade. In those circumstances, the Supreme Court held that the increase in value of those assets owing to exchange fluctuation was a capital receipt. But, relying on the following passage in the same decision "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. " the Tribunal came to the conclusion that this principle applies to the facts of this case. THE assessee had been purchasing bills of exchange and foreign currencies as part of its business and the sale proceeds of these bills of exchange and foreign currencies constituted its trading receipts. Consequent on the devaluation of the Indian rupee, the amount receivable by the assessee appreciated in value and this represented an appreciation in the value of the sale proceeds of assets in which the assessee was dealing in the course of its banking business. THE Tribunal was therefore of the view that there could be no doubt that the appreciation in value amounting to Rs. 4,65,515/- represented part of the trading receipts of the assessee and accordingly constituted a revenue receipt in the hands of the assessee. THE first question referred to above arises out of this conclusion.

(3.) APPLYING this principle the Supreme Court held in that case that the amount of Rs. 3,97,221/- was a blocked and sterilised balance and that it was at no material time employed, expended or used for any banking operation or any foreign exchange business and so it has changed its character as stock-in-trade and the increment in its value owing to the exchange fluctuation must be treated as a capital receipt. In this case the bills of exchange and other foreign currencies never ceased to be the stock-in-trade at the time when devaluation of the Indian rupee was announced and therefore the appreciation in the value of the sale proceeds of these assets which was the stock-in-trade of the assessee represented the trading receipts of the assessee only. The principle of the decision of this Court in Shamsuddin and Company v. Commissioner of Income-tax (1972 KLT. 702) is also applicable to the facts of this case. In the light of these decisions and the finding of fact arrived at by the Tribunal, the conclusion that this sum of Rs. 4,65,515/-constituted the business income in the year of account has to be sustained.