COMMISSIONER OF INCOME TAX Vs. UNIVERSAL RADIATORS

JUDGEMENT

(1.) IN this reference under Section 256(1) of the I.T. Act, 1961, the following two questions have been referred :

(2.) THE assessee is a registered firm carrying on business in the manufacture of radiators for automobiles. It entered into a contract with M/s. Associated Metal Mineral Corporation, New York, for the purchase of 32 tonnes of electrolytic copper ingot bars for re-rolling them into strips and sheets. THE goods were to be shipped before August, 1965, at the latest. THE assessee opened a letter of credit in favour of the American seller in the Bank of Baroda at Coimbatore. On August 12, 1965, the shipment was made by the American suppliers on board S. S. Express, and the ship was expected to be in Bombay on or about September 21, 1965. Hostilities opened between India and Pakistan and the vessel was seized by the Government of Pakistan towards the end of September, 1965. THE assessee and its clearing agents took up the matter with the insurance company. After some correspondence, the insurance company in New York accepted liability and issued a draft for U. S. $45,825 on October 19, 1966. This amount was credited to the assessee's account in the Bank of Baroda. As a result of the devaluation of the Indian rupee on June 6, 1966, the equivalent of U. S. $45,825, in Indian currency came to Rs. 3,43,556 as against Rs. 2,00,164 which would be the equivalent prior to the devaluation. THE difference between the two amounts came to Rs. 1,43,392 and this amount was brought to tax in the hands of the assessee as profit arising out of devaluation and as the business income of the assessee.

(3.) IN CIT v. Tata Locomotive and Engineering Co. Ltd., 1966 60 ITR 405, the Supreme Court considered the assessability of the difference as a result of devaluation. IN that case, commission had been earned in the United States. This amount was retained there for purchase of plant and machinery or other capital goods. There was a devaluation and the assessee found it more expensive to buy American goods and as there were restrictions on imports from the United States, the assessee with the permission of the Reserve Bank, repatriated the amount remitted abroad. This resulted in a surplus in terms of INdian currency and the question was whether the surplus was liable to be taxed in INdia. The Supreme Court pointed out that the answer to the question depended on whether the act of keeping the money for capital purposes after obtaining the sanction of the Reserve Bank was part of or a trading transaction, affected its character and if so, whether any profit that accrued would be a revenue receipt. If it was not part of or a trading transaction, the profit made would be a capital profit and not taxable. On the facts of that particular case it was found that the money ceased to have anything to do with the trading account after the sanction was obtained from the Reserve Bank of INdia to be utilised for certain capital purposes, and that, therefore, the transaction was taken to be one on capital account.