COMMISSIONER OF INCOME TAX Vs. MOGUL LINE LIMITED

JUDGEMENT

(1.) THIS is a reference under section 66(1) of the Indian Income -tax Act at the instance of the Commissioner of Income -tax. The assessee concerned in this reference is a limited liability company having its head office in India. Its business is plying ships on hire and it has an agency in Karachi. In September, 1949, when the Indian rupees was devalued the company had a balance standing to its account in its agent's books at Karachi. The amount in this account was Rs. 7,33,794 as on 30th April, 1950. On devaluation there was a prohibition by the Pakistan authorities on remitting monies from Pakistan to India. The company succeeded in obtaining permissions to remit its amounts to India. But the permission was granted only in respect of earnings after May, 1950, The balance of Rs. 7,33,794, in Pakistan rupees, standing to the company's account as on 30th April, 1950, remained intermitted to India. After the devaluation, the company ascertained that the vale in Indian rupees of the amount which was to its credit in its agent's books at Karachi would have to be increased by a sum of Rs. 3,22,869 in the Bombay books in terms of the Indian currency. It credited this amount to an account styled as 'Pakistan Exchange Suspense Account', and in its balance -sheet for the year ending 31st December, 1950, it showed the value of its assets in Indian rupees, and the sum of Rs, 3,22,869 in the Pakistan Exchange Suspense Account was shown on the liability side.

(2.) IN the year of account, which was the year ending with 31st December, 1951, the Pakistan authorities determined the company's liability to tax for the assessment years 1947 -48, 1948 -49 and 1949 -50 at Rs. 12,52,799 (Pakistan rupees). This amount was equivalent to Rs. 17,79,793 in Indian coin. The company, in its accounts, debited a sum of Rs. 12,52,799 to the taxation account and debited the balance of Rs. 5,26,994 to the Pakistan Exchange Suspense Account, in which there was a credit balance of Rs. 3,22,869 brought forward from the preceding year. There was, therefore, a resulting debit balance to the extent of Rs. 2,04,124 in the Pakistan Exchange Suspense Account, which was written off by the assessee in its profit and loss account for the year under reference. In assessing the company's income for the accounting year ending 31st December, 1951, the Income -tax Officer added back the sum of Rs. 5,26,994 to the company's income. He took the view that in utilizing the amount of Rs. 7,33,794, which was lying to the credit of the company on 30th April, 1950, in Pakistan rupees, in the payment of its tax liabilities in Pakistan, the company had realised a profit of Rs. 3,22,869 as a result of exchange differences. This profit was, therefore, liable to be taxed. The amount of Rs. 2,04,124 which was claimed as a loss by the assessee was not permissible since that debit was in connection with the payment of tax. In the result, therefore, according to the Income -tax Officer, the entire amount of Rs. 5,26,994 was required to be added back to the company's income.

(3.) THE Tribunal was, however, of the opinion that it was necessary to ascertain the assets and liabilities in Pakistan of the assessee company on the date of devaluation in order to find out what part of the appreciation of its fund in Pakistan can be regarded as profit on exchange fluctuation. If there was a liability in Pakistan equal to the sum standing to the credit of the assessee's account in Pakistan books no profit could possibly accrue to the assessee. Profit would only accrue to the assessee if there was an excess of assets over liabilities in Pakistan at the material time and, according to the Tribunal, therefore, it was necessary to determine that position in order to determine the profit on devaluation. It therefore directed the Income -tax Officer that he should ascertain whether the tax paid to Pakistan related to a period prior to the devaluation of the currency, and if that was so, such payment should be taken out from the credit balance lying to the assessee's account with its agents at the time of the devaluation, and profit on devaluation of the currency should be only taken in respect of the excess of the credit balance in the books of the agents over the liabilities payable by the assessee company in Pakistan at the material time. In the view that the Tribunal took of the matter, it allowed the appeal and directed the assessment to be modified on the lines indicated in its order. On an application for reference made under section 66(1) of the Income -tax Act by the department, it drew up a statement and referred to this court the following question : 'Whether, on the facts and in the circumstances of the case, the sum of Rs. 3,22,869 is the income of the assessee and liable to tax in the assessment year 1952 -53 ?'