UNITED COMMERCIAL BANK Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) In this reference under Section 256(1) of the I.T. Act, the following questions have been referred to this court : "1. Whether, on the facts and in the circumstances of the case, the disposal of the appeal by the Tribunal was in accordance with law ?

(2.) Whether, on the facts and in the circumstances of the case, the order of remand by the Tribunal was legal and valid ?" 2. In order to appreciate these questions it would be proper to refer to the relevant portion of the order of the ITO. The ITO in his order, inter alia, observed as follows : "In the beginning of September, 1971, it was reported in the press that there had been a violation of the foreign exchange regulation by the bank. For instance, the Statesman (Calcutta edition) of 1st September, 1971, contained the following report; Mr. R.B. Shah, Custodian, United Commercial Bank of 10, Brabourne Road, Calcutta, was produced in custody on Tuesday, before Mr. H.N. Sen, Chief Presidency Magistrate, Calcutta, after being arrested on the same day by an officer of the Enforcement Directorate, Department of Personnel, Government of India, under Section 19B( 1) of the Foreign Exchange Regulation Act, 1947, for the alleged contravention of the provisions of Section 4(2) and 22 of the Act. The CPM granted him bail of Rs. 10,000 till September 6, pending further investigation. Another accused, Mr. B.L. Purohit, Regional Manager of the United Commercial Bank of 10, Brabourne Road, Calcutta, had also been arrested and produced on Monday on almost similar grounds and was granted bail of Rs. 5,000 till that date, pending further investigation. In producing the accused before the Magistrate, the Enforcement Officer alleged that M/s. Hindustan Motors Ltd. applied to the United Commercial Bank on June 4, 1966, for sale to the company by the bank of 932,617 at the rate of 29 1 sh. 5 --- d. 32 to the rupee, delivery in six months. It was further alleged that the bank converted the amount payable by the company in respect of the import bills received during the period, July 8, 1966, up to March 3, 1967, covered against the sale contract of the bank at the rate of 29 1 sh. 5 --- d. 32 and not at the rate prescribed by the Foreign Exchange Dealers Association of India as effective from June 8, 1966. It was further alleged that by certain other criminal acts the United Commercial Bank converted pound sterling not at the rate; prescribed by the Foreign Exchange Dealers Association of India, effective from June 8, 1966, but at the rate of 29 1 sh. 5 --- d. 32 to the rupee, during the period July 8, 1966, to March 3, 1967, on the total amount of 932,617 and the amount had been allegedly converted into Indian currency at the rate other than the rates authorised by the Reserve Bank. Such conversion, it was alleged, of pound sterling into Indian currency had been made in contravention of Section 4(2) of the Act. It was further alleged that false information had been furnished to the Reserve Bank, thereby contravening the provisions of section 22 of the Act. By my letter dated 25th September, 1971, the assessee was called upon to furnish complete details regarding the working of devaluation profits arising in Indian and foreign branches for the years 1966 and 1967. After seeking an adjourment, the assessee finished some details by its letter dated 30th October, 1971. However, in so far as the queries related to transactions with M/s. Hindustan Motors Limited, the required information was not furnished on the plea that all the books, registers, files and correspondence, etc., relating to foreign exchange contracts of Calcutta office had been taken over by the Enforcement Directorate for the purpose of investigation into the contract issued for account of the said company. The same inability was communicated by the assessee's letter dated 14th December, 1971. The matter was discussed with Sri R. Pichai (Manager, Foreign Division) and Sri V.K. Anantharaman (Superintendent, Foreign Exchange Department) after which by its letter dated 20th December, 1971, the assessee furnished a clarification stating that the contract issued for account of M/s. Hindustan Motors Limited was in order, being against production of the necessary documents and that the rate of exchange applied was in accordance with the rate prescribed by the Foreign Exchange Dealers Association of India. However, the relevant books, registers, files and correspondence, etc., were not produced on the ground that they were still in the custody of the Enforcement Directorate. In the meantime, it was learnt that Sri V.K. Anantaraman (Superintendent, Foreign Exchange Department) and Sri N.R. Ghosh (Manager, Calcutta Main Branch) had been examined by the Enforcement Directorate in the course of which their depositions were recorded. The same persons were summoned by me under Section 131 when they confirmed the depositions made by them to the Enforcement Directorate. In addition, the grounds of arrest of Sri R.B. Shah and Sri B.L. Purohit under Section 19B(1) of the Foreign Exchange Regulation Act, 1947, were obtained and perused. On the basis of all these materials it appeared that the working of the devaluation profits as furnished by the assessee was not full and complete inasmuch as the profit relating to the contract for account M/s. Hindustan Motors Limited, which was a manifestly, collusive or colourable transaction, had not been disclosed. Therefore, on 3rd March, 1972, the following letter was issued to the assessee to show cause why undisclosed profit of Rs. 71,53,178 should not be added back to its income. Please refer to your letter dated 30th October, 1971. It is an undisputed fact that on 4th June, 1966, your bank entered into a contract of forward sale for 9,32,617 with Hindustan Motors Ltd. at Rs. 13.33 per . This contract was in contravention of Sections 3(4) and 4(2) of the Foreign Exchange Regulation Act, 1947, and the terms and conditions prescribed by the Reserve Bank of India in the Exchange Control Manual published on 4th May, 1965. Thus, the contract was illegal and, therefore, invalid and unenforceable. In the result, consequential conversion of the abovestated amount of sterling at Rs. 13,33 per with effect from 8th June, 1966, onwards cannot be accepted as shown by your bank. For the purpose of covering the above-noted contract your bank purchased sterling to the extent of 8,32,000 prior to the date of devaluation of the rupee (6-6-66) as follows :-- <FRM>JUDGEMENT_434_ITR137_1982Html1.htm</FRM> As regards the balance of 1,00,617, you arranged to make delivery as and when required out of your own ready resources of pound sterling. Inasmuch, as the effective rate of exchange with effect from 8th June, 1966, was Rs. 21 per your sales out of the total amount of 9,32,617 will have to be revalued in accordance with the said effective rate. Any amount not actually sold by the last date of your accounting year (31st December, 1966), would have been in your closing stock of foreign exchange and that balance also would have to be revalued at the then prevailing rate of exchange, viz., Rs. 21 per , Your bank has, however, valued the entire amount of 9,32,617 at Rs. 13.33 per which is not correct and which has resulted in a gross understatement of the true profits."

(3.) The ITO, thereafter, referred to certain correspondence and the relevant section of the Foreign Exchange Regulation Act and concluded as follows :