Exchange fluctuation on foreign funds is not taxable income unless realised in a business or other taxable event.

Mere appreciation in the Indian-rupee value of a foreign fund does not, by itself, create taxable income. Where the assessee's Pakistan balance was neither remitted to India nor actually converted into Indian currency, the exchange difference remained only a potential book adjustment until the fund was used. Utilisation of that fund to pay Pakistan income-tax was a non-business operation and did not amount to realisation in the course of a taxable transaction. Book entries alone were insufficient to establish a real taxable profit from exchange fluctuation, so the amount was not treated as income for the relevant assessment year.

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Issues: Whether the sum of Rs. 3,22,869 arising from devaluation-related exchange difference on the assessee's Pakistan balance, when utilised for payment of Pakistan income-tax, constituted taxable income in the assessment year 1952-53.

Analysis: The amount standing to the assessee's credit in Pakistan was not remitted to India and there was no actual conversion of the foreign currency into Indian currency. The appreciation in value caused by devaluation remained a potential book adjustment until the fund was used. Although utilisation of a foreign fund can result in taxable profit where it is employed in a trading or business operation, payment of income-tax is a non-business operation. Taxability cannot be determined merely from entries made in the assessee's books of account, because such entries do not by themselves establish that a real and taxable profit has arisen. On the facts found, the utilisation of the Pakistan fund for tax payment did not produce a taxable profit from exchange fluctuation.

Conclusion: The sum of Rs. 3,22,869 was not taxable as income of the assessee for the assessment year 1952-53.

Ratio Decidendi: Mere appreciation in the Indian-rupee value of a foreign fund does not become taxable income unless there is realisation in the course of a business operation or other taxable event; utilisation of the fund for payment of income-tax, without remittance or business conversion, does not create a taxable profit.

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