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Issues: Whether the exchange difference arising on remittance of the Karachi branch balance was assessable as taxable income or was a non-taxable capital accretion.
Analysis: The relevant test was whether the profit was produced by an act done in the true carrying on or carrying out of the assessee's business. A mere enhancement in value of an asset does not become taxable income unless the gain arises from a trading operation. The balance in question had become blocked and sterilised after devaluation, was not employed in any banking operation, and remained idle until remittance was later permitted. On those facts, the appreciation was fortuitous and not the product of any business activity or trading transaction. The character of the asset at an earlier stage as part of banking funds did not by itself make the later accretion a revenue receipt once its use in trade had ceased.
Conclusion: The exchange difference was not assessable to income-tax and the answer to the reference was in favour of the assessee.
Ratio Decidendi: An accretion to value is taxable only if it arises from a trading operation in the course of carrying on business; where the asset has been sterilised and the gain results merely from fortuitous exchange fluctuation without business use, the receipt is capital and not taxable income.
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