High Court rules devaluation benefit taxable profit, grants appeal certificate on currency timing issue

The High Court held that the assessee obtained a benefit from the devaluation of the British pound sterling, resulting in a reduction of liability and increase in taxable surplus. The Court ruled in favor of the Revenue, upholding the Tribunal's decision that the profit arising from devaluation was a taxable trading profit incidental to the business. The High Court granted a certificate for appeal to the Supreme Court on the significant question of law concerning the timing of profit or loss due to currency appreciation or depreciation.

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Issues Involved:
Assessment of trading profit or capital profit arising from devaluation of currency, treatment of liability reduction due to devaluation in income tax assessment.

Judgment Summary:

The case involved the assessment of an assessee to income tax for the assessment year 1968-69, where the liability of the assessee under outstanding bills of a foreign supplier was reduced due to devaluation of the British pound sterling vis-a-vis the Indian rupee. The Income Tax Officer (ITO) added the reduced liability amount to the income of the assessee for taxation. The assessee appealed to the Appellate Authority Commissioner (AAC) who upheld the addition. The matter was further appealed to the Income-tax Appellate Tribunal. The Tribunal held that any profit arising from devaluation was a taxable trading profit and not a capital profit. It was determined that the reduction of liability of the assessee due to devaluation was a profit incidental to the business. However, the Tribunal concluded that no profit accrued to the assessee during the relevant year as no payment had been made in foreign currency against any outstanding bill of the foreign supplier.

The Tribunal's decision was challenged by the Revenue under section 256(1) of the Income Tax Act, 1961. The question referred to the High Court was whether the Tribunal was correct in holding that no trading profit arose to the assessee due to devaluation and subsequently deleting the addition made to the assessment. The High Court considered various precedents, including cases where profits or losses were determined based on currency devaluation. The High Court held that the assessee did obtain a benefit in the assessment year due to the devaluation of pound sterling, resulting in a reduction of the liability to be paid in foreign currency. The Court emphasized that the state of accounts at the end of the accounting year should reflect the reduction in liability and an increase in taxable surplus. Therefore, the High Court answered the question in the negative, in favor of the Revenue.

The High Court granted a certificate for appeal to the Supreme Court, acknowledging the substantial question of law regarding the timing of profit or loss arising from currency appreciation or depreciation. The Court found this question to be of significance in the realm of international finance and commerce.

In conclusion, the High Court upheld the Tribunal's decision, ruling in favor of the Revenue and issuing a certificate for appeal to the Supreme Court on the substantial question of law related to currency valuation.

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