Exchange gain on foreign funds earmarked for capital goods is treated as fixed capital accretion, not revenue income.

Exchange gain arising on repatriation of dollars retained abroad for purchasing capital goods was treated as an accretion to fixed capital rather than revenue income. The decisive factor was the purpose for which the funds were earmarked: the dollars were specifically permitted to remain in a foreign account for acquisition of capital assets for the manufacturing business, and were not shown to have reverted to trading funds. On that basis, the surplus generated by devaluation on conversion into Indian currency did not bear the character of taxable revenue receipt.

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Issues: Whether the surplus arising on conversion of dollars repatriated to India from a foreign account, where the dollars had been retained for the purpose of purchasing capital goods, was taxable as revenue income.

Analysis: The amount of dollars in question had been specifically earmarked and permitted to be retained abroad for the purchase of capital goods required for the assessee's manufacturing business. The decisive test was the purpose to which the amount had been appropriated. Where money received as income is subsequently, with the requisite permission and by the assessee's own decision, set apart for a capital purpose and held as part of fixed capital rather than trading funds, the character of the amount changes. On the facts, the dollars were held in the foreign account throughout for the capital purpose and were not shown to have reverted to trading use. The exchange gain arose only on repatriation because of devaluation, and the benefit attached to the capital fund itself.

Conclusion: The surplus was not taxable as revenue income and was an accretion to fixed capital, in favour of the assessee.

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