High Court rules devaluation surplus taxable as revenue receipt for 1967-68

The High Court ruled in favor of the revenue, determining that the devaluation surplus earned by the assessee was assessable as a revenue receipt for the assessment year 1967-68. Additionally, the profit from the devaluation of Indian currency was considered to have arisen in the course of the assessee's business activities. The High Court concluded that both the devaluation surplus and the profit from devaluation were taxable, denying the assessee's claims.

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Issues Involved:
1. Whether the devaluation surplus earned by the assessee consequent to the settlement of the claim by the insurance company is assessable as revenue receipt for the assessment year 1967-68.
2. Whether the profit earned by the assessee on account of devaluation of Indian currency was in the course of carrying on the business or incidental to the business.

Summary:

Issue 1: Devaluation Surplus as Revenue Receipt
The Tribunal initially held that the devaluation surplus earned by the assessee was not assessable as a revenue receipt. The assessee, a registered firm manufacturing radiators, had imported copper ingots, which were seized by the Government of Pakistan. The insurance company compensated the assessee in U.S. dollars, and due to the devaluation of the Indian rupee, the amount received in Indian currency was higher. The AAC confirmed the assessment, treating the surplus as a trading receipt. However, the Tribunal later excluded the amount from assessment, considering it a capital receipt. The High Court, referencing CIT v. Tata Locomotive and Engineering Co. Ltd. [1966] 60 ITR 405, concluded that the transaction was on revenue account, as the profit arose from a transaction involving raw materials, thus making it assessable as revenue receipt.

Issue 2: Profit from Devaluation in the Course of Business
The Tribunal held that the profit from devaluation did not arise directly from the assessee's normal business. The High Court, however, disagreed, stating that the remittance through the Bank of Baroda was part of the ordinary course of business. The seizure of goods was akin to a loss in transit, making the entire transaction integral to the business. The High Court cited Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1, emphasizing that profit or loss from foreign currency transactions held on revenue account is a trading profit or loss. The High Court also referenced Calcutta Jute Agency (P.) Ltd. v. CIT [1979] 117 ITR 741, where similar circumstances led to the surplus being treated as assessable income. Consequently, the High Court concluded that the profit from devaluation was indeed in the course of carrying on the business and thus taxable.

Conclusion:
The High Court answered both questions in the negative, ruling in favor of the revenue. The devaluation surplus was deemed assessable as revenue receipt, and the profit from devaluation was considered to have arisen in the course of the assessee's business. The revenue was entitled to its costs, with counsel's fee set at Rs. 500.

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