Currency devaluation surplus not taxable as revenue profit

The court held that the surplus realized by the assessee in remitting monies to India from its Ceylon branch due to the devaluation of the Indian currency was a capital receipt and not revenue profit for the assessment years 1967-68 and 1968-69. The court ruled in favor of the assessee, directing the revenue to pay the costs of the reference and forwarding a copy of the opinion to the Income-tax Appellate Tribunal.

---

---

Issues Involved:
1. Whether the surplus realized by the assessee in remitting monies to India from its Ceylon branch due to the devaluation of Indian currency was a capital receipt or revenue profit for the assessment years 1967-68 and 1968-69.

Detailed Analysis of the Judgment:

Issue 1: Nature of Surplus Realized Due to Devaluation
- Facts and Background: The assessee, with a branch in Ceylon, could not repatriate profits earned in 1963 and 1964 due to a moratorium imposed by the Ceylon Government. The remittance was possible only after the devaluation of the Indian rupee on June 6, 1966. Consequently, the head office in Madras received a larger sum due to the devaluation, amounting to Rs. 4,90,094, which included Rs. 1,10,909 for the assessment year 1967-68 and Rs. 3,79,185 for the assessment year 1968-69. The Income-tax Officer treated these amounts as business profits, but the Tribunal later held them as capital receipts.

- Tribunal's Findings: The Tribunal found that the surplus was directly related to the devaluation of the Indian rupee and not to any business transaction. The profits had already accrued and been taxed in the years 1963 and 1964, thus forming part of the assessee's capital. Consequently, the Tribunal directed the Income-tax Officer to modify the assessment treating the amount as capital receipt.

- Revenue's Argument: The revenue's counsel cited two decisions from the Kerala High Court:
1. M. Shamsuddin & Co. v. Commissioner of Income-tax [1973] 90 ITR 323 (Ker): The court held that the appreciation in value due to devaluation was a trading receipt and thus taxable.
2. Bank of Cochin Ltd. v. Commissioner of Income-tax [1974] 94 ITR 93: The court held that the appreciation in value of foreign exchange assets was a trading receipt and thus taxable.

- Assessee's Argument: The assessee's counsel relied on the Supreme Court decision in Commissioner of Income-tax v. Canara Bank Ltd. [1967] 63 ITR 328, where the appreciation due to devaluation was held to be a capital receipt because the amount was blocked and sterilized, not used for any business operations.

- Court's Analysis: The court distinguished the present case from the Kerala High Court decisions cited by the revenue. It noted that in the cited cases, the appreciation was directly related to ongoing business transactions. In contrast, in the present case, the profits were already accrued and taxed before the devaluation, and the appreciation was solely due to an external cause, i.e., the devaluation of the Indian rupee.

- Conclusion: The court found the facts of the present case similar to the Supreme Court decision in Canara Bank Ltd., where the appreciation due to devaluation was held to be a capital receipt. Therefore, the court held that the surplus realized by the assessee due to the devaluation of the Indian rupee was a capital receipt and not revenue profit for the assessment years 1967-68 and 1968-69.

Judgment:
The court answered the question referred to it against the revenue and in favor of the assessee, holding that the surplus realized due to the devaluation of the Indian rupee was a capital receipt. The revenue was directed to pay the costs of the reference to the assessee, with an advocate's fee of Rs. 500. A copy of the court's opinion was to be forwarded to the Income-tax Appellate Tribunal.

---