1966 (10) TMI 33 - SC - Income Tax

Exchange difference deemed capital receipt, not assessable under Indian Income-tax Act

Commissioner Of Income-Tax, Mysore Versus Canara Bank Limited

The High Court held that the exchange difference of Rs. 1,70,746 was not assessable under the Indian Income-tax Act as it was deemed a capital receipt, ... Whether the profit of the bank on account of fluctuation of exchange arose in the course of trading operations of the bank or whether it was incidental to any such trading operation? Held that:- The money changed its character of ' stock-in-trade '. when it was ' blocked ' and ' sterilised ' and the increment in its value owing to the exchange fluctuation must be treated as a capital receipt. It has also been found by the Appellate Tribunal that the said amount of ₹ 3,97,221 was not utilised for internal banking operations within Pakistan and it is hence not possible to draw an inference that the bank realised any profit in the carrying out of its business. We accordingly hold that Mr. Hazarnavis is unable to make good his argument on this aspect of the case and the High Court was right in reaching the conclusion that the exchange difference of ₹ 1,70,746 was not assessable to income-tax. Appeal dismissed. Issues:1. Taxability of exchange difference as per Indian Income-tax Act.Detailed Analysis:The case involved an appeal from the High Court of Mysore regarding the taxability of an exchange difference of Rs. 1,70,746 under the Indian Income-tax Act. The respondent, a bank, had a branch in Karachi, and due to currency devaluation and subsequent appreciation, the bank made a profit on remittance to India. The bank claimed this as a capital gain, while the Income-tax Officer treated it as a revenue receipt. The High Court reversed the Appellate Tribunal's decision, holding the exchange difference not assessable under the Income-tax Act.The main issue was whether the profit from exchange fluctuation arose during the bank's trading operations or was incidental to such operations. The High Court analyzed the facts and found that the appreciation did not occur during any trading operation. The Karachi branch did not engage in foreign currency business until later dates, and the money remitted was not used for banking operations. The Appellate Tribunal confirmed that the amount was blocked and sterilized, leading to the conclusion that the profit was a capital receipt, not taxable as revenue.The appellant argued that the money was stock-in-trade, but the Court held that being blocked and unused for banking purposes changed its character. The increment due to exchange fluctuation was deemed a capital receipt. The Court emphasized that the bank did not realize any profit in its business operations during the period in question. The Court upheld the High Court's decision, stating that the exchange difference was not assessable to income tax.In arguments, reference was made to various case laws such as Imperial Tobacco Co. v. Kelly and Landes Brothers v. Simbson, highlighting differing views on the taxability of exchange profits. However, the Court noted that the present case's facts were distinct, and the decision must be based on the specific circumstances found by the Appellate Tribunal. Ultimately, the Court affirmed the High Court's decision, dismissing the appeal with costs.