Exchange gain on foreign currency earmarked for capital assets is capital receipt, not taxable trading profit.

Where foreign currency originally received as revenue is later earmarked, with RBI approval, for acquiring capital goods for a manufacturing business, the later appropriation is treated as a separate capital transaction and not part of trading operations. The fact that the dollars remained abroad until repatriation does not change that character. Accordingly, any gain arising from exchange fluctuation on realisation is attributable to capital employed for capital purposes and is a capital accretion, not taxable business profit. The court affirmed the negative answer to the referred question and held the surplus outside trading income.

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Issues: Whether the surplus arising on conversion of dollars retained for the purpose of acquiring capital goods, after sanction of the Reserve Bank of India, was taxable as business profit.

Analysis: The amount in question was originally a revenue receipt as commission, but it was later set apart under the authority of the Reserve Bank of India for the specific purpose of purchasing capital goods for the assessee's manufacturing business. That later appropriation was treated as an independent transaction directed to acquisition of capital assets and not as part of the assessee's trading operations. The mere fact that the dollars remained in the United States until repatriation did not alter the character of the transaction, and the gain arising from exchange fluctuation was attributable to capital employed for capital purposes.

Conclusion: The surplus was a capital accretion and not taxable as trading profit; the answer was against the Revenue and in favour of the assessee.

Final Conclusion: The appeal failed, and the High Court's negative answers to the referred questions were affirmed.

Ratio Decidendi: Where foreign currency, though originally received as revenue, is earmarked and held for acquisition of capital assets as part of a distinct capital transaction, any gain on exchange fluctuation on its realization is a capital receipt and not taxable income.

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