TaxTMI 
TaxTMI 
1981 (6) TMI 8
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....; Rs. (i) Loss on devaluation of sterling loan 4,17,833 (ii) Loss on devaluation on balance outstanding for purchase of capital goods 37,375 (iii) Loss on devaluation on balance outstanding for import of raw materials and components used for the purposes of the assessee's business 1,95,724 &....
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....stion wit which we are concerned in this reference is the first item referred to hereinbefore, that is to say, whether loss on devaluation of sterling loan amounting to Rs. 4,17,833 was properly disallowed by the ITO. The facts as found by the AAC were that the assessee-company had raised sterling loans carrying interest at 5% per annum to the extent of pounds 65,000. The rupee equivalent of the sterling loan amounting to Rs. 8,66,667 was brought to India for use in the assessee's business: as the company's circulating capital. The assessee-company made a repayment to the extent of pounds 10,500 up to the 5th of June, 1966, and the balance outstanding on the 6th of June, 1966, i.e., the date of devaluation of the Indian rupee was pounds 54,500. The rupee equivalent of the above amount prior to the date of devaluation was Rs. 7,26,667 and the rupee equivalent after the date of devaluation was Rs. 11,44,500. The difference between the aforesaid sums amounted to Rs. 4,17,833 and it represented the loss on devaluation in respect of the sterling loans outstanding as on the 6th of June, 1966. It is this loss which in the subject-matter of adjudication before us. As we have mentioned befo....
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....r the loss arises as a result of the sovereign act of the State or due to certain extraneous factors is not relevant for considering whether the loss could be allowed as a business loss in particular case. On this aspect, and on the ground on which the Tribunal had relied, it was not disputed on behalf of the Revenue that it was not a valid ground for the disallowance of this logs. No assessee carries on business for suffering a loss. It has been held and clearly laid down in several authorities and it is now well settled that if the loss arises or is brought about while carrying on the business, though it might have been caused or occasioned by extraneous or outside forces, then such loss would be allowable if it was a revenue loss and connected with the carrying on of the business and would not be allowed if it was a loss on capital account. Therefore, the main question with which we are concerned in this case is whether this loss that befell the assessee was a loss on the revenue account or on the capital account. Now, on this question it was emphasised on behalf of the assessee that this loss was suffered by the assessee in respect of the money that was held by the assessee as ....
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....erms of the contact to deposit with the company certain sums in Chinese dollars and the company was empowered to take out of the deposit any amounts which might become due from the agents in the event of their default. The deposit was repayable at the determination of agency by the company, and it was to carry interest at a fixed rate per cent. per annum. The company was empowered to use the deposit in any way it liked but it was required to keep in Shanghai banks Chinese dollar deposits to an amount equivalent roughly to the sum which the company had acquired from those agents at any given time. When war broke out between China and Japan, the company sold the Chinese dollars for sterling at the then current rate of exchange, transferred the resultant sterling amount to the United Kingdom and placed the amount on deposit with its parent company. Subsequently, the company closed down its operations through its agents in China. There was then a depreciation of the Chinese dollar with respect to sterling and the amounts required to repay the deposits of the agents in Chinese dollars were much less than the amounts held by the company to meet their claims. The question that arose was w....
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....re the relevant points about the deposit agreement. It is obvious that when a company based on sterling makes an agreement of that kind with an agent in China involving the receipt of Chinese dollars to a specified amount and an obligation in certain events to repay the like number of Chinese dollars, the company if it converts the dollars it receives into sterling may make a profit or loss on the transaction when it ultimately repays the amount, according to the movement up or down of the Chinese dollar exchange in relation to the pound. That is a possible result of an agreement such as this, but it cannot be said that any profit or loss on exchange is a necessary incident of such an agreement, or by any means necessarily within the contemplation of the parties. As the company's business was normally carried on down to 31st December, 1936, matters were in fact so managed that no fluctuation of exchange could affect the position. The company's practice, as I have said, was to keep Chinese dollar deposits in China substantially to the amount of the agents' deposits with the company. The transaction, so long as that practice was preserved, would be a self-balancing transaction, an....
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....ceipts for the purpose of computing their profits assessable to income-tax under Case I of Schedule D. My brother Singleton' on p. 69 of the report, cited the case of McKinlay v. H. T.Jenkins and Son, Lid [1926] 10 TC 372 (KB), to which I will refer in a moment, and then made this comment upon it: ' I pause there to say that in my view the, profit which arises in the present case is a profit arising directly from the business which had to be 'done, because, as is found in paragraph 6 of the case, the business was conducted on a dollar basis and the appellants had, therefore, to buy dollars in order to make the advances against the goods as prescribed by the agreements. The profit accrued in this case because they had to do that, thereafter as a trading concern in this country re-transferring or re-exchanging into sterling.' That is accepted by both parties as correctly stating the law, and 'if may say so, in my view it was clearly a right decision on the facts of that case. The question is whether it can be said to have any bearing on the very different facts of the present case." Then the Court of Appeal referred to the decision in the case of Imperial Tobacco Co. v. Kell....
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....s from what I have already said, in fact and in practice the company at all times kept, at first in China and afterwards with its parent company in England, deposit accounts covering the amounts of the agents' deposits. That is consistent with a view on the part of the company that the amounts of these deposits should be treated as something apart from the circulating capital of the company. It is a course consistent with that view, and at all events I think one can say this, that if, contrary to Sir Andrew Clark's contention, the deposits did not in origin bear the character of trading receipts but were merely in the nature of capital receipts by way of loan, there was nothing in the subsequent dealing by the company with the deposits, so far as the evidence goes, to import to them a character of trading receipts which they did not in origin possess." It would, therefore, be apparent from the aforesaid observations that if after the deposit had been made, the company had so dealt with the deposit in question that this formed part of the circulating trading capital then the result of the profit which accrued to such reduction of the company's liability in respect of the deposit ....
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....dollars at a lower rate, which enabled the company to pay off its agents' deposits at a smaller cost in sterling than the amount it had realised by converting the deposits into sterling, was not a trading profit, but it was simply the equivalent of an appreciation in a capital asset not forming part of the assets employed as circulating capital in the trade. That being so it was a profit of the nature not properly taxable under Schedule D, and the Special Commissioners in my view came to a right conclusion, which was rightly affirmed by the learned judge, and I would, therefore, dismiss the appeal." It would be apparent from the aforesaid passage that there was nothing to divest those deposits of the character which they originally bore, that is to say, the character of loans by the agents to the company and that was the prima facie evidence before their Lordships and there was no factual evidence dislodging that prima facie evidence that it was treated as a trading asset or was a part of the circulating capital. On the contrary, in the instant case, before us, it has been found as a fact that the money was borrowed to commission the circulating capital and was indeed being trea....
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....tan as capital asset or as trading asset and then whether the loss suffered by the assessee-company was a trading loss or a capital loss. The Supreme Court noted several decisions and noted the decision in the case of Imperial Tobacco Co. v. Kelly [1943] 25 TC 292 (CA). That was a case of a company which, in accordance with the usual practice, bought American dollars for the purpose of purchasing, in the United States, tobacco leaf. But before tobacco leaf could be purchased the transaction was interrupted by the outbreak of war and the company had, at the request of the Treasury, to stop all further purchases of tobacco leaf in the United States. The result was that the company was required to sell the dollars to the Treasury and owing to the rise which had in the meantime occurred in the dollar exchange, the sale resulted in a profit for the company. The question was whether the exchange profit thus made on the dollars purchased by the company was a trading profit or not. The Court of Appeal held that it was a trading profit includible in the assessment of the company under Case I of Schedule D and Lord Greene, Master of the Rolls, delivering the main judgment, observed as follow....
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....me. It had an income character impressed upon it from the very first. The Supreme Court clearly laid down that where an assessee in the course of its trade engaged in a trading transaction, such as purchase of goods abroad, which involved as a necessary incident of the transaction itself, the purchase of currency of the foreign country concerned, then profit resulting from appreciation or loss resulting from depreciation of the foreign currency embarked in the transaction would prima facie be trading profit or a trading loss. The Supreme Court also considered in this connection the Shell Company's case, [1952] 22 ITR (Supp) 1 (CA), which we have set out hereinbefore and, after referring to that decision, the court observed at p. 10 of the report that since the Court of Appeal took the view that the deposits were in the nature of fixed capital, any appreciation in their value on account of alteration in the rate of exchange would be on capital account and that is why the Court of Appeal held that such appreciation represented capital profit and not trading profit. Therefore, the court proceeded that the Court of Appeal in England in Shell Company's case had held that the amount r....
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.... a direction to the Tribunal either to take additional evidence itself or to direct the ITO to take additional evidence and make a report to it, on the question whether the sums of Rs. 25 lakhs and Rs. 12,50,000 were held in West Pakistan as capital asset or as trading asset or, in other words, as part of fixed capital or part of circulating capital in the business. The Tribunal will, on the basis of this additional evidence and in the light of the law laid down by us in this judgment, determine whether the loss suffered by the assessee on remittance of the two sums of Rs. 25 lakhs and Rs. 12,50,000 was a trading loss or, a capital loss." If that is the correct position in law, then, in our opinion, in view of the facts found by the Tribunal here that the amount was held as circulating capital and was brought to augment the circulating capital, any profit arising from the transfer or any loss arising from depreciation must be on the revenue account. Learned advocate for the Revenue, however, relied mainly on the decision of the Supreme Court in the case of Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT [1965] 56 ITR 52. There what happened was that pursuant to a scheme of ....
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....on under s. 10(2)(iii) of the Indian I.T. Act, 1922. Learned advocate for the Revenue drew our attention to the observation at p. 57 of the report where the court observed that a loan of money-undoubtedly resulted in a debt but every debt did not involve a loan. Liability to pay a debt might arise from diverse sources and a loan was only one of such sources. Every creditor who was entitled to receive a debt could not be considered to be a lender. If the requisite amount of consideration had been borrowed from a stranger, interest paid thereon for the purpose Of carrying on the business would have been regarded is a permissible allowance. But that was wholly irrelevant in considering the applicability of cl. (iii) of sub-s. (2) of s. 10 to the problem arising in this case. The Legislature has under cl. (iii) permitted as an allowance interest paid on capital borrowed for the purpose of the business. If interest be paid but not on borrowed capital, cl. (iii) would have no application. It is true that all loans did not create debts. But we need not for the purpose of our decision in this case go minutely into this aspect in view of the specific finding of fact by the Tribunal that the....
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....ferred to hereinbefore. The Division Bench observed that the Shell Co.'s case was cited with approval in two decisions of the Supreme Court. One was K. M. S. Lakshmanier & Sons v. CIT [1953] 23 ITR 202 and the other was Punjab Distilling Industries Ltd. v. CIT [1959] 35 ITR 519. It is true that in those two cases the observations of the Shell Co.'s case were referred to and relied on but the context in which those observations were referred to and relied on has to be borne in mind. In Shell Co.'s case the Division Bench held that it treated the deposits as capital receipts and profits thereon by reason of the fluctuation of exchange rate would be capital gain. In so far as the facts of that case are concerned the observation, in our opinion, are correct. But the Court of Appeal in England made it quite clear that if the sums were utilised as circulating capital and it lost prima facie the character of capital, which it originally bore, different considerations would apply. But in the instant case, as we have noted before, it has been found as a fact that the sum in question was treated as a circulating capital. Reliance was also placed on certain observations in India Cements Ltd. ....