STATE BANK OF INDIAversusCOMMISSIONER OF INCOME TAX, ERNAKULAM

    694


                           STATE llAlil OF DlDIA
A                                    Vo
                  COMMISSIONER OF IN<DlE Ult, EllNWII AM

                             ocroBER 31, 1985
             (V.D. TlJLZAPUR!<AR AND SABYASACHI MllKHABJI, JJ,]
B
          Income Tax Act, 1961 ~ s.5 - Foreign exchange bueineae -
    Devaluation of Indian rupee - Appreciation in value - Whether
    trading receipts and exigible to income tell·

          The aaaeaaee-Banlr. was l!l!llllpmated with the appellat-luk.
    Al part of its banking bueineaa the aaae11ee bad been d•lfna in
c   foreign eschange. Conaequant upon the devaluation of the Indian
    rupee the 811lOUOts credited to the uaeoaee in the foreip hanlta
    regiatered an increaae. Thia ezceas realiution on devaluation
    waa treated by the IDCOme-tax Officer aa income of the um•ru
    rejecting it• plea that the profit waa in the nature of a
    windfall,
D
          The Inc~ Officer'a order war confirmed by the
    Appellate Alriatant Coamd.Hioner, the Appelhte Tribunal. and in
    the reference by the High Court.

          Di811lia1ing the appeal of the aa1ea1ee to thia Court on the
    question; Whether the exceaa 1um realiaed on the devaluation of
E
    the Indian rupee on 6th June, 1966 wu incme charaeal>le to
    iacme-t.u:,
          BEUi : 1. The High Court wu right in holdill& that the
    appreci.ation in value represented tradina receipt• of the
    uaeosee and, thenfore, COD1tituted 'revenue receipt•' in ita
F
    hands which were chargeable to ~. [697 F)

             Sutlej Cotton Milla Ltd. Vo ,.,_,,111oner of Iw-'fa.
    'lleet lleDgal, 116 I.T,Jl, 1 and c-iuioaer of Tnc<r Tm< . . - ,
    'l'o lll>pl Lhae Ltd. Boabay, 46 I,T,Jl, 590 relied upon.

G
          2, If the foreign currency has increaaed in vilue in teru
    of Indian rupee and that 8lll0unt has been utiliaed by the uau1ee
    in carrying on hia business, it was incidental to the blnkfna
    busineu. [700 A-B]

H
              s.B. I. v. c. I. T. [SABYASACHI MUKHARJI, J,]        695


       In the instant case the profit was due to tbe devaluation         A
of the rupee and waa not due to my other busineae activities.
This is an incidental inco• arisiug from the carryiug on the
banltiug business. [698 D]

      lloperlal Tobacco· Cozpouy v. lelly, 25 Tax Casu 292,
Cmnluiooer of Inc       Tu: l!an=a Vo A.&.A. Cancem ll<o•MiD, 5          B
I.T.R. 456 and Punjab Ccr-operat:be lllmk LU. v. Cmn!BBfC!l!er of
~. Punjab, 8 I,T.R. 635 relied upon.


      3. The way in which antriea are made by the unaaee in it.a
books of account ia not determinative of the question whether tbe
aaseasee baa eat'll8d any profit or suffered any lose. The asaeaaee      c
might, by lllBkiug entries which were not in conformity with the
proper principles of accountancy, concealed profit     or
                                                        showed losa
and the entries made by him could not, therefore, be regarded as
concluaive one way or the other. (699 C-D)

      4, In this case, stock in trade of the aaseaeee was foreign        D
exchange. From the statement• made it is evident thet there was
excess realisation of the foreign excheuge in Indian rupee and
the aasessee realised their value. Under s. 5 of the ~me Tu
Act, 1961, .it would be, in case of an .assaeaae who was a
ruident and ordinarily a resident of India, asaeHllble, !he
aaaesBee showed this amount as appreciation on devaluation of the        E
rupee. (697 G-i!)

        CIVIL APPELLATE JURISDiCTION : Civil Appeal No. 596 (NT) of
1974.

      From the Judgment and Order dated 25.1.1973 of the Kerala
High Court in Income Tax Reference No. 31 of 1971,                       F

      T, s.   l<rishnamoorthy   Iyer   and   N.   Sudhakaran for   the
Appellant.

     V. Gauri Shankar, K.c. Dua and Miss A.         Subhashini for the
Respondent.                                                              G
        The Judgment of the Court was delivered by
      SABYASACHI MUKHARJI, J. The original appellant Banlt of
Cochin Ltd. has been amalgamated with the State Bank of India and
on an oral application of the appellant for substitution and with
the consent of the respondent, this application was allowed and          H
the amendment was directed to be effected.
    696                 SUPREME COURT REPORTS    [1985] SUPP.3 s.c.R.


A         This appeal arises by special leave against the judgment
    and decision of the High Court of Kerala at Ernakulam dated 25th
    January, 1973 in Income Tax Reference No. 31 of 1971.

          The assessee, previously the Bank of Cochin Ltd., a banking
    company, as part of its banking busines·s, had been purchasing
B   cheques, payment orders, mail transfers, demand drafts, bills and
    other negotiable instrtunents drawn in foreign currencies and
    sometimes foreign currencies themselves from its clients. Titese
    foreign exchange assets were subsequently sold or encashed
    through the assessee 1 s correspondent-banks in the foreign
    countries concerned and the proceeds credited to the current
    account of the assessee with the correspondent-banks concerned.
c   Consequent on the devaluation of the Indian rupee on 6th June,
    1966, the amounts credited to the assessee in the foreign banks
    registered an increase of R5.4,65,5!5. The excess realisation on
    devaluation was treated by the Income-tax Officer as the income
    of the assessee during the accounting year ending 31st December,
    1966, rejecting the assessee's plea that the profit was in the
    nature of a windfall. There was an appeal from the said decision
D   to the Appellate Assistant Conmissioner. The Appellate Assistant
    Commissioner rejected the assessee' s contention. There was ·a
    further appeal to the Appellate Tribunal. The Tribunal also did
    not .3ccept the assessee's submission. There was a further
    contention that as on the last day, 31st December, 1966, of the
    accounting year relevant to the assessment year 1967-68, the
E   assessee had valued the Government securities held by it at the
    market price and as the market price of the securities on that
    date was less than the cost price, the difference amounting to
    Rs. 52, 935 was taken as loss arising from the valuation of the
    closing stock of securities. In the return filed for the
    assessment year 1967-68, a claim was made to deduct the above
F   loss. As there was no actual loss arising on the sale of
    securities and as there was no debit to the profit and loss
    account of the alleged loss and as the method of valuation
    adopted for this year was not in accordance with the method of
    accounting regularly employed by the assessee, the Income-tax
    Officer disallowed the loss. On appeals, the Appellate Assistant
G   Commissioner as well as the Appellate Tribunal came to the same
    conclusion.

          Under section 256(1) of the Income Tax Act, 1961
    (hereinafter called the 'Act'), two questions were referred to
    the High Court :
H
            s.s.r. v. c.1.1. [SABYASACHI MUI<HARJI, J.]       697


           "(i) Whether, on the facts and in the circumstances of    A
           the case, the sum of Rs. 4,65,515, being profit
           arising on the devaluation of the lnaian rupee on 6th
           June, 1966, was income chargeable to income-tax?

           (ii) Whether, on the facts and in the circumstances of
           the case, the Appellate Tribunal was right in law in      B
           rejecting the assessee's claim to deduct an amount of
           Rs. 52,935 being loss arising on the valuation of
           closing stock of Government securities, in determining
           its total incou.e for the assessment year 1967-68?"

     The High Court answered the first question in favour of the     c
revenue and against the assessee and the second question was
answered against the revenue and in favour of the assessee.

     At the outset it may be mentioned that the second question
is no longer alive before us and the second contention is
therefore need not be considered.                                    D

     The appeal is restricted as mentioned hereinbefore to the
first question only. The High Court held that the assessee was
doing banking business and as part of banking business it was
purchasing cheques, payment orders, mail transfers, demand drafts
and other negotiable instruments, drawn in foreign currencies and    E
sale proceeds of these constituted trading receipts. Consequent
on the devaluation of the Indian rupee, the amount receivable by
the assessee appreciated in its value and this represented an
appreciation ie the value of the sale proceeds of the assets in
which the assessee was dealing in the course of its business.
Therefore, the High Court was of the opinion that there was no
doubt that the appreciation in value amounting to Rs.4,65 1 515 of   F
all such assets represented trading receipts of the assessee and,
therefore, constituted revenue receipts 1.n its hands which were
chargeable to income-tax.

     Foreign exchange in this case was stock in trade of the
assessee. It is evident from the statement made that there was       G
excess realisation of the foreign exchange in Indian rupees and
the assessee re&lised their value. If that is the position, then
under section 5 of the Income Tax Act, 1961, it would be in case
oi an assessee who was a resident and ordinarily a resident of
India, assessable. 'Ihe assessee showed this amount of Rs.4,65,515
as appreciation on devaluation of the rupee. It is further
recorded in the findings of the Income-tax Officer as follows:       H
     698                      SUPREME COURT REPORTS     [1985] SUPP.3 s.c.R.


                "Shri v.o. John, learned Advocate for the bank filed
                its objections in his letter dated 20.12.1967, He
                         11
                stated        cheques,   payment   orders,   mail   transfers,
                demand drafts, bills drawn in India and other.
                negotiable instruments drawn in foreign currency and
                sometimes foreign currency itself are purchased from
B               various parties and sent to correspondent banks in
                foreign countries for credit of our account with them.
                These foreign bank balances are periodically
                transferred over here and the process is repeated."

                The buying and selling rates in respect of various
                foreign currencies underwent a change on 6.6.1966 when
c               the Indian rupee was devalued. The balance standing to
                the credit of the bank in various foreign branches
                like London, New York, Ottava, Borlin, Sydney, Paris
                were transferred subsequent to June, 1966 on various
                dates resulting, in huge profit on valuation of
                Rs. 4,65,515 as noted above. The advocate further
                pleaded "banks" normal profit is the difference
JJ              between the buying and selling rates of foreign
                exchange. 11

          Profit was due to the devaluation of the rupee on 6th June,
     1966 and was not due to any other business activities. This is an
     incidental income arising from the carrying on the banking
E    business, See in this connection the observations in Imperial
     Tobacco Cooipany v. Kelly, 25 Tax Cases 292, and Comciissioner of
     Income TaK, Bunia v. A.S,A. Cow:etu, Baseein, 5 I.T.R.456, Also
     see the observations of the Privy Council in the caee of Punjab
     Co-operative Bani< Ltd. v. Comnissioner of ~-tax, Punjab, 8
     I,T,R, 635,
F
          The Appellate Assistant Collllllissioner noted in his order that
     in November, 1967 subsequent to the year in question, sterling
     was devalued and the assessee bank had suffered a loss in terma
     of rupee in respect of their holdings in sterling. This loss was
     debited by the assessee to his profit and loss account and
G    claimed as allowable deduction in the computation of the
     assessee's total income for the assessment year 1968-69. There-
     fore, the conduct and the treatment by the assessee of the result
     of appreciation or depreciation in value of sterling assets held
     by an assessee who is a resident and ordinarily a resident of
     India must be considered to be the income of the assessee
H    ancillary or incidental to the carrying on of the business of
     banking.
            s.B.I. v. c.I.1. [SABYASACHI hUK!iAR.Jl, J.]        699


    It was held by this Court in Sutlej Cotton Mills Ltd. v.           A
C<mnissioner of Income-Tax, West llengal, 116 I.1.1\, 1, that where
profit or loss arose to an assessee on account of appreciation or
depreciation in the value of foreign currency held by him, on
conversion into another currency, such profit ·or loss would
ordinarily be a trading profit or loss if the foreign currency
was held by the assessee on revenue account or as a trading asset      h
or as part of circulating capital embarked in the business. But,
if on the other hand, tbe foreign currency was held as a capital
asset or as fixed capital, such profit or loss would be of a
capital nature.

     'Ihe important question to be considered is the true nature       C
of the transaction and whether in fact it had resulted in prof it
or loss to the assessee. In that context it is well-settled that
the way in which entries are made by the assessee in its books of
account is not determinative of the question whether the assessee
has earned any profit or suffered any loss. 'Ihe assessee might,
by making entries which were not in conformity with the proper         t
principles of accountancy, concealed profit or showed loss and
the entries made by him could not, therefore, .be regarded as
conclusive one way or the other.

     C<mnissioner of Income-Tax Banbay v. b>gul Lille Ltd. Bombay,
46 I.T .R. 590, was a case where it was held that if a foreign         E
fund of the assessee was allowed to remain unused where it lay,
the mere circumstances that there had been fluctuation in the
currency resulting in appreciation of the fund in terms of the
coin of another country would not result in profit to the owner
of the fund. But if the fund is utilised in the course of the
business for a trading purpose, there would be realisation of the
profit arising on devaluation and the profit would be taxable.         F
If, on the other hand, the fund was not utilised for a business
operation or for the purposes of trade, but for a non-bus~ness
operation, like payment of income-tax in the foreil',n country,
there was no profit and the difference in the exchange value
could not be assessed to incollie-tax. The Division Bench of the
Bombay High Court further observed that the matter of taxability       G
could not be decided on the basis of the entries which the
assessee might choose to make in his account, but had to be
decided in accordance with the provisions of law. What would
determine the taxability is not whether the assessee has shown a
particular items as a profit or loss in the accounting year. but
whether the said item could be regarded either as a profit or
loss under the provj.sions of the Act. J:,ut as the court emphasised   H
    700                  SUFREME CCURT REPORTS   [1985] SLPP.3 s.c.R.

A
    that if the foreign currency has increased in value in terms of
    Indian rupee and that amount haS been utilised by the assessee in
    carrying on his business as precisely is the case here, i.e. the
    increased an.cunt has been utilised by repatriation, it was
B   incidental to the banking business.

          For the reasons aforesaid, the answer given by the Kerala
    High Court in the in;pugned jud5n.ent under appeal against the
c   asses see and in favour of the revenue was right. The appeal
    accordingly fails and is dismissed with costs.




    A.P ,J.                                          Appeal dismissed.




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