Commissioner of Income Tax, Madras vs V. Mandiram Pillai

Sethuraman, J.—The following question has been referred to this court at the instance of the CIT under s. 256(1) of the I.T. Act, 1961 :

Whether, on the facts and in the circumstances of the case, the Tribunal : was right in holding that the sum of Rs. 28,000 representing the loss

stated to have been incurred in repatriating the funds from Ceylon is a business loss and should be allowed as a deduction in the assessment ?

The assessee is a partner in a firm in Ceylon. He has a house property in India and also in Ceylon. He has also income by way of salary earned

abroad. From an extract of the period of stay in India filed by the representative of the assessee before the ITO, it was seen that during the seven

years preceding the previous year for the assessment year 1972-73, the assessee was in India for 890 days, and under s. 6(6)(a) if the assessee''s

stay in India during the above-said period was 730 days or more, his status was that of an ordinarily resident person. The ITO, therefore, took the

status of the assessee as an ordinary resident.

The assessee returned the Indian property income at a minus figure of Rs. 3,506. In other words, there was a loss under the head ""property"".

His foreign property income was Rs. 750, foreign salary income was Rs. 3,432 and his income from the partnership known as Messrs. S. M. R. &

Co., colombo, was Rs. 91,082. The total foreign income came to Rs. 95,264 and converting it at the official rate of exchange, the amount in Indian

rupees came to Rs. 1,25,367. After adjusting the loss in property in India, the net income was taken at Rs. 1,21,861 and it was taxed accordingly.

The assessee appealed to the AAC contending that he had remitted Rs. 2,87,536 between December 31, 1971, and March 27, 1972, that

these remittances represented share of profits earned in Ceylon from Messrs. S. M. R. & Co., Colombo, and that out of the above remittances,

only a sum of Rs. 2,38,203 was actually received in India. The result was that there was a loss of Rs. 49,333 and the assessee claimed this sum of

Rs. 49,333 as a deduction against the Ceylon income of Rs. 95,264 mentioned above. The sum of Rs. 95,264 is in terms of Ceylon rupees. The

AAC pointed out that there was no evidence whatsoever for the alleged loss of Rs. 49,333. He further pointed out that the claim was made with

reference to the remittances of profits earned in prior years and that even if there was any loss in remittances, it partook of a capital loss which

could not be deducted against the income of the current year. He, therefore, dismissed the appeal.

The assessee appealed to the Tribunal. The Tribunal noticed that the past profits had been taxed in the relevant assessment years on accrual

basis and that the current profit also was taxed on the same basis. The claim of the assessee before the Tribunal was that when a smaller sums was

received than what was taxed in the earlier years, then there would be a loss which should be allowed as deduction. In the opinion of the Tribunal,

since the income derived from the foreign firm was from business, the character of the income in the hands of the recipient was also under the head

Business"" and that the real income theory would be applicable to the assessee. The remittances were taken to involve certain expenditure in

reaching the destination, i.e., from Ceylon to India. Even if it was not officially incurred, according to the Tribunal, the assessee might have to lose

about 55 per cent. in ''the process of surrender of foreign exchange entitlement certificate and, therefore, there was scope for the inference that the

assessee must have incurred certain expenditure in getting the amount repatriated. In the absence of strict proof with regard to the loss of Rs.

49,333, the Tribunal took the view that the entire loss could not be allowed but has to be restricted to 10 per cent. of '' the amount remitted. On

this basis, a sum of Rs. 28,000, approximately 10 per cent. of the sum of Rs. 2,87,536 remitted from Ceylon, was taken to be an admissible

deduction in arriving at the total income. It is this deduction that is now questioned by the Commissioner in the form of the question set out already.

The facts mentioned above go to show that the assessee was treated only technically as a resident. He did not have any business in India which

had any connection with the foreign business so that there could be inter se transactions between them. The assessee is thus only in the position of

an owner of funds, who has remitted part of them from Ceylon for his own purposes and who, on account of the difficulties of remittances, had

actually received a smaller sum than what had been taken for purposes of assessment in the earlier years. The question is whether a short recovery

of this kind is liable to be allowed as deduction.

The learned counsel for the assessee relied strongly on the decision of the Supreme Court in Sutlej Cotton Mills Limited Vs. Commissioner of

Income Tax, Calcutta, . In that case, the assessee, a limited company, had a cotton mill in West Pakistan carrying on business of manufacturing and

selling cotton fabrics. From this business, there was a substantial profit of Rs.1,68,97,232, which was assessed in the year 1954-55. Subsequently,

a sum of Rs. 37,50,000 was remitted to India and on account of the variation in the exchange rate, the actual amount that reached India was

smaller and the assessee thus suffered a loss of Rs. 11 lakhs. The question was whether this differrence was liable to be allowed as deduction. The

Supreme Court enunciated. the principle in two or three passages which we may quote with profit here. At page 7, after referring to the decision of

the Court of Appeal, in Golden Horse Shoe (New) Ltd. v. Thurgood [1933] 18 TC 280, it was pointed out;

If there is any loss resulting from depreciation of the foreign currency which is embarked or adventured in the business and is part of the circulating

capital, it would be a trading loss, but depreciation of fixed capital on account of alteration in exchange rate would be a capital loss. Putting it

differently, if the amount in foreign currency is utilised or intended to be utilised in the course of business or for a trading purpose or for effecting a

transaction on revenue account, loss arising from depreciation in its value on account of alteration in the rate of exchange would be a trading loss,

but if the amount is held as a capital asset, loss arising from depreciation would be a capital loss.

Reference was then made to the decision in Landes Brothers v. Simpson [1934] 19 TC 62. There the assessee carried on the business in fur

which was exported from Russia. The transactions were conducted in dollars. Owing to the fluctuations in the rate of exchange between the dates

when advances in dollars were made to the selling company against goods consigned and the dates when the assessee recouped itself for the

advances on the sale of the goods there arose a profit and the question was whether this profit was liable to be taxed. The Court of Appeal held

that the profit accrued in the course of trading transactions and was, therefore, liable to be taxed. The principle of this decision was set out by the

Supreme Court in the following words at page 8 (of 116 ITR) :

Since the dollars were purchased for the purpose of carrying on the business as sole commission agents and as an integral part of the activity of

such business, it was held that the profit arising on retransfer or re-exchange of dollars into sterling was a trading profit falling within Case I of

Schedule D.

Thereafter, reference was made to another decision in Imperial Tobacco Co. Ltd. v. Kelly [1943] 25 TC 292. In that case, the assessee bought

American dollars for the purpose of purchasing in the United States tobacco leaves. Before the purchase could be effected, war broke out and the

assessee had, therefore, at the request of the treasury in Britain, to stop all further purchases of tobacco in the United States. The dollars were,

therefore, sold resulting in a profit. The Court of Appeal held that it was a trading profit and after extracting passages from the said judgment at

page 9 (116 ITR), the Supreme Court summarised the principle as follows a

This decision clearly laid down that where an assessee in the course of its trade engages in a trading transaction, such as purchase of goods

abroad, which involves 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 a trading

profit or a trading loss.

Thereafter reference was made to two decisions of the Supreme Court in Commissioner of Income Tax, Bombay City Vs. Tata Locomotive

and Engineering Co., Ltd., and Commissioner of Income Tax, Mysore Vs. The Canara Bank Ltd., and the principle of law was enunciated as

follows (p. 13) :

The law may, therefore, now be taken to be well settled that where profit or loss arises to an assessee on account of appreciation or depreciation

in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the

foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But, if

on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature. Now, in the

present case, no finding appears to have been given by the Tribunal as to whether the sums of Rs. 25 lakhs and Rs. 12,50,000 were held by the

assessee in West Pakistan on capital account or revenue account and whether they were part of the fixed capital or of circulating capital embarked

and adventured in the business in West Pakistan. If these two amounts were employed in the business in West Pakistan and formed part of the

circulating capital of that business, the loss of Rs. 11 lakhs and Rs. 5,50,000 resulting to the assessee on remission of those two amounts to India,

on account of alteration in the rate of exchange, would be a trading loss, but if, instead, these two amounts were held on capital account and were

part of fixed capital, the loss would plainly be a capital loss. The question whether the loss suffered by the assessee was a trading loss or a capital

loss cannot, therefore, be answered unless it is first determined whether these two amounts were held by the assessee on capital account or on

revenue account, or, to put it differently, as part of fixed capital or of circulating capital.

As, in that case, the relevant facts had not been found, the matter was sent back to the Tribunal after discharging the answer given to the

question by the High Court.

The principle applicable is clear. The primary enquiry should be whether the loss which the assessee claims to have sustained arose as an

incident to the carrying on of the business. If this question is determined in favour of the assessee in the sense that the loss was incidental to the

business, then the further question would arise whether the loss was on capital or revenue account. In the case before the Supreme Court, the

matter had to be considered only from the standpoint of the second aspect whether the loss arose on capital or revenue account. In the present

case the loss was not incidental to the business, because the asscssee did not carry on any business in India which had any connection with the

foreign business. The remittance had nothing to do with any business. The assessee ''was only in the position of a person who as owner of monies

thought it fit to remit funds to India. The loss was personal. The learned counsel for the assessee put forward the proposition that wherever there is

a loss on remittances from a person who earned monies abroad, then the loss must be allowed as a deduction. We are unable to accept this wide

proposition. As pointed out earlier, the loss must be incidental to the business before it is considered for the purpose of assessment. If it has

nothing to do with a business, then it cannot feature in the computation of income. When once the decision is reached that the loss was incidental to

the business, then the further circumstance of the loss being on capital or revenue account would arise for consideration. As, in the present case,

the loss has arisen only because of the assessee''s remitting the funds for his own purposes, the loss had to be taken only as personal loss and not

as business loss. The result is that the question referred to us is answered in the negative and in favour of the revenue. In the circumstances, there

will be no order as to costs.