U.P. State Bridge Corporation Ltd. vs Commissioner of Income Tax, Lucknow

We have heard Shri S.P. Gupta, Senior Advocate assisted by Shri R.P. Agarwal for the applicant-assessee. Shri A.N. Mahajan appears for the income tax department.

This income tax reference arises out of a combined order of the Tribunal in ITA Nos.1505 of 1986, 1992 of 1986 and M.A. No.9 of 1987 on the questions called for and referred by the Income Tax Appellate Tribunal as follows:

(1) Whether on the facts and in the circumstances of the case, the ITAT was correct in law in holding that the surplus of Rs.79,68,902/- arising on transition of items of debits and credits in the assessee''s trial balance kept in Iraqui Dinars into Indian currency (rupees), gave rise to income liable to tax under I.T. Act, 1961?

(2) Whether on the facts and on the circumstances of the case, the ITAT was legally correct in holding that the amount of Rs.37,58,732/- assessed under Rule 115 of I.T. Rules, 1962 was not included in the aforesaid surplus of Rs.79,68,902/- ?

(3) Whether on the facts and in the circumstances of the case, the ITAT was legally correct in further holding that the amount of Rs.37,58,732/- assessed under Rule 115 of I.T. Rules, 1962, could not be attributed to the surplus, arising out of translation of items of income and expenditure in the assessee''s trial balance kept in Iraqi Dinars, into Indian currency (Rupees) and this was not liable to be excluded from the surplus of Rs.79,68,902/- ?

The facts as stated in the statement of the case in the order of reference are as follows:

The assessee is a Govt. company owned by the State of Utter Pradesh. It derives income from contract work undertaken, inter alia, in foreign countries for the construction of bridges etc. Its accounting period for the assessment year 1982-83 commerced on Ist October, 1980, and ended on 30th of September, 1981. During the accounting period under consideration, bulk of its contract work was being done in Iraq and most of its income was from its contract earned in Iraqi Dinars. While going through the notes on accounts, forming part of the Balance Sheet as on 30th September, 1981, and profit and loss account for the year ended on that date, the ITO observed that the difference in exchange rate due to conversion of foreign currency into Indian rupees had been kept in the Exchange Reserve Account (Note No.26). The said difference this year was a credit figure of Rs.79,68,902/- In the earlier year, this figure was debit figure and was debited by the assessee to its profit and loss account as an item of loss. This year, however, the aforesaid amount being a credit figure was not similarly credited to the profit and loss account but was instead taken to the Exchange Variation Reserve Account in the Balance Sheet directly. This change in the accounting pattern was pointed out by the Auditor vide Note No.26 referred to above. The company explained to the IAC (Asstt.) that the aforesaid amount was kept in the Exchange Variation Reserve Account on account of Company''s Accounting policy No.8. The said accounting policy No.8 read as below:

I have also gone through the accounting policy No.8 which reads as under:

Translation variances in respect of non current items end depreciation are transferred to exchange variation account and, if the balance at the end of the year is debit, the same is changed to profit and loss account. If the balance is in credit, it is carried to exchange variation reserve account for subsequent set off of debit balance, if any.

The IAC (Asstt.) did not accept the above contention of the assessee. He made, interalia, the following observations in this regard:

The contention of the assessee is not accepted and the gain on account of fluctuation in exchange rate should have been shown as receipt. The assessee Corporation can not have a policy where the loss on this account is debited to the profit and loss account and the gain is not so credited. Even if this is the accounting policy of the Corporation, the treatment given by them in their books of account will not matter as far as the taxation of the receipt is concerned. Such gains or losses are obviously trading receipts or trading expenses, as the case may be, and should be given due effect too. This is an accepted principle of taxation and in a very recent case of M/s Jai Prakash Associated Private ltd., the learned CIT (A) has exhaustively dealt with the issue and come to the some conclusion. Assessee Corporation also was claiming it as loss or showing it as profit till assessment year 1981-82, but when the gains were huge in the assessment year under assessment, the policy was changed. Obviously, it was done to understate its income and the change is not bona fide. The amount of Rs.79,68,902/- representing gain to fluctuation in Foreign Exchange Rate, will, therefore, be brought to tax.

The IAC (Asstt.) also noted that through item No.5 of the Notes on account, it had been indicated that the income and expenditure for the year under consideration relating to Iraqi works had been converted into Indian currency @ 1 Iraqi Dinar equal to Rs.28.57. The actual onverd on rate, however, should have been according to Rule 115 of Income Tax Rules, 1962, should have been Rs.30.90. Due to the aforesaid difference in the conversion rate, a difference of Rs.37,58,732/- would result as per calculations of the IAC (Asstt.) as contained in paragraph-SX 7 of his order. We, therefore, added this amount also as income of the assessee corporation.

In appeal before CIT (A) the assessee disputed the addition of Rs.79,68,902/- as made by the A.O. on account of foreign exchange translation/ conversion account into Indian currency. The assessee submitted that at the end of the accounting period, the individual assets as held in foreign currency are converted into Indian rupees at the prevailing exchange rates. The difference between the valuation worked out in the earlier years and the current year is taken as loss or profit, and the amount in question represents the appreciation in the value of assets on account of exchange rate depreciation of rupee. The loss or surplus in the foreign currency account is neither actual loss nor actual income but arise only on account of accountancy principles on the basis of guidelines issued by the Institute of Chartered Accounts of India, of accounting for foreign currency translation. Similar issue had arisen in the case of M/s Jaiprakash Associates. It was dealt with by the same Assessing Officer and having satisfied himself regarding nature of the deficiency/ surplus no dis-allowance or addition was made on this account.

The assessee submitted before the CIT (A) that if any loss has been claimed in the earlier year, it was only a mistake and that the department would be free to take appropriate action, which may be found necessary. The A.O. while dealing with this matter confused the issue that the loss or profit had actually arisen on account of transfer of foreign exchange, which was held to be allowable/ deductible in the competition of income in the case of M/s Jaiprakash Associates. In that case there was actual transfer of foreign exchange into India during the year at a lesser rate compared to the rate applicable for computation of income t the end of the accounting period under Rule 115 of the Income Tax Rules. In the present case no regular transaction had taken place and only book valuations resulted in surplus.

The CIT (A) accepted the submissions of the asessee and deleted the addition in question. So far as addition of Rs.32,58,732/- and incidental point was raised before CIT (A), which was not raised before A.O. for loss incurred by the assessee on the actual transfer of money to India during the accounting period at the rate of exchange loss than the rate on the date of closing of the accounts should be allowed as deductions. It was pointed out that the rate of dollar was Rs.9.09 as on 13th September, 1981, whereas actual remittance during the year was at a lesser rate. The actual remittance were of Rs.8,25,664/- and thus loss should be reduced from the addition of Rs.32,58,732/- in terms of Rule 115 of the Income Tax Rules, whereby profit earned in Iraqui Dinar has to be converted for the purposes of assessment into Indian rupees for Income Tax Act. The CIT (A) did not accept this plea.

Both the assessee as well as the revenue appealed to the Tribunal, which decided both the appeals by common order. So far as the referred questions are concerned, the revenue challenged the findings of CIT (A) that there was no justification for making addition of Rs.79,68,902/-, being gained on account of conversion of foreign exchange into Indian currency. When there was loss in this account, the assesse had claimed the loss as revenue loss and it was so allowed. In this year when there was profit of Rs.79,68,902/-, the addition should have been upheld as taxable by CIT (A).

It was pointed out by the revenue in the Tribunal that the assessee had number of projects in Iraq accounts of which were maintained in foreign currency (Iraqi Dinars). The final accounts were permitted to head office at Lucknow in Iraqi Dinars, where after various debits and credits were translated into Indian currency in accordance with the principles and procedures recognized by the Institute of Chartered Accountants of India. Items of income and expenditure are translated at the average rate of the year. Current assets and liabilities are translated at the closing rate of the year. Fixed assets and head office accounts are translated at the closing rates for the respective year, when the purchases were made. The assessee had transferred the profits arising in this connection to the account known as Exchange Variation Reserve Account. The CIT (A) was not correct in deleting the addition as the amount represented actual gain earned by the assessee on three counts, namely income and expenditure account, current assets and liabilities accounts and fixed assets account. According to CIT (A) the revaluation did not result into any actual income or loss. He held that there was actually no profit or loss and only the assets held at Iraq in terms of Iraqi Dinars were revalued, which resulted into profits. It was submitted that profits arising by conversion of the value of assets and the transactions conducted in terms of Iraqi Dinar were actual profits. These were not imaginary profits. The assessee had entered into certain transactions, the result of which had to be incorporated in the Head Office books in terms of Indian currency. On conversion into rupees it had resulted into profits. The profits were actual and not imaginary. The profits were also credited in the books of accounts. These were taxable profits and should have been held as such. There was no reason for not taking these profits to the income and expenditure account. Further profits arising out of current assets and liabilities were also taxable. Only with regard to profits arising as result of conversion into Indian currency of fixed assets may not be held to be taxable.

It was further pointed out by the assessee before the Tribunal that Rs.37,58,732/- had already been taxed by the A.O. on account of Rule 115. This addition was made as result of conversion of income accruing or arising to the assessee in foreign currency in terms of the Indian currency exchange obtaining on the last date of the previous year. The assessee had no grievance against this addition and thus no further addition was called for on account of conversion of assets/ transactions into Indian currency obtaining on the last date of the previous year and thus no further addition was called for on account of conversion of assets/ transactions into Indian currency.

The Tribunal held:

The profits have arisen on account of revaluation of the transactions and assets of the assessee''s project at Iraq, accounts of which were maintained in terms of Iraqi Dinars, but according to the accountancy principles and procedures, recognized by Institute of Chartered Accountants in India, these transactions and assets were translated in terms of Indian currency, namely, rupees which has resulted into the said profits. We do not somehow profit so arising could be hold to be non-existent and on that account non-taxable. These profits were also not imaginary. The profits were actually there and have been determined, according to the principles and procedures recognized and laid down by the Institute of Chartered Accountants of India which Institute is undoubtedly an authority for the purpose of laying down correct accountancy procedure and principles. The profits have also been taken into account and in the books of account as per entries passed. Though the profit has been taken to exchange fluctuation variation reserve account instead of crediting to profit and loss account as far as taxability of these profits are concerned, the real nature of the profit has to be seen. In our opinion, there is no doubt that the profits arising on account of items of income and expenditure account were revenue profits and were taxable. Further, the profits arising on account of current assets and liabilities were also clearly taxable as per principles laid down by the Supreme Court in the leading case of Sutlaj Coton Mills (Supra). Their Lordships of Supreme Court have already held in the case of State Bank of Travncore (Supra) that once income accrues, the same account be defeated by the any theory of real income. Here income has arisen in terms of Indian currency by virtue of conversion of the transactions pertaining to the project of the assessee at Iraq and the income pertained not only to fixed assets but also to the items of income and expenditure account and current assets and liabilities account.

So far as the addition of Rs.37,58,732/-, which was added under Rule 115 of the Income Tax Act, the Tribunal observed:

It is true that an addition of Rs.37,58,732/- has been made according to the provisions of Rule 115 but there is no evidence to show that this amount of Rs.37,58,732/- which is added under Rule 115 is already included in this amount of Rs.79,68,902/- which is at present under consideration before us. There being no much material or evidence available before us, we are not able to give any relief here on account of the said addition under Rule 115.

However, the income was on three counts, namely, transactions pertaining to income and expenditure account, current assets and liabilities account and fixed assets. Account hold, respectfully following the decision of the Supreme Court is the leading case of Sutlej Cotton Mills (Supra) that the income pertaining to transactions of income and expenditure account and also pertaining to current assets and liabilities account were taxable but incomes pertaining to fixed assets account were not taxable being on capital account. In this connection, it is necessary to point out that at the time of hearing of appeal before us, we requested the representatives of the assessee to state bifurcation of this income of Rs.79,68,902/- into three different heads, as stated above. The representatives of the assessee unfortunately could not give the said bifurcation and expressed their inability to do so in view of the fact that at the time of hearing of the appeal, there was complete strike of the employees of the assessee corporation along with the general strike of the employees of U.P. Government and U.P. Government Corporations and the bifurcations in the three categories were thus not available before us. The conclusions of the authorities below on this issue are, therefore, set aside and the issue is restored to the file of the IAC (Asstt.) for being decided afresh as per clear directions given above in this order.

Shri S.P. Gupta, learned counsel for the assessee submits that ITAT has completely failed to appreciate following facts:

(i) the entire income of Iraqi Branch, including the difference arising on account of conversion of foreign currency transaction as per Rule 115 amounting to Rs.37,58,732, has been subject to tax by including the same in the total income of the assessee. This fact is admitted by the A.O. in his assessment order itself;

(ii) the Exchange Variation Reserve of Rs.79,68,902 was a mere book entry made to balance the debit and credit sums of the Trial Balance of the Iraqi Branch which arose on account of application of different rates of exchange for conversion of different items of the Trial Balance. This Exchange Variation Reserve did not represent any ''receipt'' or any ''profit or gain'' or ''loss'' from any transaction of business. It was merely a book entry made in the process of translation of the Trial Balance of Iraqi Branch in Indian Currency.

(iii) the Exchange Variation Reserve was not founded on any repatriation or transfer of foreign currency or income of the Iraqi Branch. There was no transaction resulting in the said Exchange Variation Reserve. If all the items of the Trial Balance of Iraqi Branch were converted into Indian rupees by applying a uniform exchange rate then no difference would have arisen and the need to show any amount under the heading of Exchange Variation Reserve would not have arisen.

(iv) the Income Tax Appellate Tribunal has assumed and observed that the aforesaid Exchange Variation Reserve was a ''receipt'' and ''profit''. This is without any legal or factual basis. There was neither any receipt nor profit.

(v) the accounting standards notified by the Institute of Chartered Accountants of India do not provide that such Exchange Variation Reserve has to be treated as receipt and profit and has to be subjected to tax under the Income Tax Act. The ITAT has misread the accounting standards. Moreover, the income or loss is to be worked out as per the provisions of the Income Tax Act. There is no provision in the Income Tax Act which provides for taxation of something which is not ''income'' at all or for taxation of such Exchange Variation Reserve created merely by a book entry in the circumstances already explained above;

(vi) the only trading asset, which is relevant for determining the profit or loss of business, is opening and closing stocks, which already form part of the profit and loss account. The variation in the value of such stocks is automatically accounted for in the computation of profit or loss as per Rule 115. Hence the question posed by the ITAT ''whether income relates to capital asset or trading assets'' is wholly misconceived. The ITAT has misdirected itself from the real issue.

(vii) the C.I.T. (A) has recorded clear finding of fact that "the dispute centers around the revaluation of assets resulting in difference in the foreign currency translation account. These revaluations have not resulted in any actual income or loss. All the assets held in Iraqi Branch in Dinars have been converted into Indian Rupees at different rates of foreign exchange depending on the date of installation of those assets/ expenditure etc. The surplus, in this case, having been arisen on account of such revaluation and conversions, no profit or loss could possibly arise for the purposes of assessment". The ITAT has completely ignored to deal with the aforesaid findings of C.I.T. (A). The said findings remain undisturbed.

(viii) the ITAT has misread and misconstrued the judgment of Hon''ble Supreme Court in Sutlej Cotton case. In that case there was repatriation and conversion of the profit in Indian rupees. In the present case, there is no repatriation or conversion of any profit. There is no transaction at all resulting in the aforesaid foreign exchange variation reserve. The said reserve is a mere book entry. There is no question of any capital or trading loss.

(ix) the ITAT has also misread and misconstrued the judgment of Hon''ble Supreme Court in the case of State Bank of Travancore. IN that case the question related to the interest on ''sticky'' loans which had been debited by the assessee bank to the account of the debtor but had been credited to ''Interest Suspense Account'' under the mercantile system of accounting. The question was whether the amount of interest so debited by the bank would be accrued income of the bank. The bank pleaded that its recovery/ realization was extremely doubtful and in the banking world it is the practice to show it as ''Interest Suspense Account'' and not to credit it to Profit and Loss Account. On this basis the plea was that it did not amount to real in-come. The majority view was that once the income has accrued in the form of debt by debiting it to the account of the debtor the doctrine of real income cannot take it out from accrual. (Note: This view has not been followed by the Supreme Court in the subsequent cases-the last being the case of Godhra Electricity Co. Ltd., Ahmedabad Vs. Commissioner of Income Tax, Gujarat-II, Ahmedabad, A Division Bench of our High Court in the case of National Handloom Development Corporation [ 266 ITR 746 ], did not follow it on the view that the Supreme Court too has not followed it. In fact in the case of Godhra Electricity Co. Ltd., Ahmedabad Vs. Commissioner of Income Tax, Gujarat-II, Ahmedabad, even the debit entries regarding the enhanced tariffs made in the account of consumers on the basis of legally confirmed rights, were not treated as real income because they were not and could not be recovered. In the present case, there is no income or accrual of income at all. Hence the question of defeating the income by the theory of ''real income'' does not arise in the present case. The exercise of translation of all the items of the Trial Balance of Iraqi Branch was not required by any provision of the Income Tax Act. It was done to prepare the consolidated Balance Sheet of the company for presentation to the shareholders. The actual or real income of Iraqi Branch was determined from the business transactions of the Branch which were in Dinars and which were converted into Indian rupees as per Rule 115 of the Income Tax Rules. There is no dispute that the income of the Branch was correctly determined and subjected to tax. The mistake of Income Tax Appellate Tribunal is that it has treated the amount of the Exchange Variation Reserve as ''receipt'' and ''profit''. But assuming it to be the increase in the value of assets, it cannot be treated as income. The submission of the appellant is supported by an English judgment of the House of Lords in the case of Patison (H.M. Inspector of Taxes) V. Marine Midland Limited reported in Vo.3 L.T.C. at page 1131.

It is submitted that to find out taxable income there has to be real income or profit or gain. The income may be actual or accrued, and may arise from profit or gain. But it has to be real.

Shri S.P. Gupta submits that the difference arisen on account of translation of items of trial balance of Iraqi Branch due to different exchange rates applied in conversion of Iraqi Dinars to Indian rupees, which was credited to Exchange Variation Reserve Account, was neither a receipt nor real or actual income or gain or profit nor was it a reserve in the sense it is commonly understood, which is created out of profit. It was merely book entry and could not be treated as income and subjected to tax. The amount of exchange variation reserve was notional entry made for balancing the debit and credit cited due to difference arisen by application of different exchange rates in the process of translating trial balance of Iraqi Branch.

In Sutlej Cotton Mills Limited Vs. Commissioner of Income Tax, Calcutta, it is held that the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. The assessee may not make entries in conformity with the proper principles of accountancy and may conceal profit or show loss. The entries made by him therefore were treated as conclusive one way or other. The Assessing Officer has to consider the true nature of transaction and to find out whether in fact it resulted into profit or loss to the assessee. The Supreme Court in the facts of that case in which Satlej Cotton Mills Ltd. having earned profits in its industrial unit in West Pakistan in the year 1954-55 was allowed to remit the profits in part after obtaining permission of Reserve Bank of Pakistan in the assessment year 1957-58. The Supreme Court held that where profit or loss arises 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 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. The Supreme Court, thereafter, setting aside the order of the High Court sent the case back to the Tribunal to consider whether the loss suffered by the assessee was treating loss or capital loss.

In Commissioner of Income Tax, West Bengal Vs. Hind Construction Ltd., cited by Shri S.P. Gupta the assessee had acquired a half interest in a joint venture for the purchase and sale of machinery. Unsold machinery remaining after the venture was divided and the assessee received machinery valued at Rs.2,06,372 as its share. In its account books the assessee wrote up the value of the machinery by Rs.4 lakhs. Thereafter, a partnership was formed in which the assessee had a half share. To the new firm the assessee transferred its stock of machinery at the book value of Rs.6,06,372 as its share of the capital. The Supreme Court held that machinery which fell to the share of the assessee was never sold. Therefore, there was no question of the assessee making any profit out of them. No one can sell his goods to himself. A sale contemplates a seller and a purchaser. If person revalues his goods and shows a higher value for them in his books, he cannot be considered as having sold those goods and made profit therefrom. Nor can a person by handing over his goods to a partnership of which he is a partner as his share of the capital be considered as having sold the goods to the partnership.

In Commissioner of Income Tax, West Bengal I Vs. India Discount Co. Ltd., the assessee, a dealer in shares, purchased from a share broker. At that time the previous owners had not claimed the dividends declared, for some part of previous years. During the relevant accounting period the assessee received such dividend. He first credited this sum to the profit and loss account and thereafter transferred it to a reserve fund. No adjustment was made in the share purchase account and the value of the shares remained the same both in the opening and in the closing of the accounts. The Supreme Court held that a receipt which in law cannot be regarded as income account become so merely because the assessee erroneously credited it to the profit and loss account. The assessee''s case had all along been that the arrear dividend received could not be treated as income liable to tax. Since the consideration paid by the assessee was given not only for the shares but also for arrear dividends, there was capital purchased

In National Handloom Development Corporation Ltd. by the assessee of the shares together with arrear dividend and thus the payment of such dividend could not be treated as National Handloom Development Corporation Ltd. Vs. Deputy Commissioner of Income Tax, the Division Bench of this Court in a case where assessee company was the wholly owned Central Government undertaking supplying handloom inputs to various handloom agencies and apex societies had sent the inputs against confirmed orders to the purchases/ suppliers of inputs, who directly dispatched the items to the user agencies. The assessee drew bills against the user agencies and sent them for payment to it on a commission, to be collected either in the form of subsidy from the Central Government or from the user agencies. The user agencies as a matter of informal practice paid the bills within 37 days, though there was no agreement with a mention on the bills that interest will be charged at the rate of 17.5% per annum on overdue amount. In the mercantile system of account maintained by the assessee it did not debit the interest to the account of the user agencies from whom it may be received on account of delay in payment. No entry was made with regard to such interest during the calendar of the year. Infact the assessee opened two accounts in the ledger (1) Deferred accrued interest (2) Deferred accrued interest receivable. Corresponding entry was debited to the account namely deferred accrued interest respectively. The entries were made in such a manner so that the accounts do not reflect non-existent income. The interest which was not actually received as it was not real or accrued income was not offered for taxation. The amount of interest actually received was treated by the assessee to be its income. The A.O. in both the years treated and credited both the amounts to be income of the assessee. The High Court held:

It is well settled that income cannot be generated, actual or accrued, by mere entries in the accounts of the assessee. Further, income cannot be said to be generated merely because the assessee has not written off the amount of interest, which was not forthcoming. The decision in State Bank of Travancore Vs. Commissioner of Income Tax, Kerala, which has been relied upon by the Tribunal has not been followed and has not been treated to be the correct enunciation of law in the judgment of the Supreme Court in the case of Godhra Electricity Co. Ltd., Ahmedabad Vs. Commissioner of Income Tax, Gujarat-II, Ahmedabad, and UCO Bank, Calcutta Vs. Commissioner of Income Tax, West Bengal, The case of State Bank of Travancore Vs. Commissioner of Income Tax, Kerala, has also been distinguished in the case of Keshavji Ravji and Co. v. CIT [1990] 183 ITR 1 (SC). In our opinion, the case of the assessee is directly covered by the judgment of the Supreme Court in the case of Godhra Electricity Co. Ltd., Ahmedabad Vs. Commissioner of Income Tax, Gujarat-II, Ahmedabad, in which the Supreme Court referred to its earlier decision in Commissioner of Income Tax, Bombay City I Vs. Shoorji Vallabhdas and Co., in which it was observed (page 757 of [1997] 225 ITR 757) :

income tax is a levy on income. No doubt, the income tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping an entry is made about a hypothetical income, which does not materialise.

The appeals were allowed by the High Court. The order of the Tribunal were set aside and it was directed that the additions were directed to be deleted.

Shri S.P. Gupta, learned counsel for the assessee submits that on the strength of the aforesaid decisions the question of law namely whether the Tribunal was justified in holding that some of Rs.79,68,902/- represented the assessee''s income liable to tax, deserves to be answered in favour of the assessee and against the department.

Shri A.N. Mahajan appearing for the revenue submits that the Tribunal has not erred in law and has given good and sufficient reasons to set aside the order of CIT (A) and to treat the amount of Rs.79,68,902/- as income of the assessee chargeable to tax. The Tribunal held that income was on three namely transactions pertaining to income and expenditure account, current assets and liabilities accounts, and fixed assets account. Following the Sutlaj Cotton Mills (Supra) it was held that income pertaining to transaction of income and expenditure account and also pertaining to current assets and liabilities account was taxable, but income pertaining to fixed assets accounts was not taxable being on capital account. The Tribunal had given opportunity to the assessee to bifurcate the income into these three different heads. The representative of the assessee could not give the bifurcation.

Shri Mahajan submits that the profits have arisen on account of revaluation of the transactions and the assets of the assesse''s projects at Iraq, the accounts of which were maintained in terms of Iraqi Dinars, who according to accountancy principles and procedures recognized by the Institute of Chartered Accountants of India, these transactions and assets were translated in terms of Indian currency namely rupees. Profits so arise could not be held to be non-existent and non-taxable. These were also not imaginary. The profits had actually accrued and were determined according to the correct accountancy procedures and principles. Though the profits were taken on account of exchange fluctuation to the foreign exchange variation reserve account instead of crediting the profit and loss accounts, real nature of profits were to be looked into. The Tribunal correctly held that profits arising on account of items of income and expenditure were revenue profits and were taxable. There was no evidence to show that Rs.37,58,732/-, which was added under Rule 115 was already included in Rs.79,68,902/-. The Tribunal after setting aside the order of the CIT (A) restored the issue to the file of AO for deciding afresh as per directions given namely to exclude income pertaining to fixed assets account, which were not taxable being capital account.

The legal position is settled since after the decision of Sutlaj Cotton Mills Ltd. (Supra). The Supreme Court in the fact of that case, which closely resemble the facts of the present case, held 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 treated as profit or loss, if foreign currency is held by the assessee on revenue account or as trading asset or as part of circulating capital earmarked in the business; but if on the other than, the foreign currency is held as capital asset or as fixed capital, such profit or loss would be of capital nature.

In this case the Tribunal did not commit any error in allowing the appeal and remitting the issue for bifurcating the transaction pertaining to income and expenditure account, current assets and liabilities account and fixed assets accounts and further in holding that the income pertaining to fixed assets account were not taxable being on capital account.

We may observe here that in the earlier years when there was a loss in this account the assessee claimed it to be a revenue loss. In the year in question when there was a profit, the amount could not be kept separate and not subjected to tax. The assessee translated the income and expenditure at the average rate of conversion into foreign currency of the year. The current assets and liabilities were translated at the closing rates of the year. The fixed assets were translated at closing rates for the respective year, when the purchases were made. The assessee had himself transferred the profit arising to an account with nomenclature as ''Exchange Variation Reserve Account''. The profits as such in the income and expenditure account and current assets and liability accounts were real and not imaginary and were thus liable to be taxed after excluding the income pertaining to the fixed assets account.

All the three questions referred to as above and relevant for the purposes of deciding this reference are decided in favour of the revenue and against the assessee.