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Petitioner: TATA LOCOMOTIVE AND ENGINEERING Co. LTD. VS Respondent: COMMISSIONER OF INCOME-TAX, BOMBAY CITYHonorable Justice TAMBEN. A. Palkhivala,G. N. Joshi
1963 P T D 251
1963 P T D 251
[Maarashtra India]
Before Y. S. Tambe and V. S. Desai, JJ
TATA LOCOMOTIVE AND ENGINEERING Co. LTD.
Versus
COMMISSIONER OF INCOME‑TAX, BOMBAY CITY
Income‑tax Reference No. 12 of 1959, decided on 30th August 1961.
Income or capital-----
----‑Money remitted to America and income earned there retained in America for purposes of purchase of capital goods‑Devaluation‑Impossibility of purchasing capital goods‑Sale of foreign exchange‑Profit whether income or capital.
The assessee was a company which manufactured locomotives and locomotive boilers. For the purpose of purchasing capital goods required for its manufacturing activities, the assessee appointed one T as its purchasing agent in the United States of America, and with the permission of the Reserve Bank remitted $33,850 to the agent. As the selling agent for B in America the assessee earned commission (on which the assessee paid tax on the accrual basis) and also spent the amounts to meet the expenses of their local representative. With the permission of the Reserve Bank the commission due from B and the amounts by way of reimbursement of the expenses of the representative were retained in the U.S.A. in the assessee's account with the purchasing agent T solely for the purchase of capital goods. Out of the remittances the assessee had spent $30,283 and the balance in its accounts with T stood , at $48,572 on September 16, 1949. The amount was composed of $3,567 being the balance of the remittances, $8,882 representing amounts reimbursed by B and $36,123 representing commission received and retained in America. On September 16, 1949, there was a devaluation in the pound sterling and in the rupee and as a result American goods became more expensive than before. The Government also imposed restrictions on the import of goods from the U. S. A. As further purchase of capital goods from America was rendered impossible the assessee, with the permission of the Reserve Bank, repatriated to the country the entire balance in America. In the process of converting the balance into rupee currency the assessee gained a surplus of Rs.70,147. The Appellate Tribunal held that $3,567, representing the balance of remittances and $8,882 reimbursed by B alone were held for capital purposes and that that portion of the surplus of Rs. 70,147 attributable to $36,123 representing commission received in America must be included in the taxable income. On a reference
Held, that although the character of the sum of $36,123 at the inception was that of income, when the assessee had taken a decision to utilise this sum for capital purposes and when the assessee obtained the requisite‑ permission of the Reserve Bank to use it for this purpose and also when the assessee‑company had, by crediting it in the account of appropriated that sum for the specific purpose, the initial character of this sum underwent a change and it assumed the character of fixed capital of the company. The character assumed by this amount of fixed capital did not undergo any change till the time benefit accrued on this amount to the assessee as a result of change in the exchange rate. The surplus or difference arising as a result of devaluation in the process of converting these dollars into rupee currency in repatriating them to assessee's own country was an accretion to its fixed capital and was not, therefore, liable to tax.
In deciding whether a particular sum is part of a fixed capital of an assessee or his circulating capital, the crucial test to be applied is to ascertain the purpose to which the assessee has appropriated that amount. No doubt the initial character of the amount at the time of its receipt would be relevant in determining the issue. In the absence of any evidence to the contrary, the amount shall continue to bear the same character, but the subsequent course of dealing with that amount by an assessee is capable of changing the initial character of the amount. If an assessee has so changed the character of the amount, then it is the use to which that amount has been put that would determine the issue. If the assessee has appropriated or employed the amount to use other than trading operations of his business, then the amount would bear the character of fixed capital of the assessee.
Davies v. Shell Company of China Ltd. (1952) 22 I T R (Suppl.) 1 (C A) rel.
John Smith & Son v. Moore (1921) 12 Tax. Cas. 266 (H L) ref.
STATEMENT OF CASE
By this application the assessee requires the Appellate Tribunal to state a case to the High Court on questions of law which are said to arise out of the Tribunal's order in I. T. A. No. 886 of 1957‑58. Inasmuch as in our opinion a question of law does arise out of the aforesaid order of the Tribunal, we hereby draw up a statement of the case, agreed to by the parties, and refer it to the High Court of Judicature at Bombay under section 66(I) of the Indian Income‑tax Act.
2. The assessee is a limited company registered under the Indian Companies Act (VII of 1913), and has its registered office at Bombay. The main business of the assessee is the manufacture of locomotive boilers and locomotives.
3. For the purpose of its manufacturing activities the assessee had to make purchases of plant and machinery etc. in various countries including the U. S. A. Messrs Tata Inc., New York, are the purchasing agents of the assessee in the. U. S. A. With the sanction of the Exchange Control Authorities, a remittance of $33,850 was made in 1946, to Messrs Tata Inc., New York, for the purpose of purchasing capital goods from the U.S.A. and meeting other expenses connected therewith.
4. In addition to remitting funds from India to the U.S.A. for the above purpose the assessee also acquired funds in dollars in the U.S.A. in the circumstances hereinafter mentioned.
5. In connection with the survey and setting up of the factory of the assessee, representatives of Baldwin Locomotive Works, Philadelphia, U. S. A., used to visit India and the assessee made available funds to such representatives for the purpose of meeting their expenses in India. The assessee was appointed as the sole selling agent of Baldwin Locomotive Works for the sale of their products in India and in connection with the sale of the products of Baldwin Locomotive Works in India the assessee had to incur expenses on their behalf in India. The funds so made available to the representatives of Baldwin Locomotive Works and the expenses incurred by the assessee on behalf of Baldwin Locomotive Works in India were reimbursed to the assessee by Baldwin Locomotive Works in the U. S. A. by paying the amounts due to Messrs Tata Inc., New York. The amounts so paid to Tata Inc., New York, were retained in the assessee's account with Messrs Tata Inc. for the purchase of capital goods.
6. The assessee was, as stated above, the sole selling agent of Baldwin Locomotive Works for the sale of their products in India. As such sole selling agent the assessee was entitled to commission from Baldwin Locomotive Works. The commission due to the assessee was not actually repatriated from U. S. A. to India but, with the sanction of the Exchange Control Autho?rities, was made over to the assessee's purchasing agents Messrs Tata Inc., New York. The reason why this was done was explained in the assessee's letter dated 26th October 1948, to the Reserve Bank of India in which the assessee stated, inter alia:
"It would be more convenient if tile amount of commission payable to us periodically deposited into our account with our representatives, Messrs Tata Inc., New York, opened with refer?ence to your letter EC. BY. 7031/74/46, dated 2nd October 1946, as the same would go to reduce the amount of remittances to be made from here in recoupment of that amount from time to time. These amounts will be utilised solely for the purposes detailed in our letter to you TG‑679 dated 15th August 1946."
The purposes referred to in the said letter of 15th August 1946, were purchase of capital goods. The commission referred to in this paragraph was taxed on the accrual basis in the relevant years.
7. The amount of the aforesaid commission was brought to tax in the relevant assessment‑years in which it was earned and tax has been paid in the relevant assessment years in respect thereof.
8. Thus the sources from which the assessee came to hold dollars in the U. S. A. were three, viz.
(1) Remittances from Bombay.
(2) Amount reimbursed by Baldwin Locomotive Works against funds made available to its representatives in India.
(3) Commission actually received from Baldwin Locomotive Works and retained in the U.S.A.
9. On 16th September 1949, there was a balance of $48,572/30 in the assessee's account with Messrs Tata Inc., New York, made up as under :
(1) Remittances from Bombay ? $33,850 00 Less: Dollars spent in the U. S. A. for capital purposes ???????????????????????????? $30,282 96 ??????????????????????????????????????????????????????????? $3,567-04 (2) Amount reimbursed by Baldwin Locomotive Works against funds made available to its representa tives in India ??????????????????????????????????????? $8,882 24 (3) Commission actually received from Baldwin Locomotive Works and retained in the U. S. A. ??????????????????????? $36,123 02 Total??????????????????????????????????????????????????? $48,572 30
10. On 16th September 1949, the pound sterling was devalued. Prior to the devaluation the rate of exchange between rupee and dollar was Rs. 3‑330 per dollar and on devaluation the rate became Rs. 4‑775 per dollar. The result was that American goods became very expensive and further the Govern?ment of India also imposed restrictions on imports from the U. S. A. This rendered further purchases of capital goods from the U. S. A. practically impossible. There was therefore no need for the assessee to retain in the U. S. A. the large amount of $48,572/30 which the assessee held on 16th September 1949,
The assessee therefore applied to the Reserve Bank of India on 17th December 1949, for permission to repatriate a sum of $40,000 out of the said sum of 48,572/30, which permission was given and the sum of $40,000 was repatriated to India Under similar circumstances in October 1950, a sum of $9,500 was repatriated to India. Though the two remittances from the U. S. A. to India of $40,000 and $9,500 fall into different accounting years, the case proceeded before the Income-tax authorities as well as before the Tribunal on the footing that the two remittances be considered as falling in the accounting year ended 31st March 1950, for the purpose of the appeal before the Tribunal. The said remittance of $49,500 includes the sum of $48,572/30 that was held by the assessee on 16th Septem?ber 1949.
11. This repatriation of the sum of $48,572/30 gave rise to the sum of Rs. 70,147 as surplus in the process of converting dollar currency into rupee currency.
12. The Income‑tax Officer brought to tax the said amount of Rs. 70,147 on the ground. that it represented profit that arose to the assessee "incidentally to its carrying on the business." An appeal against the order of the Income‑tax Officer was filed with the Appellate Assistant Commissioner who substantially agreed with the view taken by the Income‑tax Officer (and not the assessee as inadvertently stated in paragraph 7 of the order of the Tribunal) though he gave a small reduction of Rs. 6,894.
13. Thereupon, an appeal was preferred to the Income‑tax Appellate Tribunal. Before the Tribunal it was contended on behalf of the assessee that the surplus of Rs. 70,147 attributable to the conversion of $48,572/30 into rupees was of the nature of capital profit inasmuch as the said sum of $48,572/30 was held by the assessee in the U.S.A. on capital, i.e., for capital purposes such as purchasing plant, machinery, etc., and meeting expenses connected with technical know‑how. For the reasons mentioned in its order the Tribunal held that the sums of $3,567/04 and $8,88,2/24 (included in the sum of $48,572/30) were held by the assessee for capital purposes and hence any profit that arose to it as a result of its conversion into rupee currency on account of appreciation of the dollar in relation to the rupee, must be held on capital account and that therefore that portion of the sum of Rs. 70,147 attributable to the said two sums must be excluded for the purpose of computing the assessee's income.
14. As regards the sum of $36,12302, it was further contend?ed before the Tribunal on behalf of the assessee that though the said amount was earned as commission and retained in the U. S. A., it was set apart by the assessee for the purchase of capital equipment etc. with the prior sanction and authority of the Reserve Bank of India and as such it should be consi?dered, from and after the receipt of sanction from the Reserve Bank of India, to be of the same nature as the sum of $3,56‑04, i.e., held for capital purposes, that the sum of $36,12302 which was initially held on revenue account became converted into one held on capital account by reason of the permission sought from and granted by the Reserve Bank of India and that therefore when it was repatriated as part of $49,500 the repatriation was on capital account and whatever surplus was made on exchange must be held to be on capital account. Further that in accordance with the foreign exchange regulations and the manner of its operation by the Reserve Bank of India authorities, the company could not retain U. S. currency (a hard currency), except with the permission of the Reserve Bank, but would be obliged to repatriate the same to this country. If, therefore, the company had not applied for and obtained permission to retain the funds in the U. S. A. for capital purposes (but in fact it did apply by its letter No. TG‑809, dated 26th October 1948, and obtained the necessary permission by the Reserve Bank's letter dated 3rd November 1948), there would have been repatriation of these funds as and when they were earned. It was also argued that when the Reserve Bank sanctioned the, retention of the said amount of commission in the U.S.A. for the purpose of its being used for capital purposes it must be held that an equivalent sum was remitted from the U.S.A, to India and a corresponding sum was sent from India to the U.S.A. for capital purposes.
15. The Tribunal however held, for the reasons set out in its order annexed hereto as Annexure "A" and forming part of the case, that that part of the sum of Rs. 70,147 which was attributable to $ 36,123,02 should be brought to tax as a revenue receipt; 16. The questions of law that arise are;
"(1) Whether, on the facts and in the circumstances of the case, the surplus or difference arising as a result of devalua?tion in the process of converting dollar currency into rupee currency in regard to the sum of $ 36,123,02 repatriated to India was profit which was taxable in the hands of the assessee ?
and
(2) Whether the said sum of $ 36,123‑02 having been taxed in the relevant earlier years, the surplus or' difference in dollar exchange account arising by reason of the repatriation thereof as a result of devaluation was rightly taken as profit taxable?"
17. At the request of the assessee the Income‑tax Officer's and the Appellate Assistant Commissioner's orders are annexed hereto as Annexures "B" and "C", respectively.
N. A. Palkhivala for the Assessee.
G. N. Joshi with R. J. Joshi for the Commissioner.
JUDGMENT
TAMBE, J.‑This is a reference made by the Income‑tax Appellate Tribunal (hereinafter referred to as the Tribunal) under section 66(1) of the Indian Income‑tax Act (hereinafter referred to as the act). The Assessee is a limited company registered under the Indian Companies Act (VII of 1913) and has its registered office at Bombay. The main business of the assessee company is the manufacture of locomotive boilers and locomo?tives. For the purpose of its manufacturing activities, the assessee company had to make purchases of plant and machinery, etc., in various countries including the United States of America. The assessee company had appointed M/s. Tata Inc., New York, as its purchasing agents in the United States. In the year 1946 the assessee company with the sanction of the Exchange Control Authorities sent a remittance of $ 33,850 to its purchasing agents, Messrs. Tata Inc. of New York for purposes of purchasing capital goods in the United States of America and meeting other expenses connected therewith. In connection with the survey and setting up of the factory of the assessee company, repre?sentatives of Baldwin Locomotive Works, Philadelphia, U.S.A., used to visit India. The assessee made available funds to such representatives for the purpose of meeting their expenses in India, The assessee company was appointed as the sole selling agents of the Baldwin Locomotive Works for the sale of their products in India and in connection with the sale of the products of Baldwin Locomotive Works in India, the assessee had to incur expenses on their behalf in India. The funds so made available to the representatives of the Baldwin Locomotive Works and the expenses incurred by the assessee on behalf of the Baldwin Locomotive Works in India were reimbursed to the assessee by the Baldwin Locomotive Works of U.S.A. by paying the amounts due to the assessee's selling agents Tata Inc., in New York. The amounts so paid by the Baldwin Company to the Tata Inc. with the previous permis?sion of the Reserve Bank of India were retained in the assessee's account with the Tata Inc. for the purchase of capital goods. Now; as already stated, the Baldwin Company had appointed the assessee company as its sole selling agents in India. Com?mission in that respect was agreed to be paid in dollars to the assessee company in America. With the prior permission of the Reserve Bank the amounts received by way of commission by the assessee company from Baldwin Company were also credited in the account of the assessee company with the Tata Inc., which was opened in 1946 for purposes of purchasing capital goods in America. The question that has been referred to us relates to the amounts of commission received by the assessee during the year 1948‑49 and from Ist April, 1949, to 16th of September, 1949. It would, therefore, be convenient to reproduce at this stage the letter written by the assessee company to the Reserve Bank for obtaining the necessary permission to keep those amounts in their aforesaid account with the Tata Inc. The letter s of date 26th October, 1948, and the material part is in the following terms :
"It would be more convenient if the amount of commission payable to us periodically be deposited into our account with our representatives, Messrs Tata Inc., New York, opened with reference to your letter' EC.BY. 7031/74 dated 2nd October, 1946, as the same would go to reduce the amount of remit?tances to be made from here in recoupment of that amount from time to time. These amounts will be utilised solely for the purposes detailed in our letter to you TG‑679 dated August 15, 1946."
It is an admitted position that the purposes referred to in the said letter of 15th August 1946, were purchase of capital goods.
The Reserve Bank granted the permission to the assessee company to credit the amounts received by them by way of commission from Baldwin Company to their account with the Tata Inc. opened in 1946 for purchase of capital goods in America. The amounts accordingly received in the year 1948‑49 and from 1st April, 1949, to 16th September 1949, amounted to $ 36,12302. On the amount of commission received, the assessee company paid income‑tax in India on the accrual basis in the relevant years. Thus the sources from and the extent to which the assessee came to hold dollars on 16th September 1949, in its account with its purchasing agents, Tata Inc., were :
1. Remittances from Bombay ?????????????? $ 33,850.00 Less dollars spent in the U.S.A. for capital purposes ???????????????????????????????????????????????????????? $ 30,282.96 ??????????????????????????????????????????????????????????????????????? $ 3,567.04 2. Amount reimbursed by Baldwin Locomo tive Works against funds made avail able to its representatives in India????????????????????? $ 8,882.24
3. Commission actually received from Baldwin Locomotive Works? and retained in the U. S. A. ??????????????????????????????????? $ 36,123.02 ??????????????????????????????????????????????????????????????????????? $ 48,572.30
On 16th of September 1949, the pound sterling was devalued. Prior to that date the rate of exchange between rupee and dollar was Rs. 3.330 per dollar. On devaluation the rate became Rs. 4.775 per dollar. The result thus was the American goods became expensive than before. The Government of India also imposed restrictions on the import of goods from the U. S. A. It appears that this rendered, as the statement of case would show, the further purchase of capital goods from the U.S.A. practically impossible. The assessee considering that in these circumstances it was not necessary to retain large amount of $ 48,57230 in America applied to the Reserve Bank on 17th of December, 1949, for permission to repatriate a sum of 40,000 dollars out of 48,572 dollars held by it in its account with the Tata Inc. On the permission being granted a sum of 40,000 dollars was repatriated to India. Similarly, a further sum of $9,500 was also repatriated to India. Though these two remittances from the U. S. A. to India of $40,000 and $9,500 fell in different accounting years, the assessee agreed before the Income‑tax Officer that both these remittances should be considered to have been received in the accounting year ending 31st March 1950, and on that footing the case has proceeded throughout. As already stated the amount, which was to the credit of the assessee in its account with the Tata Inc. on 16th September 1949, amounted to $48,57230. This sum in its entirety had been repatriated to India. The surplus amount gained by the assessee as a result of devaluation on the repatriation of the sum of $48,572'30 amounted to Rs. 70,147 in the process of converting the amount of 48,57230 dollars into rupee currency. It was the case of the department that tote assessee is liable to pay tax on on the aforesaid amount of Rs. 70,147 on the ground that it represented profits that arose to the assessee incidental to its carrying on the business. On the other hand, it was the contention of the assessee that it was not liable to pay any tax because any benefit that might have accrued to the assessee was a benefit of its capital asset. The Income‑tax Officer negatived the conten?tion of the assessee and brought to tax the entire amount of Rs. 70,147. The assessee's appeal to the Appellate Assistant Commissioner failed. Assessee took further appeal to the Tribunal. Before the Tribunal it was contended on behalf of the assessee that the surplus of Rs. 70,147 attributable to the conver?sion of 48,57230 dollars into rupee currency was of a nature of capital profits receipt inasmuch as the said sum of 48,57230 dollars was held by the assessee in America for capital purposes such as purchasing plant, machinery, etc. and meeting expenses connected with the technical know‑how. The Tribunal did accept the contention of the assessee in respect of two amounts, namely, the sum of 3,56704 dollars balance remaining out of the first remittance of 33,850 dollars, and the sum of 8,88224 dollars that is, the amount reimbursed by Baldwin Locomotive Works against the funds made available in India to its representatives by the assessee, holding that these two sums were held by the assessee for capital purposes, that is, for the purchase of capital goods and hence any profit that arose as a result of its conversion into rupee currency on account of the appreciation of the dollar in relation to the rupee, must be held on capital account. The Tribunal,, therefore, directed that portion of the sum of Rs. 70,147 attributable to the said two sums must be excluded for the purpose of computing the assessee's income.
As regards the third sum of 36,12302 dollars received by the assessee by way of commission from the Baldwin company up to 16th September 1949, the Tribunal held that the benefit secured by the assessee in the process of converting those dollars into rupee currency should be brought to tax as revenue receipt. On an application made by the assessee under section 66 (1) of the Indian Income‑tax Act, to make a reference to this Court, the Tribunal held that questions of law did arise and, has, therefore, submitted a statement of case raising the following two questions :
"1. Whether on the facts and in the circumstances of the case, the surplus or difference arising as a result of devalua?tion in the process of converting dollar currency into rupee currency in regard to the sum of $36,123.02…
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