# COMMISSIONER OF INCOME-TAX, MYSORE v. THE CANARA BANK LTD

- **Citation:** [1967] 1 S.C.R. 859
- **Court:** Supreme Court of India
- **Decided:** 1966-10-13
- **Case number:** Civil Appeal No. 675 of 1965
- **Bench:** J.C. Shah, V. Ramaswami, V. Bharvaga
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-mysore-v-the-canara-bank-ltd-3926
- **Pages:** 5

## Headnote

Indian Income-tax Act, 1922, s. 10-Appreciatkm in value of m.<mrJ
remitted from Pakistan to India after
devaluation of Indian Rupee hr
1949-Amount of appreciation whether capital or revenue receipt.
The respondent bank had its head office at Mangalore. It also opened
a branch at Karachi in 1946. After the partition of India in 1947 the
curiencies of the two countries continued to be at · par until there was
a devaluation of the Indian Rupee in 1949.
The new exchange ratio
between the two countries was not determined until February 27, 1951.
On this date it was agreed that a hundred Pakistani Rupees W•Te equh-alent
to a hundred and forty-four Indian Rupees.
On the dale of the devaluation of the Indian Rupee the Karachi Branch of the Bank had with it
a sum of Rs. · 3,97,221 belonging to its head office. Owing to the ditliculties of the currency situation it was impossible to remit the amount to
the head effice for quite a long time. On July 1, 1953, the State Bank of
Pakistan . permitted its remittance to India. In terms of Indian currency
the said amount became equivalent to Rs. 5,71,038. The appreciation in
the value of the money was claimed by the bank to be only a capital gain
but the Income-tax Officer disallowed the claim holding that the apprecia.-
tion had resulted in a revenue receipt. Appeals before the Assistant Commissioner and the Appellate Tribunal were rejected. A reference was theil
made to the High Court. According to the agreed statement of case the
amount of Rs. 3,97,22t was 'blocked' and 'sterilised' for the period from
the devaluation of the Indian Rupee up to the time of its remittance to
India. The High Court took the view that the appreciaion of the value
of the money did not arise in the course of the trading operation of the
Bank and was not therefore taxable as a revenue receipt. The Commi>-
sioner of Income-tax appealed to this Court.
HELD : The money in question changed its character of 'stock-in-tra<ill'.
when it was 'blocked' and 'sterilised'.
According to the finding of tl\e
Tribunal it was not utilised for any internal banking operations in Pakis~
tan. The increment in the value of the money owing to the exchange
ftuctuation was therefore rightly treated by the High Court to be , •
capital receipt. [862 BJ
G

## Text

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COMMISSIONER OF INCOME-TAX, MYSORE
v.
THE CANARA BANK LTD.
October 13, 1966
(J.C. SHAH, V. RAMASWAMI AND V. BHARVAGA, JJ.)
Indian Income-tax Act, 1922, s. 10-Appreciatkm in value of m.<mrJ
remitted from Pakistan to India after
devaluation of Indian Rupee hr
1949-Amount of appreciation whether capital or revenue receipt.
The respondent bank had its head office at Mangalore. It also opened
a branch at Karachi in 1946. After the partition of India in 1947 the
curiencies of the two countries continued to be at · par until there was
a devaluation of the Indian Rupee in 1949.
The new exchange ratio
between the two countries was not determined until February 27, 1951.
On this date it was agreed that a hundred Pakistani Rupees W•Te equh-alent
to a hundred and forty-four Indian Rupees.
On the dale of the devaluation of the Indian Rupee the Karachi Branch of the Bank had with it
a sum of Rs. · 3,97,221 belonging to its head office. Owing to the ditliculties of the currency situation it was impossible to remit the amount to
the head effice for quite a long time. On July 1, 1953, the State Bank of
Pakistan . permitted its remittance to India. In terms of Indian currency
the said amount became equivalent to Rs. 5,71,038. The appreciation in
the value of the money was claimed by the bank to be only a capital gain
but the Income-tax Officer disallowed the claim holding that the apprecia.-
tion had resulted in a revenue receipt. Appeals before the Assistant Commissioner and the Appellate Tribunal were rejected. A reference was theil
made to the High Court. According to the agreed statement of case the
amount of Rs. 3,97,22t was 'blocked' and 'sterilised' for the period from
the devaluation of the Indian Rupee up to the time of its remittance to
India. The High Court took the view that the appreciaion of the value
of the money did not arise in the course of the trading operation of the
Bank and was not therefore taxable as a revenue receipt. The Commi>-
sioner of Income-tax appealed to this Court.
HELD : The money in question changed its character of 'stock-in-tra<ill'.
when it was 'blocked' and 'sterilised'.
According to the finding of tl\e
Tribunal it was not utilised for any internal banking operations in Pakis~
tan. The increment in the value of the money owing to the exchange
ftuctuation was therefore rightly treated by the High Court to be , •
capital receipt. [862 BJ
G
Case law referred to.
H
CivJL APPELLATE JURISDICTION: Civil Appeal No. 675 of 1965.
Appeal from the judgment and order dated December 11, 1961
of the Mysore High Court in I.T.R.C. No. 13 of 1959.
R. M. Hazarnavis, R. Ganapathy Iyer and R. N. Sacl1they,
for the appellant.
·
A. K. .SL•11, G. L. Sa11gl1i and B. R. Agarwal, for the respondent.
860
SUPREME COURT RJ!PORTS
(1967) I S.C.R.
The Judgment of the Court was delivered by
Ramaswami, J. This appeal is brought, by certificate, from
the judgment of the High Court of Mysore dated December I I, 1961
in Income Tax Reference .Case No. 13 of 1959. The respondent
(hereinafter referred to as the 'Bank') is a public limited company
carrying on business of banking at its head office in Mangalorc
and its branches in various places. It opened one branch in Karachi
on November 15, 1946. After the partition of India in 1947, the
currencies of the two dominions of India and Pakistan continued to
be at par until there was a devaluation of the Indian Rupee on
September 18, 1949. As Pakistan did not devalue her rupee, the
old parity of the Pakistan and Indian Rupee ceased to exist. The
exchange ratio between the two countries was not detennined until
February 27, 1951. On this date it was agreed that a hundred
Pakistani Rupees were equivalent to a huRdred
and fortyfour
Indian rupees. On the date of devaluation of the Indian Rupee
the Karachi Branch of the Bank had with it a sum of Rs. 3,97,221/-
belonging to its head office. Owing to the difficulties of the currency situation it was impossible to remit the amount to the head
office for quite a long time. On July I, 1953, the State Bank of
Pakistan permitted its remittance to India. In terms of Indian
currency the said amount became equivalent to Rs. 5,71,038/-.
Thus there was an appreciation of the value of the amount remitted
from the· Karachi branch and the Bank made a profit of
Rs. 1,73,817/-. After making certain deductions, the head office of
the Bank transferred a sum of Rs. 1,70,746/- to its Contingencies
Reserve Account.
Jn its return for the assessment year 1954-55,
the Bank claimed that this sum was a capital gain and was not
taxable.
By his order dated February 9,
1955 the Income-tax
Officer rejected lhe claim holding that the said
amount of
Rs. 1,70,746/- was a revenue receipt. The order of the Income-tax
Officer was affirmed by the Appellate Assistant Commissioner
in appeal. The Bank took the matter in further appeal to the
Income-tax Appellate Tribunal which rejected the appeal
by it>
order dated November 23, 1956. At the instance of the Bank the
Income-tax Appellate Tribunal referred the following question of
law for the determination of the High Court :
"Whether the aforesaid exchange
difference of
Rs. I ,70,746/- is assessable under any of the provisions of
the Indian Income-tax Act?"
By its order dated December 11, 1961 the High Court reversed the
finding of the Appellate Tribunal and held that the exchange difference of Rs. 1,70,746/- was not assessable to income-tax under any
provision of the Indian Income-tax Act.
The question involved in this appeal j, whether the profit
of the Bank on account of fluctuation of exchange arose iri the
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C.I.T. v. CANARA BANK (Ramaswami, J.j
861
COl!rse of trading operation of the Bank or whether it was incidental to any such trading operafa>n. If by virtue of exchange operations profits are made during the course of business and in connection with business transactions, the excess receipts on account of
conversion of one currency into another would be revenue receipts.
But if the profit by exchange operations comes in, not by way of
business of the Bank, the profit would be capital profit. In the
present case, the High Court has found, after an analysis of the
relevant facts, that the appreciatfon of the money did not arise in
the course of any trading operation. In the year 1949 when there
was a devaluation of the Indian rupee, the Karachi branch of the.
Bank was not carrying on any business in foreign curren;ies,
It has been found by the Appellate Tribunal that until April 3,
1951 when the Bank was permitted to carry on_ business in Pakistan
currency it carried on no foreign exchange business. Even after
such permission was granted and even after the Bank obtained on
April 25, 1953- a general licence to carry on business in all foreign
currencies the money of the head office was not used for any business
in foreign currencies. The appellate Tribunal has found that the
money was lying idle in the Karachi branch and it was not utiliseq·
in any banking operation and the Karachi branch was merely keeping that money with it for the purpose of remittance to India and
awaiting permission of the State Bank of Pakistan. The State
Bank of Pakistan granted the permission on July I, 1953 and the
remittance actually took place two days later i.e., on July 3, 1953.
It has been found by the appellate Tribunal that the sum of money
was at no material time employed, expended or used for any banking operation or for any foreign exchange business. In the supplementary statement of the case the appellate Tribunal stated that
"during the period April 3, 1951 to April 25, 1953 there were dealings between India and Pakistan Offices of the Bank, such as opening of letters of credit, issuing of drafts etc.", and "that all these
operations were effected in a new account which was opened and the
old balance of Rs. 3,97,221/- could not be utilised as per instructions of the State Bank of Pakistan". According to the agreed
statement of the case the amount of Rs. 3,97,221/- was "blocked"
and "sterilised" for the period from the devaluation of the Indian
rupee upto the time of its remittance to India. In the context of
these facts the High Court took the view that the appreciation of the
value of the money did not arise in the course of the trading operation of the Bank and was not therefore taxable as revenue receipt.
On behalf of the appellant Mr. Hazarnavis submitted that the
appellate Tribunal was wrong in holding that there was blocking or
sterilisation of the amount. Learned Counsel said that the balance
sheets of the Revenue account of the Karachi branch would show
that the amount of Rs. 3,97,221/- was not lying idle in the Karachi
branch but was utilised by it for internal banking operations "within
Pakistan. We did not, however, permit Mr. Hazarnavis to produce
862
SUPREME COURT REPORTS
(1967] I S.C.R.
additional evidence in this Court for controverting the findings
of fact reached by the appellate Tribunal. It is a matter of significance that the original statement of the case dated May 15, 1957
and Supplementary statel!lent of the case dated August 14, 1959 were
both agreed statements. Before the High Court also the findings of
the appellate Tribunal were not challenged on behalf of the Commissioner of lncome-tax. On the other hand, it appears that it
was conceded by the appellant before the High Court that there
was no evidence that the "blocked" balance was, in fact, employed
by the Karachi branch for the internal banking operations in Pakistan or for its business in Pakistan and other foreign currencies. It
is therefore not permissible for the appellant at this stage to go
behind the two statements of the case and to challenge the findings
of fact contained therein. The argument was also stressed by Mr.
Hll7.arnavis that the money was a 'stock-in.-trade' of tl;e bank and
an increment of Rs. 1,70,746/- due to the fluctuation in the exchange
rate must therefore be treated as incidental to the business of the
Bank. We shall assume ,in favour of the appellant that the money
was 'stock-in-trade' of the Bank. But it does not necessarily follow
that the increment due to the fluctuati1 n in the exchange rate was
due to trading operations in the carrying on of the banking business.
On the contrary, it has been found by the appellate Tribunal that the
amount of Rs. 3,97,221/- was a "blocked" and "sterilised" balance
and the Bank was unable to deal with that amount or use it for any
banking purpose between September, 1949 and July, I 953 when it
was finally remitted to India. In our opinion, the money changed
its character of 'stock-in-trade' when it was 'blocked' and 'sterilised'
and the increment in its value owing to the exchange fluctuation
must be treated as a capital receipt. It has also been found by the
appellate Tribunal that the said amount of Rs. 3,97,221/- was not
utilised for internal banking operations within Pakistan and it is
hence not possible to draw an inference that the Bank realised any
profit in the carrying out of its business. We accordingly hold
that Mr. Razarnavis is unable to make good his argument on this
aspect of the case and the High Court was right in reaching the conclusion that the exchange difference of Rs. 1,70,746/- was not assessable to income-tax.
In the course of his argument Mr. llazarnavis relied upon the
decision of the Court of Appeal in Imperial Tobacco Company v.
Kelly(I). In that case, a tobacco manufacturing company in England
with a view to buying tobacco leaf in the U.S.A. during the leaf
season, used to provide itself with dollar currency in advance by
purchasing the same beforehand. On the outbreak of war. owing to
Governmental restrictions the company had to suspend its buying
operations in U.S.A. Later, the British Treasury requisitioned the
accumulated dollars and paid the company sterling in exchange.
(t) 25 T.C. 292.
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C.I.T. v. CANARA BANK (Ramaswami, /,)
863
The dollars in the meantime having appreciated in value, the company got more sterling than what it originally laid out. It was held
by the Court of Appeal that the excess receipts were profits assessable to income-tax and the acquisition of the dollars was the first
step in the commercial transaction of the company. The dollar
was a 'commodity' of the company and it became a surplus stock
to the company's requirements on the restriction on purchase and
original revenue character would not be altered by the circumstance
ef the Governmental controls requisitioning the dollars. Mr.
Hazarnavis also referred to the decision in Landes Brothers v. Simpson(') where a similar view was taken. On the contrary, Counsel
for the respondent relied upon the decision in McKinlay (H. M.
Inspector of Taxes) v. 11. T. Jenkins & Son(2) Ltd. in which it was
held that the profit by exchange operations would be capital profit
if the profit did not come in by way of business but by means of an
investment in foreign currencies. In that case, a British company
carrying on business in marbles, bought Italian Liras in advance
with which to pay in Italy for marbles to be purchased there. But
before the time came for purchase, finding that the Lira had appreciated, it sold away the Liras at a profit, and bought a second instalment of Liras to fulfil its contract in time. It was held by Rowlatt,
J. that the first instalment of Liras should be regarded as capital
lying idle and that the conversion thereof was a speculative transaction in capital. Reference was also made to the decision in Davies
v. Thf Shell Company of China(3) Ltd. But the decision in none
of these cases is exactly in point, for the material facts in the present
case are different. The question of law arising in the present case
must be decided on the particular facts and circumstances found by
the appellate Tribunal.
For the reasons already expressed we hold that the High Court
has correctly answered the question referred to it and this appeal
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must be dismissed with costs.
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G.C.
(I) 19 T.C. 62.
(2) 10 T,C. 37l.
(3) 32 T.C. 133,
Appeal dismissed.