# COMMISSIONER OF lNCOME-TAtX, BOMBAY CITY v. TATA LOCOMOTIVE & ENGINEERING CO., LTD. Jqnuary 13, 1966

- **Citation:** [1966] 3 S.C.R. 235
- **Court:** Supreme Court of India
- **Decided:** 1966
- **Bench:** K. Subba Rao, J.C. Shah Ands. M. Sikri
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-lncome-tatx-bombay-city-v-tata-locomotive-engineering-co-ltd-3700
- **Pages:** 7

## Headnote

Income Tux-Conimission received in U.S.A.-Kept in U.S.A. for
buying capital goods with sanction of Reserve Bank-Amount later repacr;attd-Surplus in rupees due to devaluation-If capital or rtv,,nue
receipt.
The assessee was a limited company with its registered office _at
Bombay.
Its main business was the manufacture of locomotive boilers
and locomotives, and for that purpose the assessee had to make purchases
of plant and machinery, in various countries including the U.S.A.
The
.. sessee appointed M/s. Tata Inc., New York, as its purchasing agent
in the U.S.A.
The assessee was also the selling agent of Baldwin Locomotive Works, U.S.A., for the sale of their products in India, and the
commission payable to the assessee as their sole selling agent was made
over to the assessee's purchasing agent in Now York with the sanction
of the Reserve Bank and for the purchase of capital goods. This amount
was taxed in the relevant assessment years on the accrual basis and the
tax was paid. On 16th September 1949, the pound &terlinJI waa devalued
and the rate of exchange between rupee and dollar which was Rs. 3.33 per
dollar before devaluation, became Rs. 4.775 per dollar thereafter.
On
that date, there was in the as.sessee's account with the purchasing agent a
sum of $ 36,123.02 representing the commission
received from Baldwin
Locomotive Works. With the permission of the Reserve Bank this sum Vias
repatriated to India in 1950 and the change in the exchange rate gave
rise to a surplus in rupees. The Income-tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal held that this surplus amount
was liable to tax.
The High Court, on a reference, held that the sum
was not taxable in the hands of the assessee.
In appeal to this Court, it was contended that the assessee was liable
to tax because; (i) if the commission had been ano,ved to remain in the
U.S.A. up to 16th September 1949 anc1 had been repatriated on 17th
September, the assessee would have been Hable to tax and therefore the
permission of the Reserve Bank and the decision of the assessee to hold
it to buy capital goods did not make any difference; and (ii) the fact
that the assessee credited the rupee equivalent of the sum in his books
and pa:id tax on the basis of accrual did not also make any difference to the
asses~ee's liabi1ity.
HELD : The High Court was right in deciding in favour of the
asses~ee.
!
The assessee's liability to tax would depend on whether the act of
keeping the money for capital purposes after obtaining the sanction of
the Reserve Bank was part of or a trading transaction. The amount no
doubt. was a revenue receipt in the assessee's business of commission
agency.
But instead of repatriating it immediately, the assessee obtained the sanction of the Reserve Bank to utilize the commission for buying
capital good<;, and that was an independent transaction.
It was not a
236
SUP.REMB COURT REPORTS
(1966] 3 S.C . .R.
trading transaction but was a transaction of accumulating dollars to pay
A.
for capital goods, the first step to the acquisition of capital goods. If tho
assessee had repatriated the amount and then, after obtaining the sanction of the Reserve Bank, remitted it to the U.S.A. any profit made on
devaluation would only be a capital profit.
Therefore, the fact that
the assesscc kept the money in the U.S.A. did not make any difference under
!be circumstances. [241 B-F]

## Text

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COMMISSIONER OF lNCOME-TAtX, BOMBAY CITY
v.
TATA LOCOMOTIVE & ENGINEERING CO., LTD.
Jqnuary 13, 1966
[K. SUBBA RAO, J.C. SHAH ANDS. M. SIKRI, JJ.J
Income Tux-Conimission received in U.S.A.-Kept in U.S.A. for
buying capital goods with sanction of Reserve Bank-Amount later repacr;attd-Surplus in rupees due to devaluation-If capital or rtv,,nue
receipt.
The assessee was a limited company with its registered office _at
Bombay.
Its main business was the manufacture of locomotive boilers
and locomotives, and for that purpose the assessee had to make purchases
of plant and machinery, in various countries including the U.S.A.
The
.. sessee appointed M/s. Tata Inc., New York, as its purchasing agent
in the U.S.A.
The assessee was also the selling agent of Baldwin Locomotive Works, U.S.A., for the sale of their products in India, and the
commission payable to the assessee as their sole selling agent was made
over to the assessee's purchasing agent in Now York with the sanction
of the Reserve Bank and for the purchase of capital goods. This amount
was taxed in the relevant assessment years on the accrual basis and the
tax was paid. On 16th September 1949, the pound &terlinJI waa devalued
and the rate of exchange between rupee and dollar which was Rs. 3.33 per
dollar before devaluation, became Rs. 4.775 per dollar thereafter.
On
that date, there was in the as.sessee's account with the purchasing agent a
sum of $ 36,123.02 representing the commission
received from Baldwin
Locomotive Works. With the permission of the Reserve Bank this sum Vias
repatriated to India in 1950 and the change in the exchange rate gave
rise to a surplus in rupees. The Income-tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal held that this surplus amount
was liable to tax.
The High Court, on a reference, held that the sum
was not taxable in the hands of the assessee.
In appeal to this Court, it was contended that the assessee was liable
to tax because; (i) if the commission had been ano,ved to remain in the
U.S.A. up to 16th September 1949 anc1 had been repatriated on 17th
September, the assessee would have been Hable to tax and therefore the
permission of the Reserve Bank and the decision of the assessee to hold
it to buy capital goods did not make any difference; and (ii) the fact
that the assessee credited the rupee equivalent of the sum in his books
and pa:id tax on the basis of accrual did not also make any difference to the
asses~ee's liabi1ity.
HELD : The High Court was right in deciding in favour of the
asses~ee.
!
The assessee's liability to tax would depend on whether the act of
keeping the money for capital purposes after obtaining the sanction of
the Reserve Bank was part of or a trading transaction. The amount no
doubt. was a revenue receipt in the assessee's business of commission
agency.
But instead of repatriating it immediately, the assessee obtained the sanction of the Reserve Bank to utilize the commission for buying
capital good<;, and that was an independent transaction.
It was not a
236
SUP.REMB COURT REPORTS
(1966] 3 S.C . .R.
trading transaction but was a transaction of accumulating dollars to pay
A.
for capital goods, the first step to the acquisition of capital goods. If tho
assessee had repatriated the amount and then, after obtaining the sanction of the Reserve Bank, remitted it to the U.S.A. any profit made on
devaluation would only be a capital profit.
Therefore, the fact that
the assesscc kept the money in the U.S.A. did not make any difference under
!be circumstances. [241 B-F]
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 236 of - B
1965.
Appeal from the judgment and order dated August 30, 1961
of the Bombay High Court in Income-tax Reference No. 12 of
1959.
A. V. Viswanatha Sastri, N. D. Karkhanis, R. H. Dhebar and
C
R. N. Sachthey, for the appellant.
N. A. Palkiva/a, T. A. Ramaclzandran, J. B. Dadachanji,
0. C. Mathur and Ravinder Narain, for the respondent.
The Judgment of the Court was delivered by
Sikri, J, This appeal hy certificate granted by the High Court
of Judicature at Bombay under s. 66-A ( 2) of the Indian Income
Tax Act, 1922, hereinafter referred to as the Act, is
directed
against its judgment in a reference made to it by the Income-Tax
Appellate Tribunal. The following two questions were referred :
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( l ) Whether on the facts and in the circumstances
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of the case, the surplus or difference arising as a result
of devaluation in the process of converting dollar currency in regard to the sum of $36,123/02 repatriated to
India was profit which was taxable in the hands of the
assessee ?
(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 ?
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The relevant facts and circumstances, as stated in the Statement
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of the Case, are as follows : The respondent, Tata Locomotive
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and Engineering Co. Ltd., hereinafter referred to as the assessee,
is a limited company registered under the Indian Companies Act
(VII of 1913), and has it' registered office at Bombay. The
main business of the assessee is the manufacture of locomotive.
boilers and locomotives. For the purpose of this manufacturing
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activity the assessee had to make purchases of plant and machinery, etc., in various countries including the U.S.A.
The assessee
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C.I.T. V. TATA LOCOMOTIVE CO. (Sikri. J.)
237
A appointed M/s Tata Inc., New York, as its purchasing agent in
the U.S.A. With the sanction of the Exchange Control Authorities
a remittance of $33,830 was made in 1949 to Messrs. Tata Inc.,
New York for the purpose of purchasing capital goods from the
U.S.A. and meeting other expenses connected therewith.
B
The assessee was also the 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. These expenses were re-irnbursed to the assessee by
Baldwin Locomotive Works in the U.S.A. by paying the amount
c due to Messrs. Tata Inc., New York. The amount so paid to Tata
Inc. was retained in the assessee's account with Messrs. Tata Inc.
for purchase of capital goods.
As the sole selling agent the assessee was entitled to commission from Baldwin Locomotive Works. The commission payable to the assessee in dollars was not actually sent from. the
D U.S.A. to India, but with the sanction of the Exchange Control
Authorities 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 October 26, 1948, to the
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. Reserve Bank of India.
In it the assessee stated, inter alia, as
follows:
"It would be more convenient if the amount of commission payable to us periodically be deposited into our
account with our representative, Messrs. Tata I~i.c .. New
York, opened with reference to your letter PC.BY.
7031/74/46 dated 2nd October, 1946, as the same
would go to reduce the amount of remittance 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 TC-679 dated
15th August, 1946."
G The purposes referred to in the said letter of August 15, 1946,
were purchase of capital goods.
The amount received as commission was taxed in the relevant assessment years on the accrual
basis and tax has been paid,
On September 16, 1949, there was a balance of $48,572/30
in the assessee's account with Messrs. Tata Inc. made up as under :
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(I) Remittances from Bombay
$33,850·00
Less : Dollars spent in the U.S.A. for capital
$30,282 · 96
purposes
$ 3,567·04
238
SUPREME COURT
REPORTS
(2) Amount reimbursed by Baldwin Lc:ieo..
motive Works against funds made ava:Ja.
blc to its representatives in India
(3) Commission
actually
received
fron1
Baldwin Locomotive.~ Works and retai.D.-
<d in the U.S.A.
TOTAL
[1966] 3 S €R
$8,882 l4
136,123· 02
$48,S12· 30
On September 16, 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 the assessee found it
more expensive to buy American goods and as the Government
of India also imposed some restrictions on imports from
the
U.S.A., the assessee decided to repatriate the dollars and for the
purpose applied to the Reserve Bank of India on December 17,
1949. The Reserve Bank of India gave permission and a sum of
$4-0,000 was repatriated to India. Under similar circullllltanccs 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 fell 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 March 31, 1950 for the purpose of
the appeal before the Tribunal.
The remittances of $49,500
includes the sum of $48,572/30 that was held by the assessee on
September 16, I 949. 11tis repatriation of the sum of $48,572/30
gave rise to a sum of Rs. 70,147 as surplus in the process of
converting dollar currency into rupee currency.
The Income-tax Officer assessed the amount of Rs. 70,147
on the ground that it represented profits that arose to the asseilliec
"incidentally to its carrying on the business".
The Income-tax
Officer observed :
"°\Wiether the funds were sent to America with the
object pf purchasing of capital equipment or for
the
purchase of stores, or for reimbursement of revenue
expenditure there need not be distinction that only such
portion of the profits arising on funds remitted for revenue expenditure only has to be treated as revenue and
the balance should be treated as capital."
The Appellate Assistant Commissioner substantially affirmed the odrer of the Income-tax Officer except that he reduced
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C. I. T. v. TATA 1.0COMOTIVE CO. (Sikri, J.)
239
A the amount by Rs. 6,894. He was of the view that the permission of the Reserve Bank by itself did not convert the true nature
of the amount lying there. He was further of the view that the
amounts available for remittance consisting of the commission
and the reimbursement of expenses by Baldwin
Locomotive
Works were acquired in the ordinary course of business of the
B sole selling agency of Baldwin Locomotive Works, and, therefore,
any exchange profit on such amounts which formed part of the
assets employed as circulating capital in trade did arise directly
in the course of business and formed part of the trading receipts.
The Tribunal held that the sums of $3,567 /04 and $8,882/24
C 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, accordingly, the Tribunal excluded profits attributD able to these amounts. But regarding the sum of $36,123/02
the Tribunal held that it would not be justified in coming to the
conclusion that there was any constructive remittance, first in
the direction the U.S.A. to India and then of an equivalent sum
from India to the U.S.A. It further held that "the amount wrui
earned as commission. It was received in dollars and was retained
E in that form for the changed purpose under the authority of the
Reserve Bank of India. When the Company found that the purpose for which it was to be used failed, viz .• acquisition of capital
equipment etc., it requested the Reserve Bank of India to permit
it to bring to India, vide assessee's letter dated 17-12-1949 where
it sought Reserve Bank's permission to bring $40,000 to India
F and referred to in paragraph above. This permission was granted by the Reserve Bank. Dollars were changed into rupees and
money received here. Hence before there was actual remittance
of $40,000 from the U.S.A. to India, there was reconversion, the
purpose having failed, of the sum if there was initial conversion as
contended by Mr. Chokshi."
In the alternative, the Tribunal
G held that "as and when the commission was earned in dollars, the
Company did bring it into its account books in the rupee currency
at the then prevailing rate of exchange but the commission amount
physically remained in the U.S.A. and when occasion arose to
bring it physically to India it had to be converted ·into rupee
H currency and this conversion was necessarily incidental to the
assessee's business as selling agents of the foreign entity the Baldwins.
Hence whatever the profit the Company made on such
exchange of the commission earned by it in the course of il•
240
SUPREME
COURT
REPOllH
[1966] 3 S.C.R.
selling agency bu,iness must be brought to tax as a trading profit
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made by it incidentally in the course of that business."
The High Court answered the two questions in the negative.
It held that although the character of the commission earned was
at the inception that of income, but when the assesee appropriated that sum for the specific purpose of purchasing capital goods
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with the pem1ission of the Reserve Bank of India, the initial
character of this sum underwent a change and it assumed the
character of fixed capital of the Company. This character was
retained right up to September 16, 1949 when the pound sterling
was devalued, and it did not undergo any change till the benefit
accrued on this amount to the asscssee company as a result of
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change in the exchange rate.
The High Court further held that
"there is no evidence in this case nor a finding recorded by the
Tribunal that the assessee-company had at any time decided not
to utilise these amounts for the purpose of purchasing capital
goods, and, therefore, repatriated these amounts to India." The
High Court further held that the sum of $36, 123.02 was "part of
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its fixed capital and remained so till the date it was repatriated to
India.
The surplus or difference arising as a result of dovaluation in the process of converting these dollars into rupee currency
in repatriating them to India was an accretion to its fixed capital
and was not. therefore, liable to tax." The High Court felt that E
the ratio of the decision in Davies v. The Shell Company of
China(') supported the view it had taken.
The learned counsel for the revenue, Mr. A. V. Viswanatha
Sastri, contends that if the commission had been allowed
to
remain in the U.S.A. up to September 16, 1949, and it had been
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repatriated on September 17, 1949. the assessee would have been
liable to tax on the profits received as a result of devaluation.
He says that if this is so, the permission of the Reserve Bank and
the decision of the Company to hold it to buy capital goods does
not make any difference.
He further says that the fact that the
assessee credited the rupee equivalent of this sum in his books
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and paid tax on the basis of accrual does not also make any
difference. The learned counsel for t!t.e assesee, Mr. Palkhiwala,
on the other hand contends that the assesseo is not a dealer in
foreign exchange and it had not acquired or held foreign exchange
for revenue purposes or for purposes incidental to trading operations.
He says that "when foreign currency is kept or used. on
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capital account e.g. to acquire capital assets, and not as circulat·
(I) 221.T.R. Su~p. t.
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C. I. T. V. TATA LOCOMOTIVE CO. (Sikri, J.)
241
A ing capital, the profit made on realisation is capital appreciation,
even though the foreign currency may have been originally acquired as a revenue receipt."
A number of cases have been cited before us, but it seems to
us that the answer to the questions depends on whether the act of
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keeping the money, i.e. $36,123.02 for capital purposes after
@btaining the sanction of the Reserve Bank was part of or a
trading transaction. If it was part of or a trading transaction
then an)' profit that would accrue would be revenue receipt; if
it was not part of or a trading transaction then the profit made
would be a capital profit and not taxable. There is no doubt that
C the amount of $36,123.02 was a revenue receipt in the assessee's
business of commission agency. Instead of repatriating it immediately the assessee obtained the sanction of the Reserve Bank
to utilise the commission in its business of manufacture of locomotive boilers and locomotives for buying capital goods.
That
wits quite an independent transaction and it is the nature of this
D tra_nsaction which has to be determined. In our view it was not
a trading transaction in the business of manufacture of locomotive
boilers and locomotives; it was clearly a transaction of accumulating dollars to pay for capital goods, the first step to the acquisition of capital goods. If the assessee had repatriated $36,123.02
E and then after obtaining the sanction of the Reserve Bank remitted $36,123.02 to the U.S.A., Mr. Sastri does not contest that
any profit made on devaluation would have been a capital profit.
But, in our opinion, the fact that the assessee kept the money
there does not make any difference especially, as we have pointed
out, that it was a new transaction which the assessee entered into,
F the transaction being the first step to acquisition of capital goods.
In the view we have taken it is really not necessary to discuss
cases cited at the Bar because none of the cases are exactly in
point. In our view the High Court was right in answering the
questions in the negative. In the result the appeal fails and is
G dismissed with costs.
Appeal dismissed.