Case Note & Summary
The litigation concerned the tax treatment of appreciation in the value of foreign exchange held by a bank abroad, which arose upon devaluation of the Indian rupee. The respondent bank, Canara Bank Ltd., had its head office at Mangalore and opened a branch at Karachi in 1946. Following the partition of India in 1947, the currencies of India and Pakistan remained at par until the Indian rupee was devalued in 1949. The Karachi branch held a sum of Rs. 3,97,221 belonging to the head office, but due to currency restrictions, this amount was blocked and sterilised and could not be remitted to India until July 1, 1953, when the State Bank of Pakistan permitted remittance. By then, an exchange agreement had been reached on February 27, 1951, fixing the ratio at 100 Pakistani Rupees to 144 Indian Rupees, resulting in the blocked sum becoming equivalent to Rs. 5,71,038 in Indian currency. The bank claimed that the resulting appreciation of Rs. 1,73,817 was a capital gain and not taxable. However, the Income-tax Officer disallowed the claim, treating the appreciation as a revenue receipt. The bank's appeals before the Assistant Commissioner and the Appellate Tribunal were rejected. On reference, the High Court held that the appreciation did not arise in the course of trading operations and was not taxable as revenue. The Commissioner of Income-tax appealed to the Supreme Court. The core legal issue was whether the appreciation constituted a capital receipt or a revenue receipt under Section 10 of the Indian Income-tax Act, 1922. The Revenue argued that the appreciation resulted in a revenue receipt, while the bank contended it was a capital gain not arising from its ordinary banking operations. The Supreme Court, relying on the principle that a receipt arising from the realization of a capital asset or a change in its character is capital in nature, held that because the funds were blocked and sterilised and not employed in trading activities, the appreciation was a capital receipt and not taxable. The court dismissed the appeal, affirming the High Court's decision and providing finality to the classification of such gains from blocked foreign exchange.
Headnote
A) Income Tax - Capital vs Revenue Receipt - Appreciation of blocked foreign exchange due to currency devaluation not arising from trading operations constitutes capital receipt - Indian Income-tax Act, 1922, Section 10 - The assessee bank had funds in its Karachi branch which became blocked after partition; upon devaluation of Indian rupee and subsequent agreement on exchange rate, remittance resulted in appreciation; Court held that since the funds were blocked and sterilised, the appreciation did not arise from business operations and was a capital gain, not taxable as revenue - Held that the profit was capital in nature (Paras Not mentioned).
Issue of Consideration
Whether the appreciation in value of money remitted from Pakistan to India after devaluation of Indian Rupee in 1949, where the amount was blocked and sterilised, constitutes a capital receipt or a revenue receipt under Section 10 of the Indian Income-tax Act, 1922.
Final Decision
Supreme Court dismissed the appeal, holding that the appreciation in value was a capital receipt and not taxable as revenue under Section 10 of the Indian Income-tax Act, 1922.
Law Points
- Appreciation in value of foreign exchange held abroad due to devaluation
- if the amount was blocked and sterilised and not part of trading operations
- is a capital receipt
- not taxable as revenue under Section 10 of Indian Income-tax Act
- 1922.
