Sen, J.:— The facts found and/or admitted in this reference under s. 256(1) of the I.T Act, 1961, are of short compass. The Calcutta Jute Agency (P.) Ltd., Calcutta, the assessee, carries on business in purchase and sale of jute. Under an agreement dated 3rd April, 1963, one W.F Ducat & Co. had been engaged to carry on the business of the assessee as the latter's manager and/or managing agents. Acting on behalf of the assessee, W.F Ducat & Co. entered into a contract for purchase of jute in London from Pakistan in 1965, and opened a letter of credit there covering the price of the said jute in favour of the intending seller. Thereafter, hostilities broke out between India and Pakistan, the contract could not be performed and the letter of credit remained unoperated. There was devaluation of the Indian rupee in June, 1966, and by reason of the unoperated letter of credit, W.F Ducat & Co. received a sum of Rs. 1,52,710 in excess over the amount originally deposited by them in rupees. This surplus was passed on to the account of the assessee and included by the assessee in its own profit and loss account in the accounting year ending 31st March, 1968. In its assessment for the said accounting year, being assessment year 1968–69, the ITO treated this surplus as a trading receipt and added the same to the totaf income of the assessee.

2. Being aggrieved by this assessment, the assessee preferred an appeal to the AAC. It was contended before the AAC that this surplus was not a trading receipt but a receipt of a casual and non-recurring nature and as such was not taxable. It was submitted that the assessee was not a dealer in foreign exchange and did not even carry on any business itself. It was further contended that the intended contract had been frustrated due to factors beyond the control of the assessee. The AAC, however, held that the surplus arose in the hands of the assessee in the course of the business carried on by W.F Ducat & Co. on behalf of the assessee and, therefore, the amount was taxable. He confirmed the order of the ITO. Being aggrieved thereby the assessee preferred a further appeal before the Income-tax Appellate Tribunal. The assessee reiterated its aforesaid contention before the Tribunal and in support thereof cited a decision of this court in the case of Sutlej Cotton Mills Ltd. v. CIT, [1971] 81 ITR 641 (Cal). The revenue sought to distinguish Sutlej Cotton Mills on facts and, in turn, cited M. Shamsuddin & Company v. Commissioner Of Income-Tax, [1973] 90 ITR 323 (Ker) in support of their contentions to the contrary.

3. The Tribunal found that the business was admittedly being carried on by W.F Ducat & Co. Ltd., as agents for and on behalf of the assessee, and held that the surplus arising in connection with and in the course of the business carried on by the assessee through its agents had, therefore, been rightly taxed as business profits. The Tribunal dismissed the appeal of the assessee.

4. From this order of the Tribunal, the following question has been referred at the instance of the assessee:

“Whether, in the facts and circumstances of the case, the Tribunal was right in holding that the sum of Rs. 1,52,710 was the income of the assessee and liable to tax in the assessment year 1968–69?”

5. Mr. S.R Banerjee, learned advocate for the assessee, has contended before us at the hearing that mere receipt of a surplus resulting from devaluation and without any volition or activity on the part of the assessee will not result in accrual of a taxable amount in the hands of the assessee. He stated that the source of the surplus was the devaluation, an act of State, and not the business carried on by the assessee. He contended that the business of the assessee came to an end when the contract was frustrated and the amount in pound sterling was lying immobilised and frozen, This was no doubt an asset of the assessee but it was a sterlised asset in the nature of capital and was not circulating capital. In support of his contentions, Mr. Banerjee cited the following decisions:

(a) Sutlej Cotton Mills Ltd., [1971] 81 ITR 641 (Cal). The facts in that case were that the assessee which had its head office in Calcutta but its cotton mills in West Pakistan was assessed to income-tax for the accounting year ending on the 31st March, 1957, and 31st March, 1959, the assessment years being 1957–58 and 1959–60. In the said assessment years, the assessee claimed two amounts as losses suffered in exchange of remittances from Pakistan of profits caused in earlier years with the permission of the Reserve Bank of Pakistan. Prior to the remittances, there was devaluation of the Indian currency and the assessee claimed that it had suffered a loss in remittance.

6. This claim for loss in both the years were disallowed by the ITO, the AAC and also the Tribunal.

7. On a reference, this court held that no loss was suffered by the assessee in the year in question, and further that the loss, if any, was not a financial loss in the sense that it was not associated or connected with the business or trade of the assessee. Upholding the contentions of the revenue this court observed that exchange loss due to fluctuations in the international money market and the currencies of different States may arise in different circumstances and context and no general rule could be laid down as to whether such fluctuations necessarily resulted in a profit or loss to a business. The basic test laid down by the Supreme Court would have to be applied to the facts in each case to find out whether the loss sprang directly or indirectly from the business or was incidental thereto.

(b) M. Shamsuddin & Company v. Commissioner Of Income-Tax, [1973] 90 ITR 323 (Ker). The facts in this case were that the assessee was an exporter of cashew kernels. It also entered into forward transactions for export of the said commodity. The assessee also charged price in terms of dollars, though payment was received ultimately in rupees. Indian currency was devalued on the 6th June, 1966. For exports made immediately before that date, and also for forward contracts entered into before the devaluation, the assessee had become entitled to receive the price in terms of dollars. By reason of the devaluation the rupee equivalent received by the assessee resulted in surplus. The assessee claimed that this surplus arose due to devaluation and was a receipt of a casual nature and not taxable. The ITO held that the profit arose out of the assessee's trading activity, was not a capital or a casual receipt and was taxable. This decision of the ITO was confirmed by both the AAC and the Tribunal. There was a reference to the Kerala High Court. The High Court, after considering a decision of the Mysore High Court in Hindustan Aircraft Ltd. v. Commissioner Of Income-Tax, Mysore., [1963] 49 ITR 471 and the decision of the Supreme Court in Cit, Bombay City v. Tata Locomotive & Engineering Co., Ltd., [1966] 60 ITR 405 held that the assessee, trading in goods, received an appreciated value as price on account of devaluation. This was certainly a receipt arising from the business of the assessee and, therefore, was a trading receipt liable to be assessed as trading profits.

(c) Cit, Bombay City v. Tata Locomotive & Engineering Co., Ltd., [1966] 60 ITR 405 (SC). The facts in that case were that the assessee carried on the business of manufacture of locomotive boilers and locomotives. With the sanction of the exchange control authorities it had remitted to its agent in the U.S.A dollars for the purpose of purchasing capital good and for meeting other expenses. The assessee had also acted as the sole selling agent of a U.S.A concern for sale of their products in India. In that connection, the assessee had incurred expenses on behalf of their foreign principal in India and had also earned some commission. With the sanction of the exchange control authorities the amounts paid in reimbursement of the said expenses incurred and the said commission earned were retained with the agent of the assessee in the U.S.A with the object of purchase of capital goods. The pound sterling and with it the Indian rupee were devalued on the 16th September, 1949, and the assessee found it more expensive to buy American goods. The Government of India had also imposed upon them restrictions on imports from the U.S.A The assessee, therefore, with the permission/of the Reserve Bank of India, repatriated a large part of its dollar holding in the U.S.A This resulted in a surplus in its hands. The ITO assessed the amount as profit arising incidental to the business of the assessee. This was confirmed by the AAC. The Tribunal, however, held that only the part of the surplus attributable to the commission received from the U.S.A concern was a trading profit. The amounts attributable to the dollars remitted for the purpose of capital goods and to the amount received in reimbursement of expenses and kept in the U.S.A for the same purpose were not profits. From this decision of the Tribunal there was a reference to the High Court which upheld the contentions of the assessee and held that the surplus attributable to the commission earned was also accretion to the assessee's fixed capital and was not liable to tax.

8. The Supreme Court on further appeal held that the commission received by the assessee was no doubt a revenue receipt at its inception but the assessee obtained sanction of the Reserve Bank to utilise the same for buying capital goods and thereby took the first step towards acquiring capital goods. This changed the character of the fund, which became capital in nature. The Supreme Court affirmed the judgment of the High Court.

9. Mr. Banerjee also cited Commissioner Of Income-Tax, Kerala v. Union Engineering Works., [1976] 105 ITR 311 (Ker). In this case, an amount had been received by the assessee on an insurance policy on account of damage caused to certain goods which were insured. By reason of devaluation the amount paid in foreign currency resulted in a, surplus in the hands of the assessee. It was found that the payment was in settlement of a claim for damages which did not include any extra profit. The Kerala High Court held that the excess was in the nature of a windfall unconnected with the business of the assessee.

10. Drawing inspiration from the above authorities Mr. Banerjee contended that in the instant case the contract being frustrated, the money left unutilized represented frozen or capital assets in the hands of the assessee and, therefore, any accretion thereto was not a trading receipt but a capital receipt.

11. Mr. Suhas Sen, learned counsel for the revenue, contended on the other hand that the facts found by the Tribunal in the case remained unchallenged and were conclusive. He submitted that it had been found that the assessee had been carrying on business through its foreign agent. The money was initially earmarked for purchase of jute goods, which were stock-in-trade of the assessee and, therefore, this money had the character of circulating capital. When the contract was frustrated the fund was not earmarked for any other purpose and it retained its initial character of circulating capital.

12. In support of his contentions Mr. Sen relied on the case of Tata Locomotive and Engineering Co. Ltd., [1966] 60 ITR 405 (SC) as also an English decision, viz., Imperial Tobacco Co. Ltd. v. Kelly, [1943] 25 TC 292 (CA). It

13. The facts in Kelly's case were that the assessee carried on the business of tobacco manufacture and used to purchase large quantities of tobacco leaf in the United States of America through its buying organisation in that country. To finance the purchases and the expenses of this organisation the assessee used to buy dollars in the United Kingdom through its bankers and used to remit the same to the assessee's bank accounts in the U.S.A

14. In this manner, large holdings of dollars were accumulated by the assessee each year before the tobacco leaf season commenced. At the out break of the world war in September, 1939, the assessee had similarly accumulated dollars. At the request of the British Treasury the assessee refrained from purchasing tobacco leaf and later, under the Defence Regulations, the accumulated dollars were sold to the Treasury. Exchange fates having fluctuated in favour of dollar in the meantime, such sale resulted in profits to the assessee. It was held that this profit made on sale of surplus dollars to the Treasury was part of the profits of the assessee's trade even though the sale was compulsory and was liable to be taxed as such.

15. In the facts of the instant case, it is difficult to escape the conclusion that the surplus in the hands of the assessee was inextricably connected with its business. The money lying in the foreign country for the purchase of jute goods was indubitably a part of the circulating capital of the assessee and no other fact has been found to show that the fund had changed its character at the material time. It was meant to be used for a particular purpose and the fact that the purpose was frustrated by itself could not change the character of this fund., It appears to us that the principle laid down by the Supreme Court in Tata Locomotive and Engineering Co. Ltd., [1966] 60 ITR 405 (SC) applies to the facts before us arid respectfully following the same we hold that accretion to this fund resulted in a profit to the assessee in its business, though the accretion may have been caused by an external factor like devaluation. The submission of Mr. Banerjee that this fund became frozen or immobilised, even if accepted, can make no difference in the case as we are concerned with the nature and character of this fund and not its mobility. For the reasons above, we answer the question referred to us in the affirmative and against the assessee. In the facts and circumstances of the case, there will be no order as to costs.

C.K Banerji, J.:— I agree.