Income-tax Reference No. 254 of 1979

Decided on August 10, 1981

The Judgment of the Court was delivered by

Sabyasachi Mukharji, J.:— In this reference under s. 256(1) of the I.T Act, 1961, a combined statement of case has been filed by the Tribunal dealing with the assessee's application as well as the Revenue's application for reference. The assessment relates to the assessment year 1972-73. The assessee is a limited company which is mainly engaged in the business of export sales of leaf tobacco purchased and cured in India. For the relevant assessment year, among the claims made by the assessee were, that the profit on exchange amounting to Rs. 1,40,329 was not liable to tax, the weighted deduction on account of agricultural development allowance should be allowed on the entire expenses claimed amounting to Rs. 18,20,670, which included depreciation of Rs. 64,732 and scientific research expenses in the field of agriculture amounting to Rs. 81,847. It was also claimed that the expenses on account of ex gratia payments to widows or dependants of the deceased employees as well as expenses on reimbursement of the medical expenses to the employees should be allowed as a deduction in working out the business income. The ITO, however, while allowing the weighted deduction on agricultural development allowance in respect of the expenses of Rs. 16,74,091, did not allow the weighted deduction in respect of depreciation amounting to Rs. 64,732 and scientific research expenses in the field of agriculture amounting to Rs. 81,847. The ITO did not accept the other claims of the assessee-com-pany. It is not necessary to refer in detail to the order of the ITO.

2. The assessee, being aggrieved by the aforesaid order, went up in appeal before the AAC. The AAC upheld the action of the ITO except on the issue of the weighted deduction for expenses amounting to Rs. 64,732 in respect of which the AAC held the weighted deduction on account of agricultural development allowance, as laid down by s. 35C, should be allowed. Against the aforesaid order of the AAC, both the assessee as well as the Revenue went up in appeal before the Tribunal. The Tribunal, following certain decisions of the Supreme Court and on an interpretation of sub-s. (2) of s. 35C of the I.T Act, 1961, held that the weighted deduction on account of agricultural development allowance was not permissible in respect of depreciation. The Appellate Tribunal discussed in detail the decisions of the Supreme Court and certain other cases, to which it is not necessary at this stage to refer in detail, and held that profits on exchange was an appreciation in the value received by the assessee for the export sales on account of a favourable fluctuation in the foreign exchange rates at the relevant time and was not (sic) therefore, liable to be assessed as the assessee's income. The Appellate Tribunal was of the view that the direct payments to the employees did not come within the scope of expenditure resulting directly or indirectly, in the provision of any perquisite or amenity or benefit to the employees, whether convertible into money or not, for the purpose of working out the disallowance under s. 40A(5) and, therefore, the expenses incurred by the assessee-company on the reimbursement of medical expenses of the employees could not be disallowed and added back, while working out the business income. The Appellate Tribunal, following a certain decision of this court, was of the view that ex gratia payments to the dependants of the former employees were motivated by considerations of commercial expediency and were wholly and exclusively for business purposes. The Appellate Tribunal also took note of the fact that there was no single instance of any payment which had been pointed out either in the assessment order or in the order of the AAC or even at the time of hearing of the appeal before the Appellate Tribunal where the payment was made to a person other than the dependant of a former employee. The Appellate Tribunal,; therefore, held that the disallowance on account of ex gratia payments to the dependants of the former employees was not justified and we shall refer to the relevant portion of the order of the Appellate Tribunal at the relevant time. On these facts, as mentioned hereinbefore, both the assessee and the Revenue wanted to raise certain questions of law for reference. At the instance of the assessee-company, the Tribunal has referred the following two questions to the court under s. 256(1) of the I.T Act, 1961:

“(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that no weighted deduction on account of agricultural development allowance under section 35C of the Income-tax Act, 1961, was admissible in respect of depreciation on assets used for the purpose of providing goods, services or facilities as laid down in section 35C(1)(b)?

2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the profit on exchange of Rs. 1,40,529 was liable to tax and was, therefore, includible in the total income of the assessee-company?”

3. At the instance of the Revenue, the Tribunal has referred the following two questions to this court under s. 256(1) of the I.T Act, 1961:

“(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the monetary payments made by the assessee-company to its employees for reimbursement of medical expenses incurred by the employees did not represent expenditure resulting, directly or indirectly, in the provision of any benefit or amenity or perquisite to the said employees within the meaning of section 40A(5) of the Income-tax Act?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the ex gratia payments to the dependants of the former employees were allowable in working out the business income of the assessee-company?”

4. We shall initially deal with the first question referred to this court at the instance of the assessee which relates to the eligibility of the assessee to weighted deduction on account of agricultural development rebate under s. 35C in respect of depreciation on assets used for the purpose of providing goods, services or facilities as laid down in s. 35C(1)(b) of the I.T Act, 1961. It is not necessary for our present purpose to set out in extenso the relevant provisions of s. 35C of the Act. We may incidentally refer to the fact that Chap. IV, under sub-heading D, deals with the computation of profits and gains of a business or profession, in s. 38 to s. 44. Section 35C deals with the conditions under which the assessee is eligible for agricultural development allowance. The question whether the depreciation is an expenditure which is eligible for deduction, as such, came up for consideration before us in I.T Reference No. 126 of 1976 in the case of Commissioner Of Income-Tax, West Bengal-V v. Indian Jute Mills Association. (since reported in [1982] 134 ITR 68 (Cal)). There, the real question was whether the depreciation debited in the accounts was expenditure incurred by the assessee within the meaning of s. 44A of the I.T Act, 1961, and should be deducted in computing the depreciation under the said section for the year 1969-70. By a judgment delivered on 19th February, 1981, we referred to the relevant decisions of the Supreme Court, some of which again were referred to us, we also referred to the meaning of expenditure as understood in accordance with the accountancy principle and we further held that, really, depreciation was the money expended which was spread over the effective life of an asset. We further noted that the Legislature had also used the expressions “allowance” and “depreciation” in several sections under the scheme of Chap. IV within which s. 44A appears and within which also s. 35C, with which we are concerned in the instant case, appears. In this connection we also referred to s. 37 of the I.T Act, 1961, which enjoins that any expenditure, not being expenditure of the nature described in ss. 30 to 36 laid out or expended wholly and exclusively for the purpose of business or profession, should be allowed in computing the income chargeable under the head “Profits and gains of business”. We were further of the opinion that the expression “expenses incurred” as well as “allowance and depreciation” in ss. 30 to 36 had been similarly used. We were, therefore, of the opinion that, when the Legislature used the expression “any expenditure” in s. 37, it intended to cover both. We, thereafter, referred to the beneficial construction of accounting and held that two constructions were possible and, in that view of the matter, we were of the opinion that having regard to the purpose of the section and having regard to the language used it was possible to construe the depreciation claimed as expenditure incurred. If that construction was possible, the assessee was entitled to the benefit of a beneficial construction and in that view of the matter we were of the opinion that the Tribunal was right in holding that the depreciation debited in the accounts was expenditure incurred in terms of s. 44A of the I.T Act, 1961. The same ratio would be applicable in the case of s. 35C except the item of depreciation, which could not be allowed in respect of any expense which the assessee had incurred for itself. As a matter of fact that was precisely the question in a subsequent decision which came up for consideration before us and which we shall presently note. In order to illustrate this position, it would be instructive to refer to the facts on this aspect, as noted by the Tribunal. The Tribunal, dealing with this contention in the earlier order, observed, inter alia, as follows:

“The issue common to both the appeals filed by the assessee-company and the Revenue is the agricultural development allowance under s. 35C. The assessee-company claimed before the ITO that expenses entitled to the weighted deduction of 120% under s. 35C were Rs. 18,20,670, i.e, in other words, in respect of these expenses the assessee-company was entitled not only to these expenses but further 20% as laid down under s. 35C. The ITO, however, after going through the details of these expenses, which were claimed to have been incurred on agricultural development, held that the following expenses did not fall within the scope of s. 35C(b) and the corresponding r. 6A(2) and were, therefore, not entitled to the weighted, deduction of additional 20%.

Rs. Depreciation 64,732 Scientific research in the field of agriculture 81,847 1,46,579

Thus, the Income-tax Officer, while giving a weighted deduction of 120% in respect of the balance expenses of Rs. 16,74,091, did not allow the weighted deduction in respect of Rs. 1,46,579. When the matter went up in appeal, the Appellate Assistant Commissioner held that while depreciation was merely a notional expenditure, it has also to be taken into account for the purpose of computing the deduction under section 35C and, therefore, this amount was rightly not included in the expenditure entitled to the weighted deduction under section 35C; there is no justification for not allowing the weighted deduction under section 35C on the other expenses of Rs. 81,847 incurred by the assessee-company on salaries, wages and travelling expenses of personnel engaged in research, development and training programme in imparting knowledge and skill and demonstrating modern techniques and improved methods of curing leaf tobacco to the cultivators and farmers. The Appellate Assistant Commissioner, therefore, held that the amount of Rs. 81,847 on account of salaries, wages, etc., of personnel engaged in research, development and training programme in imparting knowledge and skill and demonstrating modern techniques and improved methods of curing of leaf tobacco would be entitled to the weighted deduction as laid down under section 35C. The assessee-company was aggrieved by the order of the Appellate Assistant Commissioner in holding that on depreciation amounting to Rs. 64,732 the weighted deduction under section 35C will not be admissible. The Revenue, on the other hand, was aggrieved by the order of Appellate Assistant Commissioner that on expenses of Rs. 81,847 the weighted deduction under section 35C should be allowed. Both the assessee-company and the Revenue have, therefore, come up on this issue in the present appeals before us.”

5. Thereafter, the Tribunal has set out the relevant contentions of the learned lawyers appearing before the Tribunal. The Tribunal, on the aspect of (the expenses of) Rs. 81,847 in respect of scientific research and the agricultural development, observed, inter alia, as follows:

“Elaborating on this argument, Sri Roy pointed out to us that the assessee is a non-resident company having its place of business in India whose business is purchase of tobacco leaves, curing them and then export them to the U.K According to Shri Roy if the expenses of Rs. 81,847 on the Hansur Research Development and Trading Centre or at the other centres at Rajamundry, Nandyal and Mysore were for the purpose of curing tobacco purchased by the assessee-company and not for dissemination of information to others the expenses in this connection cannot be said to be the expenses which come within the scope of section 35C and, therefore, on these expenses the weighted deduction of one and one-fifth times as laid down under section 35C cannot be allowed.”

6. Therefore, it appears that the Tribunal had kept the question of the sum of Rs. 81,847 to be enquired into again by the AAC whether these expenditure were incurred by the assessee upon itself. In the instant case, on the other aspect of the matter, there is no finding that the amount was spent on the assessee itself. Whether the depreciation can be legitimately treated from the accountancy principle as the expenditure incurred, we have referred to several accountancy principles in the previous judgment indicated before We may incidentally refer that Pickles in his books on Accountancy, 4th Edn., at pp. 0504/0505, has dealt with the expenses incurred in carrying on the affairs of a concern and mentioned “depreciation” among the usual expenses. At pp. 0701/0702, Pickles observes as follows:

Page 0701/0702

“Depreciation may be defined as the permanent and continuing diminution in the quality, quantity or value of an asset. The purchase of an asset, generally, is nothing more than a payment in advance for an expense. A simple example of this is seen in the purchase of buildings. By such purchase the purchaser expends a certain sum in advance, as a result whereof he will save the cost of rent in the future, but at the end of a period of years the building will become valueless. Thus, the purchase outlay is the equivalent to paying rent in advance for a period of years……….

All attachable and incidental revenue expenses must be provided for before the true profits can be computed, so that whether the particular expense is wages, repairs or depreciation it follows that a proportion— exact or as approximately so as the circumstances permit—for the use or consumption of an asset must be included in the charge for running the business.

The provision for depreciation does not depend upon what the business ‘can afford’ as the debit therefor is an essential one, constituting not an appropriation of, but a charge against, profits for the period in question……. During the usual yearly period a year's life has been ‘consumed’, however careful the activities of the engineer in maintaining the efficiency of machines, so that the cost of such consumption should be charged up against the profits of the appropriate period, however great may be the difficulty of measuring it.”

7. Our attention was drawn, however, to the decision in the case of Ramnugger Cane and Sugar Co. Ltd. v. CIT, [1981] 128 ITR 716, where this court observed that it was never the intention of the Legislature to give relief by way of any agricultural development allowance under s. 35C of the I.T Act, 1961, to all concerned but only to a particular category. The allowance could be claimed by a company or a co-operative society engaged in the manufacture or processing of articles or things made out or by using any products of agriculture, animal husbandry, dairy or poultry farming, if the expenditure had been incurred directly or through an approved body or institution. We further held that since the agricultural development allowance stipulated in s. 35C would cover only the expenditure which had been incurred for goods, services or facilities to certain classes of persons, cultivators, growers or producers in India, viz., the persons other than, and distinct from, the asseesee-company itself which provided the goods or services or facilities, the assessee-company was not entitled to the allowance in that case. Here also the question, whether the amounts were spent on the assessee itself, so far as the scientific research (expenses) in the field of agriculture amounting to Rs. 81,847 (was concerned), has been left out by the Tribunal to be enquired into, as it was contended by the Revenue that it was so spent. So far as the rest of the amount was concerned, there was no finding and it was nobody's case that the said amount was spent on the assessee itself. If that is the position, in view of the ratio of the decision of this court in the case of Commissioner Of Income-Tax, West Bengal-V v. Indian Jute Mills Association., [1981] 134 ITR 68 referred to hereinbefore, the assessee was entitled to succeed on this aspect of the matter. In the premises, we would answer the first question at the instance of the assessee in the negative and in favour of the assessee.

8. We will now deal with the second question referred at the instance of the assessee. This relates to the taxability of what the Tribunal has described as “profit on exchange” amounting to Rs. 1,40,529. In order to appreciate this question it would be necessary to refer to certain facts referred to by the Tribunal. The Tribunal referred to the fact that the assessee's appeal before the Tribunal was against the inclusion, in the total income or profit, of Rs. 1,40,529 resulting from fluctuations of the foreign exchange rates. The Tribunal also noted that the assessee-company was mainly engaged in the business of export sales of leaf tobacco purchased and cured in India and on these export sales when the moneys were received the amount actually received in Indian rupee was sometimes more or sometimes less depending upon the exchange rate at the relevant time. The Tribunal referring to these facts, upon which great stress was laid before us on behalf of the Revenue, dealing with the decision of the Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT, [1971] 81 ITR 641, a Calcutta High Court decision, which ultimately went to the Supreme Court, reported in [1979] 116 ITR 1 (SC), about the ratio of which we shall presently refer, observed, inter alia, as follows:

“We have considered the rival submissions. In the case of Sutlej Cotton Mills Ltd. v. CIT, [1971] 81 ITR 641 (Cal), the hon'ble High Court of Calcutta was dealing with the loss where the assessee-company earned profits in the assessment year 1954-55 which were remitted three years later resulting in loss due to devaluation of the Indian rupee and the hon'ble High Court of Calcutta held that this loss had nothing to do with the business and was due to an act of sovereign power which could not be allowed as a deduction. The facts here, however, are that there was no devaluation of currency and what was received by the assessee was on account of export sales, and the profit on exchange was the extra amount which the assessee received on account of export sales due to favourable foreign exchange rate at the relevant time and this was not a case of profits of an earlier year which were being remitted subsequently. Besides, the hon'ble High Court of Calcutta itself in the case of Sutlej Cotton Mills Ltd. v. CIT, [1971] 81 ITR 641 (Cal) had laid down that there cannot be a cut and dried formula or dogma to say that under no circumstances an exchange loss either due to devaluation or due to any other cause can never be allowed in computing profits and whether it will be allowed or not is to be determined by the basic tests laid down by the hon'ble Supreme Court, i.e, whether it is a loss which springs directly or indirectly from the business itself and/or is incidental to it. There is also the authority of the hon'ble Supreme Court in the case of Commissioner Of Income Tax, Mysore v. Canara Bank Ltd., [1967] 63 ITR 328, that 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. There is also another judgment of the hon'ble High Court of Kerala in the case of M. Shamsuddin & Company v. Commissioner Of Income-Tax, [1973] 90 ITR 323, wherein their Lordships held that the extra amount received by the assessee due to devaluation of rupee on account of export sales was directly in the course of trade and, therefore, constituted a trading profit. We are, therefore, of the view that the profit on exchange was an appreciation in value received by the assessee on export sales on account of favourable fluctuations in foreign exchange rates at the relevant time and is, therefore, of the nature of a trading receipt which is liable to be assessed as income. We, therefore, hold that the surplus in foreign exchange account was rightly treated by the revenue authorities as the assessee's income and rightly included in the assessee's total income.”

9. It was firstly stressed before us that the facts found were that the amount represented profit on exchange. The said profit arose on account of export sales due to favourable foreign exchange rate at the relevant time. It was secondly stressed that this profit arose on account of the export sales due to favourable foreign exchange. It was thirdly emphasised that this was not a case of profit of an earlier year which was being remitted subsequently. In those circumstances, it was emphasised, it was held by the Tribunal, that this profit arose because of the sale of goods and as such this amount should be treated as trading profit of the assessee. We must emphasise that in this case the Tribunal has categorically made a finding that the amount represented profit on exchange. It is not a profit due to fluctuation or escalation of price in respect of the export sales. This aspect is important to be borne in mind. Whether a devaluation profit in these circumstances would be taxable or not came up for consideration before us in Income-tax Reference No. 57 of 1977 (Indo-Burma Petroleum Co. Ltd. v. Commissioner Of Income-Tax, Central, Calcutta., [1982] 136 ITR 251 (Cal), where we referred to the several authorities. There we observed that the fundamental point that required consideration in matters of this type was whether the money was utilised for earning the profit as such which resulted in the sum of Rs. 1,68,157. In that case, as in the instant reference before us, the assessee was not a dealer in foreign exchange. The question that normally arises in such a situation is the accretion or the profit or the excess amount realised as a result of any trading activity of the assessee. Secondly, we have to address ourselves to the problem, if it is a profit, then, when did this profit arise?Is it at the time of appreciation or depreciation of the currency or at the time of conversion or repatriation?We referred to the observations in the case of Californian Copper Syndicate Ltd. v. Harris (Surveyor of Taxes), [1904] 5 TC 159 (C Exch.) and we observed that the real test was whether profit was realised in the course of the dealing in the foreign exchange. We also referred to the decision in the case of Mckinlay v. H.T Jenkins and Son Ltd., [1926] 10 TC 372 (KB), and we referred to the observations of Rowlatt J., where his Lordship posed the problem as follows (p. 269 of 136 ITR):

“‘If you look at it the other way, it was a profit which they had made by buying forward, instead of waiting until they had to provide the money: I do not think it has anything to do with the profit of the contract itself. It was, as I say, a mere appreciation of something which they had got in hand, and I think the Commissioners were bound to hold (because I see no evidence at all to the contrary) that it was not merged in a business of the company. It may be that, if the company were seeking to declare a dividend, nobody could say it was ultra vires to treat this advantage as a divisible sum. Their capital was intact; they had had cash; they had put it into an article of commerce; they had got it out again; they had got all the cash they ever had, and more cash and as far as I understand it there would be no objection to their treating that as a divisible profit as a matter of company law. But I do not think that affects the case I have got to decide. I have to decide whether they made this profit in the way of their business, as a profit of their trade, or not, and I frankly say that I do not see how it really can be argued that it was.’”

10. We also referred to the decision of Rowlatt J. in the case of George Thompson & Co. Ltd. v. IRC, [1927] 12 TC 1091 (KB) and we noted the observations of the learned judge at p. 1102 of the report. Then we referred to the decision in the case of Canara Bank Ltd. v. CIT, [1963] 47 ITR 529 (Mys). This decision of the Mysore High Court ultimately went up in appeal before the Supreme Court and was affirmed by the Supreme Court as reported in [1967] 63 ITR 328 (Commissioner Of Income Tax, Mysore v. Canara Bank Ltd.). There the Supreme Court observed, inter alia, as follows (p. 332):

“But it does not necessarily follow that the increment due to the fluctuation in the exchange rate was due to trading operations in the carrying on of the banking business.”

11. That, according to our opinion, is the true test whether the profit in question arose out of any trading activity. It is not sufficient to be taxable if it is in any way connected with the trade of the assessee. It must be as a result of a trading activity of the assessee or it must arise or result from the trading activity of the assessee. Merely because the holder of a currency gets something more than what it would have got otherwise would not transform the accretion into a trading profit unless the holding or the dealing in foreign exchange of the particular currency was the trading activity of the assessee concerned. In this case, there is no such finding. We referred to the observations of the Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT, [1979] 116 ITR 1, where the Supreme Court generally dealt with the nature of the taxability in case of both profit and loss on devaluation. But we pointed out, in the aforesaid decision of ours, that the point involved in the Supreme Court case was the allowability of a particular loss and we noted that the loss might be a loss occasioned by carrying on of the operation of the assessee. We noted that no assessee carries on business for making losses but the losses could incidentally arise in the course of the business. But in order to be trading profit the assessee must be carrying on the trading activity. The profit being taxable must arise out of business or in the course of business, not merely connected with the business of the assessee. We referred in this connection to several other decisions and we relied mainly, as we have mentioned before, on the decision of the Supreme Court in the case of Canara Bank, [1967] 63 ITR 328. We noted the decision of this court in the case of Khandelwal Brothers Pvt. Ltd. v. CIT, [1979] 117 ITR 452. We found that in the facts of a particular case that decision was given. We also referred to the decision of this court in the case of Calcutta Jute Agency (P.) Ltd. v. CIT, [1979] 117 ITR 741, upon which learned advocate for the assessee also relied in the instant case before us. In that case, this point, whether the profit should arise as a result of a trading activity of the assessee and not merely be connected with the business of the assessee was not adverted to or canvassed before the court. We also referred to several other decisions and we also noted the decision in the case of Hindustan Aircraft Ltd. v. Commissioner Of Income-Tax, Mysore., [1963] 49 ITR 471 (Mys), a decision upon which the subsequent decision of the Kerala High Court, to which the Revenue drew our attention, was based. As mentioned before, we adhere to the same view that in order to be a trading profit it must arise out of an activity of the assessee and not merely be connected with the activity of the assessee. In this case, as we have mentioned before, if the profit arose as a result of fluctuation or escalation of price then different considerations might have arisen. In this case, as we have mentioned before, it is a categorical finding that the profit was a profit on exchange. We have also noted that the assessee in this case was not a dealer in foreign exchange. In these circumstances, in our opinion, it cannot be said that the profit was trading profit. We must, however, observe that our attention was drawn to the decision of this court in the case of Calcutta Jute Agency (P.) Ltd. v. CIT, [1979] 117 ITR 741. We have noted that this point was not really adverted to and the court was not asked to deal with the question. But learned advocate for the Revenue drew our attention to the observations at p. 746, where the learned judge had referred to the decision of the Court of Appeal in England, in the case of Imperial Tobacco Co. Ltd. v. Kelly (Inspector of Taxes), [1943] 25 TC 292. There the facts as found by the Court of Appeal were significantly different. There the circumstances under which the dollars were sold could be treated to be arising in the course of the trade. Dealing with this, Lord Greene M.R observed at pp. 299-301 of the report as follows:

“Unless I am greatly mistaken, this is a perfectly clear case. The facts may be put concisely in this way. A manufacturer in this country purchased the raw material of his manufacturing business in the United States of America. With a view to the buying season he provided himself in advance with dollar currency, with which he proposed to pay for the raw material which he was going to buy. He does not carry on the business of speculation in dollar currency; but the whole of his purchases of dollars are made in contemplation of the purchases of raw material which he is proposing to make, and not otherwise. Having furnished himself in a particular year with a quantity of dollars, the buying transactions which he contemplated making for the season were suspended by reason of certain governmental instructions given shortly after the outbreak of war, which prohibited or firmly requested—I do not know which—the manufacturer not to make any more purchases of that raw material. The result of that was that he had left upon his hands a very large quantity of dollars which were no longer required for the contemplated purchases, for the simple reason that those contemplated purchases were not going to take place.

A few days later the Treasury requisitioned the dollars and—dollars ia the meantime having appreciated in terms of sterling—the price paid by the Treasury represented a profit over and above the original purchase price which the manufacturer had paid for the dollars. The question is whether, in those circumstances, the profit made was a profit derived from the manufacturing business which the manufacturer carried on. Macnaghten J. held that it was, and, in my opinion, he was perfectly right.

It is said that the purchase of dollars ought to be regarded as in some sense a colourless transaction, by reason of the fact that the appellant company—I will now go to the actual facts of this case—might have changed its mind and used the dollars for building a factory, or for buying some capital asset in the United States; or it might have decided that it would not go on with the purchases and reconverted the dollars into sterling. I do not see how speculations as to those possibilities really assist the question.

We have here a finding of fact as to the purpose for which the dollars were bought. The purchase of the dollars was the first step in carrying out an intended commercial transaction, namely, the purchase of tobacco leaf. The dollars were bought in contemplation of that and nothing else. The purchase on the facts found was, as I say, a first step in the carrying out of a commercial transaction, which would be completed by the purchase and delivery of the leaf and payment of the dollar purchase price for it.

We must decide this case having regard to the facts as found. In the light of those facts, the acquisition of these dollars cannot be regarded as colourless. They were an essential part of a contemplated commercial operation.

That being so, what is the true analysis of the position?A manufacturer has provided himself with a commodity, namely, dollars. I call dollars a ‘commodity’ not for the reason that they are not currency in this country, but because they have a characteristic which is common to other commodities, and is not shared by sterling, namely, that their value from day to day varies in terms of sterling, just in the same way as coal, or bricks, or anything else may do.

The appellant company having provided themselves with this particular commodity, which they proposed to exchange for leaf tobacco, their contemplated transactions became impossible of performance, or were not in fact performed. They then realised the commodity which had become surplus to their requirements. When I say ‘surplus to their requirements’, I mean surplus to their requirements for the purpose and the only purpose for which the dollars were acquired.

In these circumstances, they sell this surplus stock of dollars: and it seems to me quite impossible to say that the dollars have lost the revenue characteristic which attached to them when they were originally bought, and in some mysterious way have acquired a capital character. In my opinion, it does not make any difference that the contemplated purchases were stopped by the operation of Treasury or governmental orders, if that were the case; nor is the case affected by the fact that the purchase was under a Treasury requisition and was not a voluntary one. It would be a fantastic result, supposing the company had been able voluntarily, at its own free will, to sell those surplus dollars, if in that case the resulting profit should be regarded as income, whereas if the sale were a compulsory one the resulting profit would be capital. That is a distinction which, in my opinion, cannot possibly be made.

To reduce the matter to its simplest elements, the appellant company has sold a surplus stock of dollars which it had acquired for the purpose of effecting a transaction on revenue account. If the transaction is regarded in that light, it seems to me it is precisely on all fours with the case of any trader who, having acquired commodities for the purpose of carrying out a contract, which falls under the head of revenue for the purpose of assessment under Schedule D, Case I, then finds that he has bought more than he ultimately needs and proceeds to sell the surplus. In that case it could not be suggested that the profit so made was anything but income. It had an income character impressed upon it from the very first.

If authority be required for that proposition, it is to be found in the case of George Thompson & Co. Ltd. v. Commissioners of Inland Revenue, [1927] 12 TC 1091 (KB). That was a case where a company which had acquired a stock of coal for its normal operations found, for reasons which are not material, that it no longer required that stock; and, accordingly, it sold it. Rowlatt J. held, affirming the decision of the Commissioners, that the transaction of selling the coal which was no longer required was a transaction on revenue account. It seems to me, if I may say so, that that decision was manifestly right.”

12. Therefore, it appears to us that the Master of the Rolls proceeded on the finding (as to the purpose) for which the dollars were bought. The purchase of the dollars was, according to the Master of the Rolls, in that case, the first step in carrying out an intended commercial transaction, namely, the purchase of tobacco leaf. The dollars were bought in contemplation of that and nothing else. The purchase, on the facts found, the Master of the Rolls said, was the first step in the carrying out of a commercial transaction which would be completed by the purchase and delivery of the leaf and payment of the dollar purchase price for it. The sale that took place as a result of the Government order formed an integral part of one trading activity of the assessee. In those circumstances, the court of Appeal in England found that it could be treated as trading profit of the assessee. In the background of the facts as we have noted in the instant case there is no such finding.

13. We must also refer to the decision of the Kerala High Court in the case of M. Shamsuddin & Company v. Commissioner Of Income-Tax, [1973] 90 ITR 323. There, for cashew kernels exported by the assessee-firm in respect of the forward contracts, prices used to be fixed in dollars and at the time of payment, the assessee would receive the rupee equivalent of the price. On account of such receipt by the assessee after the devaluation of the Indian currency on 6th June, 1966, the assessee had earned a profit of Rs. 2,54,862 which the assessee had claimed was a receipt of casual nature. The ITO held that the amount was taxable and his order was confirmed on appeal. On a reference, the High Court, agreeing with the Tribunal, held that as a result of the devaluation the assessee became entitled to receive a larger price in terms of rupees for his goods and that was directly in the course of the trade and constituted a trading profit. We must first emphasise that this was, as we have indicated, a profit due to an escalation of price and the realisation of an enhanced price, and was not a profit on exchange, as has been found in the instant case before us. Furthermore, the Divition Bench of the Kerala High Court relied mainly on the ratio of the Mysore High Court in the case of Hindustan Aircraft Ltd. v. Commissioner Of Income-Tax, Mysore., [1963] 49 ITR 471, a decision which we have discussed in the decision of the Indo-Burma Petroleum Co. Ltd. v. Commissioner Of Income-Tax, Central, Calcutta., [1982] 136 ITR 251 (Cal). Reliance was also placed on the decision in the case of CIT v. Universal Radiators, [1979] 120 ITR 906 (Mad). There the court treated the enhanced price as really, in the facts found by the court, a profit due to escalation of price and not as a profit on exchange as such. Further, it appeared that this question was not specifically adverted to by the court.

14. Reliance was also placed on the observations of the Delhi High Court in the case of Fabindia v. Commissioner Of Income-Tax, New Delhi, [1981] 130 ITR 143. There also the court treated the excess amount as a business profit and assessable as such. But this question was not directly adverted to.

15. In the premises, in view of the ratio of the decision of this court in the case of Indo-Burma Petroleum Co. Ltd. v. Commissioner Of Income-Tax, Central, Calcutta., [1982] 136 ITR 251 (Cal), as indicated by us before, we are of the opinion that the Tribunal was in error in the view it took on this aspect of the matter. We would, therefore, answer the second question referred to us at the instance of the assessee in the negative and in favour of the assessee.

16. We will now deal with the two questions referred to us at the instance of the Commissioner. So far as the first question is concerned, that relates to the question whether the Tribunal was justified in holding that the monetary payments made by the assessee-company to its employees for reimbursement of medical expenses incurred by the employees did not represent expenditure resulting directly or indirectly in the provision of any benefit or amenity or perquisite. On this question the Tribunal has referred to the facts at pp. 43-44 of the paper-book as follows:

“Smt. Sen, on behalf of the assessee-company, submitted before us that only these expenses can be considered as perquisites of the employees which provide to the employee an amenity or benefit whether convertible into money or not and direct payments to the employees cannot be held to be a perquisite and, therefore, the expenses on medical reimbursement of the employees, which were direct payments to them for medical expenses incurred by them, do not come within the scope of perquisites for making the disallowance under s. 40A(5). On the other hand, the learned departmental representative, Shri Roy, relied on the wordings of s. 40A(5) and the proviso thereto in support of his contention that even the direct payments to the employees can be treated to be a perquisite for the purpose of making the disallowance under s. 40A(5).

We have considered the rival submissions. The various Benches of the Appellate Tribunal have been consistently holding the view that direct payments to the employees do not come within the scope of expenditure resulting directly or indirectly in the provision of any perquisite to an employee (whether convertible into money or not) for the purpose of working out the disallowance under section 40A(5). We, therefore, agree with the assessee's learned counsel, Sm. Sen, that the expenses incurred by the assessee-company on reimbursement of medical expenses of the employees could not be treated as a perquisite of the employee for the purpose of making the disallowance under s. 40A(5). The estimated disallowance of Rs. 20,000 on this account made by the Income-tax Officer and upheld by the Appellate Asst. Commissioner, therefore, appears to be unjustified and is hereby deleted.”

17. This question, we further find, is covered by the ratio of the decision of this court in the case of CIT v. Kanan Devan Hills Produce Co. Ltd., [1979] 119 ITR 431. We are of the opinion, that the same principle would be applicable in the instant case. But learned advocate for the Revenue sought to urge before us that in this case subsequent to the relevant assessment year with which we are concerned there has been a slight change in the law. He referred us to the provision of s. 40A, sub-s. (5), as modified with effect from 1st April, 1972. He referred to Expln. 2(b) which has defined perquisite. According to learned advocate for the Revenue, under cl. 4, payment by the assessee of any sum in respect of an obligation, which, but for such payment, would have been payable by the employee, and learned advocate for the Revenue contends that this would be covered by the said definition of perquisite. But in order to come within the main provision it must be an expenditure which resulted directly or indirectly in the provision of any perquisite. Now, a direct payment would not result in the provision of any perquisite. That ratio of the court will still hold good.

18. Learned advocate for the Revenue strongly relied on the observations of this court in the case of CIT v. Kanan Devan Hills Produce Co. Ltd., [1979] 119 ITR 431, at p. 438, where the learned judge emphasised that where the employee concerned had already obtained some advantage or benefit for which the payment was required, the obligation to pay had been incurred by the employee and the company made the payment to meet that obligation, it was only in such a case the payments would come within the mischief of the section. It was emphasised, in the facts and circumstances of the case, that to meet that kind of obligation the expenditure had been made. We are unable to accept this view because it was no part of the obligation of the employer for the discharge of which the assessee had made the payment and for which the reimbursement had been made.

19. In the premises, in our opinion, the ratio of the said decision of this court mentioned hereinbefore will be applicable.

20. Reliance was placed on the case of CIT v. Manjushree Plantations Ltd., [1980] 125 ITR 150 (Mad). This decision, in our opinion, does not help the Revenue. It has been noted that they referred and applied the ratio of the principles of the decision of this court in the case of CIT v. Kanan Devan Hills Produce Co. Ltd., [1979] 119 ITR 431 and also referred to the Supreme Court leave application which was dismissed.

21. In the view we have taken, we are of the opinion that the Tribunal was right on this aspect of the matter and question No. 1, at the instance of the Revenue, must be answered in the affirmative and in favour of the assessee. So far as question No. 2 is concerned, there is a categorical finding that the expenses in question were incurred by the assessee for commercial expediency. The Tribunal has observed, inter alia, as follows:

“The last grievance in the assessee's appeal is against the disallowance of ex gratia payments estimated at Rs. 10,000 by the Income-tax Officer and confirmed in appeal by the Appellate Assistant Commissioner. No details of these ex gratia payments were given to the Income-tax Officer. The Income-tax Officer, therefore, held that these expenses were not wholly and exclusively for carrying out the assessee's business. He, therefore, estimated these expenses at Rs. 10,000 which were disallowed and the Appellate Assistant Commissioner in appeal confirmed this action of the Income-tax Officer.

The assessee's learned counsel, Smt. Sen, submitted before us that when an employee dies, payments are made or pensions are granted to the widow or the family of the deceased on humanitarian grounds in order to maintain the goodwill of the employees and to inculcate in them a feeling of loyalty towards the company, these expenses were motivated by considerations of commercial expediency and were for business purposes. A few instances were given to us to show that by a resolution of the board of directors, Mrs. P.V Krishnaiah was allowed to continue to get an ex gratia payment of Rs. 650 per month till the end of June, 1968, and thereafter, Rs. 350 per month, subject to periodical review, and the youngest daughter of Mr. Narsimha Rao, a deceased employee of the assessee-company, was allowed a child's allowance of Rs. 125 per month until she attains the age of eighteen years or gets married, whichever was earlier. Reference was made by her to the ruling of the hon'ble High Court of Calcutta in the case of Calcutta Landing & Shipping Co. Ltd. v. CIT, [1967] 65 ITR 1, wherein their Lordships laid down that the payment of pension to the wife of the deceased employee was an expenditure solely laid out for the purpose of the business and was hence to be allowed.”

22. In view of the categorical finding that the expenses incurred though not as a result of any direct obligation but out of commercial expediency, in the context of the Tribunal's observation of commercial requirement of maintaining the relationship between the employer and the employee, in our opinion, the Tribunal arrived at the correct conclusion and question No. 2, referred to at the instance of the assessee, must also be answered in the affirmative and in favour of the assessee. In the premises both the questions referred to at the instance of the assessee are answered in the negative and in favour of the assessee and both the questions referred at the instance of the Commissioner are answered in the affirmative and in favour of the assessee. In the facts and circumstances of the case, each party will pay and bear its own costs.

C.K Banerji, J.:— I agree.