Commissioner Of Income-Tax v. Indian Oxygen Ltd.

Suhas Chandra Sen, J.:— The Tribunal has referred the following questions of law to this court under section 256(1) of the Income-tax Act, 1961 (“the Act”):

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the sum of Rs. 40,10,165 representing a provision made for payment of gratuity to the employees was an allowable deduction in computing the profits and gains of the assessee's business?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the amounts paid to the employees as reimbursement of medical expenses incurred by them did not result directly or indirectly in the provision of any perquisites to the employees within the meaning of section 40A(5) of the Income-tax Act, 1961?

3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 36,936 paid by the asses-see to British Oxygen Ltd., London, in pursuance of the agreement dated October 1, 1958, was a permissible deduction under section 37(1) of the Income-tax Act, 1961?

4. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in setting aside the order of the Appellate Assistant Commissioner and restoring the order of the Income-tax Officer in respect of the bad debt claim amounting to Rs. 1,05,406?”

2. In this case, the assessment year involved is 1972-73 for which the relevant accounting year is the year ending on September 30, 1971. In view of the judgment of this court in the case of Commissioner Of Income-Tax (Central-I) v. Eastern Spinning Mills Ltd., [1980] 126 ITR 686, question No. 1 is answered in the affirmative and in favour of the assessee.

3. In view of the decision of this court in the case of Indian Leaf Tobacco Development Co. Ltd. v. CIT, [1982] 137 ITR 827 question No. 2 is also answered in the affirmative and in favour of the assessee.

4. Question No. 3 is covered by the assessee's own case, viz., Commissioner Of Income-Tax v. Indian Oxygen Ltd., [1978] 112 ITR 1025 (Cal), and also in view of the principles laid down in the assessee's own case in Commissioner Of Income-Tax v. Indian Oxygen Ltd., [1978] 113 ITR 109 (Cal), this question is also answered in the affirmative and in favour of the assessee.

5. So far as question No. 4 is concerned, the finding of the Tribunal is as follows:

“The assessee had a branch in Pakistan. In 1940, another company, Pakistan Oxygen Ltd., was formed. The branch of the assessee-company was closed, but an amount of Rs. 1,40,511 remained lying with the branch at Karachi as it was not allowed to be remitted to India. In 1965, due to the conflict between India and Pakistan that amount became vested in the Custodian of Enemy Properties. The Government of India provided a relief of 25 per cent, of the claim of the assessee subject to a certain condition that the assessee did not receive anything out of its claim for Rs. 1,40,511 from the Government of Pakistan. After adjusting the amount received from the Government of India, the assessee wrote off the balance of Rs. 1,05,406 as a bad debt. The Income-tax Officer disallowed the claim of the assessee for bad debt of Rs. 1,05,406 as premature. The Appellate Assistant Commissioner took the view that the debt had become bad as nothing had been recovered for the last 20 years and consequently he allowed the assessee's claim.

Before us it is submitted by the learned representative of the Department that the assessee's branch in Pakistan was closed in 1949 and the amount of Rs. 1,40,511 was lying with the Chartered Bank, Karachi, since then. He has next submitted that the amount became a capital asset of the assessee and that the loss was a capital loss and could not be allowed as deduction as a bad debt. Reliance is placed on the decision in the case of CAT v. Canara Bank Ltd., [1967] 63 ITR 328 (SC), in support of his contention. Learned counsel for the assessee, on the other hand, has urged that the amount of Rs. 1,40,511 was part of the assessee's circulating capital and that it was kept in the current account in the bank at Karachi and the assessee could not get the same repatriated to India as the Government of Pakistan did not allow repatriation and in 1965 it was taken over by the Custodian of Enemy Properties in Pakistan. He has urged that in spite of the lapse of a long period the assessee could not recover anything and he wrote it off during the year and claimed the loss of the balance after adjustment of relief recovered from the Government of India. He has, therefore, supported the order of the Appellate Assistant Commissioner. The facts in the case of Canara Bank, [1967] 63 ITR 328 (SC) were that the assessee-bank opened a branch in Karachi in 1946. After the formation of Pakistan, the assessee-bank did not do any foreign exchange business even when it was allowed to do so by the Government of Pakistan. An amount of Rs. 3,79,221 was lying idle with its branch at Karachi. Subsequently, due to the difference in the rates of the currencies, there was a profit of Rs. 1,73,877. The assessee claimed that it was not a revenue receipt. It was held that the amount of Rs. 30,721 was originally stock-in-trade. But when it was blocked and sterilised and the bank was unable to deal with the amount, it ceased to be its stock-in-trade and the increase in its value owing to exchange fluctuation was a capital receipt. In the present case also, we find that the assessee was not allowed to bring the amount to India and that no business was done thereafter 1949. Thus even if the amount was originally a part of the assessee's circulating capital, it ceased to be so. If the above decision applies to the facts of this case, then the assessee is not entitled to claim Rs. 1,05,406 as a bad debt or as a business loss.”

6. The only question is whether the amount that was lying in Pakistan was circulating capital of the company or not. If it was circulating capital, then any loss of circulating capital will have to be allowed as a bad debt. There is no dispute about the fact that the assessee had lost all hopes of recovery of this amount in this particular accounting year. The only question is whether the assessee is entitled to write it off as a bad debt at all. In the case of Sutlej Cotton Mills Ltd. v. CIT, [1979] 116 ITR 1 (SC), it was held that when profit or loss arose to an assessee on account of appreciation or depreciation in the value of foreign currency held by him, on conversion into another currency, such profit or loss could ordinarily be trading profit or loss if the foreign currency was held by the assessee on revenue account or as a trading asset or as part of the circulating capital embarked in the business. But if, on the other hand, the foreign currency was held as a capital asset or as fixed capital, such profit or loss would be of capital nature.

7. In this case, initially the amount was held as part of the circulating capital of the assessee-company. The assessee-company did not choose to convert it into fixed capital. Money was not shown in the capital account of the assessee. Because of Governmental restriction, the money could not be utilised by the assessee-company.

8. In the case of Commissioner Of Income Tax, Mysore v. Canara Bank Ltd., [1967] 63 ITR 328 (SC), the devaluation of the Indian rupee took place in the year 1949. At that time, the Karachi Branch of the bank did not carry on any business up to April 25, 1953. But in spite of the permission, the bank did not carry on any business and kept the amount blocked and sterilised. When the amount Was ultimately brought back to India, the excess receipt on account of devaluation was held to be a capital receipt.

9. But, in the instant case, the money has not been kept unutilised by the assessee of its own volition. It was a part of its circulating capital. The assessee was not permitted to deal with this amount because of various Government regulations. Therefore, it cannot be said on the facts of this case, that the amount which originally formed part of the circulating capital of the assessee had been brought into the capital account by the assessee.

10. In that view of the matter, question No. 4 is answered in the negative and in favour of the assessee. There will be no order as to costs.

Bhagabati Prasad Banerjee, J.:— I agree.