P.B.Mukharji, CJ. -
(1.) In this statement of the case on the income-tax reference under Section 66(1) of the Indian Income-tax Act, 1922, the following questions have been raised :
" 1. Whether, on the facts and in the circumstances of the case, the assessee's claim for the exchange loss of Rs. 11 lakhs for the assessment year 1957-58 and Rs. 5,50,000 for the assessment year 1959-60 in respect of remittances of profit from Pakistan was not allowable as a deduction ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that law charges amounting to Rs. 1,170 and Rs. 3,573 incurred in respect of business profits tax appeals for the assessment years 1957-58 and 1959-60 were not allowable as deductions ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that law charges of Rs. 2,551 incurred for effecting changes in the existing managing agency agreement were not allowable as a deduction for the assessment year 1957-58 ?
4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that interest amounting to Rs. 5,236 paid on funds invested in shares which produced no dividend income was not allowable as a deduction for the assessment year 1957-58 ?
5. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that interest amounting to Rs. 10,671 disallowed in the assessments for the assessment years 1957-58 and 1958-59 on funds invested in shares was not allowable as a deduction in the assessment year 1959-60 ?
(2.) The assessee has not pressed questions Nos. 3 and 5 as set out above. That position is accepted by the revenue. The court, therefore, will not record an answer on either of questions Nos. 3 and 5.
(3.) The facts of the case are as follows : The assessee is Sutlej Cotton Mills Ltd. The statement of the case records that its head office is in Calcutta but its Cotton Mills are in West Pakistan. The assessment years are 1957-58 and 1959-60. The respective accounting years are the financial years ending on the 31st March, 1957, and the 31st March, 1959. The assessee claimed for these two years Rs. 11 lakhs and Rs. 5,50,000 as losses suffered in exchange on remittances of profits from Pakistan. In the accounting year ending on the 31st March, 1954, that is, for the assessment year 1954-55, the Pakistan profits of the assessee as assessed in Pakistan amounted to Rs. 1,68,97,232 at the official rate of exchange of 100 Pakistan rupees--144 Indian rupees prevailing at that time. For the purpose of the assessee's Indian assessment for 1954-55 the Pakistan profits were converted to a higher figure by adopting this exchange ratio and was included in the assessee's total income in India. During the accounting year for the assessment year 1957-58 the assessee obtained the permission of the Reserve Bank of Pakistan to remit Rs. 25,00,000 out of its Pakistan profits for the assessment year 1954-55 to India. But, then, at that time, the remittance was made on the then prevailing official exchange ratio which was 100 Pakistan rupees = 100 Indian rupees. The assessee, therefore, received in India Rs. 25 lakhs in Indian currency in exchange for Rs. 25 lakhs of Pakistan currency. The assessee claimed that as in its assessment for 1954-55 this amount of Rs. 25 lakhs (Pakistan) bad been included in the Indian total income of Rs. 36 lakhs (Indian), the assessee had suffered a loss of Rs. 11 lakhs when the amount was actually remitted from Pakistan to India. A similar claim for loss was made for the assessment year 1959-60 of Rs. 5,50,000 in respect of the transfer of Pakistan profits of the accounting year ending on the 31st March, 1955, to India. The claims for losses were disallowed in both the years by the Income-tax Officer who held the claims to be purely hypothetical book losses. On appeal, the Appellate Assistant Commissioner expressed the opinion that the losses claimed were notional losses and, further, that it was not incumbent on the assessee to get the profits remitted from Pakistan to India and the loss in exchange would only be a charge on the profits and not a charge on income. The Appellate Assistant Commissioner disallowed the assessee's claims for losses and upheld the order of the Income-tax Officer. In further appeal before the Tribunal, the Tribunal rejected the assessee's appeals and upheld the orders of the taxing authorities. The Judicial Member of the Tribunal held that there had been neither any loss nor any gain in exchange on the transfer of the amounts from Pakistan to India. In the assessee's books of account in the head office in Calcutta the profits of Pakistan had been shown in rupees and the remittance from Pakistan had also been shown in rupees, without showing any loss in the process or due to the exchange fluctuation between the Pakistan rupee and the Indian rupee. He, therefore, came to the conclusion that there was neither any loss nor any gain in exchange so far as the assessee's own books were concerned. The Tribunal found that the head office books of the assessee disclosed no loss in respect of the remittances from Pakistan. The Tribunal expressed the view that simply because the assessee's profits in Pakistan for the assessment year 1954-55 were included in the assessee's total income in the Indian assessment for that year at an enhanced figure due to the prevailing official exchange rate, it did not follow that the assessee suffered a loss when a portion of such profits was subsequently remitted to India. The Judicial Member held that the profit was illusory in the assessment year 1955-56 and the losses claimed for the assessment years 1957-58 and 1959-60 were also illusory and could not be allowed. The Accountant Member of the Tribunal agreed with these findings but he also gave his own added reasons for coming to that conclusion. The Accountant Member expressed the view that the remittance was merely for the purpose of repatriation of past accumulated profits and, therefore, did not amount to a trading transaction, and, secondly, that, as each year's assessment is independent of the assessment relating to the other years, the loss arising from the remittances of earlier years profits could not be allowed in a subsequent year unless it was proved that such remittances represented the normal flow of circulating capital from a branch to the head office or vice versa and that there was a compelling business necessity for such remittances during the relevant years in which the remittances took place. According to the opinion of the Accountant Member such loss was not prima facie the result of any business or trading activity in this case but was merely the consequence of repatriation of profits earned during earlier years, which due to efflux of time and vagaries of exchange regulations, had shrunk and dwindled in terms of the Indian currency. He, therefore, came to the conclusion that it could not be said in such facts and circumstances that any loss had sprung up directly from the carrying on of the assessee's business. These are the relevant facts for the purpose of question No. 1 as set out above.;