- (1.) These appeals by special leave are directed against a judgment of the Calcutta High Court answering the first question referred to it by the Tribunal in favour of the Revenue and against the assessee. There were in all five questions referred by the Tribunal but questions Nos. 2 to 5 no longer survive and these appeals are limited only to question No. 1. That question is in the following terms : "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 Since there are two assessment years in regard to which the question arises, there are two appeals, one in respect of each assessment year, but the question is the same. We will briefly state the facts as that is necessary for the purpose of answering the question.
(2.) The assessee is a limited company having its head office in Calcutta. It has inter alia a cotton mill situate in West Pakistan where it carries on business of manufacturing and selling cotton fabrics. This textile mill was quite a prosperous unit and in the financial year ending 31st March, 1954, being the accounting year relevant to the assessment year 1954-55, the assessee made a large profit in this unit. This profit obviously accrued to the assessee in West Pakistan and according to the official rate of exchange which was then prevalent, namely, 100 Pakistani rupees being equal to 144 Indian rupees, this profit, which may for the sake of convenience be referred to as Pakistan profit, amounted to Rs. 1,68,97,232/- in terms of Indian rupees. Since the assessee was taxed on actual basis, the sum of Rs. 1,68,97,232/- representing the Pakistani profit was included in the total income of the assessee for the assessment year 1954-55 and the assessee was taxed accordingly after giving double taxation relief in accordance with the bilateral agreement between India and Pakistan. It may be pointed out that for some time after the partition of India, there continued to be parity in the rate of exchange between India and Pakistan but on 18th Sept. 1949, on the devaluation of the Indian rupee, the rate of exchange was changed to 100 Pakistani rupees being equal to 144 Indian rupees and that was the rate of exchange at which the Pakistan profit was converted into Indian rupees for the purpose of inclusion in the total income of the assessee for the assessment year 1954-55. The rate of exchange was, however, once again altered when Pakistani rupee was devalued on 8th August, 1955 and parity between Indian and Pakistani rupee was restored. The assessee thereafter succeeded in obtaining the permission of the Reserve Bank of Pakistan to remit a sum of Rs. 25 lakhs in Pakistani rupees out of the Pakistani profit for the assessment year 1954-55 and pursuant to this permission, a sum of Rs. 25 lakhs in Pakistani rupees was remitted by the assessee to India during the accounting year relevant to the assessment year 1957-58. The assessee also remitted to India during the accounting year relevant to the assessment year 1959-60 a further sum of Rs. 12,50,000/- in Pakistani rupees out of the Pakistani profit for the assessment year 1954-55 after obtaining the necessary permission of the Reserve Bank of Pakistan. But by the time these remittances came to be made, the rate of exchange had, as pointed out above, once again changed to 100 Pakistan rupees being equal to 100 Indian rupees and the amounts received by the assessee in terms of Indian rupees were, therefore, the same, namely, Rs. 25 lakhs and Rs. 12,50,000. Now, the profit of Rs. 25 lakhs in terms of Pakistani rupees had been included in the total income of the assessee for the assessment year 1954-55 as Rs. 36 lakhs in terms of Indian rupees according to the then prevailing rate of exchange of 100 Pakistani rupees being equal to 144 Indian rupees and, therefore, when the assessee received the sum of Rs. 25 lakhs in Indian rupees on remittance of the profit of Rs. 25 lakhs in Pakistani rupees on the basis of 100 Pakistani rupees being equal to 100 Indian rupees, the assessee suffered a loss of Rs. 11 lakhs in the process of conversion on account of appreciation of the Indian rupee qua Pakistani rupee. Similarly, on remittance of the profit of rupees 12,50,000 in Pakistani currency the assessee suffered a loss of Rs. 5,50,000. The assessee claimed in its assessments for the assessment years 1957-58 and 1959-60 that these losses of Rs. 11 lakhs and Rs. 5,50,000/- should be allowed in computing the profits from business. This claim was however rejected by the Income Tax Officer. The assessee carried the matter in further appeal to the Tribunal but the Tribunal also sustained the disallowance of these losses and rejected the appeal. The decision of the Tribunal was assailed in a reference made at the instance of the assessee and Question No. 1 which we have set out above was referred by the Tribunal for the opinion of the High Court. On the reference the High Court took substantially the same view as the Tribunal and held that no loss was sustained by the assessee on remittance of the amounts from West Pakistan and that in any event the loss could not be said to be a business loss, because it was not a loss arising in the course of business of the assessee but it was caused by devaluation which was an act of State. The High Court accordingly answered the question in favour of the Revenue and against the assessee. The assessee thereupon preferred the present appeal after obtaining certificate of fitness from the High Court.
(3.) The first question that arises for consideration is whether the assessee suffered any loss on the remittance of Rs. 25 lakhs and Rs. 12,50,000/- in Pakistani currency from West Pakistan. These two amounts admittedly came out of Pakistan profit for the assessment year 1954-55 and the equivalent of these two amounts in Indian currency, namely, Rs. 36 lakhs and Rs. 18 lakhs respectively, was included in the assessment of the assessee as part of Pakistan profit. But by the time these two amounts came to be repatriated to India, the rate of exchange had undergone change on account of devaluation of Pakistani rupee and, therefore, on repatriation, the assessee received only Rs. 25 lakhs and Rs. 12,50,000/- in Indian currency instead of Rs. 36 lakhs and Rs. 18 lakhs. The assessee thus suffered a loss of Rs. 11 lakhs in one case and Rs. 5,50,000/- in other in the process of conversion of Pakistani currency into Indian currency. It is no doubt true - and this was strongly relied upon by the High Court for taking the view that no loss was suffered by the assessee- that the books of account of the assessee did not disclose any loss nor was any loss reflected in the balance-sheet or profit and loss account of the assessee. The reason was that though, according to the then prevailing rate of exchange, the equivalent of Pakistan profit in terms of Indian rupee was Rs. 1,68,97,232/- and that was the amount included in the assessment of the assessee for the assessment year 1954-55, the assessee in its books of account maintained at the Head Office did not credit the Pakistan profit at the figure of Rs. 1,68,97,232/-, but credited it at the same figure as in Pakistani currency. The result was that the loss arising on account of the depreciation of Pakistani rupee vis-a-vis Indian rupee was not reflected in the books of account of the assessee and hence it could not figure in the balance-sheet and Profit and Loss Account. But it is now well settled that the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. The assessee may, by making entries which are not in conformity with the proper accountancy principles, conceal profit or show loss and the entries made by him cannot, therefore, be regarded as conclusive one way or the other. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee. Here, it is clear that the assessee earned Rs. 36 lakhs and Rs. 18 lakhs in terms of Indian rupees in the assessment year 1954-55 and retained them in West Pakistan in Pakistani currency and when they were subsequently remitted to India, the assessee received only Rs. 25 lakhs and Rs. 12,50,000/- and thus suffered loss of Rs. 11 lakhs and Rs. 5,50,000/- in the process of conversion on account of alteration in the rate of exchange. It is, therefore, not possible to accept the view of the High Court that no loss was suffered by the assessee on the remittance of the two sums of Rs. 25 lakhs and Rs. 12,50,000/- from West Pakistan. This view which we are taking is clearly supported by the decision of this Court in Commr. of Income-tax v. Tata Locomotive Engineering Co. Ltd., 60 ITR 405 : (AIR 1966 SC 1506) which we shall discuss a little later.;