Sabyasachi Mukharji, J. - (1.) In this reference under Section 256(2) of tbe I.T. Act, 1961, as directed by this court, the Tribunal has referred the following three questions for the assessment year 1967-68 : "1. Whether, on the facts and in the circumstances of the case, the findings of the Tribunal as to the nature, object and purpose of the fund of the assessee held in the U.K. in Pound Sterling were based on no evidence and/or were perverse ? 2. Vhether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the profit arose in respect of the amount of 1,796 which was not remitted in India ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 1,68,157 had been eorrectly taxed as part of the assessec's trading profits?"
(2.) In order to appreciate these questions, it will be necessary to refer to certain facts as mentioned in the statement of case. But we will refer to certain summary of facts, because there is some suggestion by learned advocate for the assessee that the statement of case does not correctly summarise all the essential ingredients of the findings or of the facts admitted- It appears that during the year 1950, the assessee-company had received a sum of Rs. 97,01,124 from the Govt. of the U.K. by way of ex gratia grant, for the rehabilitation of its war-damaged industry in Burma. This amount was credited, according to the statement of case, to its capital reserve account. Learned advocate for the assepsee stresses the point that it was held as fixed assets. This reserve, subject to certain subsequent adjustments, had been permanently reflected in the company's investments in U.K. Govt. securities, B.O.C. (1954) shares and U.K. Municipal Corportion deposits. Subsequently, the company's investments in 2,01,886 shares of B.O.C. (1954) were disposed of indifferent years and the whole amount thereof was paid by the Government of Burma through B.O.C. in the U. K. The realisation was always treated for tax purposes as on capital account. The dividends received from B.O.C. shares as well as the profit from Burma operations were always repatriated to India and the Reserve Bank had never allowed to repatriate them to the U.K. According to the assessee, it had plans to invest these moneys in various capital projects in the U.K. as part of its expansion scheme and, therefore, these were kept, inter alia, in U.K. Govt. securities, Municipal Corporation deposits, etc., after obtaining the Reserve Bank of India's approval from time to time, pending finalisation of the negotiations. The company wrote on December 26, 1963, to the Ministry of Finance, Govt. of India, for retention of certain amounts in the U.K. In view of a certain controversy, though an extract of that letter has been set out in the statement of case, it is desirable to set out the said letter in extenso which appears at page 10 of the Paper Book being annex. "A" to the statement of case. The said letter, as stated hereinbefore, was dated December 26, 1963, and was addressed to the Secretary, Department of Economic Affairs, Ministry of Finance, Govt. of India, New Delhi. It stated as follows: "BALANCE HELD IN THE U. K.: We refer to the correspondence and discussions between us resting with our letter of 29th May, 1963, reference GM/7(IDIL). Your decision on the main subject under discussion was communicated to us by the Reserve Bank, and the amount of 2,02,000 sought to be utilised by us was duly remitted to India and reported to the Reserve Bank. We have still to receive the Government's decision in regard to the two outstanding matters detailed in our letter under reference and in this connection we have now reported the receipt of the sum of 260,141,13'! 1 in the U.K. in full and final settlement of the proceeds of shares in the Burma Oil Company (1954) Ltd. and fixed assets of the Indo-Burma Petroleum Company Ltd. which were transferred to the Burma Government on 1st January, 1963, in accordance with the agreement between the Oil Companies and the Revolutionary Government of the Union of Burma. The sum received also includes interest on the balance due up to date of payment and completes the financial aspect of the December, 1962, agreement. A further agreement was concluded on 28th November, 1963, in Rangoon and a copy of this is attached hereto and has also been supplied to the Reserve Bank. This has no further rights or obligations under these agreements. We shall, therefore, be obliged if you will let us have your formal approval to these transactions which have now been completed. You will recall from our earlier correspondence and discussions that we requested favourable consideration to our request to exchange sterling funds for shares in another rupee company and permit the company to use the sterling. We gave our reasons for requesting special consideration in a Note with our letter of 29th May, 1963. Our position, now that we have received the final settlement for our Burma assets, is that we wish to utilise the proceeds in whatever way will benefit the Company to the greatest extent possible. We are considering a number of projects, none of which has yet reached a stage where we can place a definite proposal before you; until such time as we are in a position to do so, we request your approval to retain the capital sum now received in the U.K. on term deposit. We would remit the interest after the U.K. tax as and when received. Our grounds for requesting special consideration are that these funds have their origin outside India, prior to the passing of the Foreign Exchange Regulation Act, 1947. The Company has for many years carried on business outside India (in Burma, Pakistan and the U.K.) and is therefore, of an international nature rather than a purely Indian concern. The investment in the Burma Oil Company (1954) Ltd. and in trading in Burma have yielded considerable sums in foreign exchange by remittance of dividends, profits and capital and India has benefited therefrom. For a number of years we have pursued a policy of investment of surplus funds in Indian industry and this policy is being continued; in fact, we have nearly completed negotiations for investment of a substantial sum in three new industrial ventures. Other projects are under consideration. We are, therefore, contributing to the industrial expansion of India. Steel Brothers and Company Limited wish to maintain and, if possible, extend the international character of its subsidiary company, the Indo-Burma Petroleum Company Ltd., and while investing its funds in India in new industries, also wish to take advantage of possibilities for investment outside India using funds released from the Burma Steel Brothers and Company Limited which have world-wide connections, particularly in the Middle East, East Africa and Canada, and through these connections are in a favourable position to arrange worthwhile investment of the funds of the subsidiary. The benefit of such investments would, of course, accrue to India in the form of dividends in foreign currency. We shall be much obliged if you will give our request your favourable consideration and permit us to retain this sum of 250,141,13.11 in the U.K. until we are able to present our firm proposals for your consideration."
(3.) Out of the various projects, only the company's scheme for drilling operations was ultimately approved and finalised and for this the company obtained the Reserve Bank's approval to retain a sum of 1,50,000 in the U. K. for the purpose of finalising this project entirely out of the funds lying in the U.K. As the company's total funds in the U.K. was much higher, the Reserve Bank from time to time instructed it to repatriate funds to India which the Reserve Bank considered as surplus and this was duly effected by the company. As a result of these instructions, the company repatriated 20,204 being the balance fund lying in the U.K. as on 30th June, 1966, after retaining the moneys for commitments for U K. drilling and meeting expenses for Burma Denial Suits. The above amount was repatriated to India in July, 1966, shortly after the devaluation of the Indian Rupee in June, 1966. The assessee, as a result of the remittance and on account of the devaluation, realised an extra sum of Rs. 1,88,157 in terms of Indian currency. In fact, as per details furnished by the assessee, it is seen that it had earned an extra profit of Rs. 2,03,300 on account of devaluation from the funds lying in current accounts with the banks and deposits with the Municipal Corporation. The whole of this amount was originally offered for tax in the return filed by the assessee. Subsequently, a revised return was filed in which the company offered to tax only Rs. 35,143 as revenue profit and the balance of Rs 1,68,157 was offered as capital gains. The ITO treated the above amount of Rs. 1,68,157 also as a profit on revenue account on the ground that it consisted of various remittances made from India to the U.K. which remained unutilised in the assesscc's business there.;