COMMISSIONER OF LNCOME-TAX, BOMBAY CITY versus TATA LOCOMOTIVE & ENGINEERING CO., LTD.

Citation: [1966] 3 S.C.R. 235 · Decided: 13-01-1966 · Supreme Court of India · Bench: K. SUBBA RAO · Disposal: Dismissed

Judgment (excerpt)

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COMMISSIONER OF lNCOME-TAtX, BOMBAY CITY 
v. 
TATA LOCOMOTIVE & ENGINEERING CO., LTD. 
Jqnuary 13, 1966 
[K. SUBBA RAO, J.C. SHAH ANDS. M. SIKRI, JJ.J 
Income Tux-Conimission received in U.S.A.-Kept in U.S.A. for 
buying capital goods with sanction of Reserve Bank-Amount later repa-
cr;attd-Surplus in rupees due to devaluation-If capital or rtv,,nue 
receipt. 
The assessee was a limited company with its registered office _at 
Bombay. 
Its main business was the manufacture of locomotive boilers 
and locomotives, and for that purpose the assessee had to make purchases 
of plant and machinery, in various countries including the U.S.A. 
The 
.. sessee appointed M/s. Tata Inc., New York, as its purchasing agent 
in the U.S.A. 
The assessee was also the selling agent of Baldwin Loco-
motive Works, U.S.A., for the sale of their products in India, and the 
commission payable to the assessee as their sole selling agent was made 
over to the assessee's purchasing agent in Now York with the sanction 
of the Reserve Bank and for the purchase of capital goods. This amount 
was taxed in the relevant assessment years on the accrual basis and the 
tax was paid. On 16th September 1949, the pound &terlinJI waa devalued 
and the rate of exchange between rupee and dollar which was Rs. 3.33 per 
dollar before devaluation, became Rs. 4.775 per dollar thereafter. 
On 
that date, there was in the as.sessee's account with the purchasing agent a 
sum of $ 36,123.02 representing the commission 
received from Baldwin 
Locomotive Works. With the permission of the Reserve Bank this sum Vias 
repatriated to India in 1950 and the change in the exchange rate gave 
rise to a surplus in rupees. The Income-tax Officer, the Appellate Assis-
tant Commissioner and the Appellate Tribunal held that this surplus amount 
was liable to tax. 
The High Court, on a reference, held that the sum 
was not taxable in the hands of the assessee. 
In appeal to this Court, it was contended that the assessee was liable 
to tax because; (i) if the commission had been ano,ved to remain in the 
U.S.A. up to 16th September 1949 anc1 had been repatriated on 17th 
September, the assessee would have been Hable to tax and therefore the 
permission of the Reserve Bank and the decision of the assessee to hold 
it to buy capital goods did not make any difference; and (ii) the fact 
that the assessee credited the rupee equivalent of the sum in his books 
and pa:id tax on the basis of accrual did not also make any difference to the 
asses~ee's liabi1ity. 
HELD : The High Court was right in deciding in favour of the 
asses~ee. 
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The assessee's liability to tax would depend on whether the act of 
keeping the money for capital purposes after obtaining the sanction of 
the Reserve Bank was part of or a trading transaction. The amount no 
doubt. was a revenue receipt in the assessee's business of commission 
agency. 
But instead of repatriating it immediately, the assessee obtain-
ed the sanction of the Reserve Bank to utilize the commission for buying 
capital good<;, and that was an independent transaction. 
It was not a 
236 
SUP.REMB COURT REPORTS 
(1966] 3 S.C . .R. 
trading transaction but was a transaction of accumulating dollars to pay 
A. 
for capital goods, the first step to the acquisition of capital goods. If tho 
assessee had repatriated the amount and then, after obtaining the sanc-
tion of the Reserve Bank, remitted it to the U.S.A. any profit made on 
devaluation would only be a capital profit. 
Therefore, the fact that 
the assesscc kept the money in the U.S.A. did not make any difference under 
!be circumstances. [241 B-F] 
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 236 of - B 
1965. 
Appeal from the judgment and order dated August 30, 1961 
of the Bombay High Court in Income-tax Reference No. 12 of 
1959. 
A. V. Viswanatha Sastri, N. D. Karkhanis, R. H. Dhebar and 
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R. N. Sachthey, for the appellant. 
N. A. Palkiva/a, T. A. Ramaclzandran, J. B. Dadachanji, 
0. C. Mathur and Ravinder Narain, for the respondent. 
The Judgment of the Court was delivered by 
Sikri, J, This appeal hy certificate granted by the High Court 
of Judicature at Bombay under s. 66-A ( 2) of the Indian Income 
Tax Act, 1922, hereinafter referred to as the Act, is 
directed 
against its judgment in a reference made to it by the Income-Tax 
Appellate Tribunal. The following two questions were referred : 
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( l ) Whether on the facts and in the circumstances 
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