SUTLEJ COTTON MILLS LTD versus COMMR. OF INCOME TAX, WEST BENGAL, CALCUTTA

Citation: [1979] 1 S.C.R. 976 · Decided: 27-09-1978 · Supreme Court of India · Bench: P.N. BHAGWATI · Disposal: Case Allowed

Judgment (excerpt)

A 
B 
c 
976 
SUTLEJ COTTON MILLS LTD. 
V-
COMMR. OF INCOME TAX, 
WEST BENGAL, CALCUTTA 
September 27, 1978 
[P. N. BHAGWATI AND V. D. TULZAPURKAR, JJ.] 
Income Tax Act, 1922-Secs. 10(1), 10(2)-Loss occasioned on account' 
of devaluation-Whether deductible as revenue expenditure-Circulating capi-
tal and fixed capital. 
The assessee is a Limited Company having its Head Office in Calcutta~ 
It has inter alia a Cotton !\fill situated 
in 
West 
Pakistan where it 
carries on business of manufacturing and selling 
cotton 
fabrics. 
For the-
accounting year relevant to the assessment year 1954-55, the assessee made a 
large profit in the unit in \\-'est Pakistan. The Pakistan profit, according to the 
D 
official rate of exchange, which was then prevalent, namely, 
100 Pakistani 
rupees being equal to 144 Indian rupees amounted to Rs. 1,68,97,232 in terms 
of 
Indian 
rupees. 
Since 
the 
assessee 
was 
taxed 
on 
accrual 
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 19"54-55\. 
and the assessee was taxed accordingly after giving double taxation relief in 
accordance with the bilateral agreement between India and Pakistan. On 8th 
August, 1955, the Pakistani rupee was devalued and parity 
between Indian 
E 
and Pakistani rupee was restored. The assessee thereafter succeeded in obtain-
ing 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. 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 !and, therefore, when the assessee received the 
sum of Rs. 25 
F 
lakhs on remittance of the profit of Rs. 25 lakhs in Pakistani rupees during 
the assessment years 1957-58, the assessee suffered a loss of Rs. t 1 lakh<i, in 
the process of conversion on account of appreciation of the Indian rupee qua 
Pakistani rupee. Likewise, in the assessment year 1959-60, a further sum of 
Rs. 12,50,000 was remitted by the assesse to India out of the Pakistani profit 
for the assessment year 1954-55 and suffered a loss of Rs. 
5,50,000. The· 
assessee claimed in its assessment for the year 1957-58 and 1959-60 that these 
G 
losses of Rs. 11 lakhs and Rs. 5,50,0-00 should be allowed in computing the· 
profit from business. The Income Tax Officer and the Tribunal disallowed the 
claim. On a reference to the High Court, the High Court took the view that 
no loss was snstain::.d 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 Joss 
because it \.Vas 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 
H 
accordingly answered the question in favour of the Revenue and against the 
assessee. 
Disposing of the appeals by special leave the Court, 
--
, 
• 
SUTLEJ COTTON MILLS v. C.I.T. (Bhagwati, !.) 
977 
HELD : The· first question that arises 
is 
whether the assessee 
sutfered 
any Joss on the remittance of Rs. 25 lakhs and Rs. 12,50,000. 
These 1wo 
.amounts admittedly came out of the Pakistani profit for the assel!Slllent 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 Pakistani profit but by the time these amounts came to 
be repatriated to India, the rate 
of exchange had undergone change on 
.account of devaluation of Pakistani rupee and, threfore, on repatriation, the 
assessee received only Rs. 25 lakhs and Rs. 12.50 lakhs in Indian currency 
·instead of Rs. 36 lakhs and Rs. 18 lakhs. The assessee thus suffered a loss of 
Rs. 11 Jakhs in one case and Rs. 5.50 lakhs in the other case; The fact thatl no 
Joss was reflected in the books of the two accounts of the assessee was not a 
conclusive factor and the High Court ought not to have reli~ on it 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 
asse-Ssee has 
earned any profit or suffered any los~. [981 A-D, 982 A-B CJ 
Conunissio11er of Income Tax v. Tata 
Loco1notive EngineeTing Co., 
60 
I. T.

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