R.C. Mankad, J.
1. The Income-tax Appellate Tribunal. Ahmedabad Bench 'A' (hereinafter referred to as 'the Tribunal'), has referred the following questions for our opinion under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act') :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that there was no single receipt which could be said to reflect only the gains of devaluation and, as such, the substantive part of section 10(3) of the Income-tax Act, 1961, was not attracted
2. Whether. on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the receipt of Rs. 1,01,572 arose out of business transaction and hence the element of casualness was totally absent
3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the total receipts in the hands of the assessee amounted to sale price arising out of trading activity and as such was taxable as revenue receipt
4. If the answer to above questions Nos. 1, 2 and 3 is in the affirmative, whether the Tribunal was justified in rejecting the alternative claim of the assessee that the excess of Rs. 41,586.42 referable to unrealised outstanding balance as on the opening day of the accounting year of Rs. 71,199.81 was not in the nature of capital accretion and hence not liable to be taxed as revenue receipt ?'
2. It appears that there is a mistake in framing question No. 4. The assessee's contention is that excess amount of Rs. 41,586.42 was in the nature of capital accretion and, therefore, the question as framed is not correct. We reframe it as under :
'If the answer to above questions Nos. 1, 2 and 3 is in the affirmative, whether the Tribunal was justified in rejecting the alternative claim of the assessee that the excess of Rs. 41,586.42 referable to unrealised outstanding balance as on the opening day of the accounting year of Rs. 71,199.81 was in the nature of capital accretion and hence not liable to be taxed as revenue receipt ?'
3. Facts leading to this reference are as follows. We are concerned with the assessment year 1967-68, the previous year being the year ending on March 31, 1967. The assessee, a registered partnership firm, is engaged in the business of dehusking of Isabgol and exporting Isabgol seeds and Isabgol husk to the United States of America ('U.S.A.' for short) and other countries. The method of accounting followed by it is mercantile. In connection with its business of export of Isabgol seeds and Isabgol husk, the assessee received during the year under consideration amongst other amounts Rs. 2,62,902.70, Rs. 37,638.01 and Rs. 2,915.03 from M/s. G. D.Searle & Co., M/s. Biddle Sawyer Corper and M/s. California Commodities Corper, respective1y, purchasers in U.S.A. The total amount received from the purchasers in U.S.A. came to Rs. 3,03,455.75. Out of this amount received by the assessee from the purchasers in U.S.A. in the year under consideration, the dispute is confined to Rs. 1,01,572. The sale price of Isabgol seeds and Isabgol husks was fixed under the agreements between the assessee and the purchasers in U.S.A. in terms of U.S. dollars. On June 6, 1966, Indian rupee was devalued in terms of U.S. dollars and as a result of this devaluation of Indian rupee, the assessee received additional or excess amount of Rs. 1,01,572 by way of consequential difference in value. The sale proceeds in respect of the goods sold to the purchasers in U.S.A. in the year under consideration in terms of rupees came to Rs. 1,29,684 and as a result of devaluation of the Indian rupee, the assessee received Rs. 59,686 in excess in respect of those sales. In the preceding year, the sale proceeds in respect of the goods exported to U.S.A. came to Rs. 71,199 and the assessee received excess amount of Rs. 41,586 as a result of devaluation of the Indian rupee towards those sales. Thus, out of the total amount of Rs. 1,01,572, the subject-matter of dispute in the present reference, Rs. 41,586 related to the preceding year whereas Rs. 59,986 related to the year under consideration. The total receipts in the year under consideration came to Rs. 3,03,455 which included the aforesaid amount of Rs. 1,01,572.
4. The assessee claimed before the Income-tax Officer that the receipt of the aforesaid excess amounts of Rs. 59,986 and Rs. 41,586 totalling to Rs. 1,01,572 was of casual and non-recurring nature and hence exempt under section 10(3) of the Act as it stood at the relevant time. The Income-tax Officer was of the view that the claim made by the assessee was frivolous. He found that what the assessee had received was only the sale price of the goods sold and that as a result of devaluation of the Indian rupee, it had received larger amount in terms of the Indian rupees. As observed by the Tribunal, in substance, what the Income-tax Officer held was that the assessee's case was covered by clause (ii) of section 10(3) and, therefore, the receipts even if they were of casual and non-recurring nature, since they arose from the business, were not exempt from payment of tax. In the appeal preferred by the assessee, the Appellate Assistant Commissioner held that the receipts in question arose out of the business transactions and the element of casualness as sought to be urged on behalf of the assessee was totally absent. He further held that there was no substance in the alternative contention of the assessee that the receipts were of capital nature. The assessee carried the matter in further appeal before the Tribunal. Same contentions which were raised before the Appellate Assistant Commissioner were reiterated before the Tribunal and it was further urged that the disputed amount of Rs. 1,01,572 included the price of goods sold in the preceding year, namely, the year of account ending on March 31, 1966, and at least so far as the amount of Rs. 41,586 which related to the preceding year was concerned, the receipt thereof must be treated as capital in nature. The Tribunal held that it was not necessary to consider the question whether the receipts in question would fall under clause (ii) of section 10(3) since, according to it, the receipts not being of casual or non-recurring nature, section 10(3) was not attracted at all. It was held that each of the amounts received from the purchasers in U.S.A. was revenue receipt in terms of U.S. dollars and receipt in terms of the Indian rupee resulting from conversion of U.S. dollars was 'at best a composite receipt including the pre-rupee devaluation equivalent of the sale price and the difference arising as a result of the devaluation as aforesaid'. As regards the contention that the receipt of Rs. 41,586 was of capital nature, the Tribunal held that the foreign currency received by the assessee by way of sale price had not been received by the assessee as investor in foreign exchange. The said sale price was received by the assessee in the course of the trading activity of making export sales of Isabgol seeds and husks and that the receipt in terms of the Indian rupee had clearly a connection with the export sales made by the assessee. The assessee feeling dissatisfied with the decision of the Tribunal, the questions reproduced above have been referred to us for our opinion at its instance.
5. Mr. K. C. Patel, the learned counsel appearing for the assessee, submitted that the excess amount received by the assessee as a result of devaluation of the Indian rupee was income of casual and non-recurring nature and, therefore, such amount was not includible in the total income of the assessee under section 10(3) of the Act as it stood at the relevant time. It was submitted that the amount of Rs. 1,01,572 which the assessee received as a result of devaluation was nothing but a windfall and, therefore, that amount cannot be included in the total income of the assessee. Prior to its substitution by the Finance Act, 1972, with effect from April 1, 1972, clause (3) of section 10 read as under :
'any receipts which are of a casual and non-recurring nature, unless they are -
(i) capital gains, chargeable under the provisions of section 45, or
(ii) receipts arising from business or the exercise of a profession or occupation, or
(iii) receipts by way of addition to the remuneration of an employee.'
6. In our opinion, the assessee's contention cannot be accepted. The income which arose to the assessee as a consequence of devaluation has arisen during the course of trade and is a trading profit inasmuch as the amount is a part of sale proceeds. It is true that the increase in the sale proceeds was because of devaluation which had no direct connection with the trading activity of the assessee, but it cannot be gainsaid that as a result of the devaluation, the assessee became entitled to receive a larger amount or price in terms of rupees for the goods sold and the income which the assessee derived as a result thereof directly arose in the course of the trade and constitutes a trading profit. A similar view was taken by the Kerala High Court in M. Shamsuddin & Co. v. CIT : [1973]90ITR323(Ker) . The assessee in that case was a firm owning cashew factories and it exported cashew kernels to foreign countries, mostly to U.S.A. The assessee also had forward transactions of sale with some of the foreign buyers. The invoice price of the exports was fixed between the parties in terms of dollars. For the forward contracts of sale also, the price was stipulated in terms of dollars. At the time of payment, the assessee received the rupee equivalent of the price in dollars. As pointed out above, Indian rupee was devalued on June 6, 1966. As on that date, the assessee had to receive the value of exports made immediately before that date. The assessee had also entered into certain forward contracts with foreign buyers before June 6, 1966, for the sale of cashew kernels, and the value of the goods had also to be received after the date of devaluation of Indian rupee. The rupee equivalent of the price in dollars, in respect of the above transactions was received by the assessee after the date of the devaluation and, consequently, it was received at the post devaluation rate. In this process, the assessee earned a profit of Rs. 2,54,862 being the appreciation in the exchange value of the price in dollars, in terms of the Indian rupee. The assessee claimed that the income which he had received as a result of devaluation was of casual nature and, therefore, not taxable. This contention of the assessee was rejected by the Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal and in the reference made at the instance of the assessee, the Kerala High Court upheld the view taken by the Tribunal observing as follows (at p. 325) :
'In our opinion, the assessee's contention cannot be accepted. The income which arose as a consequence of the devaluation has arisen during the course of the trade and is a trading profit inasmuch as the amount represents part of the sale proceeds. It may be that the increase in the sale price was occasioned by the devaluation which has nothing to do with the trade. But, the result of the devaluation was that the assessee became entitled to receive a larger price in terms of rupees for his goods and that is directly in the course of the trade and constitutes a trading profit.'
7. We respectfully agree with the view taken by the Kerala High Court. We, therefore, hold that the Tribunal was right in holding that the receipts in question totalling Rs. 1,01,572 were not of casual and non-recurring nature as urged on behalf of the assessee and that they were taxable as revenue receipts.
8. It was next contended that in any case, the amount of Rs. 41,586 which was relatable to the preceding year could not be treated as trading receipt. The assessee maintains accounts on the mercantile system. The sale proceeds in the preceding year in terms of rupees came to Rs. 71,192 which were debited to the respective accounts of the purchasers in U.S.A. At the end of the year of account, that is, March 31, 1966, this amount of Rs. 71,192 became a debt due to the assessee from the purchasers in U.S.A. This amount was shown along with sundry debts in the balance-sheet of the assessee. It was submitted that debts due to the assessee acquired the character of capital asset and, therefore, any accretion to it would necessarily be of capital nature. It is not disputed that the amount of Rs. 41,586 received by the assessee in the year under consideration was relatable to sale proceeds of Rs. 71,192 of the preceding year. It is submitted that this excess or additional amount of Rs. 41,586 which the assessee received as a result of devaluation of the Indian rupee towards the sale proceeds of the preceding year is an accretion to the assessee's capital asset and, therefore, this amount was not taxable as revenue receipt. In support of this contention, reliance was sought to be placed on the decision of the Bombay High Court in CIT v. Mehboob Productions Pvt. Ltd. : [1969]74ITR676(Bom) . That was a case in which the assessee company which carried on business of film producers and had a distribution agent in Pakistan, kept its accounts on the mercantile system, and showed in the accounts for some years the profits received in Pakistan and had such profits assessed to tax. It allowed some portion of the assessed profits to remain in Pakistan. On the devaluation of the currency in Pakistan, it claimed deduction of the loss incurred by the valuation on the ground that it was a business loss, or at least a bad debt. The Bombay High Court held that the amount initially earned as profits by the assessee, which had once been assessed and borne tax, which was left with the assessee's distributing agent in a foreign country as an asset of the assessee could not ordinarily partake the nature of a business asset; it could only be held to be an asset of a capital nature. It is only if it is shown that the fund was utilised or was intended to be utilised in the course of trade or for a trading purpose, that it can be said that there would be realisation of profit or loss on exchange, and the profit or loss would be taken into account for taxation. Otherwise the loss would merely be a loss due to depreciation in value of a capital asset. The mere fact that the asset was held on behalf of a company doing business would not be decisive of the fact that it was a business asset, for a company doing business can as well hold a capital asset in a foreign country. The assessee's contention that loss should be allowed as a bad debt was also rejected by the High Court. Relying on the aforesaid decision, it was urged that the sale proceeds of Rs. 71,199 were disclosed by the assessee in the preceding year and income arising out of such sale proceeds was also taxed in the preceding year. It was urged that since the petitioner is maintaining accounts on the mercantile system, the above income was shown on accrual basis and not on the basis of actual receipt. This amount of Rs. 71,199 which represented the sale proceeds of sales made to the purchasers in U.S.A. was not actually received in the preceding year.The sale proceeds were, in fact, received in the year under consideration and since there was devaluation of the Indian rupee, the assessee received Rs. 41,586 in excess towards the sale proceeds of Rs. 71,199 debited to the respective accounts of the purchasers in the U.S.A. in the preceding year. It was urged that the debts due to the assessee at the end of the year of account are capital assets of the assessee and, therefore, the excess or additional amount received by the assessee should be treated as accretion to its capital assets and, consequently, that amount was not taxable as revenue receipt.
9. We do not find any substance in the contentions raised on behalf of the assessee. The sale price due to the assessee from the purchasers including foreign purchasers would become a debt due to the assessee at the end of the year of account, but it is not correct to say that such debt would become capital asset of the nature as urged on behalf of the assessee. Such debt would no doubt be an asset of the assessee, but it would be a current or business asset as distinguished from a fixed asset. Debt due from purchaser representing unpaid sale price has the same character as stock-in-trade. Both are current or business assets. Loss of stock-in-trade would be revenue loss. Similarly, if unpaid purchase price or debt due from purchaser is not recoverable and becomes a bad debt, the loss suffered on that account would be revenue loss. The amount of Rs. 71,199 due to the assessee from foreign purchasers at the end of the preceding year was its current or business asset and, therefore, the excess amount of Rs. 41,586 received by the assessee as a result of devaluation of the Indian rupee towards that amount has to be treated as a revenue receipt. The excess amount as already held by us is directly connected with the sales made by the assessee in the course of its trading activity and is, therefore, a trading receipt. The facts in CIT v. Mehboob Productions Pvt. Ltd. : [1969]74ITR676(Bom) , were entirely different. The assessee in that case had allowed some portion of its assessed profits to remain in Pakistan and it was not shown that these profits were utilised or were intended to be utilised in the course of trade or trading purposes. It was held that an amount initially earned as profits by the assessee, which had once been assessed and borne tax, and which was left with the assessee's distributing agent in a foreign country was an asset of capital nature. It was, therefore, held that the loss as a result of devaluation of the Pakistani currency was due to depreciation in value of the capital asset and was not allowable as a trading loss. In the instant case, what the assessee received was sale proceeds in respect of sales made by it to the foreign purchasers. The assessee had not received sale proceeds in the preceding year nor had it allowed them to remain in its own account in the U.S.A. The sale proceeds had not acquired the character of a capital asset. The debt representing the unpaid sale proceeds, as observed above, was a current or a business asset of the assessee. In our opinion, therefore, the decision of the Bombay High Court on which reliance was placed by the assessee is of no assistance to the assessee. The excess or additional sale price received by the assessee as a result of devaluation of the Indian rupee is nothing but a trading or a revenue receipt which was directly connected with the sales made by the assessee in the course of its trading activity. We, therefore, reject the contention of the assessee that Rs. 41,586 must be treated as an accretion to its capital asset and, therefore, not taxable as revenue receipt.
10. In the result, we answer the questions referred to us in the affirmative and against the assessee.
11. Reference answered accordingly with no order as to costs.
12. A Copy of this judgment should be sent under the seal of this court and the signature of the Registrar to the Income-tax Appellate Tribunal, Ahmedabad Bench, Ahmedabad.