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Income‑tax Reference No. 23 of 1957, decided on 7th March 1962.
Property‑owning company acquiring foreign exchange and selling for profit‑Profit whether exempt or assessable as business income‑"Adventure in the nature of trade"‑Income‑tax Act, 1922, S. 2(4).
On 15th June 1949, the assessee, a property‑owning company, entered into a forward contract with the Netherland Bank for the purchase of 93,000 dollars at the rate of Rs. 333‑8‑0 for each 100 dollars, the date for delivery being July 15 and August 15. The assessee did not take delivery on the due date but on September 23, 1949, sold the said dollars to the same bank at the then exchange rate of Rs. 474‑12‑0 for each 100 dollars. The Income‑tax Officer assessed the profit thus made, viz., Rs. 1,27,125, as income from business. The assessee contended that it was exempt a as casual and non‑recurring receipt not arising from business:
Held, that the most important question to be considered in deciding the question was the object or purpose for which the assessee acquired the foreign exchange and as the facts clearly showed that the object was to make a profit by sale, the adventure was one in the nature of trade, and the profit was assessable as income from business.
Board of Revenue v. Arunachalam Chettiar (1924) I L R 47 Mad. 197; Commissioners of Inland Revenue v. Fraser (1942) 24 Tax Cas. 498; Contman v. Brougham (1918) A C 514; Davies v. Shell Company of China Ltd. (1952) 22 I T R (Suppl.) 1; George Thomson & Co. Ltd. v. Commissioners of Inland Revenue (1927) 12 Tax Cas. 1091; Graham v. Green (1925) 9 Tax Cas. 309; Imperial Tobacco Co. Ltd. v. Commissioners of Inland Revenue (1943) 25 Tax Cas. 292; Janab A. Syed Jalal Sahib v. Commissioner of Income‑tax (1960) 39 I T R 660; Mckinlay v. H. T. Jenkins & Son Ltd. (1924) 10 Tax Cas. 372; Radha Debi Jalan v. Commissioner of Income‑tax (1951) 20 I T R 176 and Rutledge v. Commissioners of Inland Revenue (1929) 14 Tax Cas. 490 ref.
In compliance with the directions of the High Court at Calcutta under section 66(2) of the Indian Income‑tax Act, we hereby draw up an agreed statement of case and refer it.
2. The assessee was a property‑owning and dealing company. The assessment year is 1950‑51, the accounting year being the financial year ending 31st March 1950. On the 15th June 1919, the assessee entered into a contract with Nederlandsche Indische Handels Bank N. V., for the purchase of 90,000 U. S. A. dollars at therate of Rs. 333‑8‑0 for each 100 dollars. On 23rd September 1949 the assessee sold the said dollars to the same bank at the exchange rate of Rs. 474‑12‑0 for each 100 dollars. The result of the said transaction of purchase and sale was that the assessee got a surplus of Rs. 1,27,125. The same was brought to tax as income in the hands of the assessee by the Income -tax Officer. The accounts extracts and the correspondence pertaining to the purchase and sale of the said dollars are Annexures "A" to "A‑3" hereto forming part of the case. The order of the Income‑tax Officer is Annexure "B" hereto and forms part of the case.
3. In the appeal before the Appellate Assistant Commissioner, it was contended that it was not the business of the assessee to deal in exchange of foreign currency and that the surplus in question was not taxable as it was in the nature of a windfall and a casual receipt. The Appellate Assistant Commissioner held against the assessee and confirmed the assessment. The order of the Appellate Assistant Commissioner is Annexure "C" hereto and forms part of the case.
4. Against the said order of the Appellate Assistant Commis sioner the assessee came up on appeal to the Income‑tax Appellate Tribunal. It was the assessee's case before the Tribunal that it never carried on a business in foreign exchange, that the articles of association of the appellant‑company did not permit the carrying of such a business; that this particular transaction was a solitary instance of the kind and that the purchase and sale in question were wholly unrelated to its normal business. It was, therefore, contended that it was a windfall not liable to be taxed. It was therefore stated that the excess realisation was exempt from taxation under the provisions of section 4(3)(vii) of the Indian Income‑tax Act.
5. The Tribunal held that, on the facts of this case, there was no doubt that the purchase and sale of exchange constituted business transactions though they were not in the line of business of the assessee‑company. It, therefore, held that the income‑tax authorities were right in assessing this income to tax. The order of the Appellate Tribunal is Annexure "D" hereto and forms part of the case.
6. From the above facts, the following question of law arises:
"Whether in the facts, and in the circumstances of the case the sum of Rs. 1, 27, 125 received by the assessee as a result of the transaction of purchases and sales of dollars was a trading receipt of a revenue character and as such assessable to income tax
A. C. Sampath Iyengar with S. B. Sen for the Assessee.
E. R. Meyer with B. L. Pal for the Commissioner.
‑The question referred to us was as follows:
"Whether in the facts and in the circumstances of the case the sum of Rs. 1,27,125 received by the assessee as a result of the transaction of purchases and sales of dollars was a trading receipt of a revenue character and as such assessable to income‑tax "
In the assessment year 1950‑51, the accounting year being the financial year ending on March 31, 1950, the assessee entered into a contract with Nederlandsche Indische Handels Bank, N. V., hereinafter referred to for the sake of brevity as the Netherland Bank, for the purchase of 90,000 U. S.A. dollars at the rate of Rs. 333‑8‑0 for each 100 dollars. On September 23, 1949, the assessee sold the said dollars to the same bank at the exchange rate of Rs. 474‑12‑0 for each 100 dollars. The Income‑tax Officer brought to tax the sum of Rs. 1,27,125 on the result of the said transaction of purchase and sale.
The contentions of the assessee before the revenue authorities were that it was not the business of the assessee to deal in exchange of foreign currency and, secondly, that the surplus in question was not taxable as it was in the nature of a windfall and a casual receipt. The Tribunal held that the purchase and sale of exchange constituted business transactions, though they were not in the line of business of the assessee.
Counsel on behalf of the assessee contended first that the nature of the article was such that there could be no trade having regard to the article. Secondly, the memorandum does not empower the assessee‑company to trade in foreign exchange. Thirdly, the company is formed mainly for the purpose of dealing in real estate. Fourthly, this was the only solitary instance when the assessee entered into a contract to buy and sell foreign exchange. Fifthly, it was not in the line of the business of the assessee to buy and sell foreign exchange. Sixthly, no money was paid to the bank initially, when the contract was entered into nor was any money paid by the bank except the difference between the two transactions. Seventhly, it was a forward contract. Eighthly, on account of devaluation of the sterling to the dollar and subsequently on account of the decision of the Government to devalue the sterling, there was an unexpec ted profit and nobody knew that there would be devaluation, and finally the assessee had no organisation or any business of foreign exchange. Counsel for the assessee emphasised that the foreign exchange was acquired with the desire of making gain on the off- chance of a rise in price.
Counsel for the Commissioner contended that under the provi sions of section 4(3)(vii) of the Income‑tax Act the exemption from taxation was only in respect of receipt not being receipts arising from business. "Business" is defined in section 2(4) of the Act as including any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. An adventure in the nature of trade is therefore within the definition of business. It cannot be denied that there can be an adventure in the nature of trade even out of an isolated transaction. The Tribunal in the present case held that the purchase and sale of exchange constituted business transactions.
In the case of Radha Debi Jalan v. Commissioner of Income tax ((1951) 20 I T R 176), Chakravartti, J., as he then was, said at page 184 of the report;
"It is true that the source need not be trade, but it must nevertheless be an adventure in the nature of a trade and, if trade connotes or implies some continuous activity aimed at producing the profits, such activity must be found even in a case of adventure if the resultant profit is to be treated as taxable business income."
As to isolated transactions it was said in the case of Rutledge v. Commissioners of Inland Revenue ((1929) 14 Tax Cas. 490), that if a person purchased by an isolated transaction some particular commodity for no purpose except that of resale at a profit an intention to trade can properly be inferred. Ordinarily, one of the tests as to isolated transactions is whether the thing purchased is such as is likely to give the purchaser a pride of possession so that he might like to hold and cherish it as a thing possessing for its own sake. Another possible test is whether the bulk of the commodity purchased is so large that in order to sell it the purchaser must have recourse to some organisation and activity of the kind that is required in trade. The third test is whether the thing purchased is such as must be subjected to some processing for the purpose of making it marketable. In the present case it cannot be said that the foreign exchange was acquired for the purpose of pride of possession nor can it be said that any organisation is required to sell foreign exchange nor that any processing is required to make foreign exchange marketable. Therefore, the only test which will be applicable here is whether there was any intention to turn the commodity over for the purpose of making profit.
The facts in the present case show that the actual purchase was on June 15, 1949. It was a forward contract inasmuch as the time for delivery stipulated in the contract was July 15 and August 15. The assessee did not take delivery on the due date but paid interest and kept the contract alive. It would appear at page eight of the paper book that the sum of Rs. 1,282‑13‑6 was paid as interest to the bank. Counsel for the Commissioner in my view rightly contended that under the Foreign Exchange Act any person acquiring foreign exchange bad to make an application and it was significant in the present case that the assessee did not either produce records of such application or state before the taxing authorities the reason as to why the foreign ex change was acquired. Counsel for the Commissioner is right in his contention that the only presumption which can be drawn from the non‑production of records relating to the acquisition of foreign exchange is that if the same were produced these would have gone against the assessee. Counsel for the Commissioner invited our attention to the letter dated June 16, 1956, written by the assessee to the bank where the assessee wrote, " In connection with our case for income‑tax assessment we require the certified copies of the purchase and sale contracts, our applications for the purchase and sale of the currency and other relevant papers, if any." The bank replied on June 20, 1956, that the available records were incomplete and therefore the bank was unable to assist the assessee. On June 16, 1956, there was no income‑tax assessment case pending and counsel for the Commissioner is right in his contention that in the absence of furnishing material by the assessee as to the acquisition of foreign exchange it would not be competent to the assessee to suggest that the foreign exchange was acquired as speculation or as gambling comparable to betting.
The objects of the assessee‑company will appear in clause 3 of the memorandum. The entire memorandum is not printed in the paper‑book but it was tendered and it should be kept on the records as an exhibit. The objects of the assessee, inter alia are to deal in traffic by way of sale, lease, exchange or otherwise with land or house property or in other property whether real or personal ; to carry on all kinds of business and to act as manufacturers, merchants, traders, bankers, commission agents, managing agents, brokers or in any other capacity; to buy, sell, exchange, deal in goods, articles and merchandise of all kinds of power such as electricals, steam, gas and otherwise and lands, farms, buildings, mines and quarries and other properties tangible or intangible whatsoever. Counsel for the Commissioner contended that the memorandum specifies in several paragraphs the various objects of the company and paragraph 36 of clause 3 of the memorandum states that the object specified in each paragraph shall not except where otherwise expressed in such paragraph be in any wise limited or restricted by‑reference to or inference from the terms of any other paragraph with the result that the Court is bound to give effect to the intention thus expressed. Counsel for the Commissioner relied on the decision in Cotman v. Brougham ((1918) A C 514) in support of the rule of construction with regard to the objects of the assessee that the objects are to be read separately and that the paragraphs in the objects clause do not control each other. Counsel for the Commissioner thus rightly contended that it would be within the objects of the assessee to deal in foreign exchange as a kind of business and he relied on the decision in Board of Revenue v. Arunachalam Chettiar ((1924) I L R 47 Mad. 197) that dealings in foreign exchange may be in the course of business. If, however, foreign exchange is bought as an investment or on capital account the profit made on realisation will be capital appreciation and not income.
Counsel for the assessee relied on the decision in McKinlay v. H. T. Jenkins & Son Ltd. ((1926) 10 Tax Cas. 372) In that case a company of marble merchants agreed to sell marble to a contractor and received 20,000 as part of the purchase price in advance. The company invested the 20,000 in the purchase of lire at a favourable rate as the money would be required later in the year to purchase the marble. Thereafter, taking advantage of a favourable exchange position, they sold the lire at a profit and when the time came near for the purchase of the marble they repurchased the lire. It was held that the profit made by the firm was not a revenue profit but a capital profit made on appreciation of a temporary investment. In the case of George Thompson & Co. Ltd. v. Commissioners of Inland Revenue ((1927) 12 Tax Cas. 1091); Rowlatt, J. referred to McKinlay's case and said that in McKinlay's case the com pany had some capital lying idle and the company embarked upon an exchange speculation. McKinlay's case ((1943) 25 Tax Cas. 292) again came up for consideration in the case .of Imperial Tobacco Co. Ltd. ((1943) 25 Tax Cas. 292). The Imperial Tobacco Company bought dollars in the United Kingdom through in bankers and remitted them to the banking agents of the company in the United States where the tobacco company bought large quantity of tobacco leaves. The company never bought dollars for the purpose of resale as a speculation. On the outbreak of war in September, 1939, the tobacco company stopped further purchase of tobacco leaves in the United States. The company had then a holding of dollars and the company was required under the Defence Regulations to sell its surplus dollars to the United Kingdom Treasury. On account of the rise in dollar exchange the sale resulted in a profit for the company. It was held that the profit made by the company on the compulsory sale of the surplus dollars to the Treasury must be included in the computation of profits of its trade for income‑tax purpose. Lord Greene said that the purchase of dollars in that case was made in contemplation of purchase of raw material and therefore the, surplus stock of dollars was acquired for the purpose of effecting transaction on revenue account. Lord Greene referred to McKinlay's case and said that in McKinlay s case there was no basis for a finding that the original purchase was a speculation.
Counsel for the assessee also relied on the decision in Davies v. Shell Co. ((1943) 25 Tax Cas. 292). In that case the assessee, a British company operat ing in China, required its Chinese agent to deposit with it certain sums in Chinese dollars which carried interest and were repayable on the determination of the agency. The assessee kept the dollar deposit in Shanghai banks. On the outbreak of war the assessee sold the Chinese dollars for sterling, transferred the sterling to the United Kingdom and placed the amount on deposit with its parent company. Subsequently, the agency was terminated. To repay in Chinese dollars the deposit of the agents the assessee repurchased Chinese dollars at a substantial profit due to depreciation of the Chinese dollar and paid off the deposits. It was held that the taking of deposit was not a trading transaction and the profit was not an assessable income but was an appreciation of a capital asset not forming part of the asset employed as circulating capital in the trade. This decision does not help the assessee in the present case because in the Shell Company's case the foreign exchange was to start with capital and nothing happened to change that capital character.
In the present case the contract for the purchase of dollars was a forward contract and on the stipulated date of delivery the assessee did not take delivery but kept the contract alive by paying interest on the value of the dollars. On the 23rd September, the assessee entered into a contract for the resale to the bank. The fact that the assessee never took delivery of the foreign exchange repels any suggestion of capital investments. The assessee's suggestion of speculative character of the transaction is in my view unacceptable because the acquisition of foreign exchange in the present case was with the sole intention of turning the same to profit or an incursion into the sphere of trading for profit as is evident from the nature of the forward contract, the course of conduct between the parties in keep ing the contract alive and never taking delivery of the foreign exchange and making any payment in respect thereof and finally, having a transaction as and by way of difference between the purchase and the resale price. In McKinlay's case it was held on the facts that the transaction by exchange of currency was one of investment. In the present case. I am unable to hold that there is any evidence of acquisition of the foreign exchange as an investment.
It is well settled that the onus of proof of claiming exemption is on the person who asserts it. It is strange and significant that the assessee withheld all relevant papers relating to the acquisition of foreign exchange. In my opinion it is idle for the assessee to contend by with holding these papers that the acquisition of foreign exchange was either as an investment or as a speculation. The assessee never parted with any money to acquire the foreign exchange.
Counsel for the assessee relied on the decision in Graham v. Green ((1925) 9 Tax Cas. 309) and the decision in Janab Sahib v. Commissioner of Income‑tax ((1960) 39 I T R 660) in support of the assessee's contention that the acquisition of foreign exchange in the present case was compar able to abetting on foreign exchange and, therefore, it was not liable to tax. Counsel for the Commissioner rightly contended that the analogy of betting is not applicable in the present case for the obvious reason that in betting the bettor pays bet money and loses that amount on the happening of the event upon which there is a bet whereas in the present case no money was paid by the assessee and on the contrary interest was paid, by the assessee to the bank for the purpose of keeping the contract alive and it amounted to borrowing of capital. In the second place, counsel for the Commissioner contended that betting is held to be income but exemption is claimed and allowed. In the case of Graham v. Green Rawlatt, J. said at page 313:
"The trade or vocation which has to do with differences, in prices may be popularly spoken of as gambling, there is no intention really to accept or deliver the article. But they are operations in relation to the differences of prices of commodities and there is an element of fecundity in those and indeed those operations form the subject of a great deal of trade."
I am, therefore, of opinion that the transaction here in essence is a dealing in difference on a certain commodity and has a trading element to it. Counsel for the Commissioner relied on the decision in Commissioners of. Inland Revenue v. Fraser ((1942) 24 Tax Cas. 498), where a wood cutter in 1937 and 1938 bought through an agent for resale whisky in bond. That was .his sole dealing in whisky and he had no special knowledge of the trade and he did not take delivery of the whisky nor did he have it blended or advertised. It was held to be an adventure in the nature of trade. In my opinion the most important question is the object or the purpose for which the assessee acquired the foreign exchange. The assessee has not disclosed the relevant papers or reason. There is a presump tion that the production of the papers or disclosure of the reason would have gone against the assessee. The transaction itself in my opinion has the unmistakable character of dealing in foreign exchange with the intention of making profit. The objects of the business of the company embrace such an activity. It is easier to hold that a single transaction entered into by an individual in the line of his own trade though not part and parcel of his or dinary business is an adventure in the nature of trade than to hold that a transaction entered into by an individual outside the line of his own occupation is an adventure in the nature of trade. The assessee in the present case has within its objects the business of dealing in personal chattels and merchandise. Dealing in foreign exchange is a form of business which is within the com pany s objects. In any event it is a business which the assessee professed to carry on. For all these reasons I am of opinion that the answer to the question is in the affirmative and against the assessee. The assessee is to pay the costs. Certificate for two counsel.
I agree.
Question answered in the affirmative.
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