PETITIONER: <ORG>. Vs. RESPONDENT: THE ASSISTANT COLLECTOR, OF SALES-TAX(INSPECTION) AND OTHERS DATE OF JUDGMENT: 25/01/1960 BENCH: <NAME>, K. BENCH: <NAME>, K. SINHA, <NAME> P.(CJ) GAJENDRAGADKAR, P.B. GUPTA, K.C. DAS SHAH, J.C. CITATION: 1960 AIR 595 1960 SCR (2) 852 ACT: Sales Tax-Sale in the course of import-Goods on high seas- Transfer of shipping documents against Payment - Whether amounts to delivery of goods-Whether transaction exempt from tax Constitution of India, Art, 286(1)(b). HEADNOTE: The petitioner who entered into contracts with <ORG> for the supply of certain quantities of sugar of foreign origin, placed orders with dealers in foreign countries and made arrangements for transporting the goods to Bombay by engaging steamers. When the goods were on the high seas and before the vessels arrived at Bombay harbour, the petitioner delivered to the <ORG> the shipping documents- including the bill of lading pertaining to the goods and received the price. After the goods reached the port, they were taken delivery of by <ORG> after paying the requisite customs duties to the authorities concerned For the assessment year 1954-55, the Assistant Collector of Sales Tax held that sales tax was payable by the petitioner in respect of the transaction relating to the sugar sold to the <ORG>. The petitioner claimed, inter alia, that the sales had taken place in the course of import and therefore they were not liable to sales tax under Art. 286(1)(b) of the Constitution of India. But it was contended for <ORG> that the sales were not in the course of import and that, in any case, under the terms of the contracts the intention of the parties was that notwithstanding the delivery of the bills of lading against payment the property in the goods should not pass to the <ORG> till actual delivery was made. Held: (1) that under Art. 286(1)(b) of the Constitution of India the course of the import of the goods starts at a point when the goods cross the customs barrier of the foreign country and ends at a point in the importing country after the goods cross the customs barrier; (2) that an importer can, if he receives the shipping documents, transfer the property in the goods when they, are on the high seas to a third party by delivering to him shipping documents against payment and such a sale is one made in the course of import; (3) that the delivery of a bill of lading while the goods are afloat is equivalent to the delivery of the goods themselves; <CITATION> ., (1883) 11 Q. B. D. 327, relied on. (4) that on a true construction of the contracts in question the property in the goods passed to <ORG> 853 when the shipping documents were delivered to them against payment; and (5) that the sales in question took place in the course of. import into India and were exempted from sales tax under Art.286(1)(b) of the constitution. <CITATION> .,  S.C. R. 1112, followed. JUDGMENT:

ORIGINAL JURISDICTION: Petition No. 38 of 1959. Petition under article 32 of the Constitution ofIndia for enforcement of Fundamental Rights.

<NAME>, and <NAME>, for the Petitioner.<NAME>, <NAME> and <NAME>, for the respondents.

<NAME> and <NAME>, for Interveners Nos. 1 to 3 <ORG>, Bombay and others).

<NAME>, Solicitor General of India and <NAME>, for intervener No. 4 Attorney-General for India). 1960. January 25. The Judgment of the Court was delivered by <NAME>, T.-This is a petition under Art. 32 of the Constitution for quashing the order of the first respondent dated February 9, 1959, setting aside the order of the second respondent allowing a deduction of an amount of Rs. 1,86,42,730-15-0 from the Petitioners sales tax turnover on the ground that the said amount was not liable to tax by virtue of s. 46 of the bombay Sales Tax Act , 1953 (Act III of 1953), (hereinafter called the Act).

The material facts are not in dispute and they may be briefly stated The petitioner is a private company within the meaning of the Companies Act , 1956 and has its registered office at Kasturi Buildings, Bombay -1 on March 24, 1954 and April 15, 1954, into two contracts with <ORG> for selling to the latter two consignements of sugar-one of 9500 Long Tons of sugar of Peruvian orgin and the other of 25000 metrice Tons of sugar of continental origin. To fulfil the terms of the contracts, the petitioner placed order with dealers in foreign countries. The following are the particulars relating to the first contract dated March 24, 1954, for the supply of 9500 Long Tons of sugar:

(i) 3rd April Letter of Credit opened by the petitioner.

(ii) 3rd May, 1954 S. S. Alba sails from Salaverry (Peru) carrying 9782.01688 Long Tons of sugar.

(iii) 26th May, 1954 The petitioner delivered to its Bankers, <ORG>, Bombay, along with the invoice for Rs. 50,35, 405-11-0 the Documents of Title (viz. the Bills of Lading duly endorsed in favour of <ORG>, <ORG>Agriculture) to the above goods) together with other papers (such as Certificates) and instructed the said Bankers to present the same to the Government of India, and to collect the said amount of Rs. 50,35,405-11-0 from the Deputy Accountant General (Food & Rehabilitation),New Delhi.............

(iv) 7th June 1954 Payment made to petitioner's Bankers by the Government ofIndia against delivery of Invoice and Bills of Lading.

(v) 26 th June 1954 Date of arrival of S. S. Alba at Bombay harbour. The corresponding details -pertaining to the second contract are as follows Vessel Vessel vassel S. S. Eleni S. S. S. S. Inger Stathatos Giovanni Marie Amendola I. II. III. IV.

(1) 9910-858 9919-7158 4464-3I5 Total 24292 - 8888 Tons Tons. Tons. Tons (ii) 5/6th 5/6th 15/6th Letter of Credit opened June, 954. June, 1954. June, 1954 by petitioner. (iii) 10th 31st July, 31st July, Date of Sailing of vessel July, 954. 1954. 1954, Vessel Vessel Vessel S. S. Eleni S. S. S. S. <NAME> <NAME>

(1V) 22nd 12th August,16th August,July, 1954. 1954- 1954.

The petitioner delivered to its Bankers, <ORG>, Bombay, along with its invoices for Rs.- 50,43,5o1-8-o, Rs. 22, 69,800-13-0, Rs. 50,38, 997-14-o respectively the Documents of Title (viz. the Bills of Lacling) duly endorsed in favour of <ORG>, <ORG>) to the above goods together with other papers (such as Certificates) and instructed the said Bankers to present the same to <ORG> and collect the said amounts of Rs. 50,43, 501-8-0, Rs. 22,69, 800-13-o and Rs. 50,38, 997-14-0, from the Deputy Accountant General (Food & Rehabilitation) New Delhi. .................................

(V)26th 18th August, 19th August, Payment made to the July, 1954. 1954. 1954. petitioner's Bankers by .the Government of India against delivery of Invoices and Bills of Lading.

(V1)12th 3rd Septem- 9th Septem- August 1954. Date of arrival of Vessel at Bombay Harbour. The foregoing particulars disclose that some weeks before the vessel arrived at the Bombay harbour, i.e., when the vessels were on the high seas, <ORG> received the documents of title, including bills of lading, pertaining to the sugar purchased by them and paid the price to the petitioner. Indeed after the goods reached the port, they were unloaded, taken delivery of, and cleared by <ORG>India after paying the requisite customs duties to the authorities concerned.

For the assessment year 1954-55 i.e., April 1, 1954 to March 31, 1955, the petitioner was assessed to sales tax by the Sales Tax Officer, Licence Circle, Division 1, Bombay. In calculating the turn-over of the petitioner, the Sales Tax Officer deducted the price of the said two sales from the petitioner's turn-over. On January 31, 1958, the first respondent, the Assistant Collector of Sales Tax, issued a notice to the petitioner under s. 31 of the Act proposing to review the said assessment order passed by the Sales Tax Officer. In due course the petitioner filed objections and made his representations. The petitioner contended before the first respondent that the notice should have been issued, if at all, under s. 15 and not under s. 31 of the Act inasmuch as the sales had been disclosed to the Sales Tax Officer and the deduction of the same had been allowed by him. it was also pleaded that in any event the sales had taken place in the course of import and therefore they were not liable to sales tax. The first respondent rejected both the contentions and held that sales tax was payable in respect of the said two transactions. He reassessed the petitioner to a total amount of sales tax and general tax of Rs.10,22,850-12-0 less Rs. 315-3-0 already paid by the petitioner, i.e., a sum of Rs. 10,22,535-9-0 and directed the second respondent, the Sales Tax Officer, to issue a notice of demand for the said amount. Pursuant to that order, the second respondent issued a notice dated February 14, 1959. The petitioner has filed the present petition for the issue of a writ of certiorari cancelling the demand notice issued by the second respondent. The learned Solicitor-General intervened on behalf of <ORG> and Mr. <NAME> intervened for interveners 1 to 3, and both of them supported the petitioner.

Mr. <NAME>, appearing for the petitioner, raised before us the following contentions: (1) Under Art. 286(1)(b) of the Constitution, as it stood before the Constitution (Sixth Amendment) Act, 1956, the sales in question were not liable to sales tax inasmuch as they took place in the course of import of the goods into the territory of India; (2) the said sales were exempted from sales tax by the Bombay State under the explanation to Art. 286(1) of the Constitution, as the goods were delivered for the purpose of consumption in States other than Bombay; (3) the sales were effected outside the State of Bombay i.e., New Delhi, and therefore they were also exempted under Art. 286(1)(a) of the Constitution; and (4) the first respondent could have only interfered with the earlier order of assessment under s. 15 of the Act within three years from the end of the assessment year 1954- 55, i.e., March 31, 1955, and that the said period having elapsed, he had no power to interfere in revision under s. 31 of the Act.

The first point is the most substantial one in the case and if the petitioner succeeds on that point, no other question would arise for consideration.

The first question turns upon the interpretation of Art. 286(1)(b) of the Constitution before it was amended by the Constitution (Sixth Amendment) Act, 1956. The said Article read;

" (1) No law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of goods where such sale or purchase takes place-

(b) in the course of the import of goods into, or export of the goods out of, the territory of India. " Under this Article, if the sales by the petitioner to <ORG> took place in the course of the import. of the goods into the territory of India, <ORG> would have no power to impose sales tax on the said sales. What does the phrase "in the course of the import of the goods into the territory of India " convey ? The crucial words of the phrase are " import " and " in the course of'. The term "import" signifies etymologically " to bring in ". To import goods into the territory of India therefore means to bring into the territory of India goods from abroad. The words " course " means it progress from point to point ". The course of import, therefore, starts from one point and ends at another. It starts when the goods cross the customs barrier in foreign country and ends when they cross the customs barrier in the importing country. These words were subject of judicial scrutiny by this Court in <CITATION> (1). Construing these words, <NAME>, observed at p. 62:

The word " course " etymologically denotes movement from one point to another, and the expression " in the course of " not only implies a period of time during which the movement is in progress but postulates also a connected relation.

" As regards the limits of the course, the learned Chief Justice observed at p. 68:

" It would seem, therefore, logical to hold that the course or the export out of, or of the import into the territory of India does not commence or terminate until the goods cross the customs barrier. "

<NAME>, J., as he then was, in his dissenting judgment practically agreed with <NAME>, C. J., on the interpretation of the said words. The learned Judge expressed his view at p. 92 thus:

"The word " course " conveys to my mind the idea of a gradual and continuous flow, an advance, a journey, a passage or progress from one place to another. Etymologically it means and implies motion, a forward movement. The phrase " in the course of " clearly has reference to a period of time during which the movement is in progress. Therefore, the words "in the course of the import of the goods into and the export of the goods out of the territory of India " obviously cover the period of time during which the goods are on their import or export journey ".

We respectfully agree with the aforesaid observations of the learned Judges. The course of the import of the goods may be said to begin when the goods- enter their import journey, i.e., when they cross the customs barrier of the foreign country and end when they cross the customs barrier of the importing country.

The next question is, when can it be said that a sale takes place in the course of import journey ? This <ORG> in <CITATION> . (2) held that a sale which occasioned (1)  S.C.R. 53 (2)  S.C.R. 1112 the export was a sale that took place in the course of export of the goods. If A, a merchant in India, sells his goods to a merchant in London and puts through the transaction by transporting the goods by a ship to London, the said sale which occasioned the export is exempted under Art. 286(1)(b) of the Constitution from the levy of sales tax. The same principle applies to a converse case of goods which occasioned the import of the goods into India. This <ORG> again in <CITATION> (1) extended the doctrine to a case of sale, or a purchase of goods effected within the State by transfer of shipping documents while the goods were in the course of transit. The decision dealt with three types of purchases, viz., (i) purchases made in the local market;

(ii) purchases made in the. neighbouring districts of an adjacent State; and (iii) imports from Africa. The imports from Africa consisted of two groups-one group consisted of goods that were purchased when they were on the high seas and shipped from the African ports to Cochin or Quilon : we are not concerned with the other group. In the said case some commission agents at Bombay arranged for the purchase on behalf of the assessee, got delivery of the shipping documents at Bombay through a bank which advanced money against the shipping documents and collected the same from the assessees at destination. This Court, by a majority, held that, in respect of the purchases falling under the first group of imports, the commission agents acted merely as agents of the respondents therein and that the said purchases occasioned the import and therefore came within the exemption. That was not a case where the goods were sold by an importer in India to a third party when the goods were on the high seas. It was a case where a party in Cochin purchased goods which were on the high seas through his agent at Bombay and the agent paid the price through a bank against the shipping documents. But the learned Judge, <NAME>, C. J., expressing the majority view, considered the scope of the exemption in all its aspects and, summarized the conclusions thus at p. 69: (1) [1954] S.C. R. 53.

" Our conclusions may be summed up as follows:-

(1) Sales by export and purchases by import fall within the exemption under article 286(1)(b) (2) Purchases in the State by the exporter for the purpose of export as well as sales in the State by the importer after the goods have crossed the customs barrier are not within the exemption. (3) Sales in the State by the exporter or importer by transfer of shipping documents while the goods are beyond the customs barrier are within the exemption, assuming that the State power of taxation extends to such transactions. "

<NAME>, J., as he then was, in his dissenting judgment, agreed with <NAME>, C. J., on the third conclusion with which we are now concerned.' The learned Judge put forward his view at p. 94 thus:

" Such sales or purchases, by delivery of shipping documents while the goods are on the high seas on their import journey were and. are well recognized species of transactions done every day on a large scale in big commercial towns like Bombay and Calcutta and are indeed the necessary and concomitant incidents of foreign trade. To hold that these sales or purchases do not take place " in the course of " import or export but are to be regarded as purely ordinary local or home transactions distinct from foreign trade, is to ignore the realities of the situation. Such a construction will permit the imposition of tax by a <ORG> over and above the customs duty or export duty levied by <ORG>. Such double taxation on the same lot of goods will increase the price of the goods and, in the case of export, may prevent the exporters from competing in the world market and, in the case of import, will put a greater burden on the consumers. This will eventually hamper and prejudically affect our foreign trade and will bring about precisely that calamity which it is the intention and purpose of our Constitution to prevent. "

The learned Judge also in his judgment elaborately considered the great hardship that would be caused to an Indian importer if he was not permitted to sell the goods which were on the high sear, by delivery of shipping documents against payment. Though that case dealt with a different situation, we agree with the learned Judge's observations that an importer can, if he receives the shipping documents, transfer the property in the goods when they are on the high seas to a third party by delivering to him shipping documents against payment and such a sale is one made in the course of import. The legal position vis-a-vis the import. sale can be summarized thus; (1) The course of import of goods starts at a point when the goods cross the customs barrier of the foreign country and ends at a point in the importing country after the goods cross the customs barrier; (2) the sale which occasions the import is a sale in the course of import; (3) a purchase by an importer of goods when they are on the high seas by payment against shipping documents is also a purchase in the course of import and (4) a sale by an importer of goods, after the property in the goods passed to him either after the receipt of the documents of title against payment or otherwise, to a third party by a similar process is also a sale in the course of import. The next question is whether the sales by the petitioner to <ORG> are sales in the course of import. From the facts narrated supra, it is seen that the petitioner, pursuant to the earlier contracts entered into with <ORG>, delivered the shipping documents, including the bill of lading to the <ORG> against payment when the goods were on the high seas. In view of the foregoing discussion, it should be held that the sales fall under the fourth principle and therefore they were sales that took place in the course of import of the goods into India. A bill of lading is " a writing, signed on behalf of the owner of the ship in which goods are embarked, acknowledging the receipt of the goods, and undertaking to deliver them at the end of the voyage subject to such conditions as may be mentioned in the bill of lading'. It is well settled in commercial world that a bill of lading represents the goods and the transfer of it operates as a transfer of the goods. The legal effect of the transfer of a bill of lading has been enunciated by <NAME>, L.J., in <ORG> <ORG> (1) thus at p. 341 "The law as to the indorsement of bills of lading is as clear as in my opinion the practice of all European merchants is thoroughly understood. A cargo at sea while in the hands of the carrier is necessarily incapable of physical delivery. During this period of transit and voyage, the bill of lading by the law merchant is universally recognised as its symbol, and the indorsement and delivery of the bill of lading operates as a symbolical delivery of cargo. Property in the goods passes by such indorsement and delivery of the bill of lading, whenever it is the intention of the parties that the property should pass just as under similar circumstances the property would pass by an actual delivery of the goods. And for the purpose of passing such property in the goods and completing the title of the indorsee to full possession thereof, the bill of lading, until complete delivery of the cargo has, been made on shore to some one rightfully claiming under it, remains in force as a symbol, and carries with it not only the full ownership of the goods, but also all rights created by the contract of carriage between the shipper and the shipowner. It is a key which in the hands of a rightfull owner is intended to unlock the door of the warehouse, floating or fixed, in which the goods may chance to be. " We have quoted the passage in extenso as it clearly and fully states the law on the subject. It is not disputed that the law in India is also similar to that in England. The delivery of the bill of lading while the goods are afloat is equivalent to the delivery of the goods themselves. The learned counsel concedes that ordinarily that will be so, but contends that in the present case, the contract clearly indicates that the intention of the parties was that till actual delivery was made the property in the goods would not pass to the buyer. Both the contracts are similar in terms and they follow the standard terms pres- cribed by the <ORG>. The main terms of the contracts may be summarized thus:

(1) (1883) 11 Q.B.D. 327.

The first clause defines the term "sellers" to mean the party selling the sugar and the term "the <ORG>" to mean the President of India. Clause 2 prescribes that suitable gunny bags approved by the <ORG> should be used for importing sugar. Clause 3 provides for inspection of quality, weight and packing of sugar by the <ORG> at the time of shipment. Clause 4 says that sugar shall be shipped to particular ports. Clause 5 compels the sellers to engage steamers on charter terms, empowers the <ORG> to take delivery of the goods at the port of discharge from the ship's rail and imposes the burden on the sellers to meet the expenses of stevedoring, lighterage where necessary, hiring of cranes, dock dues and pilotage. Clause 6 deals with the mode of payment for supplies made; under that clause the sellers are to submit a bill for full payment of cost and freight value to the <ORG> in <ORG>, New Delhi, duly supported by a complete set of clean on board bills of lading consisting of three negotiable and three non-negotiable copies, a certificate of origin of sugar, a certificate of quality, weight and packing, a certificate from the ship- owners that the freight has been paid in full and that the ship owners retain no lien whatsoever on the cargo on that account. Under clause 6 (c) letter of credit shall be opened by the sellers at their cost, and the <ORG> of India agree to arrange for the foreign exchange as necessary to the extent of the cost-and-freight-value of the quantity of sugar purchased on the production of an import licence which will be issued on application to the proper authority on their prescribed form. Clause 8 confers on the <ORG> a right, in the event of the sellers' failure to supply the sugar in accordance with the terms of the contract, to recover any sum as liquidated damages, and/or by way of penalty upto a prescribed amount. Clause 9 authorizes the <ORG>, in the event of the sellers failing to observe or perform any provisions of the contract, to terminate the contract forthwith. Clause II under the heading "Force Majeure" confers on the <ORG>, in case delivery in whole or in part is prevented or delayed directly  or indirectly by any cause of Force Majeure, war, strikes, rebellion, insurrection, political disturbances, civil commotion, fire or flood, on account of plague or other epidemics, the right to cancel the contract for the quantities so prevented or delayed. After the sellers entered into the contracts, they obtained the requisite licences from the <ORG>, opened letters of credit, placed orders with foreign companies, engaged a steamer on charter terms, took delivery of the goods from the foreign firms and, when the goods were on the high seas, delivered the documents of title to the Central <ORG> against payment and the said <ORG>, taking the licence from the sellers, cleared the goods at the Bombay harbour. Let us now scrutinize the terms of the contract to ascertain whether they disclose any intention of the parties that notwithstanding the delivery of the bill of lading against payment the property in the goods should not pass to the <ORG>. The circumstances under which the contracts were entered into between the parties indicate that both the parties were interested to see that property in the goods passed in the ordinary way when the shipping documents were handed over to the <ORG> against payment. The sellers had to meet their liability to the foreign companies with whom they opened letters of credit and the <ORG> must have been anxious to get the title to the goods so that the sellers might not divert the goods towards their other commitments or to other buyers for more tempting prices. Under the contract every safeguard for securing the goods of agreed specifications was provided for in the earlier clauses and therefore there was no reason for postponing the passing of the property in the goods to the buyer till the goods were actually delivered in the port. The sellers on their side would have been anxious that the property should pass when the goods were on the high seas, for otherwise they would be compelled to pay sales tax. Nor are the clauses of the contracts relied upon by the respondents inconsistent with the property in the goods passing in accordance with the mercantile usage. The liability undertaken by the sellers to meet the expenses relating to stevedorage, lighterage where necessary, hiring of cranes, dock dues and pilotage, at the time of delivery of the goods on which reliance is placed to indicate a contrary intention, in our view, has nothing to do with the question raised, for that liability can rest with the sellers even after the property in the goods has passed to the buyers; nor clauses 9 to 11 on which strong reliance is placed by the learned counsel are inconsistent with the property in the goods passing to the buyer; they could legitimately be made applicable to a point of time when the property in the goods has not passed to the buyer. If the sellers fail to observe the performance of any provisions of the contracts before the property in the goods passed to the buyer, under clause 9 of the contracts the buyer can cancel the contract. So too, under cl. II, if any contemplated mishap takes place on the high seas by force majeure, the seller shall send a cablegram to that effect and the buyer is empowered to cancel the whole of the contract or a part of it. This also applies to a point of time before the property in the goods has passed to the buyer. If, on the other hand, the seller delivers the shipping documents against payment and thereafter if he does not deliver the goods at the port, the buyer may have other remedies for the recovery of damages etc. But that right is not covered by either cl. (9) or el. (II) of the contract. A scrutiny of all the terms of the contract does not indicate the intention that the property in the goods shall not pass to the buyer notwithstanding delivery of shipping documents against payment. Apart from the terms of the contract, reliance is also placed by the learned counsel for the respondents on the following circumstances: (i) the seller himself chartered the ship; and (ii) the licence issued by the <ORG> was made non-transferable. We do not see how these two facts indicate the contrary intention. If the seller himself chartered a steamer. when the goods he purchased were loaded in the ship, the property in the goods passed to him and therefore he was in a position to sell the same to the <ORG>. The fact that the licence was non-transferable has no relation to the property in the goods passing to the <ORG>. The licence issued by the Govern- ment is an exercise of the statutory power under the relevant Act. Whether the petitioner sold the goods to the <ORG> or to a third party, he had to obtain a licence. Indeed in the present case, the licence was given to the seller with the express object of fulfilling the contracts with the <ORG> and was issued several days after the contracts were executed, and indeed the <ORG> took the licence from the seller and cleared the goods through their officer.

For all the foregoing reasons we hold that the property in the goods passed to <ORG> when the shipping documents were delivered to them against payment. It follows that the sale of the goods by the petitioner to <ORG> took place when the goods were on the high seas.

That being so, the sales in question must be held to have taken place in the course of the import into India and therefore they would be exempted from sales tax under Art. 286(1)(b) of the Constitution.

In this view, no other question would arise for consideration. ln the result the order of the Assistant Collector of Sales Tax is set aside and that of the Sales Tax Officer is restored. The respondents will pay the costs of the petitioner.

Petition allowed.


PETITIONER: <NAME> Vs. RESPONDENT: STATE OF U.P. & ORS. DATE OF JUDGMENT28/11/1995 BENCH: RAMASWAMY, K. BENCH: RAMASWAMY, K. MAJMUDAR S.B. (J) CITATION: 1996 SCC (1) 434 JT 1995 (9) 135 1995 SCALE (6)773 ACT: HEADNOTE: JUDGMENT:

O R D E R Delay condoned. Substitution allowed.

Notification under Section 4 (1) of the Land Acquisition Act , 1894 [for short, "the Act"] was published on June 25, 1974. Declaration under Section 6 was published on July 3, 1974 dispensing with the enquiry under Section 5- A after the Governor had exercised his power under Section 17 (4) of the Act.

It is not clear from the record that the possession of the land was taken after 15 days from the date of service of the notice under Section 9 on the appellant. The appellant has asserted that he has been in possession of the land but no counter has been filed. In support thereof, the appellant has also placed on record the resolution dated December 27, 1977 of <ORG> stating that the other land has already been allotted to 30 eligible persons of the village and the land in question no longer is necessary. After the Amendment Act 68 of 1984 was brought into force w.e.f. September 24, 1984, Section 11-A operates in the field. It envisages that if the award under Section 11 has not been made within two years from the date of coming into force of the Amendent Act, all the proceedings under Sections 4 and 6 shall stand lapsed. In view of the fact that no steps appeared to have been taken within time, the notification under Section 4 (1) and declaration under Section 6 no longer subsist.

Accordingly, the appeal is allowed. No costs.


PETITIONER: <NAME> Vs. RESPONDENT: UNION OF INDIA DATE OF JUDGMENT: 18/04/1968 BENCH: <NAME>, J.C. BENCH: <NAME>, J.C. RAMASWAMI, V. MITTER, G.K. CITATION: 1969 AIR 180 1968 SCR (3) 875 CITATOR INFO : F 1972 SC1302 (22) RF 1975 SC2299 (434) E&R 1978 SC 694 (15,47,50,60) R 1981 SC 789 (13) RF 1987 SC2354 (11) F 1989 SC1083 (8) ACT: Public Servant--Letters of resignation--Resignation accepted by appropriate authority--Acceptance not communicated to public servant--Withdrawal of resignation by public servant--Effect. HEADNOTE: By letters dated 21st August 1964 and 30th August 1964 the appellant, submitted his resignation from <ORG> and requested <ORG> in which he was serving to forward his resignation to <ORG>. On 31st October 1964, <ORG> accepted the appellant's resignation and intimated acceptance to <ORG>. On 27th November, the appellant wrote letters both to <ORG> and <ORG> withdrawing his resignation but, on 29th March 1965, <ORG> passed an order accepting the appellant's resignation and directing the appellant to hand over charge. The appellant filed a writ petition in the' <ORG> for quashing the orders of <ORG> and <ORG>. The petition was dismissed. In appeal to this Court, it was contended that : (1) So long as the acceptance of the resignation was not communicated to him, the appellant could withdraw his resignation; and (2) the. orders accepting the resignation amounted to dismissal and were therefore violative of Art. 311 of the Constitution. HELD: (1) When a public servant has invited by his letter of resignation the determination of his employment, his service normally stands terminated from the date on which the letter of resignation is accepted by the appropriate authority and. in the absence of any law or statutory rule governing the conditions of his service, to the contrary, it will not he open to the public servant to withdraw his resignation after it is accepted by the appropriate authority. Undue delay, in intimating to the public servant concerned the action taken on the letter of resignation, may justify an inference that the resignation had not been accepted. [860 F-H] In the present case, on the plain terms of the resignation letters of the appellant the resignation became effective- as soon as it was accepted by the appropriate authority. No rule has been framed under Art. 309 of the Constitution, nor is there any other rule having statutory force which requires, that for an order accepting the resignation to be effective it must be communicated to the person submitting his resignation. The circular relied upon by the appellant, according to which resignation becomes effective when it is accepted and the officer is relieved of his duties, merely contains instructions to be followed and has no statutory force. The resignation was accepted within a short time of its receipt by <ORG> and the delay of <ORG> in implementing the order was not inordinate. [860 A-D, H] State of Punjab v. <NAME>, A.T.R, 1966 S.C, 1313, held inapplicable. 858 (2) The orders were neither orders of dismissal nor of termination of service for any misconduct. [861 B-C] JUDGMENT:

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2429 of 1966.

Appeal from the judgment and order dated May 28, 1966 of <ORG> (Circuit Bench) Delhi in Civil Writ No. 170-D of 1965.

<NAME>, <NAME>, <NAME> and <NAME>, for the appellant.

<NAME>, Dhebar, for respondent No. 1.

<NAME> and <NAME>, for respondent No. 2. The Judgment of the Court was delivered by <NAME>, J. The appellant belonged to <ORG> and was in August 1964 posted as Collector & District Magistrate, <NAME>. On August 21, 1964, he addressed a letter to the Chief Minister, Rajasthan, setting out several grievances and finally stated--"In conclusion I would only request that the Government may do me the kindness of accepting my resignation from the service which I am submitting separately as I am convinced that it would be impossible to continue in such an atmosphere without being humiliated from time to time". He also addressed a letter dated August 30, 1964, to the Chief Secretary to <ORG> submitting his resignation "from <ORG> for early acceptance", and requested that it may be forwarded to <ORG> with the remarks of the State Government. The State Government recommended that the resignation be accepted. On October 31, 1964, <ORG> accepted the resignation of the appellant and requested the Chief Secretary to <ORG> "to intimate the date on which the appellant was relieved of his duties so that a formal notification could be issued in that behalf". After some time the appellant changed his mind and by letter dated November 27, 1964, the appellant requested the Chief Secretary to <ORG> to recommend "acceptance of the withdrawal" of his resignation from <ORG>. He also addressed a separate letter to the Secretary to <ORG>, <ORG>, intimating that be was withdrawing his resignation from <ORG>. On March 29, 1965, an order accepting the resignation of the appellant from <ORG> was issued and the appellant was directed to hand over charge to the Additional Collector, <NAME>. The appellant then moved a petition in <ORG> at Delhi for the issue of a writ of certiorari, calling for the record of the case and quashing the order passed by <ORG> accepting the resignation of the appellant, and also quashing the order dated March 29, 1965 issued by the State of Rajasthan. <ORG> rejected the petition holding that the resignation became effective on the date on which it was accepted by <ORG>, and a subsequent withdrawal of the resignation was ineffective, even if acceptance of the resignation was not intimated to the appellant.

In this appeal, with certificate granted by <ORG>, counsel for the appellant contends that the appellant could, so long as acceptance of the resignation was not communicated to him, withdraw the resignation submitted by him. Counsel invited our attention to a circular memorandum issued on May 6, 1958, under the signature of the Deputy Secretary to the Government of India, <ORG>, setting out the procedure to be followed in dealing with resignation from service. Clauses (c) & (d) of the circular stated :

(c) "The competent authority should decide the date with effect from which the resignation should become effective. In cases covered by (b)(i) above, the date would be that with effect from which alternative arrangements can be made for filling the post. Where an office is on leave, the competent authority should decide whether he will accept the resignation with immediate effect or with effect from the date following the termination of the leave. Where a period of notice is prescribed which a <ORG> servant should give when he wishes to resign from service, the competent authority may decide to count the period of leave towards the notice period. In other cases also, it is open to the com-

petent authority to decide whether the resignation should become effective immediately or with effect from some prospective date..............

(d) "A resignation becomes effective when it is accepted and the officer is relieved of his duties. Where a resignation has not become effective and the officer wishes to withdraw it, it is open to the authority which accepted the resignation either to permit the officer to withdraw the resignation or to refuse the request for such withdrawal. Where, however, a resignation has become effective, the officer is no longer in <ORG> service and acceptance of the request for withdrawal of resignation would amount to re-employing him in service after condoning the period of break.

Counsel says that under the instructions issued by <ORG> resignation of an officer from service becomes effective after it is accepted and the officer is relieved of his duties and not till then. But the circular letter has no statutory force. It is not a rule made under Art. 309 of the Constitution. It contains merely instructions set out by <ORG> about the procedure to be followed in respect of resignation from service. Our attention has not been invited to any statutory rule or regulation relating to resignation by members of <ORG>, especially as to the date on which the resignation becomes effective.

The letters writen by the appellant on August 21, 1964, and August 30, 1964, did not indicate that the resignation was not to become effective until acceptance thereof was intimated to the appellant. The appellant informed the authorities of the State of Rajasthan that his resignation may be forwarded for early acceptance. On the plain terms of the letters, the resignation was to become effective as soon as it was accepted by the appointing authority. No rule has been framed under Art. 309 of the Constitution which enacts that for an order accepting the resignation to be effective, it must be communicated to +,he person submitting his resignation.

Our attention was invited to a judgment of this Court in <CITATION> (1) in which it was held that an order of dismissal passed by an authority and kept on its file without communicating it to the officer concerned or otherwise publishing it did not take effect as from the date on which the order was actually written out by the said authority; such an order could only be effective after it was communicated to the Officer concerned or was otherwise published. The principle of that case has no application here. Termination of employment by order passed by the Government does not become effective until the order is intimated to the employee. But when a public servant has invited by his letter of resignation determination of his employment, his services normally stand terminated from the date on which the letter of resignation is accepted by the appropriate authority, and in the absence of any law or rule governing the conditions of his service to the contrary, it will not be open to the public servant to withdraw his resignation after it is accepted by the appropriate autho- rity. Till the resignation, is accepted by the appropriate authority in consonance with the rules governing the acceptance, the public servant concerned has locus poenitentiae but not thereafter. Undue delay in intimating to the public servant concerned the action taken on the letter of resignation may justify an inference that resignation has not been accepted. In the present case the resignation was accepted within a short time after it was received by (1) A. T. R, 1966 S, C. R. 1313, <ORG>. Apparently the State of Rajasthan did not immediately implement the order and relieve, the appellant of his duties, but the appellant cannot profit by the delay in intimating acceptance or in relieving him of his duties.

The alternative ground raised by counsel that acceptance of the resignation amounts to dismissal from employment and failure to comply with the requirements of Art. 311 of the Constitution vitiates the order accepting the resignation has no force. The order complained of did not purport to be one of dismissal : the Government of India accepted the resignation submitted by the appellant, they did not purport to terminate the appointment for any misconduct on the part of the appellant, or as a measure of penalty. The appeal fails and is dismissed. There will be no order as to costs.

<ORG> dismissed.


JUDGMENT Leach, <NAME>

1. The case for the appellants is completely devoid of merit, but questions of law have been raised and it is necessary to consider them. The appellants and respondent 4 are the managers of the communal lands of the village of Natarajapuram (also known by the name of Ethandarpatti) in the Trichinopoly Taluq. They sued in <ORG> of Trichinopoly for a declaration that the deoree obtained in Order Section No. 82 of 1929 was not binding upon them or upon the other ryots of this village. In that suit defendants 1 to 4, as the representatives of the village of Arasankudi, sued four ryots of the village of Natarajapuram, as the representatives of that village, to recover a sum of Rs. 1667-4-0 which they claimed was due to the villagers of Arasankudi by the villagers of Natarajapuram in respect of the construction of a road connecting the two villages with the main road. Both the villages had asked <ORG> authorities to construct the road and promised that they would contribute one-third of the cost, if <ORG> would bear the rest. It was afterwards arranged that the two villages should contribute a total sum of Rs. 4000 which was to be borne by them equally. At a later stage, it was agreed between the villagers of Arasankudi and the villagers of Natarajapuram that the Arasankudi villagers should pay Rs. 2250 of the Rs. 4000 and the villagers of Natarajapuram Rs. 1750. The villagers of Arasankudi paid the full amount and the villagers of Natarajapuram reimbursed them to the extent of Rs. 500 but they failed to pay the balance, and in consequence defendants 1 to 4, suing on behalf of all the villagers of Arasankudi, instituted the suit to recover the balance.

2. The District <NAME> took the plaint on his file on 20th February 1929 and numbered the suit as No. 82 of 1929. "With the plaint were filed two applications, one for an order permitting the plaintiffs to sue on behalf of the villagers of <NAME> and the other for an order allowing them to sue the defendants as the representatives of the village of Natarajapuram. Having numbered the plaint, the District <NAME> directed that notice should issue to the defendants and that a general notification should be published in <ORG>. The defendants were served, and the notification was duly published. After this had been done, namely, on 19th April 1929, the District <NAME> granted leave to the plaintiffs, as representing <NAME>, to sue the defendants as representing Natarajapuram. In his order he pointed out that there was no opposition to the application. He also directed that as defendant 3 was absent the case should proceed against him exparte. Subsequently, defendant 3 filed an application for an order setting aside the exparte order which was passed against him on 19th April 1929 and asked for permission to file a written statement. This application was granted. All the defendants filed written statements. On 2nd April 1981 the plaintiffs and defendants 1, 2 and 4, filed in Court a statement agreeing that a decree for Rs. 1250 and costs should be passed against the communal properties of the village of Nataraja-puram with full liberty to the plaintiffs to proceed in execution against these properties. Defendant 3 did not join in this application. In conjunction with the plaintiffs, he filed a memorandum stating that he was not willing to continue on the record as one of the representatives of the village of Nataraja-puram and that the plaintiffs consented to the suit being proceeded with against defendants 1, 2 and 4 as the representa-tives of Natarajapuram. In these circumstances he asked that his name be removed from the suit. On 7th April the District <NAME> passed a decree in accordance with the terms agreed upon by the parties and set out in these two statements. The suit out of which this appeal arises was filed by the appellants on 4th January 1933 in accordance with the provisions of Order 21, Rule 68, Civil P.C. The decree-holders in Order Section No. 82 of 1929 had attached the communal lands of Natarajapuram in execution of their decree and the appellants' objection to the attachment had been overruled. The District <NAME> decreed the suit On the following grounds, (1) In the earlier suit the requirements of Order 1, Rule 8 had not been complied with and (2) as defendant 3 had disappeared from that suit the Court had no power to pass a decree against the three remaining defendants as the representatives of Natarajapuram without an order expressly directing the suit to proceed against them. On appeal the decree of the District <NAME> was confirmed. The defendants then appealed to this Court. <NAME> held that the decree which had been passed in the former suit was binding upon the plaintiffs and consequently dismissed their suit with costs. This appeal is from the judgment of the learned Judge under Clause 15, Letters Patent.

3. As before <NAME>, the appellants have raised four contentions. The first two are the contentions which the District Munsif and the Subordinate Judge accepted. They also say that the <ORG> has no power to pass an order allowing persons to be sued in a representative capacity when the claim is upon a mere debt. Further they say that the decree in the former suit is not binding upon them because the defendants had no power to enter into a compromise. Order 1, Rule 8 reads as follows:

(1) Where there are numerous persons having the same interest in one suit, one or more of such persons may, with the permission of the <ORG>, sue or be sued or may defend, in such suit, on behalf of or for the benefit of all persons so interested. But the <ORG> shall in such case give, at the plaintiff's expense, notice of the institution of the suit to all such persons either by personal service or, where from the number of persons or any other cause such service is not reasonably practicable, by public advertisement, as the <ORG> in each case may direct.

(2) Any person on whose behalf or for whose benefit a suit is instituted or defended under Sub-rule (1) may apply to the <ORG> to be made a party to such suit.

4. Mr. <NAME> on behalf of the appellants says that when the plaint is first filed it is incumbent upon the <ORG> to pass an order permitting the suit to be brought in a representative capacity or the defendants to be sued as representatives, if the allegations in the plaint justify the order. After permission has been given, it is incumbent upon the <ORG> to issue public notice that the suit has been instituted so that other persons may apply to be added as defendants. Here the permission to the plaintiffs in the former suit to sue as the representatives of the Arasankudi village the defendants named therein as the representatives of Natarajapuram village was granted after the publication in the District Gazette of the notice that the suit had been filed. Consequently, Mr. <NAME> argues that as the rule contemplates permission before publication of the notice it was necessary for the District Munsif to issue a fresh notice and his failure to do so vitiated the proceedings. In this connexion he has pointed to the following passage in the judgment of <ORG> in <CITATION> ('33) 20 A.I.R. 1933 P.C. 183 at p. 666:

On such permission being given it becomes the imperative duty of the <ORG> to direct notice to be given to the absent parties in such of the ways prescribed as the <ORG> in each case may require; while liberty is reserved to any represented person to, apply to be made a party to the suit.

5. Emphasis is laid on the words "imperative duty". Divorced from its context this passage does give support to the appellants, but when the judgment is read as a whole, it is quite clear that <ORG> did not intend to lay down a rule that non-compliance with the strict wording of the rule was fatal to the case. <CITATION> ('33) 20 A.I.R. 1933 P.C. 183 the question was whether the decision in a former suit operated as resjudicata when no permission had been sought or granted under Order 1, Rule 8. <ORG> held that in a representative suit the decision in a former suit does not operate as resjudicata by reason of Section 11, Civil P.C, Expln. 6, unless the former suit was instituted in compliance with Order 1, Rule 8 of the present Code. By compliance was meant the institution of the suit with the permission of the <ORG> sifter the notice as prescribed by Order 1, Rule 8 had been given. But Lord <NAME> in delivering the judgment of the <ORG> said that their Lordships would not exclude the possibility of a decree being within the benefit of Expln. 6 of Section 11, where the litigation having been bona fide the omission to comply with the conditions of the rule had been inadvertent and no injury from the omission had been sustained by the plaintiff in the second suit. It was, however, imperative to have it recognised that the burden upon a defendant seeking a ruling to that effect was heavy indeed. No encouragement should, they thought, be offered to litigants if they would obtain the full benefit of Order 1, Rule 8 to be careless in securing full compliance with the conditions of the rule, both in the letter and in the spirit. The object of Order 1, Rule 8 is to permit a person who has an interest in the subject-matter of the suit to apply to the <ORG> to be made a defendant. He may not be convinced that the defendants named in the plaint will defend the suit properly as the representatives of all persons concerned. In this case the District Munsif, strictly speaking, should have passed orders on the two applications filed by the plaintiffs in the former suit when he admitted their plaint and left the publication of the notice of the suit to a later stage but the fact that he gave to the plaintiffs as the representatives of the Arasankudi permission to sue the defendants as the representatives of Natarajapuram after he had notified by public advertisement the institution of the suit prejudiced no one. Any person residing in Natarajapuram could have applied to be made a defendant, but no one chose to do so. The villagers of Natarajapuram had notice of the institution of the suit and they were prepared to allow it to proceed with the defendants chosen by the plaintiffs. Consequently, we hold that there was sufficient compliance with Order 1, Rule 8.

6. We consider that there is no greater force in the appellants' contention that the <ORG> was not entitled to pass a decree against defendants 1, 2 and 4, because it had allowed defendant 3 to drop out. Here Mr. <NAME> has relied on the judgment of <NAME> in <CITATION> ('31) 18 A.I.R. 1931 Mad. 452 and <CITATION> ('34) 21 A.I.R. 1934 Mad. 202. In the former of these twp cases, <NAME> held that where sanction is given by a <ORG> to certain persons eo nomine to institute or defend a suit and one of them dies, the right does not survive and therefore his heirs cannot come on the record unless the order granting the sanction can be construed as conferring the right to do so. He considered that the proper procedure was for the remaining persons to apply to the <ORG> for directions and it was for the <ORG> to decide whether it would permit them to continue to prosecute or defend the suit or whether it would insist upon the original number, in which case it should give directions in this respect. The judgment in <CITATION> ('34) 21 A.I.R. 1934 Mad. 202 was to the same effect. <NAME> considered these two decisions and, in his opinion, it was not incumbent upon the remaining parties to apply to the <ORG> for directions. The suit could lawfully proceed without them. It is not necessary for the purpose of this, appeal to decide whether the <ORG>'s directions are necessary or not, because it is quite clear that all parties, including defendant 3, were willing that there should be a decree against defendants 1, 2 and 4 in their representative capacity. In passing the decree which it did the <ORG> in fact permitted the suit to proceed against the remaining defendants.

7. <NAME> considered that the appellants ought not to be allowed to raise the plea that there cannot be a representative suit in respect of a debt and we agree with him. Permission had been given to the plaintiffs in the former suit to sue in a representative capacity and it may be added that the plea was not raised in the plaint. It may also be pointed out that the suit was a claim to enforce payment of a debt due by the whole village in connection with the construction of a road for the benefit of all the villagers and it is difficult in such circumstances to see why the defendants could not be sued in a representative capacity. Otherwise it would mean the joining of every inhabitant of the village. The last contention, namely, that the defendants in the former suit had no power to compromise can be disposed of in a few words. There are two Bench decisions of this Court which say that persons conducting a suit on behalf of themselves and others with leave of the Court can enter into a compromise so as to bind those whom they represent and the same principle must apply when the defendants are sued in a representative capacity. The first case is <CITATION> ('13) 24 M.L.J. 192 and the second the unreported case of <NAME> v. Anthony Nadar C.M.A. No. 266 of 1930. The appeal will be dismissed with costs.


PETITIONER: <ORG>. Vs. RESPONDENT: COMMR. OF INCOME TAX, WEST BENGAL, CALCUTTA DATE OF JUDGMENT27/09/1978 BENCH: BHAGWATI, P.N. BENCH: BHAGWATI, P.N. TULZAPURKAR, V.D. CITATION: 1979 AIR 5 1979 SCR (1) 976 1978 SCC (4) 358 CITATOR INFO : RF 1980 SC 680 (11) ACT: Income Tax Act , 1922-Secs. 10(1), 10(2)-Loss occasioned on account of devaluation-Whether deductible as revenue expenditure-Circulating capital and fixed capital. The assessee is a Limited Company having its Head Office in Calcutta. HEADNOTE: It has inter alia a Cotton Mill 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 West Pakistan. The Pakistan profit, according to the 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 1954-55 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 and Pakistani rupee was restored. The assessee thereafter succeeded in obtaining the permission of <ORG> 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 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. 11 lakhs, 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 assesses 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 losses of Rs. 11 lakhs and Rs. 5,50,000 should be allowed in computing the profit from business. The Income Tax Officer and the <ORG> disallowed the claim. On a reference to <ORG>, <ORG> took the view that no loss was sustained 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 loss because it was not a loss arising in the course of business of the assessee but it was caused by devaluation which was an act of <ORG>. <ORG> accordingly answered the question in favour of the <ORG> and against the assessee. Disposing of the appeals by special leave the <ORG>, 977 ^ HELD: The first question that arises is whether the assessee suffered any loss on the remittance of Rs. 25 lakhs and Rs. 12,50,000. These two amounts admittedly came out of the Pakistani profit for the assessment 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, therefore, 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 lakhs in one case and Rs. 5.50 lakhs in the other case. The fact that no loss was reflected in the books of the two accounts of the assessee was not a conclusive factor and <ORG> ought not to have relied 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 assessee has earned any profit or suffered any loss. [981 A-D, 982 <CITATION> ., 60 I.T.R. 405 relied on. The question arising in the case is whether the loss sustained by the assessee was a trading loss and if it was a trading loss whether it would be liable to be deducted in computing the taxable profit of the assessee under Sec. 10(1) of the Income Tax Act , 1922. The argument which found favour with <ORG> was that because the devaluation was an act of the sovereign power, it could not be regarded as a loss arising in the course of the business of the assessee or incidental, to such business, is plainly erroneous. It is true that a loss in order to be a trading loss must spring directly from the carrying on of business or be incidental to it, but it would not be correct to say that where a loss arises in the process of conversion of foreign currency which is part of trading asset of the assessee, such loss cannot be regarded as a trading loss because the change in the rate of exchange which occasions such loss is due to an act of the sovereign power. [982 <CITATION> ., 34 I.T.R., 10 relied on. It is not the factor or circumstance which caused the loss that is material in determining the true nature and character of the loss, but whether the loss has occurred in the course of carrying on the business or is incidental to it. If there is a loss in trading asset, it would be a trading loss, whatever be its cause, because it would be a loss in the course of carrying on the business. If the stock in trade of a business is stolen or burnt the loss, though occasioned by external agency or act of God would clearly be a trading loss. Whether the loss suffered by the assessee is a trading loss or not, would depend on the answer to the query whether the loss is in respect of a trading asset or a capital asset. In the former case, it would be a trading loss but not so in the latter. The test may be formulated in another way by asking the question whether the loss is in respect of circulating capital or in respect of fixed capital. It is, of course, not easy to define precisely what is the line of demarcation between fixed capital and circulating capital but there is a well recognised distinction between the two concepts. <NAME> in his 'Wealth of Nations' describes fixed capital as what the owner turns to profit by keeping it in his 978 own possession and circulating capital as what he makes profit of by parting with it and letting in change masters. Circulating capital means capital employed in the trading operations of the business and the dealings with it comprise trading receipts and trading disbursements, while 'fixed capital' means capital not so employed in the business, though it may be used for the purposes of a manufacturing business but does not constitute capital employed in the trading operations of the business. [982 H, 983 A-F] <ORG> v. <NAME>, 18 T.C. 280; approved. <ORG> v. <NAME> 19 T.C. 65; <NAME> v. <ORG> Ltd. 32 T.C. 133; <ORG> v. <NAME>; 25 T.C. 292; referred to with approval. Commr. of Income-tax. <CITATION> . 34 I.T.R. 10 approved. <CITATION> . 63 I.T.R. 308 approved. It is clear from the authorities that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assesses on <ORG> account or as trading asset or as part of circulating capital embarked in the business. But if, on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature. [991 B-C] In the present case, no finding has been given by the <ORG> as to whether the sum of Rs. 25 lakhs and Rs. 12.50 lakhs were held by the assessee in West Pakistan on capital account or <ORG> account and whether they were a part of fixed capital or of circulating capital embarked and adventured in the business in West Pakistan. If these two amounts were employed in the business in West Pakistan and formed part of the circulating capital of that business, the loss of Rs. 11 lakhs and Rs. 5.50 lakhs resulting to the assessee on remission of these two amounts on account of alterations in the rate of exchange, would be a trading loss, but if instead these two amounts were held on capital account and mere part of fixed capital the loss would plainly be a capital loss. [991 C-E] The <ORG> was, therefore, unable to answer the question whether the loss suffered by the assessee was a trading loss or a capital loss. Ordinarily, the <ORG> would have called for a supplementary statement of the case, from the <ORG> but since both the parties agreed that it would be proper that the matter should go back to the <ORG> with a direction to the <ORG> either to take additional evidence itself or to direct the Income Tax Officer to take additional evidence and make a report, the <ORG> made an order accordingly and directed the tribunal to dispose of the case on the basis of the additional evidence and in the light of the law laid down in the Judgment. [991 E-H] JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1847- 1848/72.

From the Judgment and Order dated 30-4-1970 of <ORG> in Income Tax Reference No. 128 of 1966.

<NAME>, <NAME>, <NAME>, <NAME>, <NAME> and <NAME> for the Appellant.

<NAME> and Miss <NAME> for the Respondent.

The Judgment of the Court was delivered by <ORG> J.-These appeals by special leave are directed against a judgment of <ORG> answering the first question referred to it by the <ORG> in favour of the <ORG> and against the assessee. There were in all five questions referred by the <ORG> but questions Nos. 2 to 5 no longer survive and these appeals are limited only to question No. 1. That question is in the following terms:-

"Whether on the facts and in the circumstances of the case, the assessee's claim for the exchange loss of Rs. 11 lakhs for the assessment year 1957-58 and Rs. 5,50,000/- for the assessment year 1959-60 in respect of remittances of profit from Pakistan was not allowable as a deduction?

Since there are two assessment years in regard to which the question arises, there are two appeals one in respect of each assessment year, but the question is the same. <ORG> will briefly state the facts as that is necessary for the purpose of answering the question.

The assessee is a limited company having its head office in Calcutta. It has inter alia a cotton mill situate in West Pakistan where it carries on business of manufacturing and selling cotton fabrics. This textile mill was quite a prosperous unit and in the financial year ending 31st March, 1954, being the accounting year relevant to the assessment year 1954-55, the assessee made a large profit in this unit. This profit obviously accrued to the assessee in West Pakistan and according to the official rate of exchange which was then prevalent, namely, 100 Pakistani rupees being equal to 144 Indian rupees, this profit, which may for the sake of convenience be referred to as Pakistan profit, amounted to Rs. 1,68,97,232/- in terms of Indian rupees. Since the assessee was taxed on actual 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 1954-55 and the assessee was taxed accordingly after giving double taxation relief in accordance with the bilateral agreement between India and Pakistan. It may be pointed out that for some time, after the partition of India. there continued to be parity in the rate of exchange between India and Pakistan but on 18th September 1949, on the devaluation of the Indian rupee, the rate of exchange was changed to 100 Pakistani rupees being equal to 144 Indian rupees and that was the rate of exchange at which the Pakistani profit was converted into Indian rupees for the purpose of inclusion in the total income of the assessee for the assessment year 1954-55. The rate of exchange was, however, once again altered when Pakistani rupee was devalued on 8th August, 1955 and parity between Indian and Pakistani rupee was restored. The assessee thereafter succeeded in obtaining the permission of <ORG> to remit a sum of Rs. 25 lakhs in Pakistani rupees out of the Pakistani profit for the assessment year 1954-55 and pursuant to this permission, a sum of Rs. 25 lakhs in Pakistani rupees was remitted by the assessee to India during the accounting year relevant to the assessment year 1957-58. The assessee also remitted to India during the accounting year relevant to the assessment year 1959-60 a further sum of Rs. 12,50,000/- in Pakistani rupee out of the Pakistani Profit for the assessment year 1954-55 after obtaining the necessary permission of <ORG>. But by the time these remittances came to be made, the rate of exchange had, as pointed out above, once again changed to 100 Pakistani rupees being equal to 100 Indian rupees and the amounts received by the assessee in terms of Indian rupees were, therefore, the same, namely, Rs. 25 lakhs and Rs. 12,50,000. Now, 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 prevailing rate of exchange of 100 Pakistani rupees being equal to 144 Indian rupees and, therefore, when the assessee received the sum of Rs. 25 lakhs in Indian rupees on remittance of the profit of Rs. 25 lakhs in Pakistani rupees on the basis of 100 Pakistani rupees being equal to 100 Indian rupees, the assessee suffered a loss of Rs. 11 lakhs in the process of conversion on account of appreciation of the Indian rupee qua Pakistani rupee. Similarly, on remittance of the profit of Rs. 12,50,000 in Pakistani currency the assessee suffered a loss of Rs. 5,50,000/-. The assessee claimed in its assessments for the assessment years 1957-58 and 1959-60 that these losses of Rs. 11 lakhs and Rs. 5,50,000/- should be allowed in computing the profits from business. This claim was however rejected by the Income Tax Officer. The assessee carried the matter in further appeal to the <ORG> but the <ORG> also sustained the disallowance of these losses and rejected the appeals. The decision of the <ORG> was assailed in a reference made at the instance of the assessee and Question No. 1 which we have set out above was referred by the <ORG> for the opinion of <ORG>. On the reference <ORG> took substantially the same view as the <ORG> and held that no loss was sustained by the assessees on remittance of the amounts from West Pakistan and that in any event the loss could not be said to be a business loss, because it was not a loss arising in the course of business of the assessee but it was caused by devaluation which was an act of <ORG>. <ORG> accordingly answered the question in favour of the <ORG> and against the assessee. The assessee thereupon preferred the present appeal after obtaining certificate of fitness from <ORG>.

The first question that arises for consideration is whether the assessee suffered any loss on the remittance of Rs. 25 lakhs and Rs. 12,50,000/- in Pakistani currency from West Pakistan. These two amounts admittedly came out of Pakistan profit for the assessment 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 Pakistan profit. But by the time these two amounts came to be repatriated to India, the rate of exchange had undergone change on account of devaluation of Pakistani rupee and, therefore, on repartition, the assessee received only Rs. 25 lakhs and Rs. 12,50,000/- in Indian currency instead of Rs. 36 lakhs and Rs. 18 lakhs. The assessee thus suffered a loss Rs. 11 lakhs in one case and Rs. 5,50,000/- in other in the process of conversion of Pakistani currency into Indian currency. It is no doubt true-and this was strongly relied upon by <ORG> for taking the view that no loss was suffered by the assessee-that the books of account of the assessee did not disclose any loss nor was any loss reflected in the balance- sheet or profit and loss account of the assessee. The reason was that though, according to the then prevailing rate of exchange, the equivalent of Pakistani profit in terms of Indian rupee was Rs. 1,68,97,232/- and that was the amount included in the assessment of the assessee for the assessment year 1954-55, the assessee in its books of account maintained at <ORG> did not credit the Pakistani profit at the figure of Rs. 1,68,97,232/-, but credited it at the same figure as in Pakistani currency. The result was that the loss arising on account of the depreciation of Pakistani rupee vis-a-vis Indian rupee was not reflected in the books of account of the assessee and hence it could not figure in the balance-sheet and Profit and Loss Account. But 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 assessees has earned any profit or suffered any loss. The assessee may, by making entries which are not in conformity with the proper accountancy principles, conceal profit or show loss and the entries 10-699SCI/7 made by him cannot, therefore, be regarded as conclusive one way or the other. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee. Here, it is clear that the assessee earned Rs. 36 lakhs and Rs. 18 lakhs in terms of Indian rupees in the assessment year 1954-55 and retained them in West Pakistan in Pakistani currency and when they were subsequently remitted to India, the assessee received only Rs. 25 lakhs and Rs. 12,50,000/- and thus suffered loss of Rs. 11 lakhs and Rs. 5,50,000/- in the process of conversion on account of alteration in the rate of exchange. It is, therefore, not possible to accept the view of <ORG> that no loss was suffered by the assessee on the remittance of the two sums of Rs.25 lakhs and Rs. 12,50,000/- from West Pakistan. This view which we are taking is clearly supported by the decision of this Court in <CITATION> (1) which we shall discuss a little later.

That takes us to the next and more important question whether the loss sustained by the assessee was a trading loss. Now this loss was obviously not an allowable deduction under any express provision of section 10(2) , but if it was a trading loss, it would be liable to be deducted in computing the taxable profit of the assessee under section 10(1) . This indeed was not disputed on behalf of the <ORG> but the serious controversy raised by the <ORG> was whether the loss could at all be regarded as a trading loss. The argument which found favour with <ORG> was that the loss was caused on account of devaluation of the Pakistani rupee which was an act of the sovereign power and it could not, therefore, be regarded as a loss arising in the course of the business of the assessee or incidental to such business This argument is plainly erroneous and cannot stand scrutiny even for a moment. It is true that a loss in order to be a trading loss must spring directly from the carrying on of business or be incidental to it as pointed out by <NAME>, j., speaking on behalf of this Court in <NAME> v. C.I.T. (2) but it would not be correct to say that where a loss arises in the process of conversion of foreign currency which is part of trading asset of the assessee, such loss cannot be regarded as a trading loss because the change in the rate of exchange which occasions such loss is due to an act of the sovereign power. The loss is as much a trading loss as any other and it makes no difference that it is occasioned by devaluation brought about by an act of <ORG>. It is not the factor or circumstance which causes the loss that is material in determining the true nature and character of the loss, but whether the loss has occurred in the course of carrying on the business or is incidental to it. If there is loss in a trading asset, it would be a trading loss, whatever be its cause, because it would be a loss in the course of carrying on the business. Take for example the stock-in-trade of a business which is sold at a loss. There can be little doubt that the loss in such a case would clearly be a trading loss. But the loss may also arise by reason of the stock-in-trade being stolen or burnt and such a loss, though occasioned by external agency or act of God, would equally be a trading loss. The cause which occasions the loss would be immaterial : the loss, being in respect of a trading asset, would be a trading loss. Consequently, we find it impossible to agree with <ORG> that since the loss in the present case arose on account of devaluation of the Pakistani rupee and the act of devaluation was an act of sovereign power extrinsic to the business, the loss could not be said to spring from the business of the assessee. Whether the loss suffered by the assessee was a trading loss or not would depend on the answer to the query whether the loss was in respect of a trading asset or a capital asset. In the former case, it would be a trading loss, but not so in the latter. The test may also be formulated in another way by asking the question whether the loss was in respect of circulating capital or in respect of fixed capital. This is the formulation of the test which is to be found in some of the English decisions. It is of course not easy to define precisely what is the line of demarcation between fixed capital and circulating capital, but there is a well- recognised distinction between the two concepts. <NAME> in his `Wealth of Nations' describes `fixed capital' as what the owner turns to profit by keeping it in his own possession and `circulating capital' as what he makes profit of by parting with it and letting it change masters. `Circulating capital' means capital employed in the trading operations of the business and the dealings with it comprise trading receipts and trading disbursements, while `fixed capital means capital not so employed in the business, though it may be used for the purposes of a manufacturing business, but does not constitute capital employed in the trading operations of the business. <ORG> v. <NAME>.,(1) If there is any loss resulting from depreciation of the foreign currency which is embarked or adventured in the business and is part of the circulating capital, it would be a trading loss, but depreciation of fixed capital on account of alteration in exchange rate would be a capital loss. Putting it differently, if the amount in foreign currency is utilised or intended to be utilised in the course of business or for a trading purpose or for effecting a transaction on revenue account, loss arising from depreciation in its value on account of alteration in the rate of exchange would be a trading loss, but if the amount is held as a capital asset, loss arising from depreciation would be a capital loss. This is clearly borne out by the decided cases which we shall presently discuss.

We will first refer to the English decisions on the subject for they are quite illuminating. The first decision to which we should call attention is that in <ORG> Simpson(1). There the appellants who carried on business as fur and skin merchants and as agents were appointed sole commission agents of a company for the sale, in Britain and elsewhere, of furs exported from Russia, on the terms, inter alia, that they should advance to the company a part of the value of each consignment. All the transactions between the appellants and the company were conducted on a dollar basis, and owing to fluctuations in the rate of exchange between the dates when advances in dollars were made by the appellants to the company against goods consigned and the dates when the appellants recouped themselves for the advances on the sale of the goods, a profit accrued to the appellants on the conversion of prepaid advances into sterling. The question arose whether this profit formed part of the trading receipts of the appellants so as to be assessable to tax. <NAME>, J., held that the exchange profit arose directly in the course of the appellants' business with the company and formed part of the appellants' trading receipts for the purpose of computing their profits assessable to income tax under Case I of Schedule D. The learned Judge pointed out that "the profit which arises in the present case is a profit arising directly from the business which had to be done, because-the business was conducted on a dollar basis and the appellants had, therefore, to buy dollars in order to make the advances against the goods as prescribed by the agreements. The profit accrued in this case because they had to do that, thereafter as a trading concern in this country re- transferring or re-exchanging into sterling." Since the dollars were purchased for the purpose of carrying on the business as sole commission agents and as an integral part of the activity of such business, it was held that the profit arising on retransfer or re-exchange of dollars into sterling was a trading profit falling within Case I of Schedule D. This decision was accepted as a correct decision by <ORG> in <NAME> v. <ORG> Ltd.(2) We may then refer to the decision of <ORG> in <ORG> v. Kelly(1). That was a case of a company which, in accordance with the usual practice, bought American dollars for the purpose of purchasing in the United States, tobacco leaf. But before tobacco leaf could be purchased, the transaction was interrupted by the outbreak of war and the company had, at the request of the <ORG>, to stop all further purchases of tobacco leaf in the United States. The result was that the company was required to sell to the <ORG> and owing to the rise which had in the mean time occurred in the dollar exchange, the sale resulted in a profit for the company. The question was whether the exchange profit thus made on the dollars purchased by the company was a trading profit or not ? <ORG> held that it was a trading profit includible in the assessment of the company under Case I of Schedule D and Lord <NAME>, Master of the Rolls delivering the main judgment, said :

"The purchase of the dollar was the first step in carrying out an intended commercial transaction, namely, the purchase of tobacco leaf. The dollars were bought in contemplation of that and nothing else. The purchase on the facts found was, as I say, a first step in the carrying out of a commercial transaction,-" "<ORG> having provided themselves with this particular commodity "namely, dollars" which they proposed to exchange for leaf tobacco, their contemplated transactions became impossible of performance, or were not in fact performed. They then realised the commodity which had become surplus to their requirements". When I say "surplus to their requirements" I mean surplus to their requirements for the purpose and the only purpose for which the dollars were acquired."

"In these circumstances, they sell this surplus stock of dollars : and it seems to me quite impossible to say that the dollars have lost the revenue characteristic which attached to them when they were originally bought, and in some mysterious way have acquired a capital character. In my opinion, it does not make any difference that the contemplated purchasers were stopped by the operation of <ORG> or <ORG> orders, if that were the case; nor is the case affected by the fact that the purchase was under a <ORG> requisition and was not a voluntary one. It would be a fantastic result, supposing the Company had been able voluntarily, at its own free will, to sell these surplus dollars, if in that case the resulting profit should be regarded as income, whereas if the sale were a compulsory one the resulting profit would be capital. That is a distinction which, in my opinion, cannot possibly be made."

"To reduce the matter to its simplest elements, <ORG> has sold a surplus stock of dollars which it had acquired for the purpose of affecting a transaction on revenue account. If the transaction is regarded in that light, any trader who, having acquired commodities for the purpose of carrying out a contract, which falls under the head of revenue for the purpose of assessment under Schedule D, Case I, then finds that he has bought more than he ultimately needs and proceeds to sell the surplus. In that case it could not be suggested that the profit so made was anything but income. It had an income character impressed upon it from the very first."

This decision clearly laid down that where an assessee in the course of its trade engages in a trading transaction, such as purchase of goods abroad, which involves as a necessary incident of the transaction itself, the purchase of currency of the foreign country concerned, then profit resulting from appreciation or loss resulting from depreciation of the foreign currency embarked in the transaction would prima facie be a trading profit or a trading loss.

The last English decision to which we may refer in this connection is Davis v. <ORG>, (supra). The <ORG> made a practice of requiring its agents to deposit with the company a sum of money usually in Chinese dollars which was repayable when the agency came to an end. Previously the <ORG> had left on deposit in Shanghai amounts approximately equal to the agency deposits, but because of the hostilities between China and Japan, the <ORG> transferred these sums to the United Kingdom and deposited the sterling equivalents with its parent company which acted as its banker. Owing to the subsequent depreciation of the Chinese dollar with respect to sterling, the amounts eventually required to repay agency deposits in Chinese currency were much less than the sums held by the <ORG> to meet the claims and a substantial profit accrued to the <ORG>. The question arose whether this exchange profit was a trading profit or a capital profit. <ORG> held that it was a capital profit not subject to income tax and the argument which found favour with it may be stated in the words of <ORG>, who delivered the main judgment :

"I find nothing in the facts of this case to divest those deposits of the character which it seems to me they originally bore, that is to say the character of loans by the agents to the company, given no doubt to provide the company with a security, but nevertheless loans. As loans it seems to me they must prima facie be loans on capital, not revenue account; which perhaps is only another way of saying that they must prima facie be considered as part of the company's fixed and not of its circulating capital. As appears from what I have said above, the evidence does not show that there was anything in the company's mode of dealing with the deposits when received to displace this prima facie conclusion.

In my view, therefore, the conversion of company's balance of Chinese dollars into sterling and the subsequent re-purchase of Chinese dollars at a lower rate, which enabled the company to pay off its agents' deposits at a smaller cost in sterling then the amount it had realised by converting the deposits into sterling, was not a trading profit, but it was simply the equivalent of an appreciation in a capital asset not forming part of the assets employed as circulating capital in the trade."

Since the <ORG> took the view that the deposits were in the nature of fixed capital, any appreciation in their value on account of alteration in the rate of exchange would be on capital account and that is why the <ORG> held that such appreciation represented capital profit and not trading profit.

That takes us to the two decisions of this Court which have discussed the law on the subject and reiterated the same principles for determining when exchange profit or loss can be said to be trading profit or loss. The first decision in chronological order is that reported in <CITATION> . (supra). There the assessee, which was a limited company carrying on business of locomotive boilers and locomotives, had, for the purpose of its manufacturing activity, to make purchases of plant and machinery in the United States. <ORG>, New York, a company incorporated in the United States, was appointed by the assessee as its purchasing agent in the United States and with the sanction of <ORG> the assessee remitted a sum of $ 33,850/- to <ORG>, New York for the purpose of purchasing capital goods and meeting other expenses. The assessee was also the selling agent of <ORG> of the United States for the sale of their products in India and in connection with this work, the assessee incurred expenses on their behalf in India and these expenses were reimbursed to the assessee in the United States by paying the amount to <ORG>, New York. The assessee also earned a commission of $ 36,123/- as selling agent of <ORG> and this amount received as commission was taxed in the hands of the assessee in the relevant assessment year on accrual basis after being converted into rupees according to the then prevailing rate of exchange and tax was paid on it by the assessee. Now these amounts paid by <ORG> in reimbursement of the expenses and by way of commission were not remitted by the assessee to India but were retained with <ORG>, New York for the purchase of capital goods with the sanction of <ORG>. The result was that there was a balance of $. 48,572.30 in the assessee's account with <ORG>, New York on 16th September, 1949 when, on devaluation of the rupee, the rate of exchange which was Rs. 3.330 per dollar shot upto Rs. 4.775 per dollar. The consequence of this alteration in the rate of exchange was that the assessee found it more expensive to buy American goods and the Government of India also imposed some restrictions on imports from the United States and the assessee, therefore, with the permission of <ORG>, repatriated $ 49,500/- to India. The repatriation of this amount at the altered rate of exchange gave rise to a surplus of Rs. 70,147/- in the process of converting dollar currency into rupee currency. The question arose in the assessment of the assessee to income tax whether that part of the surplus of Rs. 70,147/-, which was attributable to $ 36,123/- received as commission from <ORG> was a trading profit or a capital profit. The matter was carried to this Court by the <ORG> and in the course of the judgment delivered by <NAME>, J., this Court pointed out that the answer to the question :

"..... depends on whether the act of keeping the money, i.e., $ 36,123/02, for capital purposes after obtaining the sanction of <ORG> was part of or a trading transaction. If it was part of or a trading transaction then any profit that would accrue would be revenue receipt; if it was not part of or a trading transaction, then the profit made would be a capital profit and not taxable. There is no doubt that the amount of $ 36,123.02 was a revenue receipt in the assessee's business of commission agency. Instead of repatriating it immediately, the assessee obtained the sanction of <ORG> to utilise the commission in its business manufacture of locomotive boilers and locomotives for buying capital goods. That was quite an independent transaction, and it is the nature of this transaction which has to be determined. In our view it was not a trading transaction in the business of manufacture of locomotive boilers and locomotives; it was clearly a transaction of accumulating dollars to pay for capital goods, the first step to the acquisition of capital goods. If the assessee had repatriated $ 36,123.02 and then after obtaining the sanction of <ORG> remitted $ 36,123.02 to the U.S.A., Mr. <NAME> does not contest that any profit made on devaluation would have been a capital profit. But, in our opinion, the fact that the assessee kept the money there does not make any difference specially, as we have pointed out, that it was a new transaction which the assessee entered into, the transaction being the first step to acquisition of capital goods."

This Court held that the act of retaining $ 36,123/- in the United States for capital purposes after obtaining the sanction of <ORG> was not a trading transaction in the business of manufacture of locomotive boilers and locomotives, but it was clearly a transaction of accumulating dollars to pay for capital goods, the first step in the acquisition of capital goods and the surplus attributable to $ 36,123/- was, therefore, capital accretion and not profit taxable in the hands of the assessee. It would, thus, be seen that the test applied by this Court was whether the appreciation in value had taken place in a capital asset or in a trading asset or in other words, in fixed capital or in circulating capital and since the amount of $ 36,123/-, though initially a trading receipt, was set apart for purchase of capital goods and was thus converted into a capital asset or fixed capital, it was held that appreciation in its value on conversion from dollar currency to rupee currency was a capital profit and not a trading profit. The position was the same as if the assessee had repatriated $ 36,123/- in the relevant assessment year in which it was earned and then immediately remitted an identical amount to the United States for the purchase of capital goods and profit had accrued on subsequent repatriating of this amount on account of alteration in the rate of exchange.

The other decision to which we must refer is the one in <CITATION> .(1). The assessee in this case was a public limited company carrying on the business of banking in India and it had opened a branch in Karachi on 15th November, 1946. After the partition in 1947, the currencies of India and Pakistan continued to be at par until the devaluation of the Indian rupee on September 18, 1949. On that day the Karachi branch of the assessee had with it a sum of Rs. 3,97,221/- belonging to its Head Office. As Pakistan did not devalue its currency, the old parity between Indian and Pakistani rupee ceased to exist. The exchange ratio between the two countries was, however, not determined until 27th February, 1951 when it was agreed that 100 Pakistani rupees would be equivalent to 144 Indian rupees. The assessee did not carry on any business in foreign currency in Pakistan and even after it was permitted to carry on business in Pakistani currency on 3rd April, 1951, it carried on no foreign exchange business. The amount of Rs. 3,97,221/, which was lying with the Karachi branch remained idle there and was not utilised in any banking operation even within Pakistan. On July 1, 1953, <ORG> granted permission for remittance and two days later, the assessee remitted the amount of Rs. 3,97,221/- to India. This amount, in view of the difference in the rate of exchange became equivalent to Rs. 5,71,038/- in terms of Indian currency and in the process, the assessee made a profit of Rs, 1,73,817/- . The question arose in the assessment of the assessee whether this profit of Rs. 1,73,817/- was a revenue receipt or a capital accretion. <NAME>, J., speaking on behalf of this Court, pointed out that the amount of Rs. 3,97,221/- was lying idle in the Karachi branch and it was not utilised in any banking operation and the Karachi branch was merely keeping that money with it for the purpose of remittance to India and as soon as the permission of <ORG> was obtained, it remitted that money to India. This money was "at no material time employed, expended or used for any banking operation or for any foreign exchange business". It was, to use the words of <NAME>, J., "blocked and sterilised from the period of the devaluation of the Indian rupee upto the time of its remittance to India". Therefore, even if the money was originally stock- in-trade, it "changed its character of stock-in-trade when it was blocked and sterilised and the increment in its value owing to the exchange fluctuation must be treated as a capital receipt". Since the sum of Rs. 3,97,221/- was, on the finding of fact reached by the <ORG> authorities, held on capital account and not as part of the circulating capital em-

barked in the business of banking, it was held by this Court that the profit arising to the assessee on remittance of this amount on account of alteration in the rate of exchange was not a trading profit but a capital accretion.

The law may, therefore, now be taken to be well settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature. Now, in the present case, no finding appears to have been given by the <ORG> as to whether the sums of Rs. 25 lakhs and Rs. 12,50,000/- were held by the assessee in West Pakistan on capital account or <ORG> account and whether they were part of fixed capital or of circulating capital embarked and adventured in the business in West Pakistan. If these two amounts were employed in the business in West Pakistan and formed part of the circulating capital of that business, the loss of Rs. 11 lakhs and Rs. 5,50,000/- resulting to the assessee on remission of these two amounts to India. On account of alteration in the rate of exchange, would be a trading loss, but if, instead, these two amounts were held on capital account and were part of fixed capital, the loss would plainly be a capital loss. The question whether the loss suffered by the assessee was a trading loss or a capital loss cannot, therefore, be answered unless it is first determined whether these two amounts were held by the assessee on capital account or on revenue account or on revenue account or to put it differently, as part of fixed capital or of circulating capital. We would have ordinarily, in these circumstances, called for a supplementary statement of case from the <ORG> giving its finding on this question, but both the parties agreed before us that their attention was not directed to this aspect of the matter when the case was heard before the <ORG> Authorities and the <ORG> and hence it would be desirable that the matter should go back to the <ORG> with a direction to the <ORG> either to take additional evidence itself or to direct the Income Tax Officer to take additional evidence and make a report to it, on the question whether the sums of Rs. 25 lakhs and Rs. 12,50,000/- were held in West Pakistan as capital asset or as trading asset or, in other words, as part of fixed capital or part of circulating capital in the business. The <ORG> will, on the basis of this additional evidence and in the light of the law laid down by us in this judgment, determine whether the loss suffered by the assessee on remittance of the two sums of Rs. 25 lakhs and Rs. 12,50,000/- was a trading loss or a capital loss.

We accordingly set aside the order of <ORG> and send the case back to the <ORG> with a direction to dispose it of in accordance with the directions given by us and in the light of the law laid down in this judgment. There will be no order as to costs of the appeal. <ORG> allowed and case remanded.