Law:

Section:

Section 4 of the Income-tax Act, 1961 (Corresponding to section 3 of the Indian Income-tax Act, 1922) - Income - Chargeable as - Assessment year 1954-55 - Assessee-bank had opened one branch in Karachi on 15-11-1946 - After partition i.e., on 18-9-1949, when there was devaluation of Indian rupee, Karachi branch of assessee-bank had with it a sum of Rs. 3,97,221 - Said amount was however lying as 'blocked' or 'sterlised' balance as it was not being utilised for internal banking operations within Pakistan - On 1-7-1953, when State Bank of Pakistan permitted its remittance to India, in terms of Indian currency its value became equivalent to Rs. 5,71,038 - Whether, on facts, exchange difference of Rs. 1,70,746 received by assessee could be regarded as capital gains which was not assessable to income-tax - Held, yes FACTS The respondent bank opened one branch in Karachi on 15-11-1946. After the partition of India in 1947, the currencies of the two Dominions of India and Pakistan continued to be at par until there was a devaluation of the Indian rupee on 18-9-1949. On the date of devaluation of the Indian rupee the Karachi branch of the bank had with it a sum of Rs. 3,97,221 belonging to its head office. Owing to the difficulties of the currency situation, it was impossible to remit the amount to the head office for quite a long time. On 1-7-1953, the State Bank of Pakistan permitted its remittance to India. In terms of Indian currency the said amount became equivalent to Rs. 5,71,038. Thus, there was an appreciation of the value of the amount remitted from the Karachi branch and the assessee-bank made a profit. In its return for the assessment year 1954-55, the bank claimed that this sum was a capital gain and was not taxable. The ITO rejected the assessee's claim. The ITO's order was upheld by the AAC and the Tribunal. On reference, the High Court held that the exchange difference was not assessable to income-tax. On appeal to the Supreme Court : HELD If by virtue of exchange operations profits are made during the course of business and in connection with business transactions, the excess receipts on account of conversion of one currency into another would be…

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