P L D 1960 Dacca 823 (PLP)

AKBAR, J.‑As a common question of law is involved in these references, they have been heard together. In Reference Case No. 4 of 1960, the assessee is The Rajnagar Tea Co. Ltd. In Reference Case No. 5 of 1960 the assessee is the New Samanbagh Tea Co. Ltd. Shaw Wallace & Co., Ltd., Calcutta are the Managing Agents of both these Indian Companies. These companies own tea gardens in East Pakistan. As the companies' entire income arises in Pakistan, they, for tax purposes, are treated as residents in Pakistan. In both the cases the year of assessment is the year 1956‑

57. The relevant accounting year is 1955. These companies keep accounts in Indian rupee but for the purpose of assessment in Pakistan convert the same in Pakistani rupees at the prevailing rate. Prior to 31st of July 1955, both these companies had liabilities in India. The bulk of the said liabilities consists of‑-- (i) loan taken from the Indian Managing Agents for meeting business expenses, and (ii) commission due to the said Managing Agents. On 1st August, 1955 Pakistani rupee was devalued. Prior to devaluation, 100 Pakistani rupees were equivalent to 144 Indian rupees. Had the Pakistani rupee not been devalued, the companies would have discharged their Indian liabilities by paying lesser amount in the Pakistani currency. After devaluation, the outstanding Indian obligations had to be met at par. Thus, due to devaluation, the companies incurred loss on exchange. They, therefore, claim deduction of the said amount from the income in Pakistan for the purpose of arriving at the taxable income. The Income‑tax Officer took the views that the alleged loss could not be deducted in computing the income of the assessee companies. The Appellate Assistant Commissioner and the Appellate Income‑tax Tribunal upheld the order of the Income‑tax Officer. Hence, at the instance of the Managing Agents, the following questions have been referred to this Court under section 66 (1) of the Income‑tax Act. Reference Case No. 4 of 1960 :‑

"Whether the loss of Rs. 66, 747 claimed by the company as a result of the revaluation of Pakistan rupee is an allowable deduction under the provisions of the Income‑tax Act ? Reference Case No. 5 of 1960. "Whether the loss of Rs. 1,10,646 claimed by the company as a result of the devaluation of the Pakistan rupee is an allowable deduction under the provisions of the Income‑tax Act ?' Hence the only question for determination in these references is, if this loss on exchange is deductable under the Income‑tax Act. Mr. Aragon, the learned counsel for the assesses‑companies, has contended that the dues of the Managing Agents in India were payable in Pakistani currency and these obligations became very much more onerous after devaluation of Pakistani currency and hence they were entitled to claim deduction of the loss on exchange. In support of his contention, he has relied on the decision in the case of Radio Pictures Ltd. v. Commissioners of Inland Revenue (22 Tax Cases 106). In the above case, the facts were as follows: An English Company carried on the business of renters and distributors of Cinematograph films which it obtained from R. K. Production incorporated in the United States of America under an agreement entered into for the said purpose. The English Company accounts were made up on sterling basis. They claimed relief under section 24 of the Finance Act, 1923 on the ground that the agreement required payment in dollars and that the adverse differences in exchange were deductable in computing its profits. The Commissioners of Inland Revenue refused the claim and the decision was upheld by the Special Commissioner on Appeal. The Court of Appeal, however, held that under the agreement the English Company's debts to the American Com pany were dollar debts and therefore the relief claimed should be allowed. The above decision, in my opinion, does not help the assessee companies. In these cases, the Indian Managing Agents advanced money to Indian companies. The Managing Agency agreement is not before us. Hence, in the absence of any agreement to the contrary, it cannot be disputed that these debts or liabilities were payable in Indian currency. That being so, the company cannot claim adverse differences due to devaluation of Pakistani currency. In other words, the obligations of the assessee‑companies to their Managing Agents not being in Pakistan currency, no question of the debtors' getting any relief due to loss on exchange arises in these cases. I may further point out that the English Act does not contain any express allowance or enumeration of deductions but only enjoins that in computing profits and gains deductions of certain kinds must not be allowed and therefore outside the prohibited deductions and hence there is a scope for application of general principles and indeed it is to those principles that the computation is left. The Pakistan Act, on the other hand,‑ takes as profits the' whole of the receipts less only such outgoings and liabilities as the Act recognises and carefully defines. Under the Pakistan Act the profits must be determined by the method of making the statutory deductions from the receipts and any deduction from business receipts, if it is to be allowed must be brought under one or other of the deductions mentioned in section 10 (2) of the Act. In my opinion, the deductions claimed by the assessee‑companies do not fall under any of the clauses of section 10 (2). Mr. Aragon has attempted to argue that the company had to take loan from the Managing Agents in India in order to manage its business in Pakistan and hence the loss on exchange may be regarded as an expense for management. I have really failed to appreciate how the loss on exchange may be regarded as an ex pense for management. Somewhat similar question arose in the case of Bennet v. Underground Electric Railway Company of London, Ltd. ((1923) 2 K B 535). In this case, the English Company, to carry out its objects, raised money by means of bonds to bearer issued in New York, Amsterdam and Frankfort, the principal and interests thereon being payable at the bearer's option in London in sterling, or in New York, Amsterdam or Frankfort at a certain rate of exchange. In consequence of the state of the foreign exchange in 1919 the holders of the bonds secured an advantage by presenting their coupons for encashment abroad rather than in London. To pro vide currency to satisfy these payments, the company suffered a loss on exchange. They claimed repayment of the said loss as expenses of management. Rowlatt, J., while rejecting their claim, observed. "I have therefore to consider whether the loss on exchange suffered by this company, which is a holding company, is an "expense of management" within S.

33. The reason why the company suffered the loss in question was because, in order to carry on its business, it had to provide itself with money in New York and Amsterdam, and as if did not have money lying there it had to buy it at a high rate. If the company had been able to obtain the, needed currency on favourable terms, its management would have cost less, and on the other hand if, as happened, it could only obtain the necessary money on un favourable terms, its management cannot be said to have cost more. In either case the cost of management is the same. It is, of course, unfortunate that what it had to buy in the market cost more than had been anticipated, but that excess cost does not, in my opinion, constituted an expense of management." I do not say that this case is on all fours with the present case but it goes very near and furnishes valuable guidance in interpret ing the transaction before us. As already observed, the obligation of the assessee companies was to pay its Indian Managing Agents in Indian currency and hence there was no question of meeting that obligation by pay ment in Pakistani Currency. Hence these companies are not entitled to claim any deductions for the alleged loss on exchange. Before leaving this case, I would like to observe that the Income‑tax Act has its own notion of profit and therefore it is a mistake in method to assume that the Act takes only what commercial men would regard as profits or what would appear to be profits to commonsense and then to adjust the Act to the said notions. In the result, both the questions referred to this Court are answered in the negative. The Commissioner of Income‑tax will have costs of these references. SIDDIKY, J.‑I agree. Questions answered in negative.