P L D 1962 (W (PLP)

MUHAMMAD YAQUB ALI, J.-At the instance of the Commis sioner of Income-tax, Punjab, North-West Frontier and Bahawalpur Provinces, tote Income-tax Appellate Tribunal has referred to this Court the following question of law under section 66 (1) of the Income-tax Act, 1922 :- "Whether, in the circumstances of the case, the sum of Rs 10,295 is an admissible deduction in the ascertainment of profits of the respondent-company chargeable to income-tax for the assessment year 1950-51." The respondent Khanewal Oil Mills Limited, Khanewal, was incorporated under the- Companies Act, with its head office at Khanewal, District Multan. In the account year, which ended on the 30th of September 1949, they had supplied cotton-seeds to two parties residents in India, namely, firm Uttam Chand Om Parkash and firm J. L. Rellan & Company of Delhi, for a total sum of Rs. 33,693-12-0. Under the mercantile system of account ancy, which the assessee observed, the said sum was entered in its income, although no payment t was made. On the 19th of September 1949, the Indian Government devalued its currency, and in consequence of it the assessee showed a trading loss of Rs. 10,295 in respect of its assessment year 1950-51. The out standings were not remitted to the assessee until the income for the relevant account year was assessed by the Income-tax Officer on the 10th of October 1950. He added back the sums in question by observing that the claim was at par with a bad debt and was, therefore, still premature as the Indian Government had till then not recognised Pakistani currency and there was a possibility that that Government may increase the value of its currency or Pakistan Government may decrease the value of its own currency, in which event the possibility of the so-called loss would be eliminated. This view of the Income-tax Officer was upheld by the Appellate Assistant Commissioner on an appeal by the assessee on the ground that the assessee did not deal in exchange business and consequently an appreciation or depreciation in the value of its outstandings due to exchange fluctuations was outside the scope of tax. The position would, however, have been quite different if such outstandings, after realisation in India, were remitted to Pakistan in course of business, which was not the case. On a further appeal by the assessee the Income-tax Appellate Tribunal came to a contrary conclusion, and it is advantageous at this stage to reproduce the relevant portion of the order on this point: - "The debt arose in the course of trading and the assessee had to draw up his balance-sheet on the 30th September 1949, on the basis of the Pakistan currency, because the Head Office of the company is at Khanewal, within Pakistan . . . . . . The debtors in India in this case owed to the Pakistan creditor Rs. 33,696 upto 19th September 1949. If the circumstances remained unaltered and India had not devalued her currency, the value of the trade debt owed by the Indian debtors would be the same sum, namely, Rs. 33,

696. The question now is whether the creditor company was justified in valuing the balance due from the Indian debtors at a figure less by a sum of Rs. 10,295 taking into account the fact of devaluation which had come into effect from 19th September 1949. The Departmental Representative contended that the amount of loss would be admissible on actual conversion and that a mere balance sheet entry and profit and loss account debit were not enough. The Income-tax Officer has considered the claim of the assessee on the same footing as a bad debt, and to be premature. What the Income-tax Act renders liable to assessment under section 10 is profits and gains of business carried on by an assessee. The whole thing, therefore, turns upon the clear conception of the word "profits". The nature of this word was discussed somewhat fully by Lord Justice Moulton in In re: The Spanish Prospecting Company Limited (1911) L R 1 Ch.

92. There is no doubt that valuation had adversely affected the realizable value of the company's dues from its debtors in India and the difference was accordingly a business loss. The company for the purpose of ascertainment of its correct position had to value on 30th September 1949, the balance that was lying with the debtors in India and on proper valuation the assessee company had to scale down the balance due by a sum of Rs. 10,

295. It appears to us, therefore, that the claim of Rs. 10,295 is an admissible deduction in the ascertainment of profits chargeable to income-tax for the year 1950-51, and we consider that the decision of the Appellate Assistant Commis sioner is incorrect." Dissatisfied by the conclusions of the Appellate Tribunal, the Commissioner of Income-tax, Punjab, N. W. F. P. and Bahawalpur, moved a petition under section 66 (1) of the Income- tax Act on which the question reproduced above has been referred to this Court for its opinion.

2. On examining at some length the issue involved in the reference we have come to the conclusion that the Income-tax authorities as well as the learned Members of the Income-tax Appellate Tribunal have misconceived the proper legal position which arises from the facts of this case. If the Indian buyers are not liable to pay the full sum of Rs. 33,693-12-0 in Pakistan currency but to remit that sum from India, which on conversion will result in a loss of 10,295 then undoubtedly it is a trading loss permissible for deduction under section 10 of the Income-tax Act. On the other hand, if it is the right of the assessee to receive in Pakistan the contractual amount of Rs. 33,693-12-0 In Pakistan currency, then the corresponding loss will be that of the Indian buyers, because they shall have to pay the sum of Rs. 10,295 over and above the sum of Rs. 33,693-12-0 for which they had purchased cotton-seeds from the assessee for the reason that before the payment could be arranged their Government devalued their currency.

3. The answer to the above question is to be fund not in any statute book, but in the rules of the Private International Law and the decided cases on the subject. In Dicey's Conflict of Laws this subject is discussed under rules 154 and 178 under the Chapter "Law of Obligations". The first-mentioned rule lays down that the interpretation of a contract and the effect, i.e., the rights and obligations under it of the parties thereto, are to be determined in accordance with the proper law of the contract. The comment under the rule is to the effect that the laws of different countries differ as to the incidents which they attach to a given contract. The true meaning and the effect, i.e., the rights or obligations of the parties, cannot be determined until we have ascertained the law by which the contract is to be governed. The one general principle which the law of England supplies for the answer to this inquiry is, "that the rights of the parties to a contract are to be judged by that law by which they intended (to bind), or rather by which they may justly be presumed to have bound themselves". "You must have regard to the law of the contract, by which I mean the law which the contract itself imports is to be the law governing the contract." In other words, the meaning and effect of every contract depends upon the law by which the parties intended it to be governed, i.e., upon its proper law. This general principle applies both to the interpretation or explanation of a contract and to the effects of a contract, i.e., the rights and obligations of the parties under it. Thus, the term "proper law" in rule 154 means the law by which the parties intended it to be governed whether by specific mention of the law or by necessary presumption in this behalf. The illustrations under this rule are quite instructive. For example, if an English contract provides for the payment of "pounds" in Australia, English law will be applied by the Court in deciding how the term "pound" is to be construed, i.e., whether the amount owing by the debtor to the creditor must be measured in English or in Australian currency. If Australia is the only place of payment, i.e., if the creditor has no option to demand payment in several alternative countries with different "pound" currencies, e.g., in Australia or in New zealand, and if the debtor is not a Government outside Australia, the meaning to be attached to the term connoting the currency unit may according to English domestic law, be that which it bears at the place of payment, if the circumstances show that this interpretation was in the minds of the parties. Again, when an action was brought in London on a contract which was a Chilean contract, to be interpreted by Chilean law, the Chilean law in relation to matters which may be taken into account in Inter preting the contract was held to apply just as much as it would apply if it %ere to be determined in Chile. To exclude from application those parts of the foreign law of contract which in England domestic law are classified as belonging to the law of evidence would be tantamount to distorting the foreign law and to refusing to give effect to the intention of the parties. How these matters are to be proved is a question to be answered by the lex foci, but what facts should be allowed to throw light on the intention of the parties is to be determined by the lex causae, i.e., the proper law of the contract. In this case the characterisa tion used by the English system of the conflict of laws does not coincide with that used in English domestic law. The principle that a contract must be construed in accordance with its proper law is subject to an important exception in the case of foreign money obligations. The following authorities are cited in support of the exception (1) Pyrmont Ltd. v. Scholl 1939 A C 145. (2) Parry v. Equitable Life Assurance Society (1929) 45 T L R 468. (3) Re . Chesterman's Trusts (1923) 2 Ch. 466 (Court of Appeals.) (4) Ottoman Tank v. Chakarian 1938 A C 260 (P C). Out of them it will be sufficient to refer to the first-mentioned case which bears analogy to the facts of the case in hand. The appellants in that case borrowed in Gibraltar from the respondent by means of a cheque drawn on a bank in Gibraltar 500,00 Spanish pesetas, and executed a bond, dated May 22, 1935, whereby they bound themselves to repay to the respondent 500,00 pesetas at Gibraltar on May 22, 1936, with interest thereon at 3 per cent. per annum. At the date of the loan, Spanish pesetas-the unit of account in Spanish currency-although not legal tender in Gibraltar, were in frequent use there in commercial transactions. On March 16, 1936, the Spanish Republican Government having enacted a decree prohibiting the exportation of any notes of the Bank of Spain unless accompanied by an authorization called a "guia", issued by the customs authorities, it thereafter became illegal for notes to be reintroduced into Spain unless accompanied by "guias" corresponding in amount to the pesetas proposed to be brought in. After the date of that decree there were in use in Gibraltar peseta notes both accompanied and unaccompanied by "guias", and the former, since they could be remitted to Spain, were of a higher value than the latter. The respondent, having refused in repayment of the loan a tender by the appellants of a bundle of 500,000 peseta notes unaccompanied by "guias", brought an action claiming a sum in pounds sterling equivalent to the principal due under the bond at the rate of 36'80 pesetas to the pound, which was the rate of exchange for peseta notes accompanied by "guias", and interest thereon. In this state of the case it was held by the House of Lords that the contract was for the supply and return fn Gibraltar of pesetas as com modities, not money that the word "peseta" meant the unit of account in the currency of Spain, and that the obligation was to pay in whatever at the date of repayment was legal tender and legal currency in Spain, the foreign country whose money was lent. The appellants had contracted to pay 500,000 of such units of account, and not 500,000 peseta notes; such notes were not units of account of the Spanish Republic, and the contract was not fulfilled by the tender of 500,000 peseta notes. Judgment in the case was delivered by Lord Porter, who at page 157 of the report observed as follows: - "In their Lordships' opinion, it is established by the evidence that the commodity agreed to be supplied was pesetas, and that the appellants accepted a credit upon Barclays Bank in fulfill ment of that contract. It follows that, in their view, the appellants' contract was to return 500,000 pesetas in Gibraltar on the due date-namely, May 22, 1936. What, then, is meant by such a contract ? The word `peseta' means the unit of account in the currency of Spain. The appellants have contracted to supply 500,000 of such units, and their Lordships can find nothing in the contract between the parties to the present litigation to modify that meaning. The question con, therefore, be stated In another form by asking ; What performance is required to fulfill an obligation to pay a foreign unit of account ? This question does not come before their Lordships devoid of authority. It has already been discussed in In re : Chesterman's Trusts Mott v. Browning (1923) 2 Ch. 466, where the direct question came under consideration. It was there held by Russell, J., now Lord Russell of Killowen, and by the Court of Appeal that the obligation was to pay in whatever at the date of repayment was legal tender and legal currency in the foreign country whose money was lent. This decision is not binding on their Lordshisps, but they think that it correctly enunciates the law applicable to the case. In their view, the appellants borrowed 500,000 units of account of the Republic of Spain, not 500,000 peseta notes ; in perform ance of that contract they accepted a credit on Barclays Bank for 500,000 pesetas, and they were under contract to return 500,000 such units of account. The contract is not fulfilled by the tender of 500,000 peseta notes-such notes are not units of account of the Spanish Republic. They were, it is true, frequently accepted in lieu of units of account, but the party to whom they were tendered was not obliged to accept them. To adapt the words of Warrington, L. J., (as he then was) in In re Chasterman's Trusts, the form in which such payment is to be made must be regulated by the municipal law of the country whose unit of account is in question, and what would or would not be a legal tender must depend upon the law on the subject in force at the time when the tender should have been made. If this were not so, their Lordships are unable -to appreciate what principle is to be applied in ascertaining the nature of the commodity of which tender has to be made." Applying the above dictum of the House of Lords to the facts of the present case the Indian parties who purchased cotton-seeds from the assessee are bound to tender the sum of Rs. 33,693-12-0 in such currency notes as are the legal tender in Pakistan, viz., the form in which such payment was intended to be made or shall be presumed to have been made by the parties when the buyer, incurred the obligation to pay to the assessee the aforementioned sum in Pakistan currency regulated by the municipal law of Pakistan whose unit of account is in question. Similarly, as held by Lord Russell of Killowen in, In re Chesterman's Trusts, the buyer's obligation in this case is to pay in whatever at the date of repayment is the legal tender and legal currency in the foreign country. In the present case it would be Pakistan wherefrom they purchased cotton-seeds and in that sense lent its money.

4. Rule 178 deals with exchange control Legislation. It, inter alia, lays down that a contractual obligation may be invalidated or discharged by exchange control legislation if (a) such legislation is part of the proper law of the contract ; or (b) it is part of the law of the place of performance ; or (c) it is part of English law and the relevant statute or statutory instrument is applicable to the contract : ,Provided that foreign exchange control legislation will not be applied if it is used not with the object of protecting the economy of the foreign State, but as an instrument of oppression or discrimination According to the learned commentator, exchange control legislation affects contracts in various ways : it may make a contract illegal at its inception, it may add in implied term, or prohibit its performance. So far as Courts have had comparatively few opportunities of pronounc ing upon the effect of such legislation in the conflict of laws, the Rule is an attempt to summaries the principles laid down by these decisions and by the Bretton Woods Agreement which is part of English Law. Under the head "Proper Law" it is observed that the Court will refuse to enforce a contract the making or the performance of which is contrary to exchange control legislation enacted as part of its proper law. The applica tion of foreign exchange control legislation is not obnoxious to English public policy, except where under the guise of protecting its balance of payments a foreign State enacts or uses such legisla tion for the purpose of oppression or discrimination. The exchange control legislation of a State does not belong to its revenue law, anti even if it did, an English Court would not on that ground atone refuse to apply (as distinguished from enforcing) it. Where the law of a State is the proper law of the contract, its exchange control legislation will be applied by reason of general principles of the conflict of law, and it is considered irrelevant whether or not the State is a Member of the International Monetary Fund. Under this discussion there is an instance of a case decided by the New York Court of Appeals, which held that where a foreign exchange control law applies on the ground that it is part of the proper law of the contract, the mere fact of common membership in the fund precludes the Courts of one Member from refusing to apply the exchange control regulations of another Member by reason of their being against public policy, i.e., as being oppressive or discriminatory. There is no English authority on this point. Rule 178 is thus more concerned with giving effect to Foreign Exchange Control Act, but the above quoted observation that where the law of a State is the proper law of the contract, its exchange control legislation will be applied by reason of general principles of the conflict of laws, is pertinent to the issue before us. As mentioned above, the proper law in this case is the law of Pakistan where the payment is to be made and, therefore, the units of account in which the payment is to be made is legal tender of Pakistan and not of India.

5. Another case which throws light on the question involved in this reference is reported in Madeleine Vionnet Et Cie v. Wills ((1940) 1 K B D 72). The facts of the case as summed up by Clauson, L. J., were as follows. In September 1936, the defendant became liable to pay the plaintiffs, a French firm carrying on business in Paris, the sum of 8,100 francs for clothes supplied to the defendant in Paris. At the time that the debt was, by agreement of the parties, treated as becoming due, namely, September 24, 1936, the rate of exchange between Paris and London was such that the equivalent of 8,100 francs in British currency was 105 6s 4d. The- defendant failed to pay, notwithstanding repeated demands. The plaintiffs on December 1, 1938, sued the defendant in the High Court. On December 19, 1938, the defendant paid into Court 65 6s. 5d. which was supposed to be the equivalent of 8,100 francs at the rate of exchange ruling at the date of the writ. In fact owing to a miscalculation this sum was somewhat greater than the exchange value of 8,100 francs as well at the date of the writ as at the date of the payment into Court and at the date (January 31, 1939), when the Master ordered payment out of that sum to the plaintiffs. When payment out of the 65 6s. 5d. to the plaintiffs was ordered it appeared that the plaintiffs insisted that they were entitled to the larger sum of 105 6s. 4d. and the action was accordingly remitted to the County Court Judge to deal with this contention. The action was tried in the West Minster County Court on March 23, 1939. The County Court Judge took the view that the 65 6s. 5d., which was treated as the sum which at the date of payment was sufficient, and indeed more than sufficient, to purchase at the time 8,100 francs, satisfied the debt and that no more was due to the plaintiffs, and accordingly gave judgment for the defendant with casts. From this decision the plaintiffs appealed. In support of the plaintiffs' case Wynn Parry K. C., as he then was, relied upon rule 181 in Dicey's Conflict of Laws, 5th Edition, which is as follows :- "When a debtor, or upon the breach of a contract, a person in default, becomes liable for the payment of a sum of money in a foreign currency, the debt or damages for the purpose of an English judgment must be assessed at the date of the debt becoming due or the default, and the sum payable must be converted into English currency at the rate of exchange current at that date. In support of it the learned counsel relied upon Di Ferdinando v. Simon, Smits & Co. ((1920) 3 K B 409), which was approved and followed by the House of Lords in S. S. Celia v. S. S. Volturno ((1921) 2 A C 544). In Scott v. Bevan ((1931) 2 B & Ad. 78) the rule was laid down that in an action upon a foreign judgment, where the judgment was expressed in a foreign currency, the date for the conversion of the foreign currency into sterling was the date of the foreign judgment. Similarly in Cash v. Kennion ((1805) 11 Ves. 314, 316), Lord Eldon, L. C., said in: "I cannot bring myself to doubt, that, where a man agrees to pay 100 in London upon the 1st of January, he ought to have that sum there upon that day. If he fails in that contract, wherever the creditor sues him, the law of that country ought to give him just as much as he would have had, if the contract had been performed." The next authority relied upon by Wynn Parry K. C., was Manners v. Pearson & Son ((1898) 1 Ch. 581, 592), in which Vaughan Williams, L. J., had discussed the subject more exhaustively in the following terms: - "It seems clear that, in an action in whatever form in the English Courts for the recovery of a debt payable in foreign currency, the amount of the English judgment or order must be expressed in English currency, and that, unless the relative values of the respective currencies are fixed by statute or some authority binding the English Courts or by the agreement of the litigants, the amount of the English judgment or order must be based on the quantity of English sterling which one would have to pay here to obtain in the market the amount of the debt payable in foreign currency delivered at the appointed place of payment, i.e., the amount payable according to the rate of exchange. It seems plain that this mode of computing the value of foreign currency in English sterling, and thus converting the one currency into the other, is based upon damages for the breach of contract to deliver the commodity bargained for the appointed time and place, and, if this is so, it follows that the date as of which that value must be ascer tained is the date of the breach, and not the date of the judgment." In reply Mr. Gordon Thompson, learned counsel for the respon dent, relied upon Societe des Hotels le Touquet Paris plage v. Cummings ((1922) 1 K B 451), which was distinguishable on facts, inasmuch as the debt in that case was paid in France in francs, whereas in Madeleine Vionnet Et Cie v. Wills the debt was not paid in France but was paid into Court in England. The judgment of the Court was delivered by Clauson, L. J. After reviewing the various authorities cited from the Bar, including Deutsche Bank v. Humphrey (272 U S Rep. 517) and two judgments of P O. Lawrence, J., both in the matter of the liquidation of the British American Continental Bank Clauson, L. J., concluded that the exact point is one which must arise almost daily in commercial practice, and there is no indication to be found in the books that during the seventeen years since Lawrence, J.'s decision it has been regarded as open to question. In these circumstances the Court is not prepared to overrule that decision, even if it was of the view that any other conclusion could be reached consistently with the decision of the House of Lords in S. S. Celia v. S. S. Volturno ibid. The appeal was accordingly allowed and the judgment delivered for the plaintiff for the difference between sum of 65 6s. 5d. and the sum of 105 68. 4d., with costs. In the present case the amount of Rs. 33,693-12-0 became payable to the assessee as soon as goods were supplied to the firm Uttam Chand Om Parkash and J. L. Rellan & Co., of Delhi, the rate of exchange in both the countries at that time was the same. If, therefore, at the close of the year the Indian currency was devalued, it did not result in any trading loss to the assessee, because the buyers were under legal obligation to pay the full amount of sale price to them in units of account, i.e., currency which was legal tender at the time when payment became due.

6. In the view expressed above, we answer the reference in the negative and on account of the difficult nature of the question involved in it make no order as to costs. M. N./A. H. Reference answered in negative.