Dr. B.P Saraf, J.:— By this reference under section 256(1) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal, at the instance of the Revenue, has referred the following questions of law to this court for opinion:

“(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the loss of Rs. 6,38,600 arising out of devaluation of the Indian rupee is a revenue expenditure and consequently directing the deduction thereof?

(2) If the answer to question No. (1) above is in the negative, whether the Tribunal was right in holding that the aforesaid loss of Rs. 6,38,600 was a revenue loss incurred by the assessee in the course of carrying on its business, and consequently directing the deduction thereof from the total income of the assessee-company?”

2. The assessee is a company. It entered into an agreement of loan with a Swiss company Sandoz (India) Ltd. which was repayable in Swiss francs in Switzerland. The loan was specifically taken for the purpose of purchasing capital goods and as per the terms of the agreement the assessee was bound to utilise the borrowed money only for such purpose. The assessee was also required to furnish a list of plant and machinery, etc., required with the loan money to the lender. The above loan was obtained by the assessee from the foreign company with the approval of the Central Government. The remittance of the amount of the loan to India was also with the approval of the Central Government. The admitted position is that the amount of loan was utilised in terms of the agreement for the purchase of capital goods. A major part of the amount was utilised for purchase of plant and machinery from outside India and the balance for purchase from within India. The full amount of loan was thus utilised by the assessee for acquisition of plant and machinery. On June 6, 1966, devaluation of the Indian rupee took place. The assessee repaid the loan in Swiss francs after devaluation. As a result, the liability of the assessee to discharge the loan went up by a sum of Rs. 6,38,600. The assessee claimed this amount as a deduction in the computation of its income. The claim of the assessee was rejected by the Income-tax Officer on the ground that it was not a revenue expenditure. The order of the Income-tax Officer was Upheld by the Appellate Assistant Commissioner. The assessee went up in further appeal to the Income-tax Appellate Tribunal. The Tribunal decided in favour of the assessee and held the additional liability arising to the assessee on account of devaluation to be a revenue expenditure. Hence this reference at the instance of the Revenue.

3. Learned counsel for the Revenue submits that this case is fully covered by the decision of this court in Income-tax Reference No. 122 of 1980 decided on July 15, 1993 (CIT v. V.S Dempo and Co. Pvt. Ltd., [1994] 206 ITR 291). Learned counsel for the assessee does not dispute the above submission of learned counsel for the Revenue. He, however, submits that the above decision needs reconsideration in view of the decision of the Supreme Court in India Cements Ltd. v. Commissioner Of Income Tax, Madras., [1966] 60 ITR 52. According to the assessee, the loan in question having been raised for the purpose, of business, the expenditure in repayment of the same is a revenue expenditure notwithstanding the fact that the loan was utilised by the assessee for acquiring capital assets. The contention of the assessee, in other words, is that the fact that the loan was obtained and utilised for purchase of capital assets is of no relevance in determining the nature of the loss arising on account of increase in the loan liability due to exchange fluctuation.

4. We have considered the submission of counsel for the assessee and have carefully perused the decision of this court in CIT v. V.S Dempo and Co. Pvt. Ltd., [1994] 206 ITR 291 in the light thereof. We have also perused the decision of the Supreme Court in India Cements Ltd's case, [1966] 60 ITR 52. We find that the ratio of the above decision has no application to the controversy before us. Such a controversy has been dealt with by the Supreme Court in its later decisions in Cit, Bombay City v. Tata Locomotive & Engineering Co., Ltd., [1966] 60 ITR 405 and Sutlej Cotton Mills Limited v. Commissioner Of Income Tax, Calcutta, [1979] 116 ITR 1. This court in V.S Dempo and Co. Pvt. Ltd.'s case, [1994] 206 ITR 291 referred to the above decisions of the Supreme Court, particularly, the decision in Sutlej Cotton Mills' case, [1979] 116 ITR 1 (SC) and following the ratio thereof held that the loss resulting from depreciation of foreign currency which is utilised or intended to be utilised for business and is a part of the fixed capital would be a capital loss.

5. The issue for determination before the Supreme Court in India Cements Ltd.'s case, [1966] 60 ITR 52, on which reliance has been placed by the assessee, was whether a sum of Rs. 84,633 expended by the assessee towards stamp duty, registration fees, lawyer's fees, etc., in obtaining a loan or any part thereof was an allowable expenditure. It was in this context that the Supreme Court held that the amount spent was not in the nature of capital expenditure and was laid out or expended wholly and exclusively for the purpose of the assessee's business. Observations of the court in that judgment should be read in that context only. It is the ratio of the decision that would apply. Evidently, the ratio of the above decision has no application to the facts of the present case which are quite different.

6. The question that arises for consideration in this case is whether the loss incurred by an assessee due to increase in rupee repayment obligation of a foreign currency loan due to devaluation or exchange fluctuation is deductible as a revenue expenditure under section 37 of the Act if the loan was used for purchase of capital asset. This question is squarely covered by the decisions of the Supreme Court in Sutlej Cotton Mills' case, [1979] 116 ITR 1 and Cit, Bombay City v. Tata Locomotive & Engineering Co., Ltd., [1966] 60 ITR 405 and the decision of this court in V.S Dempo and Co.'s case, [1994] 206 ITR 291. There are a number of decisions of different High Courts also wherein a similar controversy has been dealt with. Reference may be made to the decisions in Bestobell (India) Ltd. v. CIT, [1979] 117 ITR 789 (Cal), Union Carbide India Ltd. v. CIT, [1981] 130 ITR 351 (Cal), Acropolymers (P.) Ltd. v. CIT, [1985] 151 ITR 158 (P & H) (sic), CIT v. Calcutta Electric Supply Corporation Ltd., [1987] 166 ITR 797 (Cal), CIT v. Cochin Refineries Ltd., [1988] 173 ITR 461 (Ker) and in Stumpp and Schuele GMBH v. CIT, [1986] 160 ITR 581 (Kar). In V.S Dempo's case, [1994] 206 ITR 291, this court has discussed the decision of the Calcutta High Court in Oil India Co. Ltd. v. CIT, [1982] 137 ITR 156 which was also a case of loan obtained by the assessee, the liability on account of which had gone up due to devaluation. The judgment of this court in V.S Dempo's case, [1994] 206 ITR 291, in our opinion, has dealt with the decision of the Supreme Court and other High Courts and laid down the correct legal proposition which needs no reconsideration.

7. The decision of the Supreme Court in Cit, Bombay City v. Tata Locomotive & Engineering Co., Ltd., [1966] 60 ITR 405 is clearly distinguishable (sic) having regard to the facts of that case. The law on the subject is well-settled by the decision of the Supreme Court in Sutlej Cotton Mills Limited v. Commissioner Of Income Tax, Calcutta, [1979] 116 ITR 1, wherein the Supreme Court has gone into all aspects of the matter and laid down the test for determining whether the loss caused on account of devaluation is a revenue loss or a capital loss in the following words (at page 13):

“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.”

8. The facts of the case before us are more identical to the facts of the case before the Supreme Court in Sutlej Cotton Mills Ltd., [1979] 116 ITR 1 and Tata Locomotive and Engineering Co. Ltd., [1966] 60 ITR 405 and the principles laid down therein are, therefore, fully applicable.

9. Similar opinion has been expressed by the House of Lords in a recent decision in Beauchamp v. F.W Woolworth PLC, 61 TC 542 : [1989] 3 WLR 1. In that case, the assessee (company) raised from a consortium of Swiss banks a loan of 50 million Swiss francs carrying interest at 7 per cent, repayable at par after five years or earlier at the company's option on payment of a premium. A further loan of the same amount carrying interest at 6 per cent. and also for a period of five years was raised in 1972. Both loans took the form of the issue and sale by the company to the Swiss banks of bearer notes. The exchange control rules then in force provided that consent to such borrowing would be granted only if the loan was outstanding for a minimum period of five years. The first loan was repaid six months early in 1976 with the consent of the Bank of England. The second loan was repaid on the due date. In each case the company converted the loan proceeds into sterling and used the money for the general purposes of its business. For repayment it bought Swiss francs out of its general funds. The exchange transactions gave rise to losses of about £11.4m Before the Special Commissioners the company contended that the losses were deductible in computing its profits for corporation tax purposes as arising on revenue account. The Special Commissioners found that the purpose of the loans was to tide the company over a short-term cash flow problem and so represented temporary facilities rather than a permanent addition to its capital. Thus the losses arising therefrom were not on capital account, and were deductions in computing the profits of the company. The Chancery Division, allowing the Crown's appeal, held that the Commissioners misdirected themselves in attaching importance to the purpose of the loans and what the company was seeking to do rather than what it had actually done. The loans were fixed in amount and term and were for substantial periods. They could not reasonably be regarded as anything other than accretions to the company's capital as distinct from a mere temporary accommodation. It followed that the exchange losses incurred in repayment of the loans were not deductible in computing the company's profits. The company appealed. The Court of Appeal, allowing the company's appeal, held that the question whether the exchange losses were deductible depended on general principles, i.e, whether the loans were revenue transactions, as being a means of fluctuating and temporary accommodation, or an accretion to capital, which the authorities showed (and the parties before the Commissioners had asked to be treated) as a question of fact; and it was impossible to say that the facts found by the Commissioners were such that no person acting judicially and properly instructed as to the relevant law could have come to the conclusion which they did.

10. The Crown appealed to the House of Lords. The House of Lords held:

“(1) A loan was only a revenue transaction if it was temporary and fluctuating and incurred in meeting the ordinary running expenses of the taxpayer's trade.

(2) The borrowing of a definite sum for a fixed term of five years was not part of the taxpayer's day-to-day activities in earning profits but an increase of its capital, and the exchange loss incurred in connection with it was accordingly not allowable.”

11. In view of the above discussion, we are of the clear opinion that loss due to increase in rupee payment obligation of a foreign currency loan due to exchange rate fluctuation is not deductible if the loan was used by the assessee for purposes of capital nature. The Tribunal was, therefore, not justified in holding the loss of Rs. 6,38,600 arising out of devaluation of the Indian rupee in the instant case to be a revenue expenditure and in directing the Income-tax Officer to deduct the same in computation of the income of the assessee. It may be pertinent to mention that the admitted position in this case is that the assessee itself has capitalised the additional expenditure incurred by it as a result of devaluation of the Indian rupee. Counsel for the assessee submits that the conduct of the assessee is not relevant for determining the controversy before us. We do not think so. The treatment of a particular expenditure by the assessee in his own account, though neither determinative of the nature of the expenditure nor conclusive one way or the other, cannot be regarded as irrelevant.

12. In the result, we answer both the questions referred to us in the negative and in favour of the Revenue.

13. Under the facts and in the circumstances of, the case, there shall be no order as to costs.