R. M. MEHTA, A.M. :

This appeal is directed against the order passed by the CIT(A) raising for the consideration of the Tribunal three separate and specific issues, but the one which was vehemently contested between the parties was the assessees claim for deduction. on revenue account of a sum of Rs. 1,65,97,972 being the "exchange loss" arising consequent to the increased foreign currency liability as a result of adverse fluctuation in the exchange rate.

2. Taking up for consideration the aforesaid issue, the AO rejected the claim on the basis of a similar view expressed in the preceding assessment year, but taking note of the fact that the CIT(A) had allowed the same, but the Department had gone in appeal against the said order.

3. At this stage, we would refer to the proceedings before the Tribunal in the present appeal when on 25th June, 1996, the learned Departmental Representative appearing on behalf of the Department was directed to give the particulars of the appeals (if any) filed by the Revenue for the asst. yrs. 1990-91 and 1991-92 as it would be proper on the part of the Tribunal to consolidate all the three appeals and hear them together. We note with regret that even on the subsequent date of hearing i.e., 9th September, 1996, the said information was not forthcoming although the Tribunal had specifically recorded an order on 3rd September, 1996, directing the Departmental Representative to positively comply with the earlier directions of 25th June, 1996. During the course of the hearing of the appeal, the learned Departmental Representative was again asked by the Bench to intimate the particulars of the appeals filed by the Revenue even after the hearing in the present appeal had concluded, but within a reasonable time, but it is once again recorded that no information has come forth even at the time of dictating the order later. The learned counsel for the assessee has not given the particulars of any appeals filed by the Revenue as according to him, his client is not in receipt of any grounds of appeal from the Tribunal. In this view of the matter, we are inclined to proceed with the present appeal on the premises that no appeals of the Revenue are pending before the Tribunal vis-a-vis the main issue raised and argued in the present appeal.

4. As already stated by us, the claim was rejected by the ITO and the assessee took up the matter before the CIT(A). The main thrust of the argument was to the effect that the liability was an ascertained one and not a contingent one and it was immaterial that the payment was to be made at a subsequent date which did not fall in the previous year under consideration. Attention was invited to the fact that the assessee had imported raw-material from a French company and the amount which was being claimed as a loss was on account of the adverse exchange rate as on 31st March, 1992, vis-a-vis the franc as compared to the Indian rupee. The submission, in other words, was to the effect that the liability which arose was on revenue account and the same was payable on demand and could not be treated as a contingent/deferred liability. It was further submitted that the raw material which had been imported stood consumed. For the proposition that even the income-tax recognised such an eventuality, attention was invited to the provisions of s. 43A which stipulated the increase or decrease in the cost of a capital asset pursuant to the increase or decrease as a result of the fluctuation in the exchange rate between the Indian currency and a foreign currency. With reference to the same section it was canvassed that the increase or decrease in the cost of the asset was to be effected on the happening of a certain event viz., the fluctuation in the rate, but it nowhere stipulated that such an adjustment could be carried out only when the amount had actually been paid. In support of the aforesaid arguments, reliance was placed on the judgment of the Honble Gujarat High Court in the case of New India Industries Ltd. vs. CIT (1993) 203 ITR 933 (Guj) as also the decision of the Honble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC). Further proposition canvassed was that under the mercantile system of accounting the liability arose on the happening of a certain event and the claim was allowable irrespective of the point of time when the payment was made. A reference was also made to the relevant accounting standard framed by the Institute of Chartered Accountants of India for the proposition that the loss was allowable on revenue account and, therefore, a valid charge against the profits of the company.

5. The case of the Revenue, on the other hand, before the CIT(A) was that the liability was a contingent one and continued to be so till the amount had been actually paid.

6. We may mention at this stage that the learned counsel for the assessee appearing before the CIT(A) also placed reliance on a number of other reported decisions and these find a place at page 5 of the appellate order. Reliance was also placed on the orders passed by the CIT(A) for the two immediately preceding assessment years whereby a similar claim had been allowed on revenue account.

7. The aforesaid submissions advanced on behalf of the assessee did not find favour with the CIT(A) who at the outset, observed that it was not in dispute that the amount was allowable, but the question was when and at what point of time was it to be allowed. The CIT(A) summarised the case of the AO to the effect that the same was allowable at the point of time when the money was actually remitted. In agreeing with the aforesaid view expressed by the AO, the CIT(A) distinguished the various decisions relied upon on behalf of the assessee and opined that the liability was in the realm of a contingent liability not because the rate of exchange was not known, but because the exact amount would be known only at the time when the remittance was actually made. In other words, the CIT(A) was of the view that the liability did not accrue till the time of actual payment. As regards the standard set out by the Institute of Chartered Accountants of India, the CIT(A) disagreed, on the ground that the view expressed was liberal and not realistic. We may mention that the CIT(A) has in the appellate order also referred to an opinion given by the Ministry of Law on the subject under consideration, but the learned counsel for the assessee stated before us that a copy of the said opinion was not supplied to the assessee at any stage of the proceedings and even before us the position remains the same. In the final analysis, the CIT(A) confirmed the disallowance made by the AO.

8. Before us, the learned counsel for the assessee, at the outset, stated that the claim for deduction was under s. 28 and not under s. 43a of the it act inasmuch as the loss on devaluation had arisen in respect of a transaction on revenue account viz., the purchase of raw-material and the same did not relate to the import of a capital asset. According to him the loss was allowable in the previous year under consideration since the assessee followed the mercantile system of accounting. The further submission was to the effect that the Department had accepted that a loss had arisen, but the erroneous view on their part was to the effect that the same was allowable in the year in which the amount was actually remitted. In support of the arguments advanced before the CIT(A) and those advanced before the Tribunal, the learned counsel placed reliance on the following decisions : Sutlej Cotton Mills Ltd. vs. CIT (1979) 116 ITR 1 (SC), CIT vs. Martin & Hanis (P) Ltd. (1985) 154 1TR 460 (Cal), Calcutta Co. Ltd. vs. CIT (1959) 37 ITR 1 (SC), CIT vs. Bank of India (1996) 218 ITR 371 (Bom) and CIT vs. The Ahmedabad New Cotton Mills Co. Ltd. 4 ITC 245 (PC).

9. The learned Departmental Representative, on the other hand, strongly supported the orders passed by the tax authorities and the subsequent arguments advanced by her were a reiteration of the reasons recorded by the said authorities in rejecting the assessees claim. According to her, the claim was allowable in the year in which the amount was actually remitted and the further submission was to the effect that it was a contingent liability and not an ascertained one, on the last day of the previous year under consideration. In support of the aforesaid arguments and in support of the orders passed by the tax authorities, reliance was placed on the following decisions :

CIT vs. South India Viscose Ltd. (1979) 120 ITR 451 (Mad), CIT vs. Bharat General & Textile Industries Ltd. (1986) 157 ITR 158 (Cal), Rohit Pulp & Paper Mills Ltd. vs. CIT (1995) 215 ITR 919 (Bom), CIT vs. Ashoka Mills Ltd. (1996) 218 ITR 526 (Gui) and CIT vs. Elgi Rubber Products Ltd. (1996) 219 ITR 109 (Mad).

10. In his short reply, the learned counsel sought to distinguish the aforesaid decisions on the ground that these related to capital and not revenue expenditure.

11. After examining the rival contentions, we are of the view that there is sufficient merit in the arguments advanced by the learned counsel, more so when both the AO and CIT(A) are agreed on the question that the claim is allowable although they dispute the point of time. According to the tax authorities the claim is to be allowed in the year of remittance whereas the assessee canvasses a view to the effect that the allowance should be in the year of appeal and which is also the year in which the fluctuation has taken place. The other aspect which requires mention is that the CIT(A) has foisted on the assessee a "hybrid system of accounting" vis-a-vis the claim although it admittedly follows the "mercantile system". Then again, the CIT(A) has questioned the "wisdom" of the Institute of Chartered Accountants of India in issuing the "Accounting Standard" in question clearly overlooking that it is the opinion of an expert body which merits due consideration. The Courts time and again have referred to the views of the Institute and have appreciated and approved them. We need only refer to a decision of the Honble Supreme Court in the case of CIT vs. Arvind Mills Ltd. (1992) 193 ITR 255 (SC) where their Lordships were considering the provisions of s. 43A.

In the judgment, a statement issued by the Institute pursuant to the devaluation of currency in 1966 has been discussed at length vis-a-vis the

"accountancy principles"

12. What we are highlighting by the above discussion is that the views of an expert should be given due consideration unless these are absolutely opposite to known and well laid down legal principles. The CIT(A) has not mentioned a word in her order on this aspect, but had made a sweeping statement which was clearly avoidable.

13. Adverting now to the standard in question i.e., A.S. 11, the heading reads as "Accounting for the Effects of Changes in Foreign Exchange Rates" and explanation 3.1 deals with a situation where an enterprise purchases or sells goods for which payment is made in foreign currency. Explanation 9.1 deals with the conversion of current assets and current liabilities other than those related to the acquisition of fixed assets at the closing rate and in the process the net gain is to be ignored whereas net loss is charged to the P&L A/c.

14. We are not proposing to base our judgment solely on the aforesaid Accounting Standard of the Institute, but on a well-accepted proposition of law which envisages revenue claims to be considered on accrual basis or due basis where an assessee follows the "mercantile system" of accounting. In other words, the system of accounting followed by an assessee is a crucial factor for allowability of expenditure and losses as also for the taxation of receipts. In the present case there is no doubt that the assessees burden has increased in respect of its liability to pay the cost of the goods which it has imported admittedly on revenue account. As it follows the mercantile system of accounting, it is entitled to claim the consequential loss in the year in which the devaluation takes place. Both the parties have already agreed that similar claims were allowed by CIT(A) in the two immediately preceding assessment years and no second appeals were filed by the Revenue against the relief allowed on identical facts.

15. A mention about s. 43A which has been discussed by the CIT(A) in her order although the claim in the present appeals is being considered under s. 28. It speaks of an "increase or reduction in the liability of the assessee as expressed in Indian currency for making payment towards the whole or a part of the cost of the asset ..." This section refers to capital expenditure, but it nowhere envisages payment as a condition for effecting an increase or decrease in the cost of an asset for specified purposes. The words "increase or reduction in the liability" are to be understood in the context of the method of accounting followed by an assessee. This line of reasoning would equally apply to the present claim made under s. 28.

16. The aforesaid view is reinforced by the judgment of the Honble Gujarat High Court in the case of New India Industries Ltd. vs. CIT (1993) 203 ITR 933 (Guj). The relevant facts and decision are extracted from the head notes at page 934 of the report as follows :

"During the year previous to the asst. yr. 1973-74, the assessee had imported certain machinery from Germany. When it had purchased the same, its value, in terms of rupees, was Rs. 26,82,299. Since the assessee received that machinery and started using it during the relevant previous year, because of the change in the foreign exchange rate, its liability had increased by Rs. 6,03,172, it claimed depreciation on the increased liability also. The claim was rejected by the ITO. The Tribunal was of the view that no enforceable obligation had arisen during the relevant previous year as the first instalment was to be paid in the following accounting year. On a reference :

Held, that when the assessee purchased assets at a price, its liability to pay the same arose simultaneously. Merely because the said liability was to be discharged in instalments it could not be said that the liability did not exist or accrue till the instalments became due and payable. It was that liability which had increased on account of fluctuation in the rate of exchange. The case of the assessee fell squarely within the sweep of s. 43A and it was thus entitled to claim the benefit of that section during the asst. yr. 1973-74".

17. The aforesaid no doubt pertains to the provisions of s. 43A, but applies with equal force to the claim made by the assessee under s. 28. This judgment also answers the question posed by the CIT(A), i.e., "when should the liability be allowed ?" Their Lordships applied the decision of the Honble Supreme Court in the case of Arvind Mills Ltd. (supra) to come to the conclusion that they did.

18. Another decision requiring mention is that of the Honble Calcutta High Court in the. case of CIT vs. Martin and Hanis (P) Ltd. (1985) 154 ITR 460 (Cal)(supra). The facts and decision are extracted from the head notes at pages 460 and 461 of the report as under :

"During the asst. yr. 1968-69, the British pound sterling was devalued vis-a-vis the Indian rupees. The assessee at that time had been manufacturing goods under licence from a foreign company in London, who were supplying to the assessee on credit major part of the materials needed for the manufacture. The price of such materials was, however, payable by the assessee, who was maintaining accounts on mercantile system, in pound sterling. The ITO found that as a result of the devaluation, the liability of the assessee under the outstanding bills of the foreign supplier was reduced by Rs. 2,86,101 and added the said amount to the income of the assessee. The AAC sustained the addition. The Tribunal deleted the addition on the ground that though a reduction of the liability of the assessee as a result of the devaluation was a profit directly or indirectly arising from and incidental to the business of the assessee, yet no profit accrued to the assessee on the day the foreign currency was devalued, that a profit should be deemed to have accrued only when the benefit of reduction of liability was realised by the assessee, i.e., when the assessee paid to the foreign supplier, that the maintenance of accounts by the assessee on the mercantile system would not make any difference to the position, that since in the relevant year no payment had been made in foreign currency against any outstanding bills of the foreign supplier, no profit had accrued to the assessee on account of devaluation. On a reference :

Held, that the assessee whose accounts were maintained on the mercantile basis obtained an advantage or a benefit in the assessment year involved as by reason of devaluation of the pound sterling vis-a-vis the Indian rupee, its outstanding liability to be liquidated by payment in foreign currency was reduced in terms of the local currency and this had to be reflected in its accounts. Therefore, the Tribunal was not right in holding that no trading profit consequent upon the devaluation of the pound sterling accrued to the assessee during the relevant previous year and in deleting the addition of Rs. 2,86,101 made in the assessment for the asst. yr. 1968-69".

19. As apparent, the reference was to the method of accounting followed by an assessee and the necessity to book the liability in the accounts irrespective of the date of payment. Even the other decisions relied upon by the learned counsel support the stand taken by the assessee. As against this the judgments relied upon by the learned Departmental Representative are clearly distinguishable as these pertain to the question of capital expenditure and the treatment to be given on fluctuation in exchange rates of currency.

20. In the final analysis, we allow the claim made by the assessee, there being no dispute raised on the quantum. We would, however, given two directions to the AO :

(1) In the year of remittance in case the assessee derives any benefit and the ultimate liability is reduced then the same would be brought to tax under s. 41(1);

(2) In case any part of the raw-material purchased still remains with the assessee then a suitable adjustment would have to be made in the valuation of closing stock to be carried over to the subsequent period.

21. We would also like to clarify that by the present judgment we have not decided the reverse the situation i.e., when the liability is reduced consequent to devaluation.

22. The second issue in the appeal pertains to the disallowance of a sum of Rs. 10,000 out of telephone expenses. The AO made the impugned disallowance without any detailed discussion and with the solitary observation "for personal use". On further appeal, the CIT(A) confirmed the disallowance on the ground that it was not believable that the relatives of the directors of the company would not use the telephone installed at the residence. A reference was also made to the non-maintenance of any record for the various calls made and necessity for an estimate to be resorted to.

23. We have heard both the parties in respect of the aforesaid ground and have also perused the orders passed by the tax authorities. The learned counsel, at the outset, stated that this was the case of a widely-held public limited company. According to him it was an ad-hoc disallowance without any basis and entirely on surmises and conjectures. The further submission was to the effect that in asst. yr. 1987-88, a similar disallowance had been deleted by the CIT(A) and the said order had been accepted by the Department as no second appeal was filed before the Tribunal. It was further stated that in asst. yr. 1988-89 and 1989-90 there was no disallowance. As regards the disallowance of Rs. 10,000 maintained in asst. yrs. 1990-91 and 1991-92 by the CIT(A), the learned counsel stated that the assessee was in appeal before the Tribunal. In concluding his arguments, the learned counsel urged that the disallowance be deleted. The learned Departmental Representative, on the other hand, supported the orders passed by the tax authorities.

24. We have considered the rival contentions and have also perused the orders passed by the tax authorities. In asst. yr. 1987-88 the CIT(A) deleted the addition on the ground that the directors had telephones at their residence for their personal use and the company reimbursed the expenses spent by them on the official calls. During the year under appeal this is not the case of the assessee either at the earlier stages or before the Tribunal. There is, however, the statement of the learned counsel to the effect that in asst. yrs. 1987-88, 1988-89 and 1989-90, no disallowance had been made at the assessment stage itself. That apart, no apparent reason has been given by the ITO in making the disallowance and the CIT(A) has also wandered into the field of surmises and conjectures. Without prejudice to the stand which the parties would take up before the Tribunal in asst. yrs. 1990-91 and 1991-92 vis-a-vis the appeals purported to have been filed by the assessee, the addition of Rs. 10,000 in the assessment year under appeal is deleted.

25. The last ground in the appeal pertains to the relief sought by the assessee under s. 80-I and the one which came to be allowed by the tax authorities. Ground No. 6 raised before the Tribunal reads as under :

"The learned CIT(A) has erred in not adjudicating on all counts in regard to declaration (sic) under s. 80-I. The CIT(A) has erred in not adjudicating on the ground that the Dy. CIT had erred in reducing other income out of business income"

26. It is quite apparent from the aforesaid ground that the assessee is aggrieved with the action of the CIT(A) in not adjudicating upon the various aspects of the claim made under s. 80-I, but merely asking the AO to calculate the relief with reference to the assessed income and not the declared income. Both the parties advanced arguments before us, but in our opinion, it would be appropriate on our part to restore this matter back to the file of the CIT(A) asking her to look into the various aspects raised during the hearing of the appeal, more so, the ones raised in the detailed written submissions which find a place at pages 14 to 16 of the compilation filed before us during the course of the hearing. At some of the subsequent pages are the details of the items which, according to the assessee, qualify for the said relief. The other argument raised before us during the course of the hearing pertains to the action of the AO in allowing deduction under s. 80-1 on a figure of Rs. 4,78,97,737 by adjusting from the gross amount unabsorbed depreciation amounting to Rs. 9.40 lakhs and various other items of income aggregating Rs. 11.82 lakhs. According to the learned counsel, the aforesaid two adjustments were required to be set at nought and the claim to be allowed on the gross amount which aggregated Rs. 5 crores and odd. In support of their respective arguments, the parties relied on various reported and unreported judgments including one of the Tribunal. In the view that we have taken to restore the matter back to the file of the CIT(A) for a decision on merits, we do not find it necessary to say anything further. The last ground in the appeal is accordingly disposed of.

27. In the result, the appeal is partly allowed.