Income-tax Reference No. 396 of 1975

Decided on March 24, 1982

The Judgment of the Court was delivered by

Suhas Chandra Sen, J.:— International Combustion (I) Pvt. Ltd. is a construction contractor and a dealer in machinery and plant. The relevant assessment year is 1967-68, and the corresponding previous year ended on 30th September, 1966. The company purchased plant and machinery from the United Kingdom. As a result of these transactions the assessee-company had to pay huge amounts to the suppliers of U.K But its liability further increased as a result of devaluation of the Indian rupee on 6th June, 1966. The assessee-company was, therefore, required to pay an additional liability of Rs. 19,48,067 to the suppliers of U.K The assessee claimed this liability as a deduction in computing the profits for the assessment year 1967-68. The ITO, however, disallowed this amount by relying on the judgment of the Bombay High Court in the case of Pohoomal Brothers, [1965] 55 ITR 112. It was further observed by him that this could not be allowed even as an expenditure under s. 37 of the I.T Act.

2. The AAC, on appeal, held that the amount in question was in respect of the outstanding dues on account of purchase of raw materials and, therefore, it could not be termed as a loss but an expenditure incurred which was reflected in the books of the assessee. The assessee was following the mercantile system of accounting. The whole of the amount was, therefore, admissible as a deduction in computing the profits of the company. He further observed that the assessee's liability to pay the nonresident in terms of sterling was a contractual relationship between the two parties. The AAC, therefore, allowed the appeal of the assessee-company. The department preferred an appeal to the Tribunal. The Tribunal held that the assessee had a trading liability which had remained as a trading liability and had not been converted either into a loan or into a reserve. The Tribunal pointed out that there was no dispute with regard to the fact that the assessee-company had purchased plant and machinery from the non-resident suppliers which formed part of stock-in-trade of the assessee. The assessee was maintaining the books of account on the mercantile system of accountancy. In other words, the income and expenses were debited to the trading account or profit and loss account on accrual basis and not on payment basis. The assessee-company purchased the goods in the earlier years also and paid various amounts and the difference was carried forward to the next year. In the assessment year under dispute, the position was as under:

Rs. Pre-devaluation position Opening balance as at 1-10-65 38,31,965.77 Add: Purchases 3,29,680.93 41,61,646.70 Less: Credit Notes received during the year 42,427.60 41,19,219.10 Less: Amount paid during the year 9,66,529.06 31,52,690.04 Add: Amounts received during the year 1,01,539.97 32,54,230.01 Post-devaluation position Opening balance as at 6th June, 1966 32,54,230.01 Add: Devaluation loss 19,49,067.84 52,03,297.85

3. On 6th June, 1966, the assessee-company had to pay Rs. 32,64,23,001. But since devaluation took place on 6th June, 1966, the assessee-company was called upon to pay Rs. 52,03,297.85 and that resulted in an additional liability of Rs. 19,49,067.84. In other words, this was the enhanced price payable for the purchases made by the assessee. The Tribunal was of the view that the additional liability due to devaluation was due to the carrying on of the business and had sprung from the business carried on by the assessee. At the instance of the Commissioner of Income-tax, the following question of law was referred by the Tribunal under s. 256(1) of the I.T Act

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 19,49,068 credited to the account of the non-resident company as an additional liability due to the devaluation of the Indian rupee, was an admissible deduction in computing the profits and gains of the assessee's business in the assessment year 1967-68?”

4. It has been contended on behalf of the revenue that the sum of Rs. 19,49,068 was not paid on account of a settlement of the transaction of purchase. No deduction on account of purchase made in the earlier year could be claimed as deduction in the assessment year under consideration in this case. The assessee-company had not incurred any liability on account of any purchase made in this year and the outstanding balance was on account of the liability of the earlier year. It was argued that the assessee's claim could only be considered under s. 28 and in the facts of this case the loss could not be said to have fallen on the assessee out of any business transaction. It was further pointed out that even if the loss had fallen on the assessee it had not sprung directly from the assessee's business and in any event the loss suffered was not deductible as it was of capital nature. The outstanding amount of unpaid price was a debt and it was in the nature of a deposit.

5. It was also argued that as the assessee maintained its accounts on the mercantile basis, the liability for the price of goods purchased arose in the year in which the delivery of the goods was obtained. It was argued that in this case; the liability for the payment of the goods purchased arose in the accounting year ended on the 30th September, 1965. Therefore, the devaluation that took place on the 6th June, 1966, could not have any impact on that liability and the accounts of the earlier year could not be reopened or disturbed in order to include this liability. For this proposition reliance was placed on the decision of the Allahabad High Court in the case of New Victoria Mills Company Ltd. v. CIT, [1952] 21 ITR 567, Pohoomal Brothers (Silk Shop) v. Commissioner Of Income-Tax, Bombay City., [1965] 55 ITR 112 (Bom) and the judgment of the Supreme Court in the case of Commissioner Of Income Tax, Madras. v. A. Gajapathy Naidu, Madras, [1964] 53 ITR 114.

6. Reliance was also placed on the case of British Mexican Petroleum Co. Ltd. v. Jackson, [1932] 16 TC 570 (HL), on the following observations of Thankerton L.J at p. 592.

“I am unable to see how the release from a liability, which liability has been filially dealt with in the preceding account, can form a trading receipt in the account for the year in which it is granted.”

7. This observation of Thankerton L.J was cited in the case of Commr. of Agrl. I.T v. Kerala Estate, [1974] 96 ITR 210 at p. 214 (Ker). In that case it was also observed that the money that was due to the creditor and was given up by the creditor comes to the assessee as a windfall. It was held that it did not arise from the business nor did it arise from the agricultural operations when the assessee was an agriculturist./

8. The principles laid down in the aforesaid cases, however, do not really deal with the point at issue in this case. The facts found by the Tribunal have not been challenged in this case at all. It has been found by the Tribunal that the plant and machinery purchased by the assessee from the non-resident suppliers formed part of the stock-in-trade of the assessee. The assessee was also following the mercantile system of accounting. The expenses were debited to the trading account on accrual basis. There was an outstanding liability to pay Rs. 32,64,230.01 to the foreign supplier on account of supply of plants and machineries. As a result of the devaluation of the rupee on the 6th June, 1966, that liability increased by Rs. 19,49,067-84. The Tribunal found that the trading liability of the earlier year had remained as a trading liability of the accounting year in question. This is not a case of reopening the accounts of an earlier year or relating back the outstanding liability of the current year to an earlier year. This is a case where the outstanding liability to pay the price of goods purchased by the assessee having gone up due to devaluation in the accounting year under consideration, the payment had to be made in foreign currency under the terms of the agreement with the foreign supplier. The additional liability arose directly from and in the course of purchase of goods and in the usual course of business of the assessee-company.

9. The counsel for revenue placed strong reliance on the cases of Bestobell (India) Ltd. v. Commissioner Of Income-Tax, West Bengal-V, [1979] 117 ITR 789 (Cal), Union Carbide India Ltd. v. Commissioner Of Income-Tax, West Bengal-Iii, [1981] 130 ITR 351 (Cal) and the judgment of the Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT, [1979] 116 ITR 1 and contended that the outstanding liability on the date of the devaluation appearing in the books of account of the assessee was a loan or a deposit and appreciation of that liability would result in a loss of a capital nature. This argument, however; cannot be accepted in view of the clear finding of facts made by the Tribunal. The outstanding liability was on account of purchase of plants and machineries which were stock-in-trade of the assessee's business. There was an appreciation of that liability in the course of business. The business was conducted in foreign exchange and the loss arose directly from the business. The fact that the purchases were made in an earlier accounting year will not make any difference in this case. The liability was and remained a trading liability. In order to discharge that liability, the assessee, after devaluation, had to pay a larger amount in rupees. The additional liability arose not in the accounting year when the purchases of goods were effected but in the accounting year when the devaluation took place.

The cases on which the counsel for the Revenue has relied upon are all cases of loans or deposits which were not trade debts at all. In the present case the liability arose on account of purchase of goods and remained a trading liability subsequently. Nothing has happened after the liability arose to divest it of the character of a trading debt and convert; it into a loan. In fact the finding of the Tribunal is that it continued as a trading debt in the assessment year in question in this case. The argument that it ceased to be a debt and it was really a loan or deposit given by the sellers to the assessee-company is not borne out by the facts found by the Tribunal.

The Supreme Court pointed out in the case of Bombay Steam Navigation Co. (P.) Ltd. v. CIT, [1965] 56 ITR 52, that “any agreement to pay the balance of consideration due by the purchaser does not in truth give rise to a loan. A loan of money undoubtedly results in a debt, but every debt does not involve a loan.”

10. A Division Bench of this court (Sabyasachi Mukharji and Sudhindra Mohan Guha JJ.) in the case of Oil India Co. Ltd. v. CIT, [1982] 137 ITR 156 held in a judgment delivered on 17/18th December 1980, that in a case involving a foreign exchange transaction where the assessee had to incur a loss in order to carry on its business or to facilitate the carrying on of its business the additional liability due to devaluation would certainly be an expenditure or a liability to be allowed in computing the revenue profits.

11. In view of the principles of law enunciated in the aforesaid cases and in view of the findings of fact made by the Tribunal, the question referred is answered in the affirmative and in favour of the assessee. Each party will pay and bear its own costs.

Sabyasachi Mukharji, J.:— I agree.