The Judgment of the Court was delivered by

Dipak Kumar Sen, J.:— M/s. Martin & Harris (P.) Ltd., Calcutta, the assessee, was assessed to income-tax in the assessment year 1968-69, the corresponding previous year ending on December 31, 1967. During the said assessment year, the British pound sterling was devalued vis-a-vis the Indian rupee. The assessee at the relevant time had been manufacturing goods under licence from M/s. Organon Laboratories Ltd. of London, who were supplying to the assessee on credit major part of the materials needed for such manufacture. The price of such materials was, however, payable by the assessee in pound sterling.

2. 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 for being brought to tax.

3. Being aggrieved, the assessee preferred an appeal before the A AC who sustained the addition.

4. There was a further appeal by the assessee to the Income-tax Appellate Tribunal. It was contended on behalf of the assessee before the Tribunal, inter alia, that:

(a) any profit accruing or any loss resulting from devaluation between the currency of this country vis-a-vis the currency of a foreign country cannot be treated as taxable trading profit or deductible trading loss, as devaluation is an act of State executed under its sovereign power de hors the trade or business.

(b) A profit arising from devaluation can only be regarded as capital profit.

(c) No remittance being made by the assessee to the foreign suppliers and there being no settlement between the parties, the assessee could not be said to have made any profit as a consequence of the devaluation.

5. The Tribunal held that if any profit arose as a result of the devaluation, the same was a taxable trading profit and not an accretion to capital. It was held further that 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.

6. The Tribunal, however, found that a profit; did not accrue to the assessee on the day the foreign currency was devalued. It was held that a profit should be deemed to have accrued to the asseseee when the benefit of reduction of liability was realised by the assessee, i.e, when the assessee paid to the foreign supplier. The fact that the assessee was maintaining its accounts on mercantile basis, it was held, would not make any difference to the position. It was not in dispute that in the relevant accounting year no payment had been made in foreign currency against any outstanding bill of the foreign supplier.

7. The Tribunal held that no profit had accrued to the assessee during the relevant year on account of devaluation. The Tribunal deleted the addition.

8. On an application of the Revenue under s. 256(1) of the I.T Act, 1961, the following question stated to be a question of law arising out of its order has been referred by the Tribunal to this court for its opinion:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law 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 that view, deleting the addition of Rs. 2,86,101 made in the assessment for the assessment year 1968-69?”

9. At the hearing, learned counsel for the parties reiterated the respective contentions raised in the proceedings below. A number of decisions were, however, cited at the Bar in aid of the respective submissions.

10. Of the decisions cited, we note in particular the following, facts in which are similar to the facts of the case before us.

(a) Shamsuddin v. CIT [1973] 90 ITR 323 (Ker). In this case, the assessee carried on business in export of cashewnuts. The assessee entered into forward contracts of sale with foreign buyers quoting price in dollars. On June 6, 1966, the Indian rupee was devalued. On that date, the assessee was entitled to receive dollars for exports actually effected before that date and also on account of forward contracts entered into earlier. By reason of the devaluation, the assessee received a greater amount in rupees resulting in surplus which accrued in the hands of the assessee. It was held by the Kerala High Court that such surplus was a trading profit which represented a part of the sale proceeds and was liable to be taxed as such.

(b) Bestobell (India) Ltd. v. Commissioner Of Income-Tax, West Bengal-V [1979] 117 ITR 789 (Cal). In this case, the assessee, an Indian subsidiary of a non-resident company incorporated in the United Kingdom, was engaged in executing a contract awarded by a Government of India undertaking. Considerable funds becoming blocked in performing the said contract, the assessee with the permission of the Reserve Bank obtained a loan from its foreign principal and agreed to repay the same in foreign currency after one year or earlier.

11. The loan remained outstanding in the books of the assessee as on June 6, 1966, when the Indian rupee was devalued.

12. In the relevant assessment year, the assessee debited its profit and loss account with an amount representing the extra money involved for repayment of the loan and claimed deduction of the amount. The ITO disallowed the claim. The successive appeals of the assessee to the AAC and the Tribunal were unsuccessful. The matter came up on a reference before this court and it was held that the extra expenditure was an expenditure in the nature of capital and the assessee could not claim it as a revenue loss. It was, however, held that as the assessee maintained its accounts on mercantile basis, on the devaluation of Indian currency, the liability of the assessee increased immediately to the extent the rupee was devalued and-the assessee become liable to pay an extra amount. This liability arose in the assessment year.

13. Learned counsel for the assessee, however, contended that even where the accounts of the assessee were kept under mercantile system, it could not be said that the assessee would suffer any loss or make a profit on the day a devaluation was declared. Such a profit or loss would occur only when there was payment or repatriation through a transaction in currency. In support, learned counsel relied on the following decisions:

(a) Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC). In this case, the assessee, an Indian company had a cotton mill in West Pakistan where it manufactured and sold cotton fabrics. In the accounting year ending on March 31, 1954, the profits of the assessee arising in Pakistan converted in rupees at the prevailing exchange rates were included in the assessee's total income in India. On August 8, 1955, Pakistan devalued its currency. Thereafter, during the accounting periods relevant to the assessment years 1957-58 and 1959-60, the assessee, with the permission of the Reserve Bank of Pakistan, remitted to India two amounts and claimed a loss on the two remittances. The claim was disallowed by the Revenue. The disallowance was sustained by the Tribunal and the High Court, on a reference. The Supreme Court, on an appeal, however, held that it could not be said whether the loss suffered by the assessee was a trading or a capital loss unless it was first determined whether the said amounts were held by the assessee on capital account or on revenue account or to put it differently as part of its fixed capital or circulating capital. The Supreme Court remanded the matter to the Tribunal with the following observation (p. 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.”

(b) Commissioner Of Income-Tax, West Bengal v. Invest Import [1982] 137 ITR 310 (Cal). In this case, the assessee, a non-resident company based in Yugoslavia, had brought funds into India from abroad. The funds were used as circulating capital in the assessee's business. Indian rupee was devalued on June 6, 1966. In the relevant assessment year, the assessee claimed a loss representing the depreciation in the value of rupee in terms of Yugoslavian currency.

14. The ITO found that the amounts due to the head office of the assessee had been remitted from India during January and March, 1968, and held that the loss claimed was not allowable in 1967-68 The Tribunal, held that the funds in India as on June 6, 1966, were circulating capital and the depreciation thereof on account of devaluation was a trading loss. On a reference, a Division Bench of this court applied the principles laid down in Sutlej Cotton Mills Ltd.'s case [1979] 116 ITR 1 (SC), and held that no revenue loss took place in the year in question as there was no conversion.

15. Decisions in Chainrup Sampatram v. Commissioner Of Income Tax, West Bengal [1953] 24 ITR 481 (SC), Commissioner Of Income Tax, Mysore v. Canara Bank Ltd. [1967] 63 ITR 328 a decision of the Supreme Court, Khandelwal Brothers Ltd. v. CIT [1979] 117 ITR 452, a decision of this court, Union Carbide India Ltd. v. Commissioner Of Income-Tax, West Bengal-Iii [1981] 130 ITR 351, a decision of this court, and Indo-Burma Petroleum Co. Ltd. v. Commissioner Of Income-Tax, Central, Calcutta. [1982] 136 ITR 251, a decision of this court, were also cited. The said decisions need not be considered further as the facts involved therein are different from the facts in the case before us and no new principles have been laid down therein.

16. In the facts before us, the assessee whose accounts were maintained on mercantile basis obtained an advantage or a benefit in the assessment year involved as by reason of devaluation of 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. In other words, the liability of the assessee to pay for the price of the materials obtained on credit was reduced. Necessarily, this had to be reflected in its accounts. In Sutlej Cotton Mills Ltd.'s case [1979] 116 ITR 1 (SC), the main question before the Supreme Court was whether the loss claimed by the assessee was a capital loss or a revenue loss. The Supreme Court no doubt observed that a profit or a loss would arise on conversion into another currency in the case of a devaluation but it was not held that actual conversion or repatriation is a precondition for accrual of profit or for a resulting of loss even where the accounts are kept on a mercantile basis. In our view, conversion can be considered on a notional basis in such a case. The state of accounts as at the end of the accounting year has to show a reduction in liability and a consequent increase in taxable surplus.

17. The decision of this court in Invest Import's case[1982] 137 ITR 310 (Cal), can be distinguished on facts. In that case, a fund had been accumulated in India and maintained in Indian rupees though the source was foreign. There was no immediate impact on the said fund on the date the devaluation took place as the fund was not found to be immediately repatriable. The question of profit or loss in the premises would arise only on final adjustment after the utilisation of the fund in India.

18. For the above reasons, we answer the question referred in the nega-tive and in favour of the Revenue.

19. Learned advocate for the assessee has orally applied for a certificate that this is a case fit for appeal to the Supreme Court. He submitted that the following substantial question of law arises from this decision:

“Where profit or loss arises to an assessee on account of appreciation or depreciation in terms of the value of a foreign currency, whether such profit or loss arises at the time when currency is devalued or whether such profit or loss arises when actual conversion from one currency to another takes place?”

20. In our view, the question is of substance and concerns international finance and commerce. Let a certificate be issued under s. 261 of the I.T Act, 1961. Let the order for issuance of such certificate be drawn up separately.

21. There will be no order as to costs.

Ajit K. Sengupta, J.:— I agree.