1981 (7) TMI 47 - HC - Income Tax

Summary

Issues: Interpretation of agreement for liability arising from devaluation and admissibility of loss as a deduction in business income.

Interpretation of Agreement for Liability Arising from Devaluation:
The case involved an assessment year of 1967-68 where the Tribunal referred two questions to the court regarding the liability of the assessee company to a foreign company due to devaluation. The Tribunal held that the liability arose from trade transactions and was directly connected to the business activities of the assessee. The court analyzed the running account between the companies, noting that the liability was maintained as a trading character and not for capital purposes. The court found that the loss due to devaluation was a revenue loss and allowable as a business loss. The court referred to the principles established in the case of Sutlej Cotton Mills Ltd. v. CIT to support its decision.

Admissibility of Loss as a Deduction in Business Income:
The court further examined the second question regarding the admissibility of the loss as a deduction in computing the business income for the assessment year 1967-68. The court agreed with the Tribunal's interpretation of the agreement dated July 28, 1960, and concluded that the loss due to devaluation was a legitimate trading liability. Therefore, the court answered both questions in favor of the assessee, allowing the claimed loss as a deduction in computing the business income. Judge C. K. Banerjee concurred with the judgment delivered by Judge Sabyasachi Mukherjee.

This judgment clarifies the treatment of liabilities arising from devaluation in the context of business transactions and emphasizes the importance of interpreting agreements to determine the nature of such liabilities for tax purposes.