TMI Blog1978 (9) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... " With reference to your application for financial assistance, we confirm that this company would agree to make you an interest-free loan of Rs. 5 lakhs (pound 37,500) for a period of one year, to enable you to finance the large Government contracts on which you are currently engaged. No doubt you will obtain the necessary permission from the Indian Government to repay this loan in sterling, at the expiration of one year, or earlier if funds become available. " Thereupon, the assessee by its letter dated the 18th January, 1965, sought the approval of the Reserve Bank of India for the said loan of Rs. 5 lakhs (pound 37,500) from the parent company with permission to repatriate the amount when required after one year or earlier if funds would become available. (a) By the said letter the Reserve Bank was, inter alia, informed that the loan amount was needed to finance the said contract of Barauni Oil Refinery. (b) An amount of Rs. 24.34 lakhs was lying blocked in the contract and the assessee's overdraft with its bankers had reached the maximum limit and there was no alternative for the assessee but to obtain the said loan from the United Kingdom. (c) Funds were required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business. It was contended further that, although the loan had not been repaid during the year in question as the assessee's accounts were kept according to the mercantile system, the liability having arisen in the year by reason of the devaluation, it was in the nature of an expenditure incurred by the assessee and, therefore, allowable under s. 37. It was contended that the expenditure for the purpose of business included the payment of the assessee's statutory dues and taxes. It was submitted that the loan had been taken by the assessee for the purposes of its business and the loss occasioned by devaluation was suffered in the business. The revenue on the other hand contended that the alleged expenditure and/or loss was not allowable inasmuch as : (a) no expenditure had been incurred ; (b) even if such expenditure was incurred it had not been laid out or expended wholly or exclusively for the purpose of the assessee's business ; and (c) the expenditure and/or loss was capital in nature inasmuch as it went to increase the amount of loan which the assessee was required to pay to its principal. It was contended that, in any event, the loss arising out of devaluation could not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the assessee under s. 256(1) of the I.T. Act, 1961, and also s. 18 of the Companies (Profits) Surtax Act, 1964, the Tribunal has drawn up a statement of case and has referred the following questions for the opinion of this court as questions of law arising from its order : Under the Income-tax Act, 1961 : " 1. Whether, on the facts and in the circumstances of the case, and on a proper construction of the assessee's letter of 18th January, 1965, the Tribunal was right in holding that the assessee's major requirement for its loan was to meet its taxation liabilities? " 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of Rs. 2,83,614 was not deductible in computing the assessee's profits and gains of business ? " Under the Companies (Profits) Surtax Act, 1964 : " Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of Rs. 2,83,614 was not deductible in computing the chargeable profits for the purposes of the surtax assessment for the year 1967-68 ? " Mr. Kalyan Roy, learned counsel for the assessee, in his submissions on question No. 1 before us co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestion No. 2 Mr. Roy for the assessee contended first that the extra amount of Rs. 2,83,614, which the assessee had to provide as a result of devaluation, was in the nature of an ordinary business expenditure. It was as much an expenditure as bank or postal charges which might have had to be incurred by the assessee if the amount was remitted by post or through bank for repayment of the loan. In terms of sterling the amount of loan remained fixed but in obtaining the foreign currency the assessee had to incur an extra expenditure in rupees. This, according to Mr. Roy, was a normal and proper business expenditure allowable under s. 37 of the Act. Mr. Roy submitted next that as the assessee at the relevant time maintained its accounts under the mercantile system, this expenditure was incurred during the relevant year. The moment devaluation took place, the liability for the extra amount was incurred by the assessee and had to be debited in the assessee's profit and loss account in that year. Alternatively, in providing for the extra amount on account of the devaluation, the assessee suffered a loss and such loss was connected with, incidental to and was incurred for the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. " (b) Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1. This decision of the Supreme Court was also cited by the assessee on mercantile system of accounting. In this case the assessee had sold land in plots for building purposes undertaking to develop them by laying out roads, providing a drainage system and installing lights, etc. The purchaser paid only a portion of the price and undertook to pay the balance in instalments. The assessee in its turn undertook to carry out the development within six months. In the relevant accounting year the assessee in accordance with the mercantile system of accounts adopted by it, credited its accounts with the full sale price of the lands though it incurred only a part and at the same time debited an estimated sum by way of expenditure for the development undertaken though nothing had been actually spent. On these facts the Supreme Court, inter alia, held as follows at page 10 of the report : "........ we find that the sum of Rs. 24,809 represented the estimated expenditure which had to be incurred by the appellant in discharging a liability which it had already undertaken under the terms of the deeds of sale of the lands in question and was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d was inadmissible. (f) Whimster Co. v. IRC [1925] 12 TC 813. This decision was also cited on behalf of the revenue. Here the loss claimed by the assessee on unexpired time-charter of ships on the basis of an anticipated fall of freight was disallowed as a deduction. (g) Allen v. Farquharson Brothers Co. [1932] 17 TC 59 (KB). This decision was cited by the revenue for the following observations of Finlay J. at page 64 of the report to illustrate the distinction between an expenditure and a loss : " Now a case might be put in which it was not very easy to say whether a thing was a disbursement or expense or was a loss. It is conceivable-such things sometimes happen-that there may be cases in which a thing might fall alternately ...... But, none the less, I do think that there is a distinction to be drawn between the two. (a) relates to disbursements ; that means something or other which the trader pays out ; I think some sort of volition is indicated. He chooses to pay out some disbursement ; it is an expense ; it is something which comes out of his pocket. A loss is something different. That is not a thing which he expends or disburses. That is a thing which, so to speak, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the English company's debts to the American company were dollar debts and, therefore, the reliefs claimed should be allowed. (k) Davies v. Shell Company of China Ltd. [1952] 22 ITR (Supp) 1 ; [1951] 32 TC 133 (CA). In this case, cited by the revenue the assessee was a British company which carried on business of sale and distribution of petroleum products in China through agents from whom the assessee obtained deposits at the termination of the agency. When hostilities between China and Japan broke out the assessee transferred the amounts of deposits to the United Kingdom and retained the same in sterling. Owing to subsequent depreciation of Chinese dollars in relation to sterling, the amounts eventually required to repay the deposits in Chinese currency were much less than the amounts held by the assessee and a substantial profit accrued to the latter It was held that such profits were capital profits and hence not taxable. The relevant observations in the judgment of Jenkins L.J. at pages 147 and 156 are set out as follows : " The sum paid is a deposit...It is not however a payment in advance ... It has the character of a loan in that it is repayable at the determinati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fees, etc., in obtaining a loan from the Industrial Finance Corporation secured by a charge on its fixed assets. The Supreme Court upheld the assessee's claim that the said expenditure was deductible as a revenue expenditure : " ...we are of the opinion that : (a) the loan obtained is not an asset or advantage of an enduring nature ; (b) that the expenditure was made for securing the use of money for a certain period ; and (c) that it is irrelevant to consider the object with which the loan was obtained. Consequently, in the circumstances of the case, the expenditure was revenue expenditure within section 10(2)(xv). " (o) CIT v. New India Assurance Co. Ltd. [1969] 71 ITR 761 (Bom). This decision of the Bombay High Court was cited by the assessee. In the relevant assessment year the assessee, an insurance company, claimed deduction of a loss. It was alleged that such loss had been incurred by reason of devaluation of the Pakistan currency on the 31st July, 1955. On that date an amount in Pakistan rupees was due from the Pakistan Government to the assessee on account of advance payment of income-tax. An amount was also due and payable to the assessee under the double taxation avo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mediate expenditure. But in all such cases, the expenditure as also the losses, if they are business losses, have to be taken into account and deducted in determining the profit. Therefore, the distinction between loss suffered without any immediate disbursement and an expenditure incurred would be of not much significance. The question which in our view is of real importance in the instant case is whether the loss or expenditure of the assessee as a result of the devaluation is of a capital nature or of a revenue nature. Mr. Kalyan Roy, for the assessee, has contended in the course of his submissions that a loss has to be considered in a different way from a gain in computing business profits. There may be cases where a loss de hors the business is allowed as a business loss, whereas a gain arising in similar circumstances will never be a business gain. In our view this distinction again is of little significance as the gain or the loss, as the case may be, has to be connected with the business before the same can enter into the computation of profits. On a scrutiny of the facts of the instant case it appears to us that as a result of the devaluation which befell the assessee, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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