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TMI Blog1993 (7) TMI 63X X X X Extracts X X X X X X X X Extracts X X X X ..... ron ore from the mines and supply the same exclusively to the assessee. As the method of extracting iron ore from its mines by the said company had become outdated, it was felt by the company as well as the assessee-company that the mines of the former company should be mechanised in order to reduce the cost of production as well as to increase the production. The necessary machinery for mechanisation was to be imported from Germany and other countries. The assessee-company agreed to provide the necessary foreign exchange required for the import of machinery. Accordingly, the assessee-company advanced the sum of $7,00,000 which it had obtained as loan from Messrs. Eisenberg Incorporated, Tokyo, Japan, to the said company for the import of mining machinery. The loan given by the assessee was thus utilised by the other company for the import of mining machinery. The amount so advanced was agreed to be adjusted against the price of iron ore supplied by the said company to the assessee. On June 6, 1966, there was a devaluation of the Indian rupee. On account of devaluation, the assessee's liability in respect of the above loan from Messrs. Eisenberg, Japan, was increased by a sum of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of iron ore supplied to the assessee. The Tribunal, therefore, held that the loss incurred by the assessee on account of devaluation was a revenue loss and hence an allowable deduction in computing its income under section 28 of the Act. Accordingly, the Tribunal set aside the orders of the Appellate Assistant Commissioner and the Income-tax Officer and allowed the claim of the assessee. Aggrieved by the order of the Tribunal, the Revenue applied for reference under section 256(1) of the Act and the Tribunal, on being satisfied that a question of law did arise out of its order, has referred the question set out above to this court for opinion. We have heard Mr. G. S. Jetly, learned counsel for the Revenue. The submission of Mr. Jetly is that the loan was taken by the assessee in the years, 1957-58 and 1958-59 and was for acquisition of the machinery and that too by another company which used to supply its products to the assessee. That being so, according to the Revenue, the loan was utilised for acquisition of a capital asset and, as such, any loss incurred by enhancement of the liability on account thereof by devaluation cannot be treated as a revenue loss. On the other ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and specially at the time of devaluation. (5) On devaluation on June 6, 1966, our liability in respect of the said loan was increased by a sum of Rs. 19,07,217 and it is this liability which we are claiming as a deduction in computation of our income for the assessment year 1967-68." The Tribunal has observed in its order that the above statement had not been doubted either by the Income-tax Officer or by the Appellate Assistant Commissioner. The Tribunal also recorded that it was clear from the above facts that the loan of $7,00,000 taken by the assessee-company from Messrs. Eisenberg Incorporated, Tokyo, Japan, which was initially utilised for the purchase of the machinery imported for the mechanisation of the mines of Messrs. Dempo and Souza Ltd., was ultimately realised from Messrs. Dempo and Souza Ltd. by 1966 by adjustment against the price of supplies of iron ore and, as such, on the date of devaluation, the entire amount of loan was utilised by the assessee for the purpose of its business. In that view of the matter, the Tribunal came to the conclusion that the loss incurred by the assessee as a result of devaluation was revenue loss because the amount of loan at the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or a capital asset. In the former case, it would be a trading loss but not so in the latter. The test may also be formulated in another way by asking the question whether the loss was in respect of circulating capital or in respect of fixed capital. This is the formulation of the test which is to be found in some of the English decisions. It is, of course, not easy to define precisely what is the line of demarcation between fixed capital and circulating capital, but there is a well-recognised distinction between the two concepts. Adam Smith in his Wealth of Nations describes 'fixed capital' as what the owner turns to profit by keeping it in his own possession and 'circulating capital' as what he makes profit of by parting with it and letting it change masters. 'Circulating capital' means capital employed in the trading operations of the business and the dealings with it comprise trading receipts and trading disbursements, while 'fixed capital' means capital not so employed in the business, though it may be used for the purposes of a manufacturing business, but does not constitute capital employed in the trading operations of the business. Vide Golden Horse Shoe (New) Ltd. v. Thurgo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it, that would be a loss in connection with or arising out of the business. The loss was, therefore, held to be deductible. In CIT v. International Combustion (I.) P. Ltd. [1982] 137 ITR 184 (Cal) also, though the assessee had purchased plant and machinery with the borrowed money, it was found by the Tribunal that such plant and machinery formed part of the stock-in-trade of the assessee. There was a loss on account of devaluation of the Indian rupee. The Tribunal held the additional liability to be allowable deduction by way of loss incurred in the course of the purchase of the goods and in the usual course of business of the assessee. This finding of the Tribunal was approved by the High Court. In Davidson of India P. Ltd. v. CIT [1983] 140 ITR 344 (Cal), the assessee-company had raised sterling loans carrying interest and the rupee equivalent of the loan had been brought to India for use in the assessee's business as the company's circulating capital. The assessee repaid part of the loan but on June 5, 1966, i.e., the date of devaluation of the Indian rupee, a balance was outstanding. The liability increased in terms of the Indian rupee due to devaluation. This increase amounti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not. (v) Loss resulting from depreciation of the foreign currency which is utilised or intended to be utilised in business and is part of the circulating capital, would be a trading loss, but depreciation of fixed capital on account of alteration in exchange rate would be a capital loss. (vi) For determining whether devaluation loss is revenue loss or capital loss what is relevant is the utilisation of the amount at the time of devaluation and not the object for which the loan had been obtained. Even if the foreign currency was intended or had originally been utilised for acquisition of fixed asset, if at the time of devaluation it had changed its character and had assumed the new character of stock-in-trade or circulating capital, the loss that occurred on account of devaluation shall be a revenue loss and not a capital loss. (vii) The way in which the entries are made by an assessee in the books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee. In the instant case, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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