1981 (6) TMI 8 - HC - Income Tax

Summary

Issues Involved:

1. Deductibility of devaluation loss of Rs. 4,17,833 in computing the assessee's business income.
2. Nature of the devaluation loss: capital or revenue.

Detailed Analysis:

1. Deductibility of Devaluation Loss of Rs. 4,17,833:

The primary issue in this case is whether the devaluation loss of Rs. 4,17,833 on the sterling loan is deductible in computing the assessee's business income. The assessee, a private limited company, claimed this loss for the assessment year 1967-68 due to the devaluation of the Indian rupee on 6th June 1966. The Income Tax Officer (ITO) disallowed the claim, considering the loss as capital in nature. However, the Appellate Assistant Commissioner (AAC) overturned this decision, stating that the sterling loan was taken to augment the company's working funds and did not create an asset or advantage of an enduring nature, thus qualifying the loss as a revenue loss. The Tribunal, however, reversed the AAC's decision, asserting that the loss was not directly related to the business operations but was a result of the sovereign act of devaluation, making it non-deductible.

2. Nature of the Devaluation Loss: Capital or Revenue:

The core question is whether the loss due to devaluation is on capital or revenue account. The Tribunal's view was that the loss was not a trading loss but a capital loss, as it did not arise directly from the business operations but from a sovereign act. However, the court referred to several precedents, including the Supreme Court's decision in Sutlej Cotton Mills Ltd. v. CIT, which established that the nature of the loss depends on whether the foreign currency was held as a capital asset or as part of the circulating capital. The court emphasized that if the foreign currency is held on revenue account or as part of the circulating capital, any loss due to devaluation would be a trading loss. The court found that the sterling loan in question was used as circulating capital for the business, and thus, the loss should be treated as a revenue loss.

The court concluded that the Tribunal erred in its decision and that the devaluation loss of Rs. 4,17,833 should be allowed as a deductible revenue loss in computing the assessee's business income. The question was answered in the negative, favoring the assessee, and it was held that the loss was on revenue account and deductible. The parties were ordered to bear their own costs.