1980 (12) TMI 12 - HC - Income Tax

Summary

Issues Involved:

1. Deductibility of Rs. 52,17,340 in computing the assessee's income.
2. Allowability of Rs. 40,60,560 as a business loss.
3. Taxability of devaluation gains referable to Rs. 36,218 and Rs. 44,927.
4. Allowability of Rs. 40,60,560 as revenue expenditure under section 37.
5. Entitlement to relief under section 80E on profits and gains before reduction by unabsorbed depreciation.

Detailed Analysis:

1. Deductibility of Rs. 52,17,340:
The Tribunal disallowed the assessee's claim of Rs. 52,17,340, referencing its decision in Bestobell (India) Ltd. v. CIT. The Tribunal held that the extra liability due to devaluation was not deductible as it was not considered a revenue expenditure. However, the High Court found that the Tribunal erred in not allowing the deduction, citing that the liability arose during the assessment year and should be considered under the mercantile system of accounting. The court emphasized that the expenditure was of a revenue nature and deductible in computing the assessee's income for the assessment year 1967-68.

2. Allowability of Rs. 40,60,560 as a Business Loss:
The Tribunal initially rejected the claim, stating that the amount was not a business loss. However, the High Court disagreed, emphasizing that the sum should be treated as a deductible expenditure due to the liability incurred from devaluation. The court referenced the principle that expenses incurred in the course of business operations, even if resulting in a loss, should be accounted for in determining taxable profits.

3. Taxability of Devaluation Gains:
The Tribunal directed the ITO to determine the devaluation gains referable to Rs. 36,218 and Rs. 44,927, and bring it to tax. The High Court upheld this direction, noting that if a part of the compensation received (Rs. 3,32,880) was taxable, any gain arising from devaluation on that part should also be taxable. The court found the Tribunal's direction appropriate and consistent with the principles of assessing gains arising from business operations.

4. Allowability of Rs. 40,60,560 as Revenue Expenditure:
The Tribunal allowed the deduction of Rs. 40,60,560, incurred due to devaluation, as revenue expenditure under section 37. The High Court affirmed this decision, emphasizing that the expenditure was incurred in the course of business and was necessary for earning profits. The court referenced the principles established in previous cases, asserting that expenses directly related to business operations should be deductible.

5. Entitlement to Relief under Section 80E:
The Tribunal granted relief under section 80E, holding that the assessee was entitled to relief on profits and gains attributable to priority industries before reduction by unabsorbed depreciation. The High Court upheld this decision, referencing the Supreme Court's ruling in Cambay Electric Supply Industrial Co. v. CIT, which supported the assessee's claim for relief on profits before accounting for unabsorbed depreciation.

Conclusion:
The High Court ruled in favor of the assessee on the issues of deductibility of Rs. 52,17,340 and Rs. 40,60,560, and the entitlement to relief under section 80E. The court upheld the Tribunal's direction to tax devaluation gains referable to specific amounts, ensuring consistency in the treatment of business-related gains and losses. Each party was ordered to bear its own costs.