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TMI Blog1983 (6) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... tested the decision of the AAC before the Tribunal. The Tribunal upheld the allowance of the claim. Against the orders of the Tribunal, the Revenue sought and obtained a reference to this court on the following question : "Whether, on the facts and in the circumstances of the case, it has been rightly held by the Tribunal that the payment of annual fee under clause 9 of the collaboration agreement was in the nature of revenue expenditure and should, therefore, be allowed under section 37 of the Income-tax, Act, 1961 ? " In the meanwhile, as a result of the devaluation of the rupee which took place on June 6, 1966, the assessee's annual liability got enhanced. The assessee had to pay instead of Rs. 26,665 for the four years 1963-64, 1964-65, 1965-66 and 1966-67, an enhanced amount of Rs. 42, 105. Thus, as a result of the devaluation of the rupee, the liability of the assessee got enlarged from Rs. 26,665 to Rs. 42,105, the difference being Rs. 15,440. On the ground that this is a liability which arose in the accounting year relevant to the assessment year 1967-68, the assessee claimed that the said sum of Rs. 15,440 should be allowed as an admissible deduction in that year. . Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gn company has to render certain services specified in the collaboration agreement to enable the assessee-company to follow the latest technical developments of the foreign company in the manufacture of card clothing, that the services rendered are in the nature of instructions and information relating to the foreign company's latest technical development in the manufacture of card clothing and is related to the carrying on or conduct of the day to day business of the assessee-company, and that, therefore, the services rendered in pursuance of cl. 9 has not resulted in the acquisition of an asset or a right of a permanent character and as such it should be taken to be a revenue expenditure which is an allowable deduction under s. 37. We are in entire agreement with the view expressed in that case. We have to, therefore, hold that the annual payments payable under clause 9 of the agreement are to be allowed as deductions under s. 37 treating them as revenue expenditure. In this view of the matter, the first question is answered in the affirmative and against the Revenue. Coming to the next question relating to the allowability of the additional liability of Rs. 15,440 which arose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions in the foreign exchange rate. When the assessee claimed deduction in respect of the excess payment, the claim was negatived by the ITO. Ultimately the matter came to this court on a reference, and this court held that as the price fixed under the agreement was only tentative price which had to be paid at the then prevailing rates of exchange at the time of the respective payments, the payments related only to the purchase price of the machinery, that as such was on capital account and not allowable as business expenditure. This decision is relied on by the learned counsel only for the purpose of sustaining his stand that the excess, payments should be taken to be of the same character as the Original payment and it cannot be taken differently from its original character. In CIT v. Universal Radiators [1979] 120 ITR 906 (Mad), an Indian company entered into a contract with an American company for the purchase of copper bars for re-rolling them into strips and sheets. The assessee opened a letter of credit in a bank in favour of the foreign seller. The ship on which the goods were sent was seized by the Pakistan Government due to hostilities between India and Pakistan. The as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n can be taken to be of the same character as the original receipt or the original liability and it cannot be taken to be having a different character. It is unnecessary to duplicate authorities on this point since the learned counsel for the Revenue does not want to support the decision of the Tribunal on this aspect of the matter. We, therefore, cannot accept the finding of the Tribunal that the enhanced liability arising out of the devaluation of the Indian rupee cannot be treated as a capital expenditure or a capital loss and that it will take the same character as the original payment which the Tribunal itself has held to be a revenue expenditure. The next question is whether the other reasoning given by the Tribunal is tenable. In this case, the assessee has admittedly claimed deduction in the earlier years on the basis of accrued liability and the same has been allowed by the Revenue. It is no doubt true that subsequently the devaluation has occurred on June 6, 1966, which falls within the assessment year 1967-68. Though the devaluation took place in the accounting period, since the original liability arose for the earlier years and the deduction has been claimed for those ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and indivisible and that there is no right to receive compensation awarded originally and a separate right to receive extra compensation and that the only right is to receive compensation for the lands which is the fair market value on the date of the acquisition. Thus, this decision in a way supports the stand taken by the Revenue that there are no two separate liabilities in this case, one the original liability and the other, the additional liability arising out of the devaluation, and that both the liabilities should be treated as one and it should be treated as an accrued liability as the assessee is adopting the mercantile system of accounting. The decision in T. N. K. Govindarajulu Chetty v. CIT [1973] 87 ITR 22 (Mad), is also relied on by the learned counsel for the Revenue in support of his submission that once an income accrues and the assessee treats it as taxable during the year of accrual, it is not open to treat it as income in the year of receipt in a case where the assessee follows the mercantile system of accounting. Though the decision dealt with a receipt, the principle of that decision will equally apply to a case of liability. In this case, the assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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