9911796707
TMI Blog1980 (12) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... the I.T Act, 1961. The assessee had also taken another loan of 10,250,000 from the Bank of Scotland on 30th June, 1963. Out of this 163,063 had remained unutilised and was retained in the U.K. The balance amounting to 1,086,937 pounds was utilised by the assessee for the purchase of capital assets and stores as also as expenses for raising the loan, for repatriation of the amount to India and as operational expenses for its business. In terms of the Indian currency the entire expenditure came to Rs. 1,347.26 lakhs. There was no dispute before the Tribunal that the original loan of 10,250,000 pounds converted into Indian currency to Rs. 1,369.04 lakhs was payable by the assessee in sterling in the U.K. As a result of the devaluation on the 6th June, 1966, the assessee was of the opinion that this liability with regard to the above loan was increased by Rs. 6,78,37,595 which it was required to incur for its repayment in sterling. There was also another amount due by the assessee by way of retention money to Bank Bush Murphy Ltd. According to the assessee, due to devaluation, it was required to incur an additional expenditure of Rs. 3,14,985 on repayment of this money also in sterlin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ince the amount of loan to which the amount was attributable bad been spent as a revenue expenditure for the purposes of the business and had also been allowed as a deduction in the respective years, the additional liability was also in the nature of expenditure of the year under appeal as it accrued in this year and required to be allowed. In the alternative, it was submitted that the loss had arisen to the assessee as a result of the devaluation and it was incidental to the business and was allowable under s. 28 of the Act. The ITO rejected both the contentions of the assessee for the reasons given by him in his order. The assessee went up in appeal before the AAC. It was urged before him that there was no justification for the distinction made by the ITO between the additional liability in respect of admissible business expenditure and in respect of outstanding temporary loan taken for such expenditure and that both were referable to expenditure of a revenue nature. It was, therefore, urged that the entire loss was required to be allowed according to the method of accounting followed by the assessee. Reliance in this connection was placed on certain decisions. It was also urge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one of Rs. 40,60,560 (Rs. 30,74,896 Plus Rs. 9,85,654) which was an expenditure incurred in the year under appeal itself on the repayment of loans to Burmah Oil Co. on 30th December, 1966, and to the Bank of Scotland on 30th June, 1966, and 31st December, 1966. It was pointed out that the assessee followed the calendar year 1966 as its accounting year and the other sum of Rs. 52,17,340 related to the balance of loans which had not been repaid and which was outstanding not only on the date of devaluation but also at the end of the accounting year. It was urged that the sum of Rs. 40,66,560 had to be treated as a revenue expenditure of the year under appeal as it had been incurred in the year. With regard to the remaining amount, it was submitted that even though it had not been spent in the sense that it had not been paid off as no remittance was made to England, yet it constituted an expenditure of the year in view of the principles laid down by the Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363. On behalf of the assessee, it was further submitted that the disbursement of the loan had been held as a revenue expenditure in the past and ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal noted that there was a distinction between loss and expenditure. Therefore, the Tribunal was of the view that the amount of Rs. 40,60,560 which the assessee had to incur by way of extra expenditure during the year under appeal in connection with the repayment of its loan was of the nature of a loss. Once this position was accepted, according to the Tribunal, its disallowance like the assessee's claim for the other amount of Rs. 52,17,340 could not but be upheld or sustained following the decision of the Calcutta High Court in the case of Sutlej Cotton Mills Ltd. v. CIT [1971] 81 ITR 641. The Tribunal, therefore, did not consider it necessary to examine whether the loss arose in the course of the assessee's carrying on its business as it was not in the nature of loss at all. The Tribunal then considered whether the above amount could also be considered or be treated as an expenditure of the year under appeal only because there was devaluation of the Indian rupee in terms of sterling. In their opinion, the case of the assessee was fully governed by the principle laid down by the Tribunal in the case of Bestobell India Ltd. (ITA No. 888 (Cal) of 1972-73, and S.T.A. No.11(Cal) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s revenue expenditure and directly related to its business. " Therefore, the Tribunal was of the view that though this was an income loss, it was an expenditure incurred for the carrying on of the business and the Tribunal allowed this sum of Rs. 40,60,560 as an expenditure wholly and exclusively laid out for the purpose of its business. There was another aspect of the matter so far as the pipelines were concerned. There, the facts were that the assessee-company was the owner of a pipeline used for carrying its crude products to the refineries. The pipeline was insured with an insurance company in the U.K. A part of this pipe line laid along Dhansiri Bridge was damaged in floods. compensation of 24,923 pounds was awarded to the assessee which in terms of the Indian rupee at its pre-devaluation value came to Rs. 3,32,880. The assessee actually received a sum of Rs. 5,26,017 in India which included the original amount of Rs. 3,32,880 and again on account of devaluation of sterling in terms of the Indian rupee amounting to Rs. 1,93,137. Out of this Rs. 3,32,880, the assessee offered Rs. 36,218 for taxation which related to expenses not capitalised and credited to profit and loss acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to be accepted that any gain arising to the assessee on that part was also assessable as profit. The Tribunal, therefore, directed the ITO to find out the amount of devaluation gain referable to the above two amounts and bring it to tax. The next question that arose before the Tribunal was the claim for Rs. 66,203 and the devaluation gain relating thereto and also the devaluation gain relating to other remittances referable to the costs of the assets destroyed. The Tribunal was of the view that these amounts were covered by the ratio of the decision of the Supreme Court, and, therefore, the Tribunal was of the opinion that the remaining amount of Rs. 66,203 or any devaluation gain relating thereto as a balance of the devaluation was not relating to the original cost of the assets destroyed and could not represent the profit in the commercial sense and, therefore, it could not be brought to tax. The assessee also made a claim for Rs. 19,04,811 as relief under s. 80E of the I.T. Act, 1961. As the assesee's profits and gains had been determined at nil after setting off the unabsorbed depreciation brought forward from earlier years, the ITO held that these resulted in no income a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ? " In respect of the application made by the revenue, the Tribunal referred the following two questions to this court: " 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 40,60,560 being the additional expenses incurred by the assessee in the payment of its loan to M/s. Burmah Oil Co. Ltd., London, and to the Bank of Scotland due to the devaluation of the Indian rupee was an expenditure wholly and exclusively laid out by the assessee for the purpose of its business and as such was an allowable revenue expenditure under section 37 of the Income-tax Act, 1961, for the assessment year 1967-68 ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to relief under section 80E of the Income-tax Act, 1961, on the profits and gains attributable to the activities of the priority industries before their reduction by the unabsorbed depreciation carried forward from the earlier years ? " We will first deal with question No. 1 of the assessee's application. It appears to us that the contentions on this point are covered by the ratio of the decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion in the amount of the borrowing was not admissible as a deduction, that the assessee not being a dealer in foreign exchange, loss was not incidental to its business or in carrying on the same, and confirmed the disallowance of the loss. On further appeal to the Tribunal, the assessee contended that the amount should be allowed as business expenditure under s. 37(1) of the I.T. Act, 1961, as a loss incidental to the business, that although the loan had not been repaid during the relevant year, as the assessee's accounts were kept on the mercantile system, liability having arisen in the relevant year by reason of the devaluation, it was in the nature of an expenditure incurred by the assessee and allowable under s. 37, that the expenditure for the purpose of the business included the payment of the assessee's statutory dues and taxes, and that the loan had been taken by the assessee for the purpose of its business and the loss occasioned by devaluation was suffered in the business. The revenue had contended that the expenditure or the loss was not allowable inasmuch as, (a) no expenditure or loss had been incurred during the assessment year; (b) even if such expenditure was incur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n so far as it held that the loss related to a capital expenditure. We need not further also express any final opinion on the question whether the expression " loss " should be interchanged with the expenditure in respect of a certain transaction, if the expenditure was incurred creating an additional liability in discharging its obligation putting the assessee at a loss, because that is not necessary for our present purposes. For our present purposes it is sufficient to refer that the contention that was mainly made before the. Division Bench, upon which the Tribunal had decided its earlier case, was that the expenditure or loss had not been incurred during the assessment year and, secondly, it was not for the purpose of the business. Now, it has also to be borne in mind that, in the instant case, the assessee maintains the mercantile system of accounting. At. p. 796 (of 117 ITR) of the report Sen J., delivering the judgment of the Division Bench of this court, observed as follows: " On question 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 bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee in future then under s. 41 of the I.T. Act, 1961, the same would again be treated as income accruing to the assessee. The liability of the assessee during the relevant period cannot be said to be a contingent liability or an anticipated future loss. On such facts the instant case is clearly distinguishable from the decisions cited by the revenue, i. e., Edward Collins Sons Ltd. [1924] 12 TC 773 (C. Sess) and Whimster Co. [1925] 12 TC 813 (C. Sess) and the principles laid down in the said decisions have no application in the instant case. The enquiry as to whether by reason of the devaluation the assessee has incurred an expenditure or has suffered a business loss is, in our view, of little relevance. No doubt, an expenditure is something which directly goes out or is deemed to go out of the pocket or till and a loss may fall on a business without any immediate liability to pay or disburse anything. There also may be cases where a loss arising from causes ab extra may necessitate immediate 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. Therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case before us and the ratio of the Division Bench referred to hereinbefore, it is not material for our present purpose to refer to the said decisions in any greater detail. We must, however, refer to another decision of the Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1, which was an appeal from the decision of the Division Bench of the Calcutta High Court in the case [1971] 81 ITR 641 in respect of the same assessee on which the Tribunal bad relied. The said decision of the Calcutta High Court was reversed by the Supreme Court by the aforesaid decision. There, the Supreme Court noted that where profit or loss arose to an assessee on account of appreciation or depreciation in the value of the foreign currency held by him, on conversion into another currency, such profit or loss would ordinarily be considered a profit or loss if the foreign currency was held by the assessee on revenue account or as a trading asset or as part of the circulating capital in the business. But if, on the other hand, the foreign currency was held as a capital asset or as fixed capital, such profit or loss would be of capital nature. Reliance was placed on the observatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fund, if the assessee had to incur an additional liability it would be loss in connection with or arising out of the business and would certainly be an expenditure or a liability to be allowed in computing the revenue profit. It has to be borne in mind that very often in the case of additional liability the expressions " loss and " expenditure " have been used as interchangeable expressions. Our attention was also drawn to the decision in the case of CIT v. A. Gajapathy Naidu [1964] 53 ITR 114. There, the Supreme Court reiterated the principle of accrual of interest in the mercantile system of accounting. Reliance was also placed for the same proposition in the case of CIT v. Swadeshi Cotton and Flour Mills P. Ltd. [1964] 53 ITR 134 (SC). The principles upon which the mercantile system of accounting is based are fairly well settled and it is not necessary, in our opinion, now to deal with these principles in detail. In that view of the matter, in our opinion, question No. 1 of the assessee's reference must be answered in the negative and in favour of the assessee. Question No. 2 of the assessee's application is the same as question No. 1 of the revenue's application. In thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that purpose. It is not enough that the disbursement is made in the course of, or arises out of, or is connected with, the trade or is made out of the profits of the trade. It must be made for the purpose of earning the profits. In short, I agree with the judgment of the Master of the Rolls. " Reliance was also placed on a certain observation in the case of IRC v. E. C. Warnes Co. Ltd. [1919] 12 TC 227 (KB), where at p. 231 of the report, Mr. Justice Rowlatt observed that the detriment suffered was loss. Reliance was also placed in the case of Firestone Tyre Rubber Co. Ltd. v. Evans (Inspector of Taxes) [1977] Simon's Tax Cases 104; [1976] 51 TC 615, where a taxpayer-company was indebted to its parent-company in the United States in the sum of pounds 3,699,323. The indebtedness arose prior to 1931 and the amount represented the balance outstanding of an inter-company dollar account between the taxpayer-company and the parent company. In the year ended 31st October, 1938, the debts stood at pounds 76,117, the sum arrived at by converting various dollar liabilities into sterling at the exchange rate ruling at the dates when the debts comprising the indebtedness were occurred. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot an allowable deduction. Accordingly, the question arose as to how the debt should be apportioned between capital and revenue. In the course of correspondence with the Inspector of Taxes between 1932 and 1935 the taxpayer-company's accountant made submissions that 90 per cent. of the debt should be apportioned to capital and 10 per cent. to revenue. On that evidence, the Special Commissioners came to the conclusion that for the purpose of computing the profits for corporation tax for the period ended 31st October, 1965, 90 per cent. of the debts was attributable to capital and 10 per cent. to revenue. The taxpayer-company appealed contending that the statements made in the years between 1932 and 1935 in the correspondence were not binding since they were only a convenient concession made by the accountants to the Crown and did not establish an agreement between the parent-company and the taxpayer-company. It was held that the question as to the apportionment of the debt between capital and revenue was one of fact. In this connection, for our present purpose, it is only relevant to bear in mind whether the additional liability should be allowed at all either as expense or as loss. ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
