Dipak Kumar Sen, J.
1. The facts found and/or admitted in these proceedings are shortly as follows :
Bestobell (India) Ltd., Calcutta, is the Indian subsidiary of M/s. Bells' Asbestos & Engineering (Holdings) Ltd., a non-resident company incorporated in the United Kingdom. At the material period the assesses was engaged in executing a contract awarded by Barauni Oil Refinery, a Government of India undertaking. In executing the said contract the funds of the assessee to the extent of over Rs. 24 lakhs became blocked. In the circumstances, the assessee approached its parent company for a loan of 37,500 being about Rs. 5 lakhs in Indian currency at that time. The foreign principal company agreed to advance the amount to the assessee and in its letter dated the 14th January, 1965, wrote to the assessee as follows :
'With reference to your application for financial assistance, we conefirm that this company would agree to make you an interest-free loan of Rs. 5 lakhs ( 37,500) for a period of one' year, to enable you to finance the large Government contracts on which you are currently engaged.
No doubt you will obtain the necessary permission from the Indian Government to repay this loan in sterling, at the expiration of one year, or earlier if funds become available.'
2. Thereupon, the assessee by its letter dated the 18th January, 1965, sought the approval of the Reserve Bank of India for the said loan of Rs. 5 lakhs ( 37,500) from the parent company with permission to repatriate the amount when required after one year or earlier if funds would become available.
(a) By the said letter the Reserve Bank was, inter alia, informed that the loan amount was needed to finance the said contract of Barauni Oil Refinery.
(b) An amount of Rs. 24.34 lakhs was lying blocked in the contract and the assessee's overdraft with its bankers had reached the maximum limit and there was no alternative for the assessee but to obtain the said loan from the United Kingdom.
(c) Funds were required immediately to meet a taxation liability of Rs. 10 lakhs in January and February, 1965, apart from the continuous requirements in the said contract.
(d) The approval of the Reserve Bank for the loan was requiredimmediately so that the assessee could meet the urgent taxation liabilitieswithout default.
3. Necessary permission was granted by the Reserve Bank for the aforesaid loan and the assessee received the loan on the 25th February, 1965, The loan was not repaid at the expiry of one year and remained outstanding in the books of the assessee up to the 6th Jane, 1966, on which date the Indian rupee was devalued. As a result of such devaluation the asses-see found that it had to arrange for a sum of Rs. 7,87,692 to repay the original loan of 37,500, and consequently an extra amount of Rs. 2,87,692 was necessary to repay the original loan of Rs. 5 lakhs.
4. After deducting a gain of about Rs. 4,078 on the assessee's sterling deposit in a London bank the assessee debited its profit and loss account with a sum of Rs. 2,83,614 for the assessment year 1967-68 and claimed deduction of this amount. The ITO rejected the claim of the assessee on the ground that the increase of liability arising from devaluation on account of the sterling loan was of a capital nature and could not be allowed as a revenue expense.
5. Being aggrieved, the assessee preferred an appeal and contended before the AAC, inter alia, that the loan in question was not raised for acquiring any capital asset and the extra amount of Rs. 2,83,614 payable against the loan on account of devaluation of Indian rupee was a revenue expenditure and should have been allowed as deduction in computing the assessee's business income. The AAC held that the loss on account of devaluation in connection with a loan could not under any circumstances be considered to be a revenue loss. Accretion in the amount of the borrowing was not admissible as a deduction. He also held that the assessee not being a dealer in foreign exchange, the loss was not incidental to its business or in the carrying on of that. Accordingly, the AAC confirmed the disallowance of the loss.
6. The assessee preferred further appeal to the Tribunal. It was contended on behalf of the assessee in the appeal that the said amount should have been allowed as a deductible expenditure under Section 37(1) of the I.T. Act, 1961, as a loss incidental to the business. It was contended further that, although the loan had not been repaid during the year in question as the assessee's accounts were kept according to the mercantile system, the liability having arisen in the year by reason of the devaluation, it was in the nature of an expenditure incurred by the assessee and, therefore, allowable under Section 37. It was contended that the expenditure for the purpose of business included the payment of the assessee's statutory dues and taxes. It was submitted that the loan had been taken by the assessee for the. purposes of its business and the loss occasioned by devaluation was suffered in the business.
7. The revenue on the other hand contended that the alleged expenditure and/or loss was not allowable inasmuch as : (a) no expenditure had been incurred ; (b) even if such expenditure was incurred it had not been laid out or expended wholly or exclusively for the purpose of the assessee's business; and (c) the expenditure and/or loss was capital in nature inasmuch as it went to increase the amount of loan which the assessee was required to pay to its principal. It was contended that, in any event, the loss arising out of devaluation could not be allowed as a loss incidental to business. It was finally submitted that the loss, if any, was of a capital nature. There was no change in the amount of loan and the provision for a higher amount for repaying the loan could not be called a revenue expenditure as it was related to capital and was connected with the return thereof.
8. The Tribunal, inter alia, noted that no evidence had been adduced to show the probable date of repayment of the said loan. On the date of the devaluation the original period for repayment, i.e., one year, had already expired. Accordingly, the Tribunal held that the assessee was not required to repay the loan on the 6th June, 1966, or that any liability for the expenditure of the extra amount of Rs. 2,83,614 arose on that date. The Tribunal held further that the liability to pay the extra amount, if any, was a contingent liability.
9. On the authority of the Supreme Court in Indian Molasses Co. (P.) Ltd. v. CIT : [1959]37ITR66(SC) , the Tribunal held that the assessee did not actually incur any expenditure which would qualify for allowance under Section 37.
10. The Tribunal also found that the assessee required additional funds and obtained the said loan not only for financing its business but also to meet an immediate taxation liability of Rs. 10 lakhs as admitted in the letter dated 18th January, 1965, addressed to the Reserve Bank. There being no evidence as to which part of the taxation liabilities was met out of the loan, the Tribunal concluded from the said letter that the major requirement of the assessee was to meet the taxation liabilities. Following a decision of this court in Mannalal Ratanlal v. CIT : [1965]58ITR84(Cal) , the Tribunal held that the expenditure it incurred was in connection with the payment of tax and could not be allowed under Section 37.
11. The Tribunal held that, as no repayment was made to the principal-company in the assessment year, there was no question of claiming any lossin that year. The Tribunal also held, following a decision of this court inSutlej Cotton Mills Ltd. v. CIT : [1971]81ITR641(Cal) , that the loss inexchange having arisen due to devaluation, which was an act of the Stateand an act of the Sovereign, was not a loss springing directly from thecarrying on nor incidental to the carrying on of the business of the assesseeand, therefore, could not be allowed also on this ground,
12. On the application of the assessee under Section 256(1) of the I.T. Act, 1961, and also Section 18 of the Companies (Profits) Surtax Act, 1964, the Tribunal has drawn up a statement of case and has referred the following questions for the opinion of this court as questions of law arising from its order :
Under the Income-tax Act, 1961:
'1. Whether, on the facts and in the circumstances of the case, and on a proper construction of the assessee's letter of 18th January, 1965, the Tribunal was right in holding that the assessee's major requirement for its loan was to meet its taxation liabilities ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of Rs. 2,83,614 was not deductible in computing the assessee's profits and gains of business ?'
Under the Companies (Profits) Surtax Act, 1964 :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of Rs. 2,83,614 was not deductible in computing the chargeable profits for the purposes of the surtax assessment for the year 1967-68 ?'
13. Mr. Kalyan Roy, learned counsel for the assessee, in his submissions on question No. 1 before us contended that on a proper construction of the assessee's letter dated the 18th January, 1965, it could not be said that the major requirement of the assessee in obtaining the said loan was to meet its taxation liabilities as on that date. He contended that it was clearly seen from the letter of the foreign principal that the loan was being advanced to the assessee to enable it to finance the current Government contract and not to meet the assessee's taxation liabilities. In the assessee's letter to the Reserve Bank it was also reiterated that the loan was necessary for the purpose of financing the contract. It also appeared from the said letter that the subject of the loan was broached prior to the 17th June, 1964, and prior to the taxation liability of 1965. On a proper construction of the said letter, which was a question of law, Mr. Ray submitted that it could not be said that the major requirement of the assessee for the loan was for meeting taxation liability.
14. Mr. Suhas Sen, learned counsel for the revenue, contended on the other hand, that the finding of the Tribunal that the major requirement of the assessee was to meet the taxation liabilities was a finding of fact which had not been challenged in these proceedings as perverse or based on no evidence. He submitted that construction of ordinary correspondence did not give rise to questions of law which could arise only where legal documents Were being construed. In the instant case the Tribunal has drawn a factual conclusion from the letter.
15. It appears to us that the question No. 1 is an academic question. In the earlier part of its order the Tribunal records as follows : '.........Theabove facts as emerged from the letter dated 18-l-65 go to show that the major requirement before the company was to meet the taxationliabilities'. But in the latter part of the order it is recorded as follows ; '17. Besides, as we have already stated above, the loss has arisen, if not substantially at least to a great extent, in the discharge of the assessee's income-tax liabilities......' The latter part of the Tribunal's order whichdoes not mention the assessee's major requirement has not been challenged and, therefore, the challenge to the earlier construction of the letter by itself does not advance the assessee's case further.
16. For the reasons given above we decline to answer question No. 1. 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 business expenditure. It was as much an expenditure as bank or postal charges which might have had to be incurred by the assessee if the amount was remitted by post or through bank for repayment of the loan. In terms of sterling the amount of loan remained fixed but in obtaining the foreign currency the assessee had to incur an extra expenditure in rupees. This, according to Mr. Roy, was a normal and proper business expenditure allowable under Section 37 of the Act.
17. Mr. Roy submitted next that as the assessee at the relevant time maintained its accounts under the mercantile system, this expenditure was incurred during the relevant year. The moment devaluation took place, the liability for the extra amount was incurred by the assessee and had to be debited in the assessee's profit and loss account in that year. Alternatively, in providing for the extra amount on account of the devaluation, the assessee suffered a loss and such loss was connected with, incidental to and was incurred for the purpose of the assessee's business. It was a loss of a revenue nature and not of a capital nature.
18. Mr. Roy, lastly, submitted that even if it was admitted that the object of the assessee in obtaining the loan was to meet its income-tax liabilities, the extra expenditure incurred in connection with such loan would also come within the ambit of the expression 'purpose of the assessee's business' in Section 37 of the Act. Mr. Roy submitted that by reason of the subsequent decisions of the Supreme Court, the decision of this court in Mannalal Ratanlal's case : [1965]58ITR84(Cal) was no longer good law.
19. Mr. Suhas Sen, for the revenue, has contended to the contrary. He submitted first that the assessee did not incur any expenditure. Expenditure meant an actual and current disbursement. In the facts of the instant case, the assessee not having determined any particular date for repayment of the loan, no question arose of its spending anything.
20. Mr. Sen next contended that the loss of the assessee, if any, by reason of the devaluation was not the loss suffered in the year. In any event,assuming that the assessee suffered a loss, the same was a capital loss and not a revenue loss and the assessee was not entitled to any deduction thereof.
21. Lastly, Mr. Sen submitted that Mannalal Ratanlal's case : [1965]58ITR84(Cal) was still good law and the assessee having obtained the loan with the object of meeting its income-tax liabilities did not incur any expenditure solely or exclusively for the purpose of its business nor suffered any loss therein and, therefore, was not entitled to any deduction of the extra amounts repaid on account thereof.
22. In support of the respective contentions of the parties a large number of decisions were cited at the Bar. We shall refer to the following which in our opinion are of relevance in the present reference.
(a) Keshav Mills Ltd. v. CIT : [1953]23ITR230(SC) . This decision of the Supreme Court was cited on behalf of the assessee for the following observations of Bhagwati J. at page 239 on mercantile system of accounting :
'The mercantile system of accounting or what is otherwise known as the double entry system......brings into credit what is due, immediately itbecomes legally due and before it is actually received and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed.' (b) Calcutta Co. Ltd. v. CIT : [1959]37ITR1(SC) . This decision of theSupreme Court was also cited by the assessee on mercantile system ofaccounting.
In this case the assessee had sold land in plots for building purposes undertaking to develop them by laying out roads, providing a drainage system and installing lights, etc. The purchaser paid only a portion of the price and undertook to pay the balance in instalments. The assessee in its turn undertook to carry out the development within six months. In the relevant accounting year the assessee in accordance with the mercantile system of accounts adopted by it, credited its accounts with the full sale price of the lands though it incurred only a part and at the same time debited an estimated sum by way of expenditure for the development undertaken though nothing had been actually spent. On these facts the Supreme Court, inter alia, held as follows at page 10 of the report 3 :
'....we find that the sum of Rs. 24,809 represented the estimated expenditure which had to be incurred by the appellant in discharging a liability which it had already undertaken under the terms of the deeds of sale of the lands in question and was an accrued liability which according to the mercantile system of accounting the appellant was entitled to debit in its books of account for the accounting year as against the receipts of Rs. 43,692-11-9 which represented the sale proceeds of the said lands.' (c) Indian Molasses Co. v. C1T : [1959]37ITR66(SC) . This decision of the Supreme Court was also cited on behalf of the assessee for the following observations at page 76 :
'Thus, in finding out what profits there be, the normal accountancy practice may be to allow as expense any sum in respect of liabilities which have accrued over the accounting period and to deduct such sums from profits. But the income-tax laws do not take every such allowance as legitimate for purposes of tax. A distinction is made between an actual liability in praesenti and a liability de future which, for the time being, is only contingent. The former is deductible but not the latter......What a prudent trader sets apart to meet a liability, not actually present but only contingent, cannot bear the character of expense till the liability becomes real.' (d) Metal Box Company of India Ltd. v. Their Workmen : (1969)ILLJ785SC . This decision of the Supreme Court was cited by the assessee. It was held in this case that an estimated liability, amounting to a contingent liability and not a debt under the W.T. Act, if it could be properly ascertainable and its present value could be fairly discounted, would be deductible from the gross receipts while preparing the profit and loss account.
(e) Edward Collins & Sons Ltd. v. IRC [1924] 12 TC 773. This English decision was cited on behalf of the revenue. The facts in this case were that the accounting period of the assessee ended on the 30th April, 1921. Prior to that date the assessee had entered into contracts to purchase quantities of goods to be delivered between November, 1920, and December, 1921. After the contract was entered into prices fell. The assessee had received only a portion of goods by the 30th April, 1921, but in the computation of excess profits duty the assessee claimed to deduct the difference between the contract price and the market price of the undelivered goods as estimated loss. On these facts it was held on a reference that loss plaimed was only an apprehended future loss and not one suffered during the accounting period and, therefore, the deduction claimed was inadmissible.
(f) Whimster & Co. v. IRC [1925] 12 TC 813. This decision was also cited on behalf of the revenue. Here the loss claimed by the assessee on unexpired time-charter of ships on the basis of an anticipated fall of freight was disallowed as a deduction.
(g) Alien v. Farquharson Brothers & Co. [1932] 17 TC 59. This decision was cited by the revenue for the following observations of Finlay J. at page 64 of the report to illustrate the distinction between an expenditure and a loss :
'Now a case might be put in which it was not very easy to say whether a thing was a disbursement or expense or was a loss. It is conceivable--such things sometimes happen--that there may be cases in which a thing might fall alternately......But, none the less, I do think that there is a distinction to be drawn between the two. (a) relates to disbursements ; that means something or other which the trader pays out ; I think some sort of volition is indicated. He chooses to pay out some disbursement; it is an expense; it is something which comes out of his pocket. A loss is something different. That is not a thing which he expends or disburses. That is a thing which, so to speak, comes upon him ab extra.' (h) Pandyan Insurance Co. Ltd. v. CIT : [1965]55ITR716(SC) was cited by the revenue for an observation of the Supreme Court similar to the above as follows :
'The word 'expenditure' in rule 6 of the Schedule to the Indian Income-tax Act, 1922, meant 'disbursement' and did not include depreciation.' (i) Landes Brothers v. Simpson [1934] 19 TC 62. This decision was cited on behalf of the revenue. In this case the assessee, the sole commission agent of a company for sale in Britain, which imported furs under the terms of the agency, had to advance to its principal a part of the value of each consignment to be adjusted after the sale thereof. The transactions were conducted on dollar basis and when the assessee recouped itself for the advances a profit accrued as a result of fluctuation in the rate of exchange. Such profits were held to be a part of the trading receipts of the assessee arising in the course of its business and hence taxable.
(j) Radio Pictures Ltd. v. IRC [1938] 22 TC 106. This decision was cited on behalf of the assessee. The facts in this case were that an English company was granted a licence to distribute within a definite territory the films of an American company. The agreement provided that the English company would pay to its American company 70% of the gross receipts less certain stipulated deductions but was silent as to the exchange basis which was to govern the transactions. At an earlier stage, the English company had been instructed to keep the accounts on the basis of a fixed rate of exchange and the difference between that rate and the rate prevailing at the end of the week in which the transaction took place was directed to be passed on to a suspense account. The books of the English company were maintained throughout on this basis. Owing to a delay in the adjustment of accounts between the two companies and a fall in the value of sterling in relation to dollar large adverse differences were shown in the suspense account. The English company was initially assessed to income-tax without regard to the suspense account but subsequently preferred claims for relief on the ground that the adverse differences in exchange as shown in the suspense account were deductible in computing its profits. It was held by the Court of Appeal that the contractual relationship of the parties established that the English company's debts to the American company were dollar debts and, therefore, the reliefs claimed should be allowed.
(k) Davies v. Shell Company of China Ltd. [1952] 22 ITR (Supp) 1; [1951] 32 TC 133. In this case, cited by the revenue the assessee was a British company which carried on business of sale and distribution of petroleum products in China through agents from whom the assessee obtained deposits at the termination of the agency. When hostilities between China and Japan broke out the assessee transferred the amounts of deposits to the United Kingdom and retained the same in sterling. Owing to subsequent depreciation of Chinese dollars in relation to sterling, the amounts eventually required to repay the deposits in Chinese currency were much less than the amounts held by the assessee and a substantial profit accrued to the latter. It was held that such profits were capital profits and hence not taxable. The relevant observations in the judgment of Jenkins L.J. at pages 147 and 156 are set out as follows :
'The sum paid is a deposit...It is not however a payment in advance...It has the character of a loan in that it is repayable at the determination of the agency by the company, and also in that it has to carry interest at a fixed rate per cent. per annum. '
P. 156 : 'It is to be available during the period of the agency for making good the agent's defaults in the event of any default by him ; but otherwise it remains, as I see it, simply as a loan owing by the company to the agent and repayable on the termination of the agency ; and I do not see how the fact that the purpose for which it is given is to provide a security against any possible default by the agent can invest it with the character of a trading receipt.'
(l) K.M.S. Lakshmanier & Sons v. CIT & EPT : [1953]23ITR202(SC) . The facts in this case cited by the revenue were that the assessee who carried on business in yarns received from its customers sums which they claimed to be 'borrowed money' within the meaning of the Excess Profits Tax Act and as such not chargeable to excess profits tax. The revenue authorities, the Tribunal and the Madras High Court rejected the contentions of the assessee. On a final appeal, the Supreme Court, however, found that a part of the deposits from the customers of the assessee had no connection with the price of the yarn to be supplied, but were to be held as security for due performance of the contract and that the assessee had to pay the interest on the amounts. Ultimately, unless there was adjustment against liability, the amount had to be returned.
The Supreme Court held that the transaction was essentially a contract of loan. The Supreme Court considered Shell Company of China Ltd. [1952] 22 ITR (Supp) 1; [1951] 32 TC 133, and noted that similardeposits were treated as capital receipts and profits thereon by reason of fluctuation of the exchange rate would be capital gain.
(m) Punjab Distilling Industries Ltd. v. CIT : [1959]35ITR519(SC) was also cited by the revenue, where the Supreme Court again considered Shell Company of China Ltd. [1952] 22 ITR (Supp) 1; [1951] 32 TC 133 and construed it in the same manner as in Lakshmanier & Sons : [1953]23ITR202(SC) .
(n) India Cements Ltd. v. CIT : [1966]60ITR52(SC) was cited on behalf of the assessee. It was contended that this decision had a departure from Shell Company of China Ltd. [1952] 22 ITR (Supp) 1 ; [1951] 32 TC 133.
In this case, the assessee spent a substantial sum towards stamp duty, registration fees, lawyer's fees, etc., in obtaining a loan from the Industrial Finance Corporation secured by a charge on its fixed assets. The Supreme Court upheld the assessee's claim that the said expenditure was deductible as a revenue expenditure (p. 63) :
'...we are of the opinion that : (a) the loan obtained is not an asset or advantage of an enduring nature ; (b) that the expenditure was made for securing the use of money for a certain period ; and (c) that it is irrelevant to consider the object with which the loan was obtained. Consequently, in the circumstances of the case, the expenditure was revenue expenditure within Section 10(2)(xv). ' (o) CIT v. New India Assurance Co. Ltd. : [1969]71ITR761(Bom) . This decision of the Bombay High Court was cited by the assessee. In the relevant assessment year the assessee, an insurance company, claimed deduction of a loss. It was alleged that such loss had been incurred by reason of devaluation of the Pakistan currency on the 31st July, 1955. On that date an amount in Pakistan rupees was due from the Pakistan Government to the assessee on account of advance payment of income-tax. An amount was also due and payable to the assessee under the double taxation avoidance agreement between India and Pakistan. As a result of devaluation the amounts so due and payable were reduced. The assessee alleged that it had suffered a loss and claimed a deduction thereof from its business income. The Bombay High Court held as follows (p. 797): 'It is clear, therefore, that when the difference arose it was a differencewhich was entirely independent of the volition of the assessee. At no stagedid the assessee intend to lay out this amount for any expenditure but,on the other hand, it was fortuitous circumstance that Pakistan devaluedits currency that resulted in this difference. It was, therefore, upon thetests laid down in the authorities, clearly a business loss which the assesseeincurred.'
23. In the facts of this case as found we are unable to accept the contention of the revenue that notionally the expenditure, if any, incurred by or any loss accruing to the assessee by reason of the devaluation did not arise in the year of assessment. The assessee admittedly maintained its accounts on mercantile basis. On devaluation of the Indian currency the liability of the assessee immediately increased to the extent the rupee was devalued and the assessee became liable to pay and/or spend an extra amount in rupees in order to pay its dues. This liability accrued during the relevant period. In the event this debt would be remitted or would become irrecoverable from the assessee in future then under Section 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 and Whimster & Co. [1925] 12 TC 813 and the principles laid down in the said decisions have no application in the instant case.
24. 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. Therefore, the distinction between loss suffered without any immediate disbursement and an expenditure incurred would be of not much significance.
25. The question which in our view is of real importance in the instant case is whether the loss or expenditure of the assessee as a result of the devaluation is of a capital nature or of a revenue nature. Mr. Kalyan Roy, for the assessee, has contended in the course of his submissions that a loss has to be considered in a different way from a gain in computing business profits. There may be cases where a loss de hors the business is allowed as a business loss, whereas a gain arising in similar circumstances will never be a business gain. In our view this distinction again is of little significance as the gain or the loss, as the case may be, has to be connected with the business before the same can enter into the computation of profits.
26. On a scrutiny of the facts of the instant case it appears to us that as a result of the devaluation which befell the assessee, it became immediately liable to an extra liability in terms of its rupee assets for repayment of its debts. This extra expenditure, deemed or otherwise, or this loss, is inextricably connected with the assessee's indebtedness and did not arise de hors the indebtedness nor was it incurred for the purposes of the loan and it was, as, if, from the date of the devaluation the dues from the assessee to its creditors in rupees were increased. We are unable to accept the contentions of Mr. Ray that the extra amount which the assessee had to provide for as a result of the devaluation is to be considered as extra expenditure to be incurred for meeting the debt just as postal expenses or bank charges or this extra expenditure which would result in a business loss of a revenue nature.
27. In our view, the propositions laid down in the case of Shell Co. of China Ltd. [1952] 22 ITR (Supp.) 1 ; [1951] 32 TC 133 apply on all fours to the instant case. If there would have been a devaluation in favour of the rupee as a result of which the assessee had to pay less to its creditors, the surplus arising would have been of capital nature and could not have been assessed in the hands of the assessee as a business profit. Conversely as a result of the exchange rate going against the assessee the loss which the assessee incurred cannot be held to be a revenue loss. The Supreme Court considered Shell Co. of China Ltd. : [1952]22ITR1(All) ; [1951] 32 TC 133 in K.M.S. Lakshmanier & Sons : [1953]23ITR202(SC) and Punjab Distilling Industries Ltd. : [1959]35ITR519(SC) . The ratio in the said English decision and the principle laid down therein were accepted and approved by the Supreme Court. The instant case can also be distinguished from the decision of the Supreme Court in India Cements Ltd. : [1966]60ITR52(SC) . It was decided in that case that any expenditure incurred for securing the use of money for a certain period, i.e., for the purpose of obtaining a loan which was not an asset or advantage of an enduring nature, was a revenue expenditure, and that the purpose for which the loan was obtained was irrelevant in deciding whether such expenditure would be a capital expenditure or a revenue expenditure. In the instant case it is not contended by the assessee that it had incurred the extra expenditure in order to secure the loan. The loan had already been obtained. It is at the point of repayment that the assessee has to provide an extra amount in rupees by reason of the devaluation.
28. For the reasons given above We answer question No. 2 in the affirmative and in favour of the revenue.
29. A large number of decisions were cited and extensive submissions weremade on the aspect whether an expenditure incurred or a loss suffered inrespect of money borrowed for the purpose of payment of income-tax wouldbe deductible as a business expenditure or a business loss. Inasmuch as wehold that the loss suffered or expenditure incurred is not deductible as it isof capital nature, it is not necessary for us to consider this aspect of thematter any further.
30. The question referred to under the Companies (Profit) Surtax Act, 1964, is a question consequential to question No. 2. By reason of the answer given to question No. 2, we answer this question also in the affirmative and in favour of the revenue. There will be no order as to costs.
Bimal Chandra Basak, J.
31. I agree.