Sabyasachi Mukharji, J. - (1.) In this reference under Section 256(1) of the I.T. Act, 1961, the Tribunal has referred certain questions of law both at the instance of the assessee as well as at the instance of the Revenue. In order to understand these questions, it is necessary to note that the assessment year involved is the assessment year 1967-68. The assessee had taken a loan of 3,94,433, from the Burmah Oil Co., London, in 1966, which was free of interest. It was repaid in December, 1966. In the meantime, there was a devaluation of the Indian rupee on the 6th June, 1966. As a result of the devaluation, the assessee had to pay in terms of the Indian currency Rs. 83,24,896 as against Rs. 52,50,000 received by the assessee as the original amount of loan. The extra amount of Rs. 30,74,896 was claimed by the assessee as a loss incidental to its business or as an expenditure under Section 37 of 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 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 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 sterling. The assessee, therefore, worked out its loss as a result of devaluation at Rs. 7,12,27,476 as per the following details : JUDGEMENT_156_ITR137_1982Html1.htm
(2.) Against the above, the assessee had a gain of Rs. 1,93,137 on account of devaluation on money realised in the U.K. for an insurance claim in respect of the damage caused to its pipeline lying along the Dhansiri Bridge. This gain was originally adjusted against the loss stated above and after the adjustment the net devaluation loss was claimed at Rs. 7,10,34,340. Subsequently, the assessee changed its stand and claimed that the devaluation gain in respect of insurance claim was not taxable at all and as such the devaluation loss should not be reduced by that amount. The above loss of Rs. 7,12,27,476 was allocated by the assessee towards the capital and revenue expenses as the loan itself was utilised for such combined purposes. The allocation as given was as under : JUDGEMENT_156_ITR137_1982Html2.htm
(3.) The assessee claimed depreciation on the enhanced value of Rs. 6,13,37,796 which was allowed by the ITO under Section 43A of the Act. The ITO also observed that the claim for deduction of Rs. 6,11,780 would be embedded in the cost of stores as and when these were consumed and debited to the accounts in the subsequent years and that it would come for consideration in those years. These decisions of the ITO were accepted by the assessee. The claim was, therefore, reduced to Rs. 92,77,900. The assessee urged before the ITO that the above amount of Rs. 92,77,900 was either allowable as an expenditure under Section 37 of the Act or as a loss incidental to its business under Section 28 of the Act. It was urged that since the amount of loan to which the amount was attributable had 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 Section 28 of the Act. The ITO rejected both the contentions of the assessee for the reasons given by him in his order.;