Sabyasachi Mukharji, J. - (1.) In this reference, under Sub-section (1) of Section 256 of the I.T. Act, 1961, for the assessment year 1967-68, the following questions have been referred to this court for answer ; "1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the increase in liability of Rs. 1,75,99,854 due to devaluation was not deductible in computing the assessee's business income ? 2. If the answer to question No. 1 is in the affirmative, whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the alternative claim of the assessee-company for development rebate under section 33 of the 'Income-tax Act, 1961, on Rs. 1,09,24,832 was not admissible under the provisions of the Act ?"
(2.) In order to appreciate these questions, it is necessary to state certain facts. The assessee is a limited company and, as mentioned hereinbefore, the reference relates to the assessment year 1967-68. The assessee-company under an agreement dated August 16, 1963, had taken a loan from the Export Import Bank of Washington for making payment in the United States of America of the price of capital plant and machinery purchased for the new project, viz., a petrochemical undertaking. The loan was taken and repayable in dollars. This is an important fact which is to be borne in mind. Out of this loan, which the assessee-company took from the Export Import Bank, payment was made for capital plant and machinery purchased from the various suppliers in the United States of America and the plant and machinery so purchased were shipped to India for installation in the petrochemical undertaking. On June 6, 1966, there was devaluation of the Indian rupee and, therefore, the liability of the assessee-company for repayment of loan to the Export Import Bank in dollars increased in terms of rupees to Rs. 1,75,99,854. This increased liability was accounted for by the assessee-company by crediting the Export Import Bank and debiting Rs. 1,09,24,932 to the plant and machinery account, Rs. 98,766 to the building account and Rs. 65,74,256 to the capital work-in-progress. The assessee-company claimed before the ITO that the increased liability of Rs. 1,75,99,854 arising out of devaluation of the Indian rupee on June 6, 1966, should be allowed as deduction in computing the business income. Alternatively, it was claimed by the assessee-company that the amount of Rs. 1,09,24,832, attributable to the plant and machinery account, development rebate should be allowed. The ITO rejected both these claims. The assessee-company thereafter preferred an appeal before the AAC. The AAC, relying on some other point, upheld the findings of the ITO on these two aspects. The assessee-company thereafter preferred a further appeal before the Tribunal. The Tribunal, on a consideration of the rival contentions made before it, had held as follows: "5. We have considered the rival submissions. On the first issue whether the loss arising out of devaluation on account of loan from the Export Import Bank of Washington was an allowable deduction in computing the business income, even though a number of case law have been cited before us by both the sides, the answer to the question is self-evident from the ruling of the hon'ble Supreme Court in the case of Commissioner of Income-tax v. Tata Locomotive and Engineering Co. Ltd. In that case, the hon'ble Supreme Court has laid down that where profit or loss arising from change in exchange rate of foreign currency was on the balance outstanding in connection with the purchase of capital goods, the profit or loss is of the nature of capital. Viewed in this context, it was not under dispute in the present case that the loan from the Export Import Bank of Washington was taken for the purchase in the USA of capital plant and machinery in the new project of petrochemical undertaking. The loan outstanding to the Export Import Bank on the devaluation date was thus for a capital purpose, i.e., purchase of capital plant and machinery in the new project of petrochemical undertaking. It follows, therefore, that if there was any profit or loss on account of devaluation in respect of this liability it was on capital account. We, therefore, following the ruling of the hon'ble Supreme Court in the case of Tata Locomotive and Engineering Co. Ltd. , which is a binding authority for us and with which we are in respectful agreement, hold that the loss arising from devaluation attributable to the Export Import Bank was of the nature of capital loss. This could not, therefore, be allowed as a deduction in computing the business profit and was rightly disallowed by the revenue authorities. We will now deal with the alternative issue raised by the assessee-company that even if the loss on devaluation was considered to be capital loss, development rebate should have been allowed on the increased liability arising out of devaluation attributable to plant and machinery installed during the previous year amounting to Rs. 1,09,24,832. Here again, it is not under dispute that out of the loan taken from the Export Import Bank payments were made to suppliers of capital plant and machinery in the USA and the plant and machinery which were installed during the previous year were those items of plant and machinery in respect of which payments had already been made by the assessee-company before the date of devaluation. This means that the actual amount which the assessee-company had to pay for the plant and machinery which was installed during the previous year was at the pre-devaluation rates and the increased liability on account of devaluation was in respect of loan taken in the USA which was outstanding on the devaluation date, and not in respect of purchase of capital plant and machinery. In these circumstances, even according to the criterion of actual cost as submitted before us by the assessee's learned counsel, Shri Rozario, the increased liability on account of devaluation will have nothing to do with what the assessee company had to pay for acquiring capital plant and/or machinery or for bringing them into working condition. No part of the increased liability on account of devaluation can, therefore, be included in the actual cost of plant or machinery which was installed during the previous year. The judgment of the Income-tax Appellate Tribunal in I.T. A, No. 2027 of 1971-72 will, therefore, not be applicable here. If resort is had to the provisions of Section 43A, Sub-section (2) of Section 43A clearly lays down that the variation in actual cost worked out under this section, will have no effect of development rebate admissible under Section 33 of the Income-tax Act, 1961. Thus, the alternative plea of the assessee also fails and the revenue authorities, in our view, were justified in not allowing development rebate on the increased liability arising out of devaluation which was debited by the assessee to the plant and machinery account on both the issues. Therefore, the appeal of the assessee-company fails."
(3.) Upon this, the aforesaid questions have been referred to us.;