Suhas Chandra Sen, J. - (1.) International Combustion (I) Pvt. Ltd. is a construction contractor and a dealer in machinery and "plant. The relevant assessment year is 1967-68, and the corresponding previous year ended on 30th September, 1966. The company purchased plant and machinery from the United Kingdom. As a result of these transactions the assessee-company had to pay huge amounts to the suppliers of U.K. But its liability further increased as a result of devaluation of the Indian rupee on 6th June, 1966. The assessee-company was, therefore, required to pay an additional liability of Rs. 19,48,067 to the suppliers of U.K. The assessee claimed this liability as a deduction in computing the profits for the assessment year 1967-68. The ITO, however, disallowed this amount by relying on the judgment of the Bombay High Court in the case of Pohoomal Brothers [1965] 55 ITR 112. It was further observed by him that this could not be allowed even as an expenditure under Section 37 of the I.T. Act.
(2.) The AAC, on appeal, held that the amount in question was in respect of the outstanding dues on account of purchase of raw materials and, therefore, it could not be termed as a loss but an expenditure incurred which was reflected in the books of the assessee. The assessee was following the mercantile system of accounting. The whole of the amount was, therefore, admissible as a deduction in computing the profits of the company. He further observed that the assessee's liability to pay the nonresident in terms of sterling was a contractual relationship between the two parties. The AAC, therefore, allowed the appeal of the assessee-company. The department preferred an appeal to the Tribunal. The Tribunal held that the assessee had a trading liability which had remained as a trading liability and had not been converted either into a loan or into a reserve. The Tribunal pointed out that there was no dispute with regard to the fact that the assessee-company had purchased plant and machinery from the non-resident suppliers which formed part of stock-in-trade of the assessee. The assessee was maintaining the books of account on the mercantile system of accountancy. In other words, the income and expenses were debited to the trading account or profit and loss account on accrual basis and not on payment basis. The assessee-company purchased the goods in the earlier years also and paid various amounts and the difference was carried forward to the next year. In the assessment year under dispute the position was as under : JUDGEMENT_184_ITR137_1982Html1.htm
(3.) On 6th June, 1966, the assessee-company had to pay Rs. 32,64,230 01. But since devaluation took place on 6th June, 1966, the assessee-company was called upon to pay Rs. 52,03,297.85 and that resulted in an additional liability of Rs. 19,49,067.84. In other words, this was the enhanced price payable for the purchases made by the assessee. The Tribunal was of the view that the additional liability due to devaluation was due to the carrying on of the business and had sprung from the business carried on by the assessee.;