- (1.) THE Income-tax Appellate Tribunal, Chandigarh Bench, Chandigarh, has referred the following question of law under Section 256 (1) of the I. T. Act, 1961 (hereinafter referred to as "the Act"), for the opinion of this court: "whether, on the facts and in the circumstances of the case, the loss of Rs. 2,30,000 on account of increase in the liability of the loans payable in foreign exchange is an allowable deduction ?"
(2.) THE relevant facts giving rise to the reference are as follows : The assessee is an Indian company set up in collaboration with Groz-Beckert International A. G. and is engaged in the manufacture and sale of hosiery and knitting machine needles. The company was incorporated after the sanction, from the Government, of the collaboration agreement, on October 15, 1960. The collaboration agreement provided as follows : (1) that the collaborators were to supply machinery and shares worth Rs. 9 lakhs were to be allotted to them as against the price of the machinery. (2) that the Indian promoters were to make available the amount of Rs. 6 lakhs for building indigenous machinery and air conditioning plant, etc.
(3.) THE collaborators and the Indian promoters fulfilled their part of the obligation. The cost of the initial project was estimated at Rs. 15,00,000 and the capital was formed accordingly. Later, at the time of working out the details of the project, it was revealed that an amount of Rs. 23 lakhs would be required for the total project initially. To meet the additional cost of Rs. 8 lakhs, the assessee considered the possibility of raising a loan in India. It could, however, be raised from any finance institution by putting a charge on the machines. The collaborators were not agreeable to put the machines under a charge for reasons of trade secrecy of machines. They, however, agreed to grant a loan to the assessee to the extent of Rs. 5. 5 lakhs at 7 1/2% per annum as interest. The assessee, vide letter dated April 20, 1961, informed the Govt. of India, Ministry of Finance (Dept. of Economic Affairs), of this position and sought their approval for the loan. It was proposed in the letter that 1/3 loan received from the collaborators would be paid back together with the accrued interest by December 31, 1963, of the loan with the accrued interest by December 31, 1964, and the remaining and of the loan interest by December 31, 1965.;