1. These are references under section 256(1) of the Income-tax Act, 1961, made at the instance of the Revenue. Two common questions are posed, namely :
'(1) Whether, on the facts and in the circumstances of the case, the Data Processing Machines are office appliances and are, therefore, ineligible for the allowance of development rebate to the assessee for the assessment years 1967-68, 1968-69, 1969-70, 1970-71 and 1971-72 ?
(2) Whether, on the facts and in the circumstances of the case, the devaluation loss of Rs. 42,44,932 is an allowable revenue loss in the assessment year 1967-68 ?'
2. Counsel are agreed that the answer to be given to the first question is covered by the decision of this court in the assessee's own case in CIT v. I. B. M. World Trade Corporation : 130ITR739(Bom) . The first question shall, accordingly, be answered in the negative and in favour of the assessee.
3. The facts that are set out are in relation to the second question.
4. The assessment years involved are 1967-68 to 1971-72. The method of accounting followed by the assessee is the mercantile system.
5. The head office of the IBM World Trade Corporation is at New York. It has branches all over the world, including one in India which is 'the assessee'. It is an admitted position that the assessee was required to pay to the head office in U. S. Dollars its share of 'administrative and overhead expenses' incurred by the head office.
6. The liability of the assessee to pay its share of administrative and overhead expenses to the head office has been considered by the Income-tax officer year after year to be allowable revenue expenditure. Although this allowance had been granted from year to year, the assessee had not been able to remit to the head office the amounts due on this account for the Reserve Bank's permission therefor had not been obtained. This was because the assessee's income-tax assessments were not completed. On June 6, 1966, the amount on account of administrative and overhead expenses unmerited to the head office and standing to its credit amounted to U. S. S 16,26,106. On June 6, 1966, the Indian rupee was devalued. The liability of the assessee to the head office in terms of the Indian rupee increased, consequent upon the devaluation, by an amount of Rs. 44,76,735. Setting off of profit which the assessee had earned in respect of commission and other credits due by the head office to it, against the amount of RS. 44,76,735, the net increase in the liability in terms of rupees amounted to Rs. 42,44,932.
7. In the course of the assessment of the assessee for the accounting period relevant to the assessment year 1967-68, the assessee claimed the said amount of Rs. 42,44,932 as an admissible deduction, being a loss arising on account of devaluation. The Income-tax Officer rejected the assessee's claim. In appeal by the assessee, the Appellate Assistant Commissioner allowed the deduction.
8. An appeal was filed to the Income-tax Appellate Tribunal. One of the grounds of the Revenue's appeal needs, in the context of the arguments that have been advanced before us on behalf of the Revenue, to be set out|
'On the facts and in the circumstances of the case and without prejudice to the ground at 2 above, the learned Appellate Assistant Commissioner ought to have upheld the Income-tax Officer's contention that unmerited head office expenses represented funds that were retained in India and were used in India as working capital and, therefore, the increased liability, if any, on this account would be a loss of capital and not a loss on revenue account, especially in view of the fact that the assessee-company made no attempt to remit to the head office expenses in the relevant years.'
9. The Tribunal came to the conclusion that the assessee was entitled to the deduction of the said amount of Rs. 42,44,932 in its assessment for the assessment year 1967-68 as the devaluation took place on June 6, 1966, and the loss arose to the assessee in the course of carrying on its business. The Tribunal noted that, admittedly, the proportionate share of the assessee towards the administrative and overhead expenses payable to the head office had been allowed by the Revenue in the past year after year. As such, the amount which was due to the head office on account of that proportionate share as on the date of devaluation, which was in the nature of an allowable revenue liability, could not, by any stretch of imagination, take the nature of a capital asset, as was argued on behalf of the Revenue.
10. Mr. Jetly, learned counsel for the Revenue, submitted that the unmerited head office expenses, which had been allowed from year to year as revenue expenditure and which were held by the assessee on behalf of the head office, were held as part of its capital; that the loss at the time when these expenses were actually remitted was a capital loss and not a revenue loss; that the unmerited head office expenses did not form part of the circulating capital of the assessee but were in the nature of a capital asset and that the loss suffered by the assessee towards increased liability on account of devaluation was, therefore, a capital loss and not a loss incurred in the carrying on of its business; and that the unmerited head office expenses were in the nature of a debt and the liability was of a capital nature. Alternatively, it was urged by Mr. Jetly that the increased liability caused by devaluation could not be treated as a trading or revenue loss but as a capital loss.
11. Great emphasis was laid by Mr. Jetly upon the decision of the Supreme Court in Sutlej Cotton Mills Ltd. v. CIT : 116ITR1(SC) . The appellants before the Supreme Court had their head office in Calcutta and a cotton mill in West Pakistan. During the year ending March 31, 1954, they made large profits. The then prevailing rate of exchange was 100 Pakisthani rupees equal to 144 Indian rupees. On August 8, l955, Pakistan devalued its rupee and restored parity between the Indian and Pakistani rupees. The appellants thereafter obtained the permission of the Reserve Bank of Pakistan and remitted certain sums of money to India. The appellants claimed that they had suffered losses on the remittances. The claim was rejected by the authorities. The Tribunal sustained the disallowance. The High Court, on a reference, held that no loss had been sustained by the appellants and that in any event, the loss could not be said to be a business loss, because it was not a loss arising in the course of the business of the appellants but was one caused by the act of State, that of devaluation. The Supreme Court observed that it was not the factor or the circumstances which caused the loss that was material in determining the true nature and character thereof but whether it had occurred in the course of carrying on the business or was incidental to it. Whether the loss suffered by the appellants was a trading loss or not would depend on the answer to the question whether the loss was in respect of a trading asset or a capital asset; in the former case, it would be a trading loss but not so in the latter. The test was also formulated in another way by asking the question whether the loss was in respect of circulating capital or of fixed capital. Circulating capital was capital employed in the trading operations of the business and the dealings with it comprised trading receipts and trading disbursements, while fixed capital meant capital not so employed in the business. If there was any loss resulting from depreciation of foreign currency which was embarked or adventured in the business and was part of the circulating capital, it would be a trading loss; but depreciation of fixed capital on account of an alteration in the exchange rate would be a capital loss. The law could be taken to be well-settled that where a profit or loss arose to an assessee on account of appreciation or depreciation in the value of foreign currency held by it on conversion into another currency, such profit or loss would, ordinarily, be trading profit or loss if the foreign currency was held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. If, on the other hand, the foreign currency was held as a capital asset or as fixed capital, such profit or loss would be of a capital nature. On the facts of the case before the Supreme Court, the question whether the loss suffered by the appellants was a trading loss or a capital loss could not be answered, unless it was first determined whether the amounts had been held by the appellants on capital account or on Revenue account or, to put it differently, as part of fixed capital or of circulating capital. The Supreme Court, therefore, ordered that the matter should go back to the Tribunal to make a report on whether the sums were held by the appellants in West Pakistan as a capital asset or as a trading asset or, in other words, as part of fixed capital or part of circulating capital in the business.
12. The facts in the Supreme Court case were different from those before us, in that, there, it was the appellants themselves who held the foreign currency in West Pakistan. There was no material to show whether it had been so held as part of the appellants' circulating capital or as part of their fixed capital.
13. In the instant case, as the ground of appeal to the Tribunal quoted above shows, it was the case of the Revenue itself that the unmerited head office expenses were used in India by the assessee as working capital. Working capital is that which is utilised in the business and is another expression for circulating capital. The Supreme Court has, in the abovementioned case, stated that a loss resulting from devaluation of foreign currency which is embarked or adventured in business and is part of the circulating capital is a trading loss. On the Revenue's own showing, therefore, the assessee incurred a trading loss.
14. Mr. Jetly relied upon two decisions, one of the Court of Appeal and the other of the Supreme Court, which also are distinguishable on facts.
15. In Davies (H. M. Inspector of Taxes) v. The Shell Company of China Ltd.  22 ITR (Supp) 1, the Court of Appeal was dealing with a case in which the assessee was a British company carrying on the business of sale and distribution of petroleum products in China. It employed a number of Chinese agents to whom petroleum products were consigned, payments for which were not made beforehand. The agents were required by the terms of their contracts to deposit with the company certain sums in Chinese dollars and the company was empowered to take out of the deposits any amounts which might become due from the agents in the event of their default. The deposits were repayable at the determination of the agency by the company and were to carry interest at a fixed rate. The company was empowered to use the deposits in any way it liked; but it kept in Shanghai banks Chinese dollar deposits of an amount roughly equivalent to the sum which the company had acquired from the agents at any given time. When war broke out between China and Japan, the company sold the Chinese dollars for sterling at the then current rate of exchange, transferred the resultant sterling amount to the United Kingdom and placed the amount on deposit with its parent company. Subsequently, the assessee closed down its operations through the agents in China. There was then a depreciation of the Chinese dollar with respect to sterling and the amount required to repay the deposits of the agents in Chinese dollars was much less than the amount held by the company to meet their claims. The question was whether the profit thus made by the company was assessable to income-tax. The Special Commissioners found that the assessee was free to use the moneys for the time being in its hands for investment as part of its fixed capital and did, in fact, so use them. On these facts, the Court of Appeal observed that the agents' deposits were not trade receipts but were anterior to the stage of trade receipts and that the excess amount was not a trading profit but was the equivalent of an appreciation in a capital asset not forming part of the assets employed as circulating capital in the trade.
16. In CIT v. Tata Locomotive and Engineering Co. Ltd. : 60ITR405(SC) , the assessee had to make purchases of plant and machinery in the U. S. A. and had remitted to its agent there a certain sum for purchasing capital goods and other expenses. As selling agents of an American company, the assessee had earned the amount of $36,123. With the sanction of the exchange control authorities, this amount was retained with the assessee's agent in the U. S. A. for the purchase of capital goods. The pound sterling, and, with it, the Indian rupee, was devalued on September 16, 1949, and the assessee found it more expensive to buy American goods. Restrictions on imports from the U. S. A. had also been imposed. The assessee, therefore, with the permission of the Reserve Bank, repatriated an amount of $ 49,500. This resulted in a surplus which the Income-tax Officer assessed as the assessee's profit arising incidental to the carrying on of its business. When the matter reached the Supreme Court, it was held that the assessee's act of retaining the moneys in the U. S. A. for capital purchases was not a trading transaction but a transaction of accumulating dollars to pay for capital goods, the first step in the acquisition of capital goods. The surplus was a capital accretion and not profit taxable in the hands of the assessee.
17. Mr. Dalvi, learned counsel for the assessee, brought to our attention a case whose facts are akin to the facts before us, namely, CIT v. International Combustion (I) Put. Ltd. : 137ITR184(Cal) . The assessee company which followed the mercantile system of accounting, purchased plant and machinery from the U. K. and incurred an additional liability to the supplier in the U. K. as a result of the devaluation of the Indian rupee on June 6, 1966. The assessee claimed the same as a deduction in computing its profits. The Tribunal, when the matter went up to it, upheld the assessee's claim. The Calcutta High Court, upon a reference, affirmed the Tribunal's decision. It noted that this was a case where the outstanding liability to pay the price of goods purchased by the assessee had gone up due to devaluation in the accounting year under consideration. The payment had to be made in foreign currency under the terms of the agreement with the foreign supplier. The additional liability arose directly from and in the course of purchase of goods and in the usual course of business of the assessee. In order to discharge the liability, the assessee had. after devaluation, to pay a larger amount in rupees. The additional liability arose not in the accounting year when the purchase of goods was effected but in the accounting year when the devaluation took place. The liability had arisen on account of the purchase of goods and remained a trading liability subsequently. Nothing had happened after the liability arose to divest it of the character of a trading debt.
18. In the instant case, the assessee and its head office in the U. S. A. have been treated by the Revenue as different units. The liability of the assessee to pay its share of administrative and overhead expenses of the head office has, year after year, been recognised by the Revenue to be revenue expenditure. Remittances in respect of these annual liabilities were not made by the assessee for lack of the Reserve Bank's sanction. By the time the remittances could be made, devaluation had been effected and to meet the same liability in U. S. dollars, more Indian rupees were required. The excess in Indian rupees in the year in which the remittance was made was as much a trading liability as the amounts in Indian rupees required earlier and allowed as revenue expenditure. Nothing had transpired till the time of the remittance to change the character of the assessee's liability to the head office. The trading liability remained a trading liability.
19. In the view we take, which is supported by the decision of the Calcutta High Court, we find that the Tribunal was right in holding that the devaluation loss of Rs. 42,44,932 was an allowable revenue loss.
20. We answer the questions thus : Question No.1 : In the negative and in favour of the assessee. Question No.2 : In the affirmative and in favour of the assessee. The Revenue shall pay to the assessee the costs of the reference.