1. This is a reference under s. 256(1) of the I.T. Act, 1961. The facts giving rise to this reference are as follows : The assessee is a limited company in which the public are not substantially interested, and the previous year followed by the assessee is the calendar year. The assessee-company manufactures and sells come anchorages under a licence granted to it by a French company, which has been referred to in the statement of the case as 'S.T.U.P., Paris'. We propose to refer to the said company as 'the French company'. The said licence was granted to the assessee by an agreement dated February 1, 1955. The recitals in that agreement show that the French company was the exclusive licensee in respect of certain patents and processes relating to post-tensioned pre-stressed concrete structures and/or products incorporating cone anchorages and that the French company had developed the use of post-tensioned pre-stressed concrete structures and/or products incorporating cone anchorages, and it became possessed of valuable data, information and experience in the application of the aforesaid patents and processes in relation to the use of cone anchorages. Under the agreement the French company granted to the assessee the right to prospect for and exploit in India, excluding certain parts thereof, the aforesaid patents in respect of post-tensioned pre-stressed concrete structures and/or products constructed or manufactured under or in conjunction with or embodying the said patents and processes and embodying Freyssinet cone anchorages which have been referred to in the said agreement as 'the structures and products'. The assessee was also granted the right to grant sub-licenses to construct, manufacture, use and sell under the said patents structures and products as aforesaid. It may be mentioned that the assessee had been referred to in the said agreement as 'the agent'. Sub-clause (c) of cl. 7 of the said agreement provides that the assessee shall keep all necessary and proper books of account relating to the said patents and structures and payment of royalty under the said agreement, and would allow the French company or its duly authorised agents reasonable access to such books of account. The relevant clause dealing with the question of royalty, with which we are concerned, is cl. 11 of the said agreement. The said clause runs thus :
'11(a)(i) The royalty to be paid by the agent or by a sub-licensee under a sub-licence to be granted hereunder shall not exceed a rate of five per centum of the total cost of all pre-stressed concrete worked, involved or used in connection with the structures and products constructed and/or manufactured under this agreement or any such sub-licence, and for the purpose of this clause such total cost shall include the cost of the cone anchorages used in connection with such work.
(ii) In order to facilitate the assessment of such royalties in accordance with the aforesaid rate S. T. U. P. agrees to such royalties being obtained by charging an appropriate increment on the selling price of the cone anchorages embodied in the structures and/or products constructed and/or manufactured pursuant to the terms of this agreement.
(iii) The basis for assessing such royalties as aforesaid shall be at the rate from time to time in force of the Indian equivalent of ten shillings sterling for each cone anchorage of twelve wire file mill : diameter wire of twenty shillings sterling for each cone anchorage of twelve wire seven mill : diameter wire. In no case shall the agent or a sub-licensee be liable to pay both the maximum five per cent. royalty rate and the respective cone anchorage royalties but only one or the other of such rates as may be agreed with S.T.U.P.
(iv) The agent shall pay all royalties received by it from its sub-licensees together with all royalties payable by it under the terms of this agreement into a separate banking account. The agent shall render to S.T.U.P. an account within thirty days after the thirtieth day of June and the thirty-first day of December in every year during the continuance of this agreement of all royalties received or payable by the agent and paid into such banking account during the preceding half year or other period. Such royalties shall be divided as to forty-eight per cent. thereof to S.T.U.P., as to twelve per cent. thereof to the Pre-stressed Concrete Company Limited of London and as to the balance of forty per cent. thereof to the agent. The agent shall remit with each account the amount shown to be due to S.T.U.P.
(v) Apportionment of royalties under the above sub-clause :-
(i) on direct royalty basis at 5% rate:S.T.U.P. 48%The agent 40%The Pre-Stressed ConcreteCompany Ltd. London 12%(ii) On cone anchorage basis rate:(a) On 12.5 cone anchorage(b) On 12.7 cone anchorageS.T.U.P. 4/9 S.T.U.P. 9/6The agent 4/0 The agent 8/0The Pre- The Pre-Stressed StressedConcrete ConcreteCo. Ltd. 1/3 Co. Ltd. 2/6 Provided always that when and as soon as the cone anchorages shall be manufactured in the territory by the agent, then the above-mentioned proportions of royalties of four shillings and nine pence and nine shillings and six pence payable to S. T. U. P. shall be increased to five shillings and three pence and ten shillings respectively.
(vi) All royalties and other sums payable hereunder to S. T. U. P. shall be payable in French francs in Paris calculated at the official legal rate of exchange applicable at the time when payment is due.'
2. In the profit and loss account for the calendar year 1964, the assessee debited Rs. 2,43,614 as royalty payable by it to the French company under the terms of the said agreement. Out of this the assessee remitted an amount of Rs. 1,61,347 prior to June 6, 1966, on which date the Indian rupee was devalued in terms of several foreign currencies, including the French franc. The royalty which remained outstanding in respect of the calendar year ending December 31, 1964, by the assessee to the French company amounted to Rs. 82,267. This amount was remitted by the assessee to the French company after June 6, 1966. On account of devaluation of the rupee as aforesaid, the assessee was obliged to spend Rs. 1,30,879 to make this remittance and thus incurred an additional expenditure of Rs. 48,612 in payment of the royalty for that year. In respect of the calendar year 1965, the assessee had debited a sum of Rs. 2,33,245 as the royalty payable to the French company during that calendar year in its profit and loss account. This entire amount was remitted to the French company after June 6, 1966, and in order to make that remittance the assessee had to incur an additional expenditure of Rs. 1,37,616 on account of devaluation of the Indian rupee. Thus, on account of devaluation of the Indian rupee the assessee had to make a total additional expenditure of Rs. 1,86,227 in respect of royalties for the calendar years ending December 31, 1964, and December, 1965, respectively, which remained to be remitted on June 31, 1966. The assessee claimed a deduction in respect of this additional expenditure on the ground that it was a revenue expenditure incurred by it and as such deductible under the provisions of s. 37 of the I.T. Act, 1961. The ITO rejected this claim of the assessee on the ground that the assessee maintained its account on the mercantile system of accounting, which is the admitted position, and under that system of accounting the liability for payment of royalty as debited in its books in the calendar years 1964 and 1965, was fixed and became final prior to the date of devaluation. He held that all royalties and other sums payable to the French company by the assessee were payable in French francs in Paris calculated at the official legal rate of exchange applicable at the time when the payment was due and the excess payment arising out of devaluation was not a permissible deduction as it did not form part of the contract dues payable to the French company by the assessee. The appeal preferred by the assessee to the AAC was dismissed by the AAC. The assessee then went by way of a second appeal to the Income-tax Appellate Tribunal. The Tribunal held that the payment of royalty had to be determined in terms of French francs alone and that the said liability became final and conclusive only at the time when the remittance of the amount was made to Paris and by that time since the assessee had incurred additional expenditure to discharge the said liability in terms of French francs on account of devaluation of the Indian rupee, the assessee was entitled to claim the amount of the said liability by way of a business expenditure. It is from this decision of the Tribunal that the following question has been referred to us in this reference :
'Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 1,86,227 was a permissible deduction ?'
3. It appears to us that really speaking there are only two main questions which arises for consideration in this reference. The first question is as to whether the liability incurred by the assessee was in Indian rupees or in French francs, and the second question is as to what is the point of time at which this liability became final.
4. In respect of the first question the submission of Mr. Joshi, learned counsel for the Revenue, is that the liability of the assessee was fixed only in terms of Indian rupees and the assessee was bound to send only such amount of French francs as could be obtained for the liability as determined in Indian rupees. In this connection, we may point out that sub-cl. (i) of cl. 11 a) of the said agreement merely fixes the maximum percentage at which the royalty would have to be paid. Sub-clause (iii) provides that the basis for assessing such royalty as aforesaid would be the rate from time to time in force of the Indian rupee equivalent of 10 shillings sterling for each cone anchorage of a particular type and of a 20 shillings sterling for each cone anchorage of another type, namely, of a larger diameter. This sub-clause, in our opinion, merely fixes the amount of royalty which would be payable by the assessee in terms of Indian rupees and that the amount of the liability in terms of the Indian rupees shall be calculated with reference to the rupee equivalent of certain shillings sterling. It must also be noticed that this sub-clause does not deal at all with royalties to be received by the assessee from the sub-licensees, which are dealt with under sub-cl. (iv). What Mr. Joshi is trying to do is to read sub-cl. (iii) in complete isolation from sub-cl. (vi). This, however, cannot be done. It is beyond dispute that sub-cl. (vi) is very relevant for the determination of the question of the currency in which and the time at which the liability is to be determined. A plain reading of sub-cl. (vi) of cl. 11(a) makes it clear that the liability of the assessee for all royalties payable to the French company was in French francs in Paris, calculated at the official legal rate of exchange applicable at the time when the payment was due. This clause makes it clear that the liability is to be in terms of French francs and the determination of the amount of French francs payable is to be on the basis of the official legal rate of exchange between the Indian rupee and the French franc at the time when the payment of the liability is due. Under sub-cl. (iv) of cl. 11(a), the assessee had to pay all royalties received by it from sub-licensees together with all other royalties payable by it under the agreement into a separate bank account. No specific time was, however provided as to when such royalties were to be paid into the separate bank account, and, for a good reason. A particular sub-licensee might not remit to the assessee the royalty payable by that sub-licensee as soon as the liability accrues. Moreover, looking to the terms of the agreement, it would even take some time for the assessee to determine what was the amount payable by it on account of royalty to the French company after closing the accounts as at the end of any particular calendar month. Further, the provisions of sub-cl. (iv) of cl. 11(a) show that the assessee had to render to the French company an account within 30 days after the June 30 and December 31 of every year, during the continuance of the agreement, of all royalties received and payable by the assessee and paid in such bank account as referred to above. It is clear that this account is only relating to such amounts as had been paid by way of royalty by the assessee into the separate bank account and could never be of all royalties which became payable at that point of time, namely, June 30 and December 31 of every year. Under the said sub-clause there was a liability on the assessee to remit such part of the amount in the said separate account as was due to the French company. From this sub-clause read with sub-cl. (vi), in our opinion, it is clear that the liability of the assessee to the French company in respect of royalty had to be calculated in terms of French francs and not in terms of Indian rupees, as contended by Mr. Joshi, and at the time when remittance was made.
5. In respect of the second contention of Mr. Joshi also, what we have pointed out earlier clearly shows that the liability in terms of French francs had to be calculated at the time when the payment or remittance had to be made. In the absence of any contention by the Revenue that the assessee did not make the payment as per the accounts sent to the French company within the time specified in sub-cl. (iv) of cl. 11(a) of the said agreement, we must assume that this was not the case. As the liability has to be ascertained as on the date on which the payment had to be made and as there is no contention that the remittances were made beyond the time stipulated as aforesaid, we are of the view that the liability in terms of French francs was rightly held by the Tribunal to be determinable at the time when the remittance was made.
6. It may be mentioned that, although no such point had been taken before the Tribunal, it was sought to be urged by Mr. Joshi that, in the present case, the assessee had made remittances beyond the time stipulated under the said agreement, and the additional liability on account of devaluation was incurred by reason of such delay, and the assessee was not entitled to get any deduction in respect thereof. In our view, it is not open for Mr. Joshi to raise this contention. If such a contention had been raised even before the Tribunal, which is the final fact-finding authority, an investigation could have been made as to the statements relating to the amounts deposited in the aforesaid bank account which were sent by the assessee prior to June 6, 1966, and whether the assessee had failed to make any remittance, as it was bound to as per such statements, in time. It is not open to the Revenue to raise a contention of this type which would entail further factual investigation at this stage. Moreover, even assuming that there was delay on the part of the assessee in making some remittances and the remittances were made later than stipulated under the said agreement, it would only amount to this, that the additional liability was to some extent incurred by the assessee by reason of a breach of the terms of the said agreement by the assessee. There is no suggestion that such breach of contract was, in any manner, mala fide or deliberate; and one fails to see how, even assuming that the additional liability became due by way of damages for breach of contract, it could ever be said that it should not be allowed as a business expenditure. It is the undisputable position that the aforesaid agreement was entered into by the assessee in the course of its business. The remittances made were also in the course of its business, and the additional liability also accrued to the assessee in the course of its business. It is a liability which the assessee had to incur as an incident of trade, and the expenditure incurred to discharge the said liability must be held to be allowable as a deduction as business expenditure. In this regard, we may refer to the decision of a Division Bench of this court in Narandas Mathuradas & Co. v. CIT : 35ITR461(Bom) . In that case the assessee-firm, which carried on business in several commodities in the course of that business submitted tenders to the B. B. and C. I. Railway and undertook to supply certain commodities. The amount which it had deposited as security for properly carrying out the contract in accordance with the terms of the tender was forfeited as the assessee could not carry out the contract, and the assessee claimed this amount as a trading loss. It was held that as the assessee was already carrying on business and the tender was only a transaction in that business and it was in order to put through that transaction that it made the deposit and it was made solely for the purpose of earning profits in the course of business, the amount paid as deposit which was forfeited was a trading loss, and the assessee was, therefore, entitled to deduct that amount in order to arrive at the true profits of the business.
7. In the result, the question referred to us is answered in the affirmative and in favour of the assessee. The Revenue to pay to the assessee the costs of the reference.