Rajendra Nath Mittal, J.
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. 15,00,000and 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 & of the loan interest by December 31, 1965.
4. The Govt. of India, Ministry of Finance (Dept. of Economic Affairs), by their letter dated July 20, 1961, approved the assessee's proposal of obtaining a loan of Rs. 6.5 lakhs from M/s. Groz-Beckert International, a Swiss company of the assessee's collaborators, M/s. Groz-Beckert, West Germany. It was, however, said that the loan would be repayable in three equal and yearly instalments after 10 years and would carry interest at the rate of 8% per annum subject to Indian taxes. The Reserve Bank gave its approval, vide letter dated August 25, 1961. Thereafter, the assessee received 1,84,000 Swiss francs on August 10, 1961, from M/s. Groz-Beckert International A. G. and a further amount of 1,84,000 Swiss francs on September 5, 1961. The exchange ratio at the relevant time was such that the sum of 1,84,000 Swiss francs was equivalent to Rs. 2,00,000.
5. The Indian currency was devalued with effect from June 5, 1966, at a ratio of 57.5%. On that date, the assessee owed to M/s. Groz-Beckert International A.G. a sum of 3,84,000 Swiss francs plus interest of 26,000 Swiss francs. The result of the devaluation was that the assessee was required to pay an increased sum in rupees and the increase was Rs. 2,43,300 (Rs. 2,30,000 on account of loan and Rs. 13,800 on account of additional interest). The assessee at that time had also foreign assets in the shape of bills realisable. It earned a profit of Rs. 1,02,632 due to the devaluation of the rupee on the outstanding foreign bills. This amount was due because of supplying goods in the trade account outside India. The resultant profit of Rs. 1,02,632 was amalgamated by the assessee with the loss of Rs. 2,43,800 and the balance of Rs. 1,41,168 was taken to the profit and loss account as being revenue loss. The ITO did not accept the contention of the assessee that the balance of Rs. 1,41,168 was a revenueloss. On the other hand, he held that the profit of Rs. 1,02,632 was taxable being revenue appreciation, while the loss of Rs. 2,43,800 was not admissible being capital loss on exchange fluctuation in capital account.
6. The assessee filed an appeal against the order of the ITO to the AAC which was dismissed. It went up in second appeal before the Tribunal and pleaded that Rs. 2,43,800 should be allowed as revenue loss. It was contended by the assessee that the loss occurred because the assessee was short of working capital, that the liability could be described only as liability for working-cum-circulating capital and that it was a case of revenue loss. On the other hand, it was contended on behalf of the revenue that the liability arose because of the assessee's intention to utilize the loan in the capital account and that the loss was inadmissible as it was not a charge on the revenues of the year. The Tribunal observed that there were two significant factors for determining the issue, first, the loan was received from the supplier of the machinery and, secondly, it was received towards the beginning of the career of the company. It admitted that the trading operation had begun prior to the receipt of the loan, but said that, in view of the aforesaid material, the loan was to be treated as part of the capital structure. It further held that it was immaterial to consider whether the loan was utilized for the purpose of acquiring any capital asset or as a circulating capital. The disallowance of Rs. 2,30,000 was, therefore, upheld. The liability of Rs. 13,800 on account of interest was, however, allowed as business expenditure.
7. The assessee made an application for referring three questions of law for the opinion of this court under Section 256(1) of the Act, but the Tribunal referred only one question which has been already reproduced above.
8. It is contended by Mr. Sibal, learned counsel for the assessee, that the amount of loan from M/s. Groz-Beckert was taken for working capital and not for erecting the profit-making apparatus. He submits that even if it may be assumed that it was to be utilized in capital account it was not used for that purpose and was diverted towards working capital. He further urges that the amount in capital account can be used as a working capital and vice versa. According to him, in the present case, the Tribunal should have found out as to how the loan was being used by the assessee in the financial year concerned, which it failed to do. He submits that the Tribunal has misdirected itself in taking into consideration irrelevant matters in holding that the loan was part of fixed capital. On the other hand, Mr. Awasthy, learned counsel for the revenue, has argued that the question as to whether the loan was part of fixed capital or working capital is a question of fact and the finding of the Tribunal that this forms part of the fixed capital cannot be upset by this court.
9. We have heard the learned counsel for the parties at considerable length. It may be highlighted that in the first instance, the cost of the initial project was estimated as Rs. 15,00,000 but later while working out the details of the project, it was revealed that an amount of Rs. 23 lakhs would be required for the total project. Details of the project cost have been given in the paper book as annex. A. This was annexed with the letter dated July 20, 1961, written by the assessee to the Ministry of Finance (Dept. of Economic Affairs). In annex. A cost of several items are mentioned which include, land and building for factory, plant and machinery, fixture for factory, furniture and vehicles, miscellaneous expenses, i.e., salaries and wages, deposits, rents, contingencies; provision for raw material, stores, etc., and provision for working capital. From a perusal of the above details it is evident that out of about Rs. 23 lakhs some part was to be utilized towards fixed capital and some towards working capital. In the letter dated July 20, 1961, it was stated by the assessee to the Ministry of Finance that the additional finance to meet the increased cost would be only for the beginning years, that a loan had been considered the best solution as the company was expected to earn good profits in its manufacturing programme and that it would be possible for it to repay the loan by December 31, 1965. It would also be relevant to mention that the assessee submitted to the ITO the balance-sheet and statement of account showing the disbursement of the loan received by it from Groz-Beckert, which is annex. D. In that it is shown that payments had been made to various parties between August 10, 1961, to September 5, 1961. The learned counsel for the revenue before the Tribunal had argued that the liability on account of devaluation arose on the amount which the assessee had intention to utilize in capital account and, therefore, the loss was in capital account. On the other hand, the counsel for the assessee had urged that the assessee sought a loan for working capital and, therefore, the loss was to be considered towards working-cum-circulating capital. The learned Tribunal held that the loan was received from the supplier of the machinery and that the loan was received towards the beginning of the career of the company, and, therefore, it was to be considered as a part of the capital assets. It may further be highlighted that before the receipt of the loan, the assessee had started trading operations.
10. It is not disputed that if the loss is sustained by the assessee towards trading account, it is a trading loss and if it is suffered towards capital account, it is a capital loss. The question, however, is as to what is circulating capital and what is fixed capital. It is not easy to give any definition of the two terms. The Supreme Court noticed this matter in Sutlej Cotton Mills Ltd. v. CIT  115 ITR 1 wherein it observed.:
'It is, of course, not easy to define precisely what is the line of demarcation between fixed capital and circulating capital, but there is a well recognized distinction between the two concepts. Adam Smith in his Wealth of Nations describes 'fixed capital' as what the owner turns to profit by keeping it in his own possession and 'circulating capital' as what he makes profit of by parting with it and letting it change masters. 'Circulating capital' means capital employed in the trading operations of the business and the dealings with it comprise trading receipts and trading disbursements, while 'fixed capital' means capital not so employed in the business, though it may be used for the purposes of a manufacturing business, but does not constitute capital employed in the trading operations of the business. Vide Golden Horse Shoe (New) Ltd. v. Thurgood  18 TC 280. If there is any loss resulting from depreciation of the foreign currency which is embarked or adventured in the business and is part of the circulating capital, it would be a trading loss, but depreciation of fixed capital on account of alteration in exchange rate would be a capital loss. Putting it differently, if the amount in foreign currency is utilized or intended to be utilized in the course of business or for a trading purpose or for effecting a transaction on revenue account, loss arising from depreciation in its value on account of alteration in the rate of exchange would be a trading loss, but if the amount is held as a capital asset, loss arising from depreciation would be a capital loss...'
11. To buttress the aforesaid conclusion, the Supreme Court referred to its earlier decisions in CIT v. Tata Locomotive and Engineering Co. Ltd. : 60ITR405(SC) and CIT v. Canara Bank Ltd. : 63ITR328(SC) . We shall make a reference to these decisions in some detail at a later stage. The Tribunal, while coming to the conclusion that the loan was taken towards the capital account, took into consideration irrelevant matters, namely, the loan was received from the supplier of the machinery and that it was received towards the beginning of the career of the company. The person from whom the loan is received by an assessee cannot be a relevant consideration for determining as to whether the loan was towards the trading account or capital account. The time when the loan is received is also not of much significance. The crucial thing is regarding the utilization of the loan. The Tribunal, however, did not consider the matter from this point of view. It is also relevant to point out that the Tribunal felt some difficulty in deciding the question especially in view of the fact that trading operations had already begun prior to the receipt of the money, and it frankly admitted so. That shows that the Tribunal itself is doubtful about the correctness of its view.
12. It is now well settled that circulating capital can be utilized towards capital account. In this regard it will be advantageous to refer to the observations of their Lordships of the Supreme Court in Tata Locomotive and Engineering's case  60 ITR 405. In that case, the assessee carried on business in the manufacture of locomotive boilers and locomotives, for the purpose of manufacturing activity which had to make purchases of plant and machinery in the U.S.A. With the sanction of the exchange control authorities it had remitted to its agent in the U.S.A. $33,850 for the purpose of purchasing capital goods and other expenses. The assessee as the selling agent of Baldwin Locomotive Works of U.S.A. for the sale of their products in India, incurred expenses on their behalf in India and also earned a commission of $36,123. With the sanction of the exchange control authorities the amounts paid by Baldwin Locomotive Works in reimbursement of the expenses and towards commission were retained with its agent in the U.S.A. for the purchase of capital goods there. The pound sterling and with it the Indian rupee were devalued on September 16, 1949. Thereafter, the assessee found it more expensive to buy American goods and, as the Govt. of India also imposed some restrictions on imports from the U.S.A., the assessee with the permission of the Reserve Bank, repatriated $49,500. This resulted in a surplus and the ITO assessed it as profit arising to the assessee incidentally to its carrying on the business. The Appellate Tribunal, however, held that only that part of the surplus which was attributable to $36,123 received from Baldwin Locomotive Works was a trading profit. On a reference, the High Court held that the surplus attributable to $36,123 was an accretion to the assessee's fixed capital and was not liable to tax. The Supreme Court affirmed the judgment of the High Court. The following observations are relevant (p. 410):
'...but it seems to us that the answer to the questions depends on whether the act of keeping the money, i.e., $36,123.02, for capital purposes after obtaining the sanction of the Reserve Bank was part of or a trading transaction. If it was part of or a trading transaction then any profit that would accrue would be revenue receipt; if it was not part of or a trading transaction then the profit made would be a capital profit and not taxable. There is no doubt that the amount of $36,123.02 was a revenue receipt in the assessee's business of commission agency ; instead of repatriating it immediately, the assessee obtained the sanction of the Reserve Bank to utilize the commission in its business of manufacture of locomotive boilers and locomotives for buying capital goods. That was quite an independent transaction, and it is the nature of this transaction which has to be determined. In our view, it was not a trading transaction in the business of manufacture of locomotive boilers and locomotives; it was clearly a transaction of accumulating dollars to pay for capital goods, the first step to the acquisition of capital goods. If the assesseehad repatriated $36,123.02 and then after obtaining the sanction of the Reserve Bank remitted $36,123.02 to the U.S.A., Mr. Sastri does not contest that any profit made on devaluation would have been a capital profit. But, in our opinion, the fact that the assessee kept the money there does not make any difference especially, as we have pointed out, that it was a new transaction which the assessee entered into, the transaction being the first step to acquisition of capital goods.'
13. Bhagwati J., after referring to the said judgment (Tata Locomotive's case : 60ITR405(SC) ) in Sutlej Cotton Mills' case : 116ITR1(SC) , observed thus:
'It would, thus, be seen that the test applied by this court was whether the appreciation in value had taken place in a capital asset or in a trading asset or, in other words, in fixed capital or in circulating capital and since the amount of $36,123, though initially a trading receipt, was set apart for purchase of capital goods and was thus converted into a capital asset or fixed capital, it was held that appreciation in its value on conversion from dollar currency to rupee currency was a capital profit and not a trading profit. The position was the same as if the assessee had repatriated $36,123 in the relevant assessment year in which it was earned and then immediately remitted an identical amount to the United States for the purchase of capital goods and profit had accrued on subsequent repatriation of this amount on account of alteration in the rate of exchange.'
14. The same view was taken in Canara Bank's case : 63ITR328(SC) . In that case, the Canara Bank had opened a branch in Karachi on November 15, 1946. After the partition of the country, the currency of the two dominions of India and Pakistan continued to be at par until there was a devaluation of the Indian rupee on September 18, 1949. On that date the respondent had a sum of Rs. 3,97,221 at the Karachi branch belonging to its head office. As Pakistan did not devalue its currency the parity between the Indian rupee and the Pakistan rupee ceased to exist. The exchange ratio between the two countries was not determined until February 27, 1951. The bank did not carry on any business in foreign currency and even after it was permitted to carry on business in Pakistan currency on April 3, 1951, it carried on no foreign exchange business. The Appellate Tribunal found that the money was lying idle in the Karachi branch and was not utilised in any banking operation even within Pakistan. The State Bank of Pakistan granted permission on July 1, 1953, and two days later the bank remitted the amount to India and in view of the difference in values of the currencies, made a profit of Rs. 1,73,817. The question arose as to whether that amount was a revenue receipt. The Supreme Court held that the appreciation of the money did not arise in the course of any trading operation. Assuming that the amount of Rs. 3,97,221 was originally stock-in-trade, when it was blocked and sterilised and the bank was unable to deal with that amount, it ceased to be its stock-in-trade and the increase in its value owing to exchange fluctuation was a capital receipt. It was further held that if the profit by exchange operations comes in not by way of business of the assessee, the profit would be capital. From a perusal of the above two cases, it is evident that the assessees had been initially using the amounts repatriated on circulating capital but at the time of repatriation it was to be utilized on capital account. Therefore, it was held that the amount should be taken towards capital account. Similarly, the amounts taken for the purposes of fixed capital may be utilized as working capital and in that eventuality it will be treated as a working capital. The Tribunal while deciding the matter did not take these factors into consideration.
15. The next question is as to at what point of time the utilization of the loan is to be seen, that is, whether at the time when the loan was taken or at the time when the loss was suffered on account of repatriation. The answer to this question is also impliedly given by their Lordships of the Supreme Court in Tata Locomotive and Engineering Co. : 60ITR405(SC) and Canara Bank : 63ITR328(SC) cases. The facts in the above two cases have already been given above. The purpose for which the money had been kept in the accounts at the time of repatriation was considered relevant. We have already held above that circulating capital can be utilized towards capital account and vice versa. If it is so, then the purpose for which the amount is being utilized is to be seen in the relevant assessment year. We also got support in the abovesaid view from Sutlej Cotton Mills' case : 116ITR1(SC) . In that case, the appellant company had its head office in Calcutta. It had a cotton mill situated in West Pakistan where it manufactured and sold cotton fabrics. During the financial year ending March 31, 1954, relevant to the assessment year 1954-1955, the appellant made large profits amounting to Indian Rs. 1,68,97,232 converted at the then prevailing rate of exchange of 100 Pakistani rupees to 144 Indian rupees. On August 8, 1955, Pakistan devalued its rupee restoring the parity between the Indian rupee and the Pakistani rupee. Thereafter, during the accounting periods, relevant to the assessment years 1957-58 and 1959-60, the appellant obtained permission of the Reserve Bank of Pakistan and remitted to India Rs. 25 lakhs and Rs. 12 1/2 lakhs, respectively. The appellant claimed that on remittance it suffered respectively a loss of Rs. 11 lakhs and Rs. 5 1/2 lakhs. The claim was rejected by the department and the Tribunal sustained the disallowance. On a reference, the High Court held that no loss was sustained by the appellant on remittance of the amounts from West Pakistan and that, inany 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 appellant but was one caused by devaluation which was an act of State. On appeal to the Supreme Court, the order of the High Court was set aside and the case was remanded to the Tribunal, observing that the question whether the loss suffered by the appellant was a trading loss or a capital loss, could not be answered unless it was first determined whether the two amounts of Rs. 25 lakhs and Rs. 12 1/2 lakhs were held by the appellant on capital account or on revenue account. The Tribunal while deciding the question also did not take into consideration the said criterion.
16. The question then arises as to whether the finding of fact reached by the Tribunal by referring to irrelevant matters and not taking into consideration the relevant matters is binding on the High Court in a reference. Mr. Sibal has argued that such a finding is vitiated and not binding. He has referred to CIT v. Daulat Ram Rawatmull : 87ITR349(SC) . On the other hand, the learned counsel for the revenue has strenuously urged that such a finding is binding. In support of his contention, he has referred to CIT v. Scindia Steam Navigation Co. Ltd. : 42ITR589(SC) , Aluminium Corporation of India Ltd. v. CIT : 86ITR11(SC) and CIT v. Madan Gopal Radhey Lal : 73ITR652(SC) .
17. We have given due consideration to the arguments of the learned counsel. In our view, the finding of fact arrived at by the Tribunal by taking into consideration irrelevant matters is not binding in a reference. In the aforesaid view, we find support from the observations of the Supreme Court in Daulat Ram Rawatmull's case : 87ITR349(SC) . It was held in that case that there should be some direct nexus between the conclusion of fact arrived at by the authority concerned and the primary facts upon which that conclusion is based. The use of extraneous and irrelevant material in arriving at that conclusion would vitiate the conclusion of fact because it is difficult to predicate as to what extent the extraneous and irrelevant material has influenced the authority in arriving at the conclusion of fact. It is further held that when a court of fact acts on material partly relevant and partly irrelevant, it is impossible to say to what extent the mind of the court was affected by the irrelevant material used by it in arriving at its finding. Such a finding is vitiated because of the use of inadmissible material and thereby an issue of law arises. It is further held that likewise, if the court of fact bases its decision partly on conjectures, surmises and suspicions and partly on evidence, in such a situation an issue of law arises. The cases referred to by the learned counsel for the revenue are distinguishable. The criteria which the Tribunal has taken into consideration for arriving at the finding of fact and which it ought to have taken into consideration for doing so havealready been given above, and it is not necessary to refer to them again. No finding has been given by the Tribunal as to whether the amount of loan was utilized by the assessee as a fixed capital or working capital in the relevant assessment year which is necessary for determining the question referred to the court. In the circumstances, it would be proper that the case is sent back to the Tribunal to dispose of the matter in accordance with the observations made above. A similar view was taken by their Lordships of the Supreme Court in Sutlej Cotton Mills' case : 116ITR1(SC) .
18. For the aforesaid reasons, we send the case back to the Tribunal with the direction that it should dispose of the case in the light of the observations made above.
19. No order as to costs.
J.V. Gupta , J.
20. I agree.