RAMANUJAM J. - The assessee-company had entered into a collaboration agreement dated February 23, 1961, with one M/s. Graf Sales of Switzerland (hereinafter referred to as the 'foreign company'). As per clause 9 of the said agreement, the assessee has to make certain annual payments to the foreign company which for the sake of convenience, may be called 'know-how payments'. For the assessment years 1965-66 and 1967-68, the assessee had made payments of Rs. 6,666 and Rs. 10,526 respectively to the foreign company. The ITO had disallowed the claim for deduction of the said amounts holding that for the previous years, such amounts have been disallowed and the same has been accepted by the assessee without any demur. The said disallowance was challenged before the AAC who, however, held that the claim for deduction was admissible. The Revenue contested the decision of the AAC before the Tribunal. The Tribunal upheld the allowance of the claim. Against the orders of the Tribunal, the Revenue sought and obtained a reference to this court on the following question :
'Whether, on the facts and in the circumstances of the case, it has been rightly held by the Tribunal that the payment of annual fee under clause 9 of the collaboration agreement was in the nature of revenue expenditure and should, therefore, be allowed under section 37 of the Income-tax, Act, 1961 ?'
In the meanwhile, as a result of the devaluation of the rupee which took place on June 6, 1966, the assessees annual liability got enhanced. The assessee had to pay instead of Rs. 26,665 for the four years 1963-64, 1964-65, 1965-66 and 1966-67, an enhanced amount of Rs. 42,105. Thus, as a result of the devaluation of the rupee, the liability of the assessee got enlarged from Rs. 26,665 to Rs. 42,105, the difference being Rs. 15,440. On the ground that this is a liability which arose in the accounting year relevant to the assessment year 1967-68, the assessee claimed that the said sum of Rs. 15,440 should be allowed as an admissible deduction in that year. According to the assessee, the said sum of Rs. 15,440 was a loss incidental to the business and that the said payment was made on October 7, 1966, which should be allowed as a deduction in the assessment year 1967-68. The ITO, however, did not allow the deduction stating that the said payment represented capital expenditure or capital loss and, therefore, no deduction could be allowed. On appeal, the AAC allowed the deduction stating that it was admissible on the basis of ordinary principles of commercial accounting. The Revenue took the matter in appeal to the Tribunal. The Tribunal held that as the know-how payment was already allowed as a deduction on the ground of accrued liability, the question of allowing any further deduction in respect of such amount during the assessment year 1967-68 will not arise. The Tribunal also took the view that the payment of Rs. 15,440 will amount to a capital expenditure or a capital loss, and, therefore, it cannot be allowed as a deduction treating it as a revenue expenditure or as a revenue loss. Aggrieved by this view of the Tribunal, the assessee has sought and obtained a reference of the following questions :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of Rs. 15,440 was not an admissible deduction in computing the total income for the assessment year 1967-68 ?'
So far as the first question which arises in respect of the years 1865-66 and 1966-67 is concerned, as already stated, the Tribunal held that the know-how payments which are made annually as per clause 9 of the collaboration agreement should be treated as admissible deduction and thus upheld the findings of the AAC in that regard. In respect of the assessees own case for the subsequent year, the Tribunal has taken the view that the payment made under cl. 9 of the agreement is an admissible deduction as it is in the nature of revenue expenditure. The said subsequent decision of the Tribunal was considered by this court in T. C. No. 576 of 1976, CIT v. Lakshmi Card Clothing Mfg. Co. (P.) Ltd., judgment dated March 19,1980- : 149ITR712(Mad) and this court upheld the view of the Tribunal as correct. This court took the view in that case that the service rendered under cl. 9 has nothing to do with the setting up of the plant by the assessee-company, that after the setting up of the plant, the foreign company has to render certain services specified in the collaboration agreement to enable the assessee-company to follow the latest technical developments of the foreign company in the manufacture of card clothing, that the services rendered are in the nature of instructions and information relating to the foreign companys latest technical development in the manufacture of card clothing and is related to the carrying on or conduct of the day to day business of the assessee-company, and that, therefore, the services rendered in pursuance of cl. 9 has not resulted in the acquisition of an asset or a right of a permanent character and as such it should be taken to be a revenue expenditure which is an allowable deduction under s. 37. We are in entire agreement with the view expressed in that case. We have to, therefore, hold that the annual payments payable under clause 9 of the agreement are to be allowed as deductions under s. 37 treating them as revenue expenditure. In this view of the matter, the first question is answered in the affirmative and against the Revenue.
Coming to the next questions relating to the allowability of the additional liability of Rs. 15,440 which arose as a result of the devaluation, the Tribunal has given two reasons for holding that the said is not an allowable deduction. One is that the said expenditure is the capital expenditure or a capital loss and hence it cannot be allowed under s. 37. Secondly, the annual payments have been claimed as deduction on the basis of an accrued liability in each of the relevant assessment years, and a deduction having been allowed on that basis, the question of allowing any further deduction in respect of the same liability could not arise. The learned counsel for the assessee submitted that the Tribunal was in error in treating the additional liability in a sum of Rs. 15,440 arising out of devaluation as amounting to capital expenditure or a loss after having held that the original know-how payments partake the character of revenue expenditure. According to him the annual payments provided for in clause 9, which the Tribunal has held to be a revenue expenditure cannot take a different character. When that liability stands enhanced liability arising out of devaluation can only take the character of a revenue expenditure. Merely because the liability stands enhanced on account of the devaluation, the enhanced liability alone cannot take the character of capital expenditure as held by the Tribunal.
The learned counsel for the assessee referred to the decisions of this court in CIT v. South India Viscose Ltd. : 120ITR451(Mad) and CIT v. Universal Radiators : 120ITR906(Mad) , in support of his stand that both the original as well as the enhanced liability should be taken to be of the same character. In CIT v. South India Viscose Ltd. : 120ITR451(Mad) , an India company purchased machinery from an Italian company under an agreement dated December 3, 1958. The agreement provided for payment in terms of British sterling calculated at the then prevalent exchange rate between sterling and the U. S. dollar. In pursuance of the said agreement, the Italian company drew four bills of exchange on the assessee for a certain amount according to the then prevailing rate of foreign exchange. However, due to fluctuations in the rate of foreign exchange, the assessee had to pay a higher sum. Consequently, the assessee had to pay during certain assessment years excess amounts arising out of the variations in the foreign exchange rate. When the assessee claimed deduction in respect of the foreign exchange rate. When the assessee claimed deduction in respect of the excess payment, the claim was negatived by the ITO. Ultimately the matter came to this court on a reference, and this court held that as the price fixed under the agreement was only a tentative price which had to be paid at the then prevailing rates of exchange at the time of the respective payments, the payments related only to the purchase price of the machinery, that as such was on capital account and not allowable as business expenditure. This decision is relied on by the learned counsel only for the purpose of sustaining the stand that the excess payments should be taken to be of the same character as the original payment and it cannot be taken differently from its original character.
In CIT v. Universal Radiators : 120ITR906(Mad) . an Indian company entered into a contract with an American company for the purchase of copper bars for re-rolling them into strips and sheets. The assessee opened a letter of credit in a bank in favour of the foreign seller. The ship on which the goods were sent was seized by the Pakistan government due to hostilities between the India and Pakistan. The assessee made a claim on the insurance company for the loss of the material. The insurance company accepted the liability and paid the amount in America dollars. Due to devaluation of the rupee, the assessee got a higher amount in Indian rupees than what it had paid. The ITO treated the surplus as liable to tax as trading profit. The AAC confirmed the view. The Tribunal, however, held that when the vessel was impounded by the Pakistan authorities, the character of the goods changed and then became sterlised and ceased to be the stock-in-trade of the assessee and hence the amount was a capital receipt. When the matter came to this court, this court took the view that so long as the profit accruing to the assessee had its origin on the revenue account, the assessee would be liable to be taxed and that there is no capital element in the transaction, that the whole transaction was part and parcel of the business carried on by the assessee and not extraneous to it, that the receipt cannot be treated as capital in nature and that the profit occasioned by an external factor like devaluation would make no difference.
Reference was also made to a decision of the Calcutta High Court in Calautta Jute Agency (P) Ltd. v. CIT : 117ITR741(Cal) . In that case, there was a contract for the purchase of jute from London by an Indian commpany. A letter of credit was opened in favour of the seller in London. However, the contract of sale could not be performed due to hostilities between India and Pakistan. Therefore, the letter of credit remained unoperated. There was devaulation of the Indian rupee in June, 1966, and by reason of the unoperated letter of credit, the assessee got an amount in excess over the amount originally deposited by them in rupees. The question arose whether the excess receipt is a business profit. The court held that the surplus in the hands of the assessee was inextricably connected with its business, that the money lying in the foreign country for the purchase of jute goods was part of the circulating capital of the assessee, that the fund had not changed its character at the material time, that the accretion to the fund resulted in a profit to the assessee in its business and that, therefore, it is a business profit.
From the three decisions cited above, it can be seen that any additional receipt or an additional liability arising out of devaluation can be taken to be of the same character as the original receipt or the original liability and it cannot be taken to be having a different character. It is unnecessary to duplicate authorities on this point since the learned counsel for the Revenue does not want to support the decision of the Tribunal on this aspect of the matter. We, therefore, cannot accept the finding of the Tribunal that the enhanced liability arising out of the devaluation of the Indian rupee cannot be treated as a capital expenditure or a capital loss and that it will take the same character as the original payment which the Tribunal itself has held to be a revenue expenditure.
The next question is whether the other reasoning given by the Tribunal is tenable. In this case, the assessee has admittedly claimed deduction in the earlier years on the basis of accrued liability and the same has been allowed by the Revenue. It is no doubt true that subsequently the devaluation has occurred on June 6, 1966, which falls within the assessment year 1967-68. Though the devaluation took place in the accounting period, since the original liability arose for the earlier years and the deduction has been claimed for those amounts on the basis of accrued liability, the question is whether can be any further deduction in respect of that liability for the assessment year 1967-68.
The learned counsel for the assessee contends that the devaluation having taken place in the accounting period, the assessee is entitled to claim deduction during that period. However, Mr. J. Jayaraman, learned counsel for the Revenue, points out that the liability is one and it is not open to the assessee to claim deduction in respect of that liability once on the basis of an accrual liability again on the basis of accrued liability and again on the basis of actual payment.According to the Revenue, once decution has been cloaimed on the basis of an accrual of liability, no further deduction could be claimed in respect of the same liability in any subsequent year and the fact that the liability got enhanced as a result of devaluation will not mean that any fresh liability arose in the year of accounting. The learned counsel for the Revenue draws analogy from cases of compensation paid under the Land Acquisition Act and submits that a right or liability which accrued or arose earlier cannot be tacked on to a subsequent year merely because the quantum of that right or liability was modified by extraneous factors. The learned counsel referred to the decision of the Supreme Court in Mrs. Khorshed Shapoor Chenai v. Asst. CED : 122ITR21(SC) as supporting his stand. Dealing with an assessment under the E. D. Act, the Supreme Court went into the question as to the value of certain lands, which had been acquired by the Government under the Land Acquisition Act even before the death of the deceased, when some of his lands had been acquired by the Government under the Land Acquisition Act, the assessee had only a right to receive compensation and that right alone had to be evaluated for determining the principal value of the estate. It was contended on behalf of the accountable person that the right to receive compensation should be regarded as two rights, one the right to receive compensation as per the award made by the Land Acquisition Officer and the other, a right to claim further compensation. The Supreme Court took the view that the right to receive compensation for the lands acquired by the Government at the market value on the date of acquisition is one and indivisible and that there is no right to receive compensation and awarded originally and a separate right to receive extra compensation and that the only right is to receive compensation for the lands which is the fair marked value on the date of the acquisition. Thus, this decision in a way supports the stand taken by the Revenue that there are no two separate liabilities in this case, one the original liability and the other, the additional liability arising out of the devaluation, and that both the liabilities should be treated as one and it should be treated as an accrued liability as the assessee is adopting the mercantile system of accounting.
The decision in T. N. K. Govindarajulu Chetty v. CIT : 87ITR22(Mad) , is also relied on by the learned counsel for the Revenue in support of his submission that once an income accrues and the assessee treats it as taxable during the year of accrual, it is not open to treat it as income in the year of receipt in a case where the assessee follows the mercantile system of accounting. Though the decision dealt with a receipt, the principle of that decision will equally apply to a case of liability.
In this case, the assessee has treated the liability to make the know-how payments as an accrued liability in the earlier assessment years and sought and obtained deduction for those payments under s. 37. Merely because the payment was postponed by the assessee and the liability got enhanced as a result of the devaluation, it cannot be said that there is a creation of any fresh liability during the relevant year 1967-68. Admittedly, the liability to make the original know-how payment arose during the respective earlier. All claims for deduction in respect of that liability should be made only in the relevant assessment year. The mere fact that, as a result of the devaluation, the liability got enhanced will not make that liability as one which arose for the first time in the accounting year referable to the assessment year 1967-68. Therefore, even if the additional liability of Rs. 15,440 is to be treated as a revenue expenditure, it cannot be allowed as a deduction for the year 1967-68, as the said amount will not represent the liability which accrued or arose in that year. Thus, though we hold that the sum of Rs. 15,440 is a revenue expenditure which could be claimed as a deduction under s. 37, the same cannot be claimed as a deduction for the assessment year 1967-68, as it is not a liability which arose or accrued in that year. In this view of the matter, we answer the second question in the affirmative and against the assessee. There will be no order as to costs.