Sabyasachi Mukharji, J.
1. In this reference under Section 256(1) of the I.T. Act, 1961, the following question has been referred to this court:
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the devaluation loss of Rs. 4,17,833 was not deductible in computing the assessee's business income ?'
2. The assessee is a private limited company and the reference relates to the assessment year 1967-68. Daring the previous year relevant to this assessment year there was devaluation of the Indian rupee on 6th June, 1966 and the assessee-company, therefore, claimed before the revenue authorities devaluation loss of Rs. 5,71, 615 on this account, the break-up of which WMS as follows :
(i) Losson devaluation of sterling loan
(ii)Loss on devaluation on balance outstanding for purchase of capital goods
(iii)Loss on devaluation on balance outstanding for import of raw materials andcomponentsused for the purposes of the assessee's business
Deduct : Profit on devaluation onsterling bank balance
3. The ITO, however, disallowed the entire devaluation loss claimed by the assessee-company. The assessee went up in appeal before the AAC. Now, so far as the second item, that is to say, loss on devaluation on balance outstanding for purchase of capital goods is concerned, this was disallowed by the I.T. authorities and has subsequently been upheld and no question has been directed on this account. The loss on devaluation on the balance outstanding for the import of raw materials and components used for the purposes of the assessee's business has been allowed by the Revenue. Therefore, that question is also not the subject-matter of reference before us as the Revenue has not come up in reference on tins point. The deduction of profit on devaluation on the sterling bank balance is also not the subject-matter of adjudication by us because it has been allowed and no question arises on this point. The only question with which we are concerned in this reference is the first item referred to hereinbefore, that is to say, whether loss on devaluation of sterling loan amounting to Rs. 4,17,833 was properly disallowed by the ITO. The facts as found by the AAC were that the assessee-company had raised sterling loans carrying interest at 5% per annum to the extent of 65,000. The rupee equivalent of the sterling loan amounting to Rs. 8,66,667 was brought to India for use in the assessee's business as the company's circulating capital. The assessee-company made a repayment to the extent of 10,500 up to the 5th of June, 1966, and the balance outstanding on the 6th of June, 1966, i.e., the date of devaluation of the Indian rupee was 54,500. The rupee equivalent of the above amount prior to the date of devaluation was Rs. 7,26,667 and the rupee equivalent after the date of devaluation was Rs. 11,44,500, The difference between the aforesaid sums amounted to Rs. 4,17,833 and it represented the loss on devaluation in respect of the sterling loans outstanding as on the 6th of June, 1966. It is this loss which in the subject-matter of adjudication before us. As we have mentioned before the assessee's claim was disallowed by the ITO on the ground that the loss was capital in nature.
4. The AAC, however, was of the view that the ITO's action on this account could not be upheld. The sterling loan had been taken by the assessee-company, according to the AAC, in the regular course of its business 'in order to augment its working funds'. The AAC held that no asset or advantage of an enduring nature had been brought into existence as a result of the loan. As such, according to the AAC, the additional liability incurred on account of devaluation could not be considered to be on capital account. Since devaluation had taken place during the accounting year, the liability had clearly accrued during the relevant previous year, according to the AAC. Therefore, the disallowance Rs. 4,17,833 by the ITO was deleted.
5. Being aggrieved by the aforesaid order, the Revenue went up in appeal before the Tribunal. After setting out the rival contentions and after referring to several authorities, the Tribunal was of the view that whether this loss could be allowed or not depended on whether this loss was due to a sovereign act of the State or whether this sprang directly from the carrying on of the business and/or was incidental to it and whether it was not a loss sustained by the assessee even in some connection with the business. The Tribunal was of the view in that context that even if the loan was taken by the assessee in the running of the business and a certain amount of loan taken in sterling remained outstanding on the devaluation date, a loss would fall to the assessee on this amount as the owner of foreign exchange, to which all persons would be exposed on that date, whether they did business, or not. That meant that this loss, even though it had some connection with the business was not a loss, according to the Appellate Tribunal, which sprang directly from the carrying on of the business or was incidental to it. In the premises the Tribunal was unable to agree with the view taken by the AAC and allowed the Revenue's contention on this ground. There are also several other points involved with which we are not concerned in this reference. As mentioned hereinbefore, under Section 256(1) of the I.T. Act, 1961, the question as indicatedbefore has been referred to this court out of the aforesaid decision of the Tribunal.
6. It is well settled that whether the loss arises as a result of the sovereign act of the State or due to certain extraneous factors is not relevant for considering whether the loss could be allowed as a business loss in a particular case. On this aspect, and on the ground on which the Tribunal had relied, it was not disputed on behalf of the Revenue that it was not a valid ground for the disallowance of this loss. No assessee carries on business for suffering a loss. It has been held and clearly laid down in several authorities and it is now well settled that if the loss arises or is brought about while carrying on the business, though it might have been caused or occasioned by extraneous or outside forces, then such loss would be allowable if it was a revenue loss and connected with the carrying on of the business and would not be allowed if it was a loss on capital account. Therefore, the main question with which we are concerned in this case is whether this loss that befell the assessee was a loss on the revenue account or on the capital account. Now, on this question it was emphasised on behalf of the assessee that this loss was suffered by the assessee in respect of the money that was held by the assessee as circulating capital. Therefore, it was emphasised that this loss should be considered to be loss on the revenue account and as the loss was occasioned in the year in question, on which there is no dispute, the loss should be allowed as revenue loss or revenue expenditure and was to be deducted in computing the total income of the assessee. In this connection reliance was mainly placed on the observations of the Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT : 116ITR1(SC) . But before we deal with that decision it may not be inappropriate to refer to some of the authorities upon which reliance was placed on behalf of the Revenue and the propositions sought to be urged on behalf of the Revenue. It was urged on behalf of the Revenue that unlike the trade debt, a loan is always a capital asset. The user of a loan, which is not a trade debt, would not make it none the less capital. Therefore, it was stressed that between a borrower and the lender the relationship always remained the same irrespective of the manner in which the borrowed money was utilised by the borrower. It was, therefore, emphasised that different considerations might arise or might be applicable in the case of usual trade debts or what is known in common parlance as the current liabilities or outstandings. According to learned advocate for the Revenue, a loan can never be treated on revenue account and, therefore, any loss arising not in respect of dealing with a loan amount but loss because of devaluation or revaluation of the currency in which such loan was obtained and was to be repaid would be always on the capital account. In aid of this proposition,reliance was sought to be placed on the observations of the Court of Appeal of England in the case of Davies v. Shell Company of China Ltd.  32 TC 133 ;  22 ITR (Supp) 1. As this was a case upon which Revenue sought great reliance and as this case had been the subject-matter of interpretation by the Supreme Court on more than one occasion it may not be inappropriate to remind ourselves of the basic facts of that case. There, the assessee-company was a British company carrying on the business of sale and distribution of petroleum products in China and it had employed a number of Chinese agents to whom the petroleum products were consigned for which payments were not made beforehand. They were, however, required by the terms of the contact to deposit with the company certain sums in Chinese dollars and the company was empowered to take out of the deposit any amounts which might become clue from the agents in the event of their default. The deposit was repayable at the determination of agency by the company, and it was to carry interest at a fixed rate per cent. per annum. The company was empowered to use the deposit in any way it liked ; but it was required to keep in Shanghai banks Chinese dollar deposits to an amount equivalent roughly to the sum which the company had acquired from those 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 company closed down its operations through its agents in China. There was then a depreciation of the Chinese dollar with respect to sterling and the amounts required to repay the deposits of the agents in Chinese dollars were much less than the amounts held by the company to meet their claims. The question that arose was whether the profit thus made by the company was assessable to income-tax in England. The Special Commissioners there held that it was a capital profit not subject to income-tax. Mr. Justice Danckwerts held that the question whether it was a trading profit or merely a capital profit was a question of fact on which there was evidence to support the conclusion of the Special Commissioners and that he was not, therefore, entitled to interfere with that finding. On appeal, the Court of Appeal was of the view that the question whether the Special Commissioners were right in holding that the exchange profit was a capital profit not subject to income-tax was properly framed by them as a question of law and that it was open to the court to go into that question. The Court of Appeal further held that it was not a trading profit, but it was simply the equivalent of an appreciation in a capital asset not forming part of the assets employed as circulating capital in the trade and it was, therefore, not assessable to tax. Therefore, from the narration of events, it is apparent that the court proceeded onthe basic assumption of fact that it was an appreciation of a capital asset which did not form part of the assets employed as circulating capital in the trade. We need not actually examine the details or the nature of the deposit made. But it may not be inappropriate to refer to certain observations of Lord Justice Jenkins in the course of the judgment. There, (at pp. 13-14 of the ITR) Jenkins L.J. observed as follows :
'The points to be noticed as to the character of the payment made by an agent under that form of agreement and as to the essential features of the bargain recorded by it are these: The sum paid is a deposit; it is to stand as security for, to put it shortly, the fidelity of the agent so that in the event of default by the agent it may be applied in discharge of sums due from him in respect of sales of petrol or the like. It is not however a payment in advance because what it contemplates is that it shall remain as a standing deposit throughout the period of the agency, and recourse shall not be had to it except in the case of default. It has the character of a loan in that it is repayable at the determination of the agency by the company, and also in that it has to carry interest at a fixed rate per cent. per annum. It is a deposit made in dollars and repayable in dollars. I think those are the relevant points about the deposit agreement.
It is obvious that when a company based on sterling makes an agreement of that kind with an agent in China involving the receipt of Chinese dollars to a specified amount and an obligation in certain events to repay the like number of Chinese dollars, the company if it converts the dollars it receives into sterling may make a profit or loss on the transaction when it ultimately repays the amount, according to the movement up or down of the Chinese dollar exchange in relation to the pound. That is a possible result of an agreement such as this, but it cannot be said that any profit or loss on exchange is a necessary incident of such an agreement, or by any means necessarily within the contemplation of the parties. As the company's business was normally carried on down to 31st December, 1936, matters were in fact so managed that no fluctuation of exchange could affect the position. The company's practice, as I have said, was to keep Chinese dollar deposits in China substantially to the amount of the agents' deposits with the company. The transaction, so long as that practice was preserved, would be a self-balancing transaction, and fluctuations in exchange would be irrelevant. On the face of it the document is not one calculated to provide any profit at all to the company unless indeed it could so use the deposit as to earn interest at a higher rate than the interest it was liable to pay to the depositor. Apart from this possibility the advantage the company got out of the agreement and deposit was simply and solely the security thus provided for the due performance by the agent of his obligations.'
7. On the question of law, Jenkins L.J. observed as follows (p. 18): 'As regards the law to be applied there is a considerable measure of agreement between the parties. Mr. Grant for the company does not dispute that where a British company in the course of its trade engages in a trading transaction such as the purchase of goods abroad, which involves, as a necessary incident of the transaction itself, the purchase of currency of the foreign country concerned, then any profit resulting from an appreciation or loss resulting from a depreciation of the foreign currency embarked in the transaction as compared with sterling will prima facie be a trading profit or a trading loss for income-tax purposes as an integral part of the trading transaction. That concession or admission by Mr. Grant is amply justified by the cases to which we have been referred. There is the case of Landes Brothers v. Simpson  19 TC 62, which is a decision of my brother Singleton as a judge of first instance. There, the appellants, who carried on business as fur and skin merchants and as agents, were appointed sole commission agents of a company for the sale in British and elsewhere of furs exported from Russia on the terms, inter alia, that they should advance to the company a part of the value of each consignment. All the transactions between the appellants and the company were conducted on a dollar basis and owing to fluctuations in the rate of exchange between the dates when advances in dollars were made by the appellants to the company against goods consigned and the dates when the appellants recouped themselves for the advances on the sales of the goods, a profit accrued to the appellants on the conversion of repaid advances into sterling. The decision was that the exchange profits arose directly in the course of the appellants' business with the company and formed part of the appellants' trading receipts for the purpose of computing their profits assessable to income-tax under Case I of Schedule D. My brother Singleton, on p. 69 of the report, cited the case of McKinlay v. H. T. Jenkins and Son, Ltd.,  10 TC 372, to which I will refer in a moment, and then made this comment upon it:
' I pause there to say that in my view the profit which arises in the present case is a profit arising directly from the business which had to be done, because, as is found in paragraph 6 of the case, the business was conducted on a dollar basis and the appellants had, therefore, to buy dollars in order to make the advances against the goods as prescribed by the agreements. The profit accrued in this case because they had to do that, thereafter as a trading concern in this country re-transferring or re-exchanging into sterling.'
That is accepted by both parties as correctly stating the law, and if I may say so, in my view it was clearly a right decision on the facts of thatcase. The question is whether it can be said to have any bearing on the very different facts of the present case.'
8. Then the Court of Appeal referred to the decision in the case of Imperial Tobacco Co. v. Kelly  25 TC 292 , as also to the decision in the case of McKinlay v. H. T. Jenkins and Son, Ltd.  10 TC 372 . The real question, in the view of Jenkins L.J., was whether looking at the nature of the company's business, the nature of the receipts represented by the agents' deposits and of the liabilities represented by the company's obligations as to their repayment and the terms of the documents governing those receipts and liabilities, the transactions with respect to the agents' deposits were trading transactions or not. The real issue, as Lord Justice Jenkins pointed out in that case, was whether the taking of each deposit on the terms of the relative deposit agreement was a trading transaction or not. Lord Justice thereafter noted the arguments of Sir Andrew Clark, who appearing for the Crown said that what was subsequently done with the deposits once they were received would not be material if their receipt was in origin properly to be regarded as a trading receipt. That, Sir Andrew Clark said, must determine the character of the profit made by reason of their repayment in depreciated Chinese dollars. The Lord Justice agreed with that view and to put in the words of Lord Justice Jenkins, it may not be inappropriate to refer to the observations made at  22 ITR (Suppl.) 22 (Davies v. Shell Co. of China Ltd.), wherein it was observed as follows :
'As I have said, Sir Andrew Clark contends that that is an irrelevant consideration, and I agree with him, subject to this reservation : The company might conceivably have used these deposits in such a way as to mingle them with the capital employed in its trading in petrol and petroleum products. It might have invested the deposits in the purchase of petroleum, treating the depositors as trade creditors, the deposits as trade receipts, and repayments of deposits as trade outgoing. If that had been so then it might well have been said, it seems to me, that whatever the nature of the transaction was at the outset the company had so dealt with the deposits in question as to make them part of its circulating or trading capital, with the result that any profit which accrued threugh reduction in the company's liabilities in respect of the deposits owing to the alteration in the rate of exchange could be nothing else but a trading profit. But nothing of that sort happened here and as appears from what I have already said, in fact and in practice the company at all times kept, at first in China and afterwards with its parent company in England, deposit accounts covering the amounts of the agents' deposits. That is consistent with a view on the part of the company that the amounts of these deposits should be treated as something apart from the circulatingcapital of the company. It is a course consistent with that view, and at all events I think one can say this, that if, contrary to Sir Andrew Clark's contention, the deposits did not in origin bear the character of trading receipts but were merely in the nature of capital receipts by way of loan, there was nothing in the subsequent dealing by the company with the deposits, so far as the evidence goes, to import to them a character of trading receipts which they did not in origin possess.'
9. It would, therefore, be apparent from the aforesaid observations that if after the deposit had been made, the company had so dealt with the deposit in question that this formed part of the circulating trading capital then the result of the profit which accrued to such reduction of the company's liability in respect of the deposit owing to the alteration in the rate of exchange would be nothing but trading profit. This seems precisely to be the facts of this case. In the Shell Company's case  22 ITR (Supp) 1 , Sir Andrew Clark had emphasised that we should look at the character of the agents' deposits and the terms of the agreement which was made. Learned advocate appearing for the asses-see described the agents' deposits as part of the company's trading structure, not trade receipts but anterior to the stage of trade receipts and the Lord Justice agreed that that was a fair description of them. Lord Justice observed that it seemed to him that it would be an abuse of language to describe one of these agents after he had made a deposit, as a trade creditor of the company ; he was a creditor of the company in respect of the deposit, not on account of any goods supplied or services rendered by him in the course of its trade but simply by virtue of the fact that he had been appointed an agent of the company with a view to his trading on its behalf, and as a condition of his appointment had deposited with, or in other words, lent to the company the amount of his stipulated deposit. Therefore, this deposit was considered to be simpliciter a loan to the company and on that basis the Court of Appeal had arrived at the conclusion. The decision on this aspect was put by Lord Justice in the following words at  22 ITR (Suppl) 26 :
'After paying the best attention I can to the arguments for the Crown and those for the respondent company, I find nothing in the facts of this case to divest those deposits of the character which it seems to me they originally bore, that is to say, the character of loans by the agents to the company, given no doubt to provide the company with a security, but nevertheless loans. As loans it seems to me they must prima facie be loans on capital not revenue account; which perhaps is only another way of saying that they must prima facie be considered as part of the company's fixed and not of its circulating capital. As appears from what I have saidabove, the evidence does not show that there was anything in the company's mode of dealing with the deposits when received to displace this prima facie conclusion.
In my view, therefore, the conversion of the company's balances of Chinese dollars into sterling and the subsequent re-purchase of Chinese dollars at a lower rate, which enabled the company to pay off its agents' deposits at a smaller cost in sterling than the amount it had realised by converting the deposits into sterling, was not a trading profit, but it was simply the equivalent of an appreciation in a capital asset not forming part of the assets employed as circulating capital in the trade. That being so it was a profit of the nature not properly taxable under Schedule D, and the Special Commissioners in my view came to a right conclusion, which was rightly affirmed by the learned judge, and I would, therefore, dismiss the appeal.'
10. It would be apparent from the aforesaid passage that there was nothing to divest those deposits of the character which they originally bore, that is to say, the character of loans by the agents to the company and that was the prima facie evidence before their Lordships and there was no factual evidence dislodging that prima facie evidence that it was treated as a trading asset or was a part of the circulating capital. On the contrary, in the instant case, before us, it has been found as a fact that the money was borrowed to commission the circulating capital and was indeed being treated as a part of the circulating capital of the company.
11. This case has been understood by the Supreme Court in the light, as we have indicated before, in the case of Sutlej Cotton Mills Ltd. v. CIT : 116ITR1(SC) . In that case what happened was that the assessee-company, which had its head office in Calcutta, 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 1954-55, the assessee had 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 assessee-company obtained permission of the Reserve Bank of Pakistan and remitted to India Rs. 25 lakhs and Rs. 12 1/2 lakhs respectively. The assessee claimed that on remittance the assessee-company suffered respectively a loss of Rs. 11 lakhs and Rs. 5 1/2 lakhs but the claims of the assessee-company were rejected by the Revenue and the Tribunal sustained the disallowance. On a reference, the High Court held that no loss was sustained by the assessee-company on remittance of the amounts from West Pakistan and that, in any event,the loss could not be said to be a business loss because it was not a lossarising in the course of the business of the assessee-company but was onecaused by devaluation which was an act of the State. It was held by theSupreme Court, on appeal, while setting aside the decision of the HighCourt and remanding the case to the Tribunal, that the assessee-company suffered a loss of Rs. 11 lakhs and Rs. 5 1/2 lakhs in the processof conversion on account of alteration in the rate of exchange and furtherthat the question whether the loss suffered by the assessee-company wasa trading loss or a capital loss could not be answered unless it was firstdetermined whether the two amounts of Rs. 25 lakhs and Rs. 12 1/2 lakhswere held by the assessee-company on capital account or on revenueaccount and, since the Tribunal had not enquired into this aspectof the matter, the matter had to be remanded to the Tribunal to determine whether the amounts were held in West Pakistan as capital assetor as trading asset and then whether the loss suffered by the assessee-company was a trading loss or a capital loss. The Supreme Courtnoted several decisions and noted the decision in the case of ImperialTobacco Co. v. Kelly  25 TC 292 . That was a case of a companywhich, in accordance with the usual practice, bought American dollars1for the purpose of purchasing, in the United States, tobacco leaf. Butbefore tobacco leaf could be purchased the transaction was interrupted bythe outbreak of war and the company had, at the request of the Treasury,to stop all further purchases of tobacco leaf in the United States. Theresult was that the company was required to sell the dollars to the Treasuryand owing to the rise which had in the meantime occurred in the dollarexchange, the sale resulted in a profit for the company. The question waswhether the exchange profit thus made on the dollars purchased by thecompany was a trading profit or not. The Court of Appeal held that itwas a trading profit includible in the assessment of the company underCase I of Schedule D and Lord Greene, Master of the Rolls, delivering themain judgment, observed as follows (p. 300):
'The purchase of the dollars was the first step in carrying out an intended commercial transaction, namely, the purchase of tobacco leaf. The dollars were bought in contemplation of that and nothing else. The purchase on the facts found was, as I say, a first step in the carrying out of a commercial transaction.....
The appellant-company having provided themselves with this particular commodity, (namely, dollars) which they proposed to exchange for leaf tobacco, their contemplated transactions became impossible of performance, or were not in fact performed. They then realised the commodity which had become surplus to their requirements. When I say, 'surplus totheir requirements', I mean surplus to their requirements for the purpose and the only purpose for which the dollars were acquired.
In these circumstances, they sell this surplus stock of dollars ; and it seems to me quite impossible to say that the dollars have lost the revenue characteristic which attached to them when they were originally bought, and in some mysterious way have acquired a capital character. In my opinion, it does not make any difference that the contemplated purchases were stopped by the operation of Treasury or governmental orders, if that were the case ; nor is the case affected by the fact that the purchase was under a Treasury requisition and was not a voluntary one. It would be a fantastic result, supposing the company had been able voluntarily, at its own free will, to sell those surplus dollars, if in that case the resulting profit should be regarded as income, whereas if the sale were a compulsory one the resulting profit would be capital. That is a distinction which, in my opinion, cannot possibly be made.
To reduce the matter to its simplest elements, the appellant company has sold a surplus stock of dollars which it had acquired for the purpose of effecting a transaction on revenue account. If the transaction is regarded in that light, it seems to me it is precisely on all fours with the case of any trader who, having -acquired commodities for the purpose of carrying out a contract, which falls under the head of revenue for the purpose of assessment under Schedule D, Case I, then finds that he has bought more than he ultimately needs and proceeds to sell the surplus. In that case it could not be suggested that the profit so made was anything but income. It had an income character impressed upon it from the very first.'
12. The Supreme Court clearly laid down that where an assessee in the course of its trade engaged in a trading transaction, such as purchase of goods abroad, which involved as a necessary incident of the transaction itself, the purchase of currency of the foreign country concerned, then profit resulting from appreciation or loss resulting from depreciation of the foreign currency embarked in the transaction would prima facie be a trading profit or a trading loss. The Supreme Court also considered in this connection the Shell Company's case,  22 ITR (Supp) 1 , which we have set out hereinbefore and, after referring to that decision, the court observed at p. 10 of the report that since the Court of Appeal took the view that the deposits were in the nature of fixed capital, any appreciation in their value on account of alteration in the rate of exchange would be on capital account and that is why the Court of Appeal held that such appreciation represented capital profit and not trading profit. Therefore, the court proceeded that the Court of Appeal in England in Shell Company's case had held that the amount represented fixed capitalasset and not, as in this case, the circulating capital. The Supreme Court after referring to the several other decisions, put the law so far as the present question before us is concerned as follows (Sutlej Cotton Mills' case : 116ITR1(SC) ) :
'The law may, therefore, now be taken to be well settled that where profit or loss arises 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 is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But, if, on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature. Now, in the present case, no finding appears to have been given by the Tribunal as to whether the sums of Rs. 25 lakhs and Rs. 12,50,000 were held by the assessee in West Pakistan on capital account or revenue account and whether they were part of fixed capital or of circulating capital embarked and adventured in the business in West Pakistan. If these two amounts were employed in the business in West Pakistan and formed part of the circulating capital of that business, the loss of Rs. 11 lakhs and Rs. 5,50,000 resulting to the assessee on remission of those amounts to India, on account of alteration in the rate of exchange, would be a trading loss, but if, instead, these two amounts were held on capital account and were part of fixed capital, the loss would plainly be a capital loss. The question whether the loss suffered by the assessee was a trading loss or a capital loss cannot, therefore, be answered unless it is first determined whether these two amounts were held by the assessee on capital account or on revenue account or, to put it differently, as part of fixed capital or of circulating capital. We would have ordinarily, in these circumstances, called for a supplementary statement of case from the Tribunal giving its finding on this question, but both the parties agreed before us that their attention was not directed to this aspect of the matter when the case was heard before the revenue authorities and the Tribunal and hence it would be desirable that the matter should go back to the Tribunal with a direction to the Tribunal either to take additional evidence itself or to direct the ITO to take additional evidence and make a report to it, on the question whether the sums of Rs. 25 lakhs and Rs. 12,50,000 were held in West Pakistan as capital asset or as trading asset or, in other words, as part of fixed capital or part of circulating capital in the business. The Tribunal will, on the basis of this additional evidence and in the light of the law laid down by us in this judgment, determine whether the loss suffered by the assessee on remittance of the two sums of Rs. 25 lakhs and Rs. 12,50,000 was a trading loss or a capital loss.'
13. If that is the correct position in law, then, in our opinion, in view of of the facts found by the Tribunal here that the amount was held as a circulating capital and was brought to augment the circulating capital, any profit arising from the transfer or any loss arising from depreciation must be on the revenue account.
14. Learned advocate for the Revenue, however, relied mainly on the decision of the Supreme Court in the case of Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT : 56ITR52(SC) . There what happened was that pursuant to a scheme of amalgamation between two shipping companies the assessee-company was incorporated on August 10, 1953, to take over certain passenger and ferry services carried on by one of the former. On 12th August, 1953, the assessee-company took over the assets which were finally valued at Rs. 81,55,000 and agreed that the price was to be satisfied partly by allotment of 29,990 fully paid-up shares of Rs. 100 each and the balance was to be treated as a loan and secured by a promissory note and hypothecation of all movable properties of the assessee-company. The balance remaining unpaid from time to time was to carry simple interest at 6 percent. By a supplemental agreement the original agreement was modified to the effect that the balance should be paid by the assessee-company and until it was paid in full the assessee-company should pay simple interest at 6 per cent. per annum on so much of the balance as remained due. The balance was also to be secured by hypothecation of all movable properties of the assessee-company. During the relevant accounting years the assessee-company paid interest on the balance outstanding and the question was whether the interest paid was allowable as a deduction under Section 10(2)(iii) or (xv) of the Indian I.T. Act, 1922. It was held by a majority of two learned judges, Shah and Sikri JJ., that the expression 'capital' used in Section 10(2)(iii), in the context in which it occurred, meant money and not any other asset. There was in truth no capital borrowed by the assessee. An agreement to pay the balance of consideration due by the purchaser did not in truth give rise to a loan. Therefore, the claim for deduction of the amount of interest under Section 10(2)(iii) was not admissible. It was, however, held by the full court that the interest paid by the assessee was business expenditure and was allowable as a deduction under Section 10(2)(xv). The transaction: of acquisition of assets was closely related to the commencement and carrying on of the assessee's business and the interest paid on the unpaid balance of the consideration for the assets acquired had, in the normal course, to be regarded as expended for the purpose of the business which was carried on in the accounting periods. Learned advocate for the Revenue emphasised that the trade debts could not be treated as capital borrowed but that was the view of the Supreme Court in the context of the expression under Section 10(2)(iii) ofthe Indian I.T. Act, 1922. Learned advocate for the Revenue drew our attention to the observation at p. 57 of the report where the court observed that a loan of money undoubtedly resulted in a debt but every debt did not involve a loan. Liability to pay a debt might arise from diverse sources and a loan was only one of such sources. Every creditor who was entitled to receive a debt could not be considered to be a lender. If the requisite amount of consideration had been borrowed from a stranger, interest paid thereon for the purpose of carrying on the business would have been regarded as a permissible allowance. But that was wholly irrelevant in considering the applicability of Clause (iii) of Sub-section (2) of Section 10 to the problem arising in this case. The Legislature has under Clause (iii) permitted as an allowance interest paid on capital borrowed for the purpose of the business. If interest be paid but not on borrowed capital, Clause (iii) would have no application. It is true that all loans did not create debts. But we need not for the purpose of our decision in this case go minutely into this aspect in view of the specific finding of fact by the Tribunal that the amount of currency was borrowed for the purpose of augmenting the working capital and the sum in question was utilised as circulating capital. Reliance was placed on certain observations of the Division Bench of this court in the case of Bestobell (India) Ltd. v. CIT : 117ITR789(Cal) , on behalf of the Revenue. We are, however, of the opinion that that case did not deal with the question where in a case the amount was intended to be circulating capital, whether the depreciation suffered as a result of devaluation was revenue loss or capital loss. There the first question was whether money borrowed for payment of taxation liability was an allowable expenditure. It was held that it was not an allowable expenditure. Taxation liability is always treated as a class by itself. Secondly, the finding of fact which was challenged as perverse was also negatived. The second question in that reference was whether, on the facts and circumstances of the case, the Tribunal was right in holding that the amount of Rs. 2,83,614 was not deductible in computing the assessee's profits and gains of the business. Dealing with this contention at p. 796 of the report the learned judge has set out the contentions raised on behalf of the assessee. On behalf of the assessee it was contended that the extra amount of Rs. 2,83,614 which the assessee had to provide as a result of devaluation was in the nature of an ordinary business expenditure. It was as much an expenditure as postal charges which might have been incurred by the assessee if the amount was remitted by post for repayment of the loan. The assessee maintained its accounts on the mercantile system and it was, therefore, contended that the loss in any case did not arise in the year and particularly it was contended that the loan was to meet the income-tax liability and should be allowed. AH thesecontentions were negatived. On the other hand, on behalf of the Revenue it was contended that the assessee did not incur any expenditure. Expenditure, according to learned advocate for the Revenue, in that case meant actual and current disbursement. In the facts of the instant case, the assessee having not determined any particular date for repayment of loan, no question arose for its spending anything.
15. The Division Bench referred to the several cases including the case of Shell Company  22 ITR (Supp) 1 , which we have referred to hereinbefore. The Division Bench observed that the Shell Co.'s case was cited with approval in two decisions of the Supreme Court. One was K. M. S. Lakshmanier & Sons v. C/T : 23ITR202(SC) and the other was Punjab Distilling Industries Ltd. v. CIT : 35ITR519(SC) . It is true that in those two cases the observations of the Shell Co.'s case were referred to and relied on but the context in which those observations were referred to and relied on has to be borne in mind. In Shell Co.'s case the Division Bench held that it treated the deposits as capital receipts and profits thereon by reason of the fluctuation of exchange rate would be capital gain. In so far as the facts of that case are concerned the observation, in our opinion, are correct. But the Court of Appeal in England made it quite clear that if the sums were utilised as circulating capital and it lost prima facie the character of capital, which it originally bore, different considerations would apply. But in the instant case, as we have noted before, it has been found as a fact that the sum in question was treated as a circulating capital. Reliance was also placed on certain observations in India Cements Ltd. v. CIT : 60ITR52(SC) and our attention was drawn to the observations at pp. 58 and 63 of the report. We have discussed these observations in two subsequent decisions which we shall presently note. For the purpose of the present decision it is not necessary to recapitulate the facts again. The view which we are taking is in consonance with the view we have expressed in the case of Oil India Co. Ltd. v. CIT (Income-tax Reference No. 71 of 1977, judgment delivered on 17th & 18th December, 1980) : 137ITR156(Cal) and in the case of Union Carbide (India) Ltd. v. CIT (Income-tax Reference No. 127 of 1977, judgment delivered on 28th April 1980), reported in : 130ITR351(Cal) . In those two decisions we have reviewed most of the decisions that were cited before us and we have indicated that when a sum is held, even if a loan is taken originally, as loan but is utilised as a circulating capital or as a trading asset, then any accretion or depreciation must be treated on the revenue account either as profit or loss as a result of devaluation. In the instant case, as loss has resulted, it is deductible as revenue loss. In the premises, the question is answered in the negative and in favour of the assessee.
16. In the facts and circumstances of the case the parties will pay and bear their own costs.
Sudhindra Mohan Guha, J.
17. I agree.