Suhas Chandra Sen, J.
1. The assessee is a company and the relevant assessment years are 1968-69 and 1969-70, corresponding accounting period being the calendar years ended on 31st December, 1967, and 31st December, 1968, respectively. The following questions of law have been referred by the Tribunal for opinion of this court :
' 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 8,35,359 and Rs. 3,30,965, being the additional expenses incurred by the assessee in the payment of its loan to the Bank of Scotland due to the devaluation of the Indian rupee, was an expenditure wholly and exclusively laid out by the assessee for the purpose of its business and as such was an allowable revenue expenditure under Section 37(1) of the Income-tax Act, 1961, for the assessment years 1968-69 and 1969-70, respectively
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the sum of Rs. 8,71,399, being the amount of guarantee commission paid to the bank represented a part of the capital expenditure and, therefore, was not allowable underSection 37(1) of the Income-tax Act, 1961, for the assessment year 1969-70?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the expression 'such profits and gains' appearing in section 80-I of the Income-tax Act, 1961, referred only to profits and gains attributable to priority industry as included in the gross total income and such profits and gains signified profits and gains of the priority industry determined and finally included in the gross total income in accordance with the provisions of the said Act including its sections 32, 33, 71 and 72?
4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that no depreciation was admissible on drains, culverts and roads for the assessment year 1969-70 '
2. The first question has been referred at the instance of the Revenue. The questions Nos. 2, 3 and 4 have been referred at the instance of the assessee.
3. The first question arises out of devaluation of the Indian rupee which took place on 6th June, 1966. On this question the Tribunal held as follows :
' We have given a careful consideration to the rival submissions and do not find any merit to the objections raised on behalf of the Revenue before us. In view of the order of the Appellate Tribunal dated 31st December, 1975, relating to the assessment year 1967-68, which was passed after the orders of the Appellate Assistant Commissioner and the Income-tax Officer relating to the assessment years now under appeal before us, the assessee was perfectly justified in raising the issues in the grounds of appeal taken for the instant years. The statement appearing at page 24 of the assessee's paper book was relied upon by the Appellate Tribunal while disposing of the appeal relating to the assessment year1967-68 and the sum of Rs. 9,85,664 forming part of Rs. 40,60,560 represented a sum total of two amounts of Rs. 4,86,147 and Rs. 4,99,517, being losses claimed by the assessee on account of remittances on 30th June, 1966, and 31st December, 1966, respectively. Therefore, we have no hesitation to accept the veracity of the statement of the assessee and to direct the Income-tax Officer to allow losses of Rs. 8,35,359 and Rs. 3,30,965 in the respective assessments for the assessment years1968-69 and 1969-70. In this connection, we must mention here also that the assessee had in computing the losses taken into consideration the devaluation of pound sterling on 18th November, 1967. This has relevance for the departmental appeal relating to the assessment year 1968-69 (I.T.A. No. 537(C)/73-74). '
4. So far as the assessment year 1967-68 is concerned, there was a reference to this High Court on this question and the point was decided by a judgment delivered on 17th/18th December, 1980, in I.T, Reference No. 71 of 1977 (Oil India Co. Ltd. v. CIT : 137ITR156(Cal) ). In that case it was held that the inquiry as to whether by reason of the devaluation the assessee had incurred an expenditure or had suffered business loss was of little relevance. In that case reliance was placed on the decisions in the cases of Bestobell (India) Ltd. v. CIT : 117ITR789(Cal) and Kedarnath Jute . v. CIT : 82ITR363(SC) . It was held that the liability for the additional amount accrued during the relevant period in which devaluation took place. It was held in that case (p. 170):
'We have already observed that the Division Bench held, in the facts of the case before that Bench, that the loss was a capital loss. But that is not the controversy here and it is undisputed that the expenditure in respect of the additional expenditure incurred was of a revenue nature. Following the ratio of the said decision on the two aspects, we are of the opinion that the Tribunal was in error in not holding that the amount was not deductible in computing the assessee's income for the assessment year 1967-68. '
5. The question in this year really follows the decision of the earlier year. In this case the Tribunal has allowed the deduction on the basis that in this year the actual payment was made and the Revenue has come up on reference against it. The logical corollary of the judgment given in the earlier year is that the amount cannot be allowed as deduction in this year because the liability was incurred and allowed as a deduction in the earlier year.
6. It has been argued on behalf of the assessee that the Tribunal has only been logical and, therefore, the Tribunal has not committed any mistake in this particular year. The Tribunal in the earlier year had held that the amount could be allowed on the basis of actual payment and this year it has been allowed on the basis of actual payment. Therefore, the Tribunal had done only what could be done under the circumstances. Therefore, the decision of the Tribunal cannot be held to be erroneous on principle in the facts found by the Tribunal.
7. We are, however, unable to accept this contention. The decision of the Tribunal in the earlier year was held to be erroneous by this High Court on the ground that it failed to appreciate that under the mercantile system of accounting which the assessee was following the loss arose or accrued in the earlier accounting year and should have been allowed in that year.
8. In this case we are not interfering with any finding of fact made by the Tribunal, The Tribunal had failed to apply the principles of mercantile system of accounting in the assessment year 1967-68 and also in the assessment year 1968-69, which is under consideration in the present case. Therefore, having held in the earlier reference for the assessment year 1967-68, that the Tribunal should have allowed the amount in question on accrual basis, we are bound to hold that the amount in question cannot once again be allowed as a deduction on cash basis in this year.
9. Reliance placed on a Division Bench judgment of this High Court in Calcutta Jute Agency (P.) Ltd. v. CIT : 117ITR741(Cal) , is also misplaced. In that case there was no finding that the assessee was following the mercantile system of accounting and there was no argument that the income in question arose in the accounting year in which devaluation took place. The only point that came up for consideration in that case was whether the money that was lying in foreign country before devaluation had changed its character and whether as a result of devaluation there was a capital receipt or a revenue receipt. The year in which the receipt should be assessed was not an issue in that case at all.
10. The principle that in a case where the assessee follows the mercantile system of accounting, a profit or loss on account of devaluation takes place in the year in which the devaluation takes place has been consistently followed in a number of cases.
11. A Division Bench of this High Court in the case of Khandelwal Brothers Pvt. Ltd. v. CIT : 117ITR452(Cal) , held that the currency surplus accrued to the assessee at the time of devaluation and not at the time of subsequent adjustment of the accounts of the assessee or at the time when the assessee obtained the sanction of the Reserve Bank of India to adjust its two accounts. This was done on the basis of the principles underlying the mercantile system of accounting.
12. The point was also gone into at length in the case of Bestobell (India) Ltd. v. CIT : 117ITR789(Cal) , where it was held that since the assessee maintained its accounts on mercantile basis, on the devaluation of the Indian currency the liability of the assessee to its foreign creditor immediately increased to the extent of rupees devalued and the assessee became liable to pay and/or spend an extra amount in rupees in order to pay its dues. The liability of the assessee arose during the assessment year and could not be said to be a contingent liability or an anticipated future loss.
13. It has been argued that the principle enunciated in the aforesaid cases is not correct and reliance was placed for this purpose on a judgment of the Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT : 116ITR1(SC) and in particular on the following passage at p. 13 :
'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.'
14. The points that came up for decision before the Supreme Court and the facts of that case were entirely different. There the assessee, a limited company, had its head office in Calcutta and a cotton mill in West Pakistan where it carried on business of manufacturing and selling cotton fabrics. In the accounting year ending on 31st March, 1954, relevant to the assessment year 1954-55 the assessee made a large profit in West Pakistan unit. At the prevalent rate of exchange of 100 Pakistani rupees being equal to 144 Indian rupees the profit amounted to Rs. 1,68,97,232 in terms of Indian rupees. Since the assessee was taxed on accrual basis, the sum of Rs. 1,68,97,232 representing the Pakistan profit was included in the total income of the assessee for the assessment year 1954-55. The assessee was taxed accordingly after giving double taxation relief in accordance with the bilateral agreement between India and Pakistan. Thereafter, the profit made by the assessee was lying unused in Pakistan. The assessee succeeded in obtaining the permission of the Reserve Bank of Pakistan to remit a sum of Rs. 25,00,000 in Pakistani rupees and remitted the said amount to India during the accounting year relevant to the assessment year 1957-58. The assessee also remitted during the accounting year relevant to the assessment year 1959-60 a further sum of Rs. 12,50,000 in Pakistani rupees out of the Pakistani profit for the assessment year 1954-55. By the time these remittances came to be made, the rate of exchange had once again changed to 100 Pakistani rupees being equal to 100 Indian rupees and the amount received by the assessee in terms of Indian rupees was, therefore, the same, namely, Rs. 25,00,000 and Rs. 12,50,000. The profit of Rs. 25,00,000 in terms of Pakistani rupees had been included in the total income of the assessee for the assessment year 1954-55 as Rs. 36,00,000 in terms of Indian rupees according to the then prevailing rate of exchange. Therefore, when the assessee ultimately converted the amount into Indian currency at par on the basis of the new rate of exchange, the assessee suffered a loss on account of appreciation of Indian rupee qua Pakistani rupee. The question before the Supreme Court was whether this loss which the assessee suffered on actual remittance of the amount of money lying in Pakistan to India was capital loss or revenue loss.
15. It is to be noted that in the case before the Supreme Court when the profits arose in Pakistan it Was taxed in India on accrual basis without any actual physical conversion but on a notional conversion of Pakistani rupees into Indian rupees at the prevailing rate of exchange. After the income accrued and was taxed, the money was retained in Pakistan for some time and ultimately repatriated to India, upon repatriation the question arose whether the loss suffered due to further fluctuation in the rate of exchange was capital loss or revenue loss. In our opinion, this judgment does not help the assessee in the case before us in any way at all.
16. The profit or loss arising out of transactions made in foreign exchange has to be treated on the same footing as the purchase and sale of any other business commodity. The Supreme Court has not in the case of Sutlej Cotton Mills Ltd. v. CIT : 116ITR1(SC) , laid down any special rule for taxation in case of profit or loss arising out of appreciation or depreciation in value of foreign currency. If the assessee follows the mercantile system of accounting, the profit or loss will have to be assessed on the accrual basis and if the assessee follows the cash system of accounting, the profit or loss will have to be assessed on the basis of actual receipt.
17. The principle to be applied in the transactions involving foreign exchange has been stated in the case of Imperial Tobacco Co. v. Kelly  25 TC 292 (CA), by Lord Greene M.R., at p. 300 in the following words :
' We must decide this case having regard to the facts as found. In the light of those facts, the acquisition of these dollars cannot be regarded as colourless. They were an essential part of a contemplated commercial operation.
That being so, what is the true analysis of the position A manufacturer has provided himself with a commodity, namely, dollars. I call dollars a ' commodity ' not for the reason that they are not currency in this country, but because they have a characteristic which is common to other commodities, and is not shared by sterling, namely, that their value from day to day varies in terms of sterling, just in the same way as coal, or bricks, or anything else may do.'
18. And then again at p. 301 :
' In the present case it is truly said that it was no part of the company's business to buy and sell dollars. But in each case the commodity (in the one case the coal and in the other case the dollars) was acquired for the purpose of transactions on revenue account and nothing else.'
19. A point was also made that as a result of devaluation of the English pound, the assessee also suffered some loss and that has also to be takeninto account in this year. The question before us is, however, limited to the loss because of devaluation of Indian rupee and, therefore, that question is not before this court and we need not go into that question.
20. On the facts and in the circumstances of this case, the first question is answered in the negative and in favour of the Revenue,
21. So far as the second question is concerned, the assessee-company has stated that it does not wish to press the question and, therefore, we decline to answer this question.
22. So far as the third question is concerned, the scope and effect of Section 80-I has been gone into by a Division Bench of this High Court in the case of CIT v. Orient Paper Mills Ltd. The judgment was delivered on 18th/19th March, 1981, in I.T. Ref. No. 424 of 1977--since reported in : 139ITR763(Cal) . Following the principles laid down in that judgment, this question is answered in the negative and in favour of the assessee.
23. So far as the fourth question is concerned, the principles relating to depreciation on roads, drains and culverts will be governed by the decision given by this High Court in the case of CIT v. Kalyani Spinning Mills Ltd. : 128ITR279(Cal) . In view of the principles laid down in the said decision, this question is answered in the negative and in favour of the assessee.
24. In the facts and circumstances of this case, each party will pay and bear its own costs.
Sabyasachi Mukharji, J.
25. I agree.