Sabyasachi Mukharji, J.
1. This reference relates to the assessment year 1967-68. The Tribunal has referred to this court the following two questions under Section 256(1) of the I.T. Act;
'1. Whether, on the facts and circumstances of the case and on a correct interpretation of the agreement dated July 28, I960, between Samuel Osborn & Co., U.K., and the assessee-company, the Tribunal's finding that the assessee's liability to the foreign company on the date of the devaluation arose out of the import of its stock-in-trade and was thus directly connected with its business, was based on no evidence and/or otherwise perverse ?
2. If the answer to question No. (1) is in the negative whether, on the facts and circumstances of the case and on a correct interpretation of the agreement dated July 28, 1960, between Samuel Osborn & Co., U.K., and the assessee-company, the Tribunal was justified in holding that the sum of Rs. 21,09,587 represented the assessee's trading liability and was admissible as a deduction in computing its business income for the assessment year 1967-68?'
It appears that the assessee is a company and is engaged in the business of importing high speed steel, alloy steel, stainless steel and similar other raw materials and selling them to different buyers in India. The assessment year is 1967-68 and the relevant accounting year ended on September 30, 1966. The assessee was a 100% subsidiary of Samuel Osborn & Co., Sheffield, United Kingdom, during the year under reference. On April 20, 1967, in deference to the wishes and scheme of the Govt. of India, the foreign company sold 51% of its shareholding in the assessee to certain Indian parties.
2. By an agreement dated July 28, 1960, which was still in force, in the year relevant to the assessment year 1967-68, the foreign company constituted the assessee its sole selling agent in the territories in India as defined, on the terms and conditions set forth therein. Clause 9 of the agreement, which alone is relevant for the present reference, stipulated that the goods supplied by the foreign company to the assessee for sale shall be invoiced to the assessee at net sterling prices F.O.B. British Port and shall be paid by the assessee by net cash in sterling against shipping documents at Calcutta. That clause also stipulated that 'if special circumstances should arise necessitating a variation of the said terms of payment, such variation to be mutually agreed between the parties hereto. In pursuance of the said agreement, the assessee was importing into India from the foreign company its iron and steel goods and was debiting the purchaseaccount and crediting the foreign company's account for the value of goods received at the prevailing exchange rate. This running account stood as hereunder:
YearOpening balance on 1st AugustAdd imports during the yearLess remittances and credit notesClosing balance on 31st July
sh. d. sh. d. sh. d. sh. d.1962.........166,299-8-31963166,299-8-346,470-17-815,282-10-5197,487-15-61964197,487-15-642,626-11-132,347-17-5207,766-9-21965207,766-9-292,220-17-418,551-18-11281,435-7-71966281,435-7-783,514-6-1178,246-5-11286,703-8-71967286,703-8-7.........
As per these accounts, the opening balance on June 6, 1966, the date of devaluation of the Indian Rupee, was 2,72,544-0-10 which was equivalent to Rs. 36,40,537 at the pre-devaluation exchange rate and Rs. 57,52,3.24 at the new exchange rate after devaluation. There was, thus, as a consequence of the devaluation, an appreciation of the assessee's liability to the extent of Rs. 21,11,787. After adjustment of Rs. 2,200 being the amount receivable against debit balance of some other parties, the assessee claimed the balance of Rs. 21,09,587 as revenue loss by reason of the devaluation.
3. The ITO held that this appreciation of the liability to the foreign company due to devaluation was not allowable as a business loss. Being aggrieved by the aforesaid order, the assessee went up in appeal before the AAC who upheld the ITO's contention. Thereafter, the assessee went up before the Tribunal. The Tribunal, after considering the rival contentions observed, inter alia, as follows :
'We have considered the rival submissions. The amount payable by the assessee to the foreign company on the date of the devaluation of the rupee was what was due under a running account, and represented the price of goods supplied by the latter for its trade. It was thus a trade liability. The case of the department that these amounts had been left by the foreign company with the assessee for its use as capital for developmental and investment purposes is shown to be factually not true. The running account itself belies the case. There is besides the affidavit sworn to on behalf of the assessee, which is not controverted by the department, that there never was any such arrangement or understanding between the assessee and the foreign company permitting the employment of the amount due to the latter in any such manner. True it is that in everyyear the remittance to the foreign company were less than its import into India and thus the running account had only been steadily swelling in its favour. But the assessee has explained that that was more for the reason that the Reserve Bank was restricting remittances abroad. It was to be noted that every year there had been in fact remittances, though not to the full extent of the imports of that year. That the account was maintained as a running account was itself proof of the continuance of the liability in its trading character. It cannot also be accepted that in the case of the running account interspersed with transactions both ways, the liability would be in respect of past transactions closed once for all. In fact even in the accounting period relevant to the assessment year 1967-68, there had been imports to the tune of 83,514-6-11 and remittance of 78,246-5-11. The fact that every year the assessee was a defaulter and was thus allowing its liability under the running account to increase, and the foreign company for some reason was tolerating such defaults, cannot take us to any, conclusion that the unremitted balance was being allowed to be retained and utilised by the assessee for purposes to gain any enduring benefit. The fact that in the next year the foreign company reimbursed to some extent the increased liability of the assessee on account of devaluation cannot also prove that the loss on account of devaluation was the liability of that company and not of the assessee. The clauses in the agreement of agency repel such a contention. The other contention of the department that the assessee had not shown in the accounts of 1967-68 this devaluation loss and that itself was proof enough that it was not its liability, also cannot be accepted. There is the explanation given that it was because everything then was in a fluid state and the matter was under negotiation with the foreign company that the assessee could not decide then what was to be done with regard to the loss.'
Then the Tribunal discussed the relevant authorities and observed that the assessee was following the mercantile system of accounting. The devaluation loss arose and accrued in the accounting period relevant to the assessment year 1967-68. Revenue's stand that the loss arose in respect of transactions that took place in earlier years the accounts of which had been closed long back and the assessments also completed earlier, for obvious reasons did not appeal to the Tribunal. Therefore, having regard to certain principles which the Tribunal has referred, the Tribunal came to the view that, as the loss accrued in the year in question on account of the devaluation of the rupee and was a liability in respect of the goods imported for its trading activities, such loss sprang directly from the business and the assessee was entitled to claim it as a business loss. The Tribunal, therefore, accepted the contention that it was a revenue loss.
4. From the aforesaid facts two questions, as noted earlier, have been referred to this court.
5. The principles involved in this case have been laid down in the case of Sutlej Cotton Mills Ltd. v. CIT : 116ITR1(SC) . In this case, it has been found that the debt arose to the assessee for the purchase of stock-in-trade. The assessee could not repay the money and had to maintain a running account because there was a restriction on the yearly remittance to a foreign country. Having regard to this background, as a matter of prudent business transaction, the authorities of the company to whom the money was due, agreed to allow the assessee to repay in the manner that the assessee was doing. In the course of doing that, there was a devaluation and certain loss was suffered. Such loss sprang directly from the business. The assessee was not keeping the amount specially for any capital purpose when the assessee was free to remit the entire amount. The assessee was forced to the circumstances and as a matter of prudent business transaction the creditor company had to allow the assessee to pay in the manner that the assessee did. In these circumstances, the Tribunal came to the conclusion as it did.
6. In our opinion, it could not be said that the Tribunal acted without evidence or the conclusion of the Tribunal was perverse in law. If that is the position, question No. 1 must be answered in the negative and in favour of the assessee. If that again is the position, in view of the terms of the agreement, the Tribunal, in our opinion, has correctly summarised the agreement dated July 28, 1960. In the facts and circumstances of the case, the question No, 2 must also be answered in the affirmative and in favour of the assessee.
7. There will be no order as to costs.
C.K. Banerji, J.
8. I agree.