Law:

Section:

Section 37(1), read with section 28(i), of the Income-tax Act, 1961 - Business expenditure - assessee-company raised during 1963 to 1966 large loans (repayable in sterling) from foreign bank mostly for purchase of capital assets/stores-Devaluation of Indian rupee on 6-6-1966 created additional liability to discharge such loans-Whether tribunal was right in holding that under mercantile system of accounting, this amount was deductible as business expenditure for assessment year 1967-68-Held, on facts, yes FACTS The assessee-company, which was following calendar year as its accounting year under the mercantile system of accounting, had taken during the period 1963 to 1966, loans from various sources in England out of which an utilised amount of £1,63,063 was retained in UK, the major portion of the balance amount of £10,86,937 (Rs. 1,347.26 lakhs in Indian currency) having been spent on purchase of capital assets/stores. The balance amount covered expenditure on raising the loans, on repatriation of the amount to India and on operational expenditure for its business. Consequent on the devaluation of the Indian rupee on 6-6-1966, the liability of the assessee for repayment of loan, and payment of interest increased by Rs. 7,12,27,476. Out of this amount, a sum of Rs. 92,77,900 representing the liability attributable to other than capital assets and stores, was claimed by the assessee as a deduction for the assessment year 1967-68, either as an expenditure under section 37 or as a loss incidental to its business under section 28. The claim was negatived by the ITO and the AAC upheld the disallowance, observing, inter alia, that the impugned loss was not in the nature of the expenditure as the same had already been incurred much earlier and that the liability was capital in nature. Before the Tribunal, the assessee pleaded, inter alia, (i) that under the relevant agreements, the loan was repayable in sterling in UK so that the plea of variation in loan was untenable; (ii) that the said amount of Rs. 92,77,900 was made up of two components, namely, (a) Rs. 40,60,560 as additional cost of remittance actually spent in the previous year on the repayment of certain loans…

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