Law:

Section:

section 5 of the income-tax act, 1961-income-accrual of-whether where profit or loss arises to assessee on account of appreciation or depreciation in terms of value of a foreign currency, such profit or loss arises at time when currency is devalued and not when actual conversion from one currency to another takes place-held, yes Facts During the relevant year, the British pound sterling was devalued vis-a-vis the Indian rupee. The assessee, at the relevant time, had been manufacturing goods under licence of a foreign company, who was supplying to the assessee, on credit, a major part of the material needed for such manufacture. The accounts were maintained on mercantile basis and the price was payable by the assessee in pound sterling. The ITO found that as a result of the devaluation, the liability of the assessee under the outstanding bills of the foreign supplier was reduced and he added the difference, due to devaluation, to the income of the assessee for being brought to tax. On appeal, the Tribunal held that profit could be deemed to have accrued to the assessee only when the benefit of reduction of liability was realised by the assessee by conversion and since no payment was made to the foreign party in the relevant accounting year against any outstanding bill, no profit had accrued to the assessee during that year on account of devaluation. On reference: Held The assessee, whose accounts were maintained on mercantile basis, obtained an advantage or a benefit in the assessment year involved as by reason of devaluation of pound sterling vis-a-vis the Indian rupee, its outstanding liability to be liquidated by payment in foreign currency was reduced in terms of the local currency. Necessarily, this had to be reflected in its accounts. In Sutlej Cotton Mills Ltd. v. CIT [1979 ] 116 ITR 1, the main question before the Supreme Court was whether the loss claimed by the assessee was a capital loss or a revenue loss. The Supreme Court, no doubt, observed that a profit or a loss would arise on conversion into another currency in the case of a devaluation but it was not held that actual conversion or repatriation is a precondition for accrual of profit or for a…

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