1993 (7) TMI 63 - HC - Income Tax

Loan repaid by adjusting stock-in-trade treated as circulating capital; rupee devaluation loss held revenue deductible

HC held that where a loan advanced for purchase of machinery was repaid by adjustment against the assessee's stock-in-trade, the loan monies were, at the ... Loss incurred on account of enhancement of the liability due to devaluation - Business Loss - foreign exchange required for the import of machinery - HELD THAT:- In the instant case, the admitted position is that the entire amount of loan which had been advanced to the other company for the purchase of machinery had been repaid by that company to the assessee by way of adjustment against the price of iron ore supplied to it which was its stock-in-trade. That being so, it cannot be disputed that whatever might have been the original object of the loan, at the time of devaluation, the amount of loan was utilised by the assessee as circulating capital. That being so, the loss which occurred due to devaluation of the Indian rupee was clearly a revenue loss and was allowable as a deduction in computation of the income of the assessee for the assessment year concerned. Accordingly, the question referred to us is answered in the affirmative, i.e., in favour of the assessee and against the Revenue. Issues Involved:1. Whether the sum of Rs. 19,07,217 is an allowable expenditure.2. Determination of the nature of the loss due to devaluation of the Indian rupee.Summary:Issue 1: Allowability of Rs. 19,07,217 as ExpenditureThe assessee, a private limited company, borrowed $7,00,000 (Rs. 33,42,783) from Messrs. Eisenberg Incorporated, Tokyo, Japan, and advanced it to Messrs. Dempo and Souza Ltd. for importing mining machinery. Due to the devaluation of the Indian rupee on June 6, 1966, the assessee's liability increased by Rs. 19,07,217, which it claimed as a deduction. The Income-tax Officer disallowed the claim, considering the loan as capital in nature. The Appellate Assistant Commissioner upheld this view, treating the transaction as an investment and the loss as depreciation of a capital asset. However, the Appellate Tribunal allowed the claim, viewing the loss as a business loss deductible u/s 28 of the Income-tax Act, 1961.Issue 2: Nature of Loss Due to DevaluationThe Tribunal found that the loan was repaid by Messrs. Dempo and Souza Ltd. before devaluation by adjusting against the price of iron ore supplied to the assessee, thus converting the loan into circulating capital. The Tribunal held that the loss due to devaluation was a revenue loss, allowable as a deduction. The Revenue contended that the loan was for acquiring capital assets, thus the loss should be capital in nature. The assessee argued that the utilisation of the loan at the time of devaluation, not its original purpose, was relevant. The High Court, referencing Supreme Court precedents, concluded that the loss was a trading loss since the loan was part of the circulating capital at the time of devaluation.Conclusion:The High Court affirmed the Tribunal's decision, holding that the loss due to devaluation was a revenue loss and thus an allowable deduction. The question was answered in favor of the assessee and against the Revenue. No order as to costs was made.