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 time of devaluation, being used as circulating capital. Consequently, the loss arising from devaluation of the rupee constituted a revenue loss and was allowable as a deduction in computing the assessee's income for the relevant assessment year. The reference was answered in favour of the assessee and against the Revenue.

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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 Expenditure
The 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 Devaluation
The 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.

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