Court rules Data Processing Machines eligible for development rebate and allows devaluation loss as revenue loss

The court ruled in favor of the assessee on both issues. It held that Data Processing Machines are eligible for development rebate and allowed the devaluation loss as a revenue loss for the assessment year 1967-68. The court emphasized that the loss was a trading loss incurred in the course of business activities and distinguished the case from previous decisions based on the specific facts and nature of the liabilities involved. The Revenue was ordered to pay the costs of the reference to the assessee.

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Issues Involved:
1. Eligibility of Data Processing Machines for development rebate.
2. Allowability of devaluation loss as revenue loss.

Summary:

Issue 1: Eligibility of Data Processing Machines for Development Rebate

The first issue was whether Data Processing Machines are considered office appliances and thus ineligible for the allowance of development rebate for the assessment years 1967-68 to 1971-72. The court noted that this question was already covered by a previous decision in the assessee's own case (CIT v. LB.M. World Trade Corporation [1981] 130 ITR 739). Consequently, the court answered this question in the negative and in favor of the assessee.

Issue 2: Allowability of Devaluation Loss as Revenue Loss

The second issue concerned whether the devaluation loss of Rs. 42,44,932 is an allowable revenue loss for the assessment year 1967-68. The assessee followed the mercantile system of accounting and had a liability to pay its head office in U.S. Dollars for administrative and overhead expenses. Due to the devaluation of the Indian rupee on June 6, 1966, the liability in terms of Indian rupees increased. The assessee claimed this increased liability as a revenue loss, which was initially rejected by the Income-tax Officer but allowed by the Appellate Assistant Commissioner and upheld by the Income-tax Appellate Tribunal.

The Tribunal concluded that the loss arose in the course of carrying on the business and was a trading loss. The court noted that the Revenue had consistently treated the liability as revenue expenditure in previous years. The court also distinguished this case from the Supreme Court decision in Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1, where the nature of the asset (trading or capital) was in question. Here, the Revenue itself had argued that the unremitted expenses were used as working capital, which is another term for circulating capital. Therefore, the loss due to devaluation was a trading loss.

The court also distinguished the present case from other cases cited by the Revenue, such as Davies v. The Shell Company of China Ltd. [1952] 22 ITR (Suppl) 1 and CIT v. Tata Locomotive and Engineering Co. Ltd. [1966] 60 ITR 405 (SC), based on the specific facts and nature of the liabilities involved.

The court found support in the decision of the Calcutta High Court in CIT v. International Combustion (I) Pvt. Ltd. [1982] 137 ITR 184 (Cal), where a similar devaluation loss was treated as a trading liability.

Conclusion:

The court answered:
- Question No. 1: In the negative and in favor of the assessee.
- Question No. 2: In the affirmative and in favor of the assessee.

The Revenue was directed to pay the costs of the reference to the assessee.

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