Foreign loan devaluation liability can be included in capital computation where borrowing financed a qualifying capital asset.

Enhanced rupee liability arising from devaluation, where a foreign currency loan had been taken to create a capital asset, was held includible in capital computation under rule 1(v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The court treated the increase as a real liability because the assessee had to pay more rupees to discharge the same dollar obligation. It rejected the contention that a fresh capital asset had to be created out of the enhanced liability, and also rejected any requirement that the asset be completed only after devaluation. The earlier use of the borrowing for a qualifying capital asset was sufficient.

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Issues: Whether the increase in the assessee's liability in rupee terms on account of devaluation of the Indian rupee, arising from repayment of a dollar loan taken for creation of a capital asset, was includible in computing the capital of the assessee under rule 1(v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964 for determining statutory deduction.

Analysis: The dollar borrowing had been admittedly made for the creation of a capital asset and satisfied the requirements of rule 1(v) and its proviso. The increase in liability after devaluation was not merely notional, because the assessee in fact had to pay a larger amount in rupees to discharge the same foreign currency obligation. Nothing in the language of the rule required that a fresh capital asset must be created out of the enhanced rupee liability, and the earlier use of the borrowed dollars for a qualifying capital asset was sufficient. The contention that the asset must have been completed after the devaluation was also rejected, as that requirement finds no support in the rule and was not part of the case stated.

Conclusion: The enhanced rupee liability on account of devaluation was includible in the computation of capital under rule 1(v), and the question was answered in favour of the assessee.

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