Court rules liability in foreign currency, timing of finalization, and devaluation expenditure deduction under Income Tax Act

The court determined that the liability incurred by the assessee was in French francs, not Indian rupees, as specified in the agreement. The timing of liability finalization was deemed to be at the time of remittance, not when initially debited. Additionally, the court allowed the deduction for additional expenditure due to devaluation as a permissible business expense under the Income Tax Act. The court ruled in favor of the assessee, directing the Revenue to pay the costs of the reference.

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Issues Involved:
1. Currency of Liability: Indian Rupees or French Francs.
2. Timing of Liability Finalization.
3. Deductibility of Additional Expenditure Due to Devaluation.

Issue-wise Detailed Analysis:

1. Currency of Liability: Indian Rupees or French Francs
The primary question was whether the liability incurred by the assessee was in Indian rupees or French francs. The agreement between the assessee and the French company specified that royalties were to be paid in French francs in Paris, calculated at the official legal rate of exchange applicable at the time when the payment was due. Sub-clause (vi) of clause 11(a) explicitly stated that all royalties and other sums payable to the French company were to be paid in French francs. This clause was pivotal in determining that the liability was in French francs and not in Indian rupees, as contended by the Revenue. The court emphasized that sub-clause (iii) of clause 11(a), which provided the basis for assessing royalty in terms of Indian rupees, could not be read in isolation from sub-clause (vi). Therefore, the liability was indeed in French francs.

2. Timing of Liability Finalization
The second issue was determining the point of time at which the liability became final. The court noted that the liability in terms of French francs had to be calculated at the time when the remittance was made. According to sub-clause (iv) of clause 11(a), the assessee was required to render an account of all royalties received or payable within thirty days after the 30th of June and the 31st of December each year. The court inferred that the liability in terms of French francs was determinable at the time of remittance and not at the time when the royalty was initially debited in the books. Since there was no contention from the Revenue that the assessee delayed the remittance beyond the stipulated time, the court held that the liability was rightly determined at the time of remittance.

3. Deductibility of Additional Expenditure Due to Devaluation
The final issue was whether the additional expenditure incurred due to the devaluation of the Indian rupee was a permissible deduction under section 37 of the I.T. Act, 1961. The assessee claimed a deduction for the additional expenditure incurred due to the devaluation when remitting the royalty to the French company. The court held that this additional expenditure was a revenue expenditure incurred in the course of business and was thus deductible. The court referenced the decision in Narandas Mathuradas & Co. v. CIT, where it was held that a trading loss incurred in the course of business was deductible. The court concluded that the additional liability due to devaluation was an incident of trade and allowable as a business expenditure.

Conclusion:
The court answered the referred question in the affirmative, holding that the expenditure of Rs. 1,86,227 was a permissible deduction. The Revenue was directed to pay the costs of the reference to the assessee.

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