Foreign currency loan devaluation loss held capital in nature and not deductible as business expenditure

Additional liability arising on repayment of a foreign currency loan due to devaluation was treated as capital in nature because it was referable to the loan principal itself and the borrowing obligation, not to revenue expenditure incurred for business operations. The court held that the exchange loss affected the capital structure of the borrowing and was not deductible as business expenditure or business loss under section 37(1). For the same reason, it was also not allowable in computing chargeable profits under the Companies (Profits) Surtax Act.

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Issues: Whether the extra rupee liability arising on devaluation of the Indian currency in respect of a foreign currency loan taken for business purposes was deductible in computing business profits under section 37(1) of the Income-tax Act, 1961, and correspondingly deductible in computing chargeable profits under the Companies (Profits) Surtax Act, 1964.

Analysis: The liability to repay the foreign currency loan in Indian rupees increased immediately on devaluation, and the assessee maintained its accounts on the mercantile system. The decisive question, however, was not whether the liability had arisen in the year, but whether the additional amount payable was of a capital or revenue nature. The additional burden was held to be inextricably connected with the borrowing itself and with repayment of the loan principal. It did not constitute expenditure incurred for the purpose of securing or carrying on the business in the revenue field. The exchange loss resulting from the movement in currency value was treated as affecting the capital structure of the borrowing obligation and was therefore not deductible as business expenditure or business loss.

Conclusion: The additional amount attributable to devaluation was not deductible under section 37(1) and was not allowable in computing chargeable profits under the surtax provisions.

Ratio Decidendi: A loss or additional liability arising on repayment of a foreign currency loan due to devaluation is capital in nature when it is referable to the loan principal itself, and not deductible as revenue expenditure or revenue loss.

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