Loss on account of devaluation in connection with a loan is not a revenue loss and cannot be deducted as a business expenditure.

( 1 ) THE facts found and/or admitted in these proceedings are shortly as follows : bestobell (India) Ltd. , Calcutta, is the Indian subsidiary of M/s. Bells' Asbestos and Engineering (Holdings) Ltd. , a non-resident company incorporated in the United Kingdom. At the material period the assesses was engaged in executing a contract awarded by Barauni Oil Refinery, a Government of India undertaking. In executing the said contract the funds of the assessee to the extent of over Rs. 24 lakhs became blocked. In the circumstances, the assessee approached its parent company for a loan of 37,500 being about Rs. 5 lakhs in Indian currency at that time. The foreign principal company agreed to advance the amount to the assessee and in its letter dated the 14th January, 1965, wrote to the assessee as follows :"with reference to your application for financial assistance, we conefirm that this company would agree to make you an interest-free loan of Rs. 5 lakhs ( 37,500) for a period of one" year, to enable you to finance the large Government contracts on which you are currently engaged. No doubt you will obtain the necessary permission from the Indian Government to repay this loan in sterling, at the expiration of one year, or earlier if funds become available. "

( 2 ) THEREUPON, the assessee by its letter dated the 18th January, 1965, sought the approval of the Reserve Bank of India for the said loan of Rs. 5 lakhs ( 37,500) from the parent company with permission to repatriate the amount when required after one year or earlier if funds would become available. (a) By the said letter the Reserve Bank was, inter alia, informed that the loan amount was needed to finance the said contract of Barauni Oil Refinery. (b) An amount of Rs. 24. 34 lakhs was lying blocked in the contract and the assessee's overdraft with its bankers had reached the maximum limit and there was no alternative for the assessee but to obtain the said loan from the United Kingdom. (c) Funds were required immediately to meet a taxation liability of Rs. 10 lakhs in January and February, 1965, apart from the continuous requirements in the said contract. (d) The approval of the Reserve Bank for the loan was required immediately so that the assessee could meet the urgent taxation liabilities without default.

( 3 ) NECESSARY permission was granted by the Reserve Bank for the aforesaid loan and the assessee received the loan on the 25th February, 1965, The loan was not repaid at the expiry of one year and remained outstanding in the books of the assessee up to the 6th Jane, 1966, on which date the Indian rupee was devalued. As a result of such devaluation the asses-see found that it had to arrange for a sum of Rs. 7,87,692 to repay the original loan of 37,500, and consequently an extra amount of Rs. 2,87,692 was necessary to repay the original loan of Rs. 5 lakhs.

( 4 ) AFTER deducting a gain of about Rs. 4,078 on the assessee's sterling deposit in a London bank the assessee debited its profit and loss account with a sum of Rs. 2,83,614 for the assessment year 1967-68 and claimed deduction of this amount. The ITO rejected the claim of the assessee on the ground that the increase of liability arising from devaluation on account of the sterling loan was of a capital nature and could not be allowed as a revenue expense.

( 5 ) BEING aggrieved, the assessee preferred an appeal and contended before the AAC, inter alia, that the loan in question was not raised for acquiring any capital asset and the extra amount of Rs. 2,83,614 payable against the loan on account of devaluation of Indian rupee was a revenue expenditure and should have been allowed as deduction in computing the assessee's business income. The AAC held that the loss on account of devaluation in connection with a loan could not under any circumstances be considered to be a revenue loss. Accretion in the amount of the borrowing was not admissible as a deduction. He also held that the assessee not be