Rajendra Nath Mittal, J.

1. The Income-tax Appellate Tribunal, Chandigarh Bench, Chandigarh, has referred the following question of law under Section 256(1) of the I.T. Act, 1961 (hereinafter referred to as "the Act"), for the opinion of this court:

"Whether, on the facts and in the circumstances of the case, the loss of Rs. 2,30,000 on account of increase in the liability of the loans payable in foreign exchange is an allowable deduction ?"

2. The relevant facts giving rise to the reference are as follows :

The assessee is an Indian company set up in collaboration with Groz-Beckert International A.G. and is engaged in the manufacture and sale of hosiery and knitting machine needles. The company was incorporated after the sanction, from the Government, of the collaboration agreement, on October 15, 1960. The collaboration agreement provided as follows : (1) that the collaborators were to supply machinery and shares worth Rs. 9 lakhs were to be allotted to them as against the price of the machinery.

(2) that the Indian promoters were to make available the amount of Rs. 6 lakhs for building indigenous machinery and air conditioning plant, etc.

3. The collaborators and the Ind