Gupta, J.M.—In this appeal, the assessee, M/s. Oil & Natural Gas Corporation Ltd., Dehradun (ONGC) had taken the following grounds of appeal :—

"1. In the circumstances of the case, the Ld. Commissioner of Income-tax (Appeals) has erred in fact and in law and in confirming the order of the Assessing Officer on the point of foreign exchange loss suffered on foreign loans attributable to Revenue Account.

2. The appellant craves to take any other ground of appeal before or at the time of hearing."

1.2 At the instance of the assessee, a Special Bench was constituted to consider the following questions :—

"Whether on the facts and circumstances of the case and in law, the additional liability arising on account of fluctuations in the rate of exchange in respect of loans taken for revenue purposes could be allowed as deduction in the year of fluctuations in the rate of exchange or the same could only be allowed in the year of repayment of such loans."

1.3 M/s. Maruti Udyog Ltd., whose appeals involving the above issues are pending before the Tribunal, were allowed to join as an Intervener.

2. We would firstly refer the facts of the case. To be stated succinctly the assessee i.e. ONGC, which is a wholly owned Government of India Undertaking, established under the ONGC Act, 1959 for exploration, exploitation and extraction of mineral oils, had filed its return for the assessment year under consideration, declaring a total income of Rs. 4,39,49,86,580, against which the Assessing Officer completed the assessment on a total income of Rs. 8,12,37,78,325 by making various disallowances and additions. The Assessing Officer disallowed, inter alia, the claim of loss of Rs. 5,78,25,83,451 on accrual basis on revenue account on account of fluctuation of foreign exchange rate. He did so by following the assessment order for an earlier year, wherein it was held that such loss was a notional loss. The assessee had also claimed deduction on account of revenue loss due to fluctuation in foreign currency rate on the basis of actual payment at Rs. 1,13,37,36,360 and it was allowed by the Assessing Officer.

3. The assessee preferred appeal before the CIT (Appeals). Detailed submissions were made before the CIT (Appeals) along with the written opinion of Shri G.N. Gupta, Ex-Chairman of Central Board of Direct Taxes. It was explained before the CIT (Appeals) through written submissions that ONGC, which is engaged in capital intensive exploration and production had to heavily depend on foreign loan to cover its expenses, both capital and revenue on import of machinery on capital account, such as, rigs, platform etc.; import of stores, both on capital and on revenue account; payment to non-resident contractors in foreign currency for various services rendered and to repay old foreign loans and interest by fresh borrowings. It was explained that the ONGC has been raising external commercial borrowings as well as suppliers/buyers credit in the global market. It was further stated that such type of external commercial borrowings are with the approval of Central Government and sometime at its behest. It was further explained, "that ONGC has been keeping its books of account on accrual basis i.e., mercantile system of accounting, although certain heads of income, like dividend on units, receipts on account of short lifted gas, interest on delayed payments, penalties, liquidated damages, subsidies and grants, statutory payments etc. which cannot be ascertained, are accounted on receipt basis". Accordingly, it was submitted that the assessee had filed its return of income on the basis of accounts prepared on mercantile system of accounting. The past history was also stated before the CIT (Appeals), and it was clarified that till financial year 1980-81, the ONGC claimed loss on account of fluctuation of foreign exchange rate on the basis of re-payment of foreign currency loans in the year in which such loans or part of loans were repaid. ONGC resorted to heavy borr