<NAME>, J.

1. The six appellants before us by special leave were tried by the Additional Sessions Judge of Gangapur and convicted under Section 147 Indian Penal Code and sentenced to one year's rigorous imprisonment as well as under Section 302 Indian Penal Code read with Section 149 Indian Penal Code and sentenced to life imprisonment. The convictions and sentences had been upheld by <ORG>.

2. The party of the accused had been claiming possession over a field called "Bhaiwala" over which there had been some litigation between two parties so that <NAME> was appointed as Receiver by the orders of <NAME>. <ORG> then upheld the claim of <NAME> the murdered man who was said to be in actual possession of it. The party of the accused had threatened him so that proceedings under Section 107 Criminal Procedure Code had to he instituted against the accused who had also been prosecuted for the theft of the crop by <NAME>. The theft case was pending when an occurrence took place on the morning of 16-8-1965 over the ploughing of the field by a tractor taken by the party of <NAME>. In this incident, two of <NAME>'s brothers and four of the accused persons were said to have been injured. A report had been lodged at the Police Station. It was in this state of tense feelings between the two sides that the accused are said to have proceeded in a group at about 5 p.m. on 16.8.1985 to give <NAME> a beating when he was returning to his house after taking a bath in a pool of water. They are said to have caught him in the field of <NAME>, P.W. 5, and given him a beating witnessed by Shri Das P.W. 1, <NAME>, P.W. 2, <NAME>, P.W. 3, <NAME>, P.W. 5, <NAME>, P.W. 6, and <NAME>, P.W. 7. Out of the six alleged eye witnesses only <NAME>, P.W. 5, <NAME>, P.W. 6, and <NAME> P.W. 7, the son of deceased <NAME>, are residents of village Timava where the occurrence took place. The three other alleged eye witnesses belong to other villages. <ORG> had examined the evidence of each one of the eye witnesses and found it unsafe to rely upon the evidence of any witness except <NAME> whose evidence was accepted by it mainly on the ground that he was a resident of village Timava and he was a Mina by caste. The accused were also Minas by Caste so that, in the opinion of <ORG>, the evidence of a Mina against members of his own caste could be considered reliable. But, <ORG> did not examine facts and circumstances which throw doubts on the complete reliability of <NAME> also. The learned Counsel for the appellants has submitted that <ORG> had erred in failing to consider objections to the testimony of the only witness relied upon by it.

3. learned Counsel for the State of Rajasthan had contended that <ORG> was in error in holding that <NAME>' P.W. 5. was the only reliable witness. learned Counsel attempted to take us through the evidence of each of the other alleged five eye witnesses, and submitted that it was not unacceptable. We will, therefore, consider the objections of <ORG> to the evidence of these five alleged eye witnesses, namely, <NAME>, P.W. 1, <NAME>, P.W. 2, <NAME>, P.W. 3. <NAME>, P.W. 6, and <NAME>, P.W. 7, before taking up the evidence of <NAME>, P.W. 5.

4. <NAME>, P.W. 1, apart from being a chance witness from another village, stated that he had not been examined by the police, although he was, according to himself, present in the village. <NAME> to witness the occurrence in the morning as well as the one in the evening, and for some unexplained reason, remained in the village until the next morning when a police Head Constable came to the spot. He stated that he informed the Head Constable that he was a witness of the murder. But, in <ORG> he had definitely stated that the Head Constable neither enquired anything from him nor did he tell him that he was a witness of the murder. When the contradiction was put to him he said that he may have so stated in the Committing Magistrate's court although the truth was that he had informed the Head Constable. He was shown to have been examined by the police 5 or 6 days after the occurrence.

5. <NAME>, P.W. 2, also a resident of another village, who had claimed in <ORG> that he had been present in village Timava since 11 a.m., tried, at the trial, to shift the time of his arrival in the village to 3 or 4 p.m. His statement indicated that when he reached the spot <NAME> had already fallen down and did not raise any alarm. But, he had stated in his evidence before the Committing Magistrate, that the deceased had raised an alarm on being beaten. This witness was also examined 5 or 6 days after the occurrence.

6. <NAME>, P.W. 3, again a witness of another village whose presence in Timava at the time of occurrence is not satisfactorily explained, stated that he had not himself seen the occurrence at all although he had made contrary statements earlier. He was declared hostile and cross examined by the prosecution. His evidence was rightly considered worthless by <ORG>.

7. <NAME>, P.W. 6, is certainly a resident of Timava. But, he was shown to have been regularly deposing against the accused persons. <ORG> considered the testimony of such a witness to be too 'hazardous' to be acted upon.

8. The evidence of <NAME>, P.W. 7, the son of deceased <NAME>, a resident of Timava, had been rejected by <ORG> mainly because he deposed that the accused had continued beating <NAME> even after he had fallen down. This witness had lodged an F.I.R. dated 18-8-1965 at 2 p.m. at Police Station Gadh Mora, 14 miles away from the place of occurrence, in which he gave out the name of <NAME>, <NAME>, and <NAME> as eye witnesses. He had added there that "many other persons were also there but none of them intervened".

9. We have also examined the evidence of <NAME>, P.W. 5, the only witness considered thoroughly reliable by <ORG>. We are unable to agree with the view that this witness is really so reliable as <ORG> thought him to be even though he may be a Mina by caste and a resident of Timava. <NAME>, P.W. 3, definitely stated that this witness was actually standing at the well with <NAME> and not in the field in which the occurrence took place But, it is difficult to believe <NAME>, P.W. 3, the rightly discarded witness; if the presence of <NAME> who is a chance witness from another village, is itself very doubtful. Hence, this fact, by itself, may not be enough to discard <NAME>. <NAME>, P.W. 6, had stated that <NAME>, P.W. 5, had come with <NAME> after the beating of <NAME> had started and that a number of persons then collected at the well. According to <NAME>, P.W. 6, a resident of Timava who had been deposing for <NAME> and against the accused persons ragularly, <NAME> came to the well after he had reached there. This also does not mean that <NAME> could not be present at the place from where he is alleged having witnessed the occurrence. He may have gone to the well a little after wards. <NAME> had also stated that <NAME> fell when <NAME> put his own leg in between the legs of <NAME>. But, he had stated earlier that <NAME> fell on receiving <NAME> blows. If, as he had stated, he had turned round to see the occurrence in his field when <NAME> had raised an alarm, presumably after beating had started, it was unlikely that he would see anyone tripping <NAME>. But, this may be characterised as a minor discrepancy which was not inexplicable by faulty observation or memory. What makes the evidence of <NAME> really hazardous was that he is not only not mentioned by name with the other witnesses in the F.I.R. but he had been actually arrested by the police, for some unknown reason, and was kept locked up before he gave his statement. It may also be mentioned here that the statements of prosecution witnesses were recorded under Section 164 Criminal Procedure Code also during the investigation. It is true that the evidence of <NAME> is not as reliable as <ORG> thinks. Further more, the evidence of alleged eye witnesses is mostly of general character and does nor specify the parts played by various accused persons.

10. It can, however, not be overlooked that the witnesses had given evidence at the Trial in August and October 1966, of an occurrence which had taken place on 16-8-1965. It is also not unlikely that the appellants had, as the witnesses had deposed, attempted to terrify witnesses of their own village. Some of the evidence of witnesses of other villages which may not have been present at all, is certainly unreliable. But, after examining the whole evidence in the case, we find that the cumulative effect of the evidence against the accused persons is sufficiently convincing for <ORG> as well as <ORG> to have come to the conclusion that the offence with which the accused were charged were established against them beyond reasonable doubt. We should hesitate very much to substitute our own conclusions for theirs in such a case.

11. <ORG> had certainly given sufficiently good reasons for distrusting the evidence of witnesses who did not belong to village Timava although, even out of these, <NAME>, P.W. 1 and <NAME>, P.W. 2, are mentioned in the F.I.R. Courts have held that the testimony of a chance witness, although not necessarily false, is proverbially unsafe. In the case before us, however, there is the evidence of <NAME>, P.W. 7, son of the deceased, and of <NAME>, P.W. 6, who seems to belong to the party of <NAME>, as well as of <NAME>, P.W. 5, who are residents of village Timava. It has been held by this Court that the mere fact that a witness is a relation of a victim is not sufficient to discard his testimony. <CITATION> 1954 SCR 145 @ 152, this Court said:

A witness is normally to be considered independent unless he or she springs from sources which are likely to be trained and that usually means unless the witness has cause, such as enmity against the accused, to wish to implicate him falsely. Ordinarily, a close relative would be the last to screen the real culprit and falsely implicate an innocent person. It is true, when feelings run high and there is personal cause for enmity, that there is a tendency to drag in an innocent person against whom a witness has a grudge along with the guilty, but foundation must be laid for such a criticism and the mere fact of relationship far from being a foundation is often a sure guarantee of truth. However, we are not attempting any sweeping generalisation. Each case must be judged on its own facts. Our observations are only made to combat what is so often put forward in cases before us as a general rule of prudence. There is no such general rule. Each case must be limited to and be governed by its own facts.

This is not to say that in a given case, a judge for reasons special to that case and to that witness cannot say that he is not prepared to believe the witness because of his general unreliability, or for other reasons, unless he is corroborated. Of course, that can be done. But the basis for such a conclusion must rest on facts special to the particular instance and cannot be grounded on a supposedly general rule of prudence enjoined by law as in the case of accomplices.

12. Although the evidence of <NAME>, P.W. 5, may not, by itself, be considered good enough to convict the appellants, yet, when there is the evidence of so many witnesses, supported by a great likelihood of the incident in view of the earlier occurrence during the day and the admitted tension between the two sides, it is difficult to hold that no reliance at all can be placed upon the evidence of an attack which is said to have taken place in broad day light. We think that, for the purposes of corroboration, even if <NAME>, P.W. 5, fell within the category of only a partially reliable witness, as explained by this Court in <CITATION> 1957 SCR 981, the evidence of <NAME>, P.W. 7, and <NAME>, P.W. 6, would be sufficient.

13. If corroboration of the allegations of the prosecution witnesses against the accused were needed, it could be found in the motive and the tense feelings between the accused due to the quarrel over the Bhaiwala field and in the injury report showing the merciless beating given to the deceased who sustained the following injuries :

1" x 1" scar Rt. thigh upper third antr. aspect wearing <NAME>, <NAME>. Advanced age H.M. with grey hairs cut short. P.M. rigidity (torned) passed off from limbs Blister all over the body. Body is swollen. Mouth open. Dark greenish brown (illeg.) Rt. iliac fossa, chest and face. Teeth intact. Blood from nostrils and mouth (illeg.) full swell.

Multiple contusions of different sizes on the head and face. Multiple contusions of different sizes on the upper part of the left side chest, Multiple contusions of different sizes on the left arm and lateral sides. Contusion with abrasion 1" x 1" left forearm center dorsal aspect. Contusion 1" x 1" left hand dorsum. Contusion 11/2" x 1/4" on the center of the chest and to right side. Contusion 6" x 4" on the lower part of the Rt. arm and upper part of right forearm back side. Contusion of different sizes right side chest. Contusion Rt. arm outer side. Contusion 4" x 21/2" upper half of the forearm post. Side Contusion (4) of different sizes on inner side left knee. Contusion with abrasion (4) 1/4" x 1/4" each on the tribunal tubercle left side. Abrasion 1/2" x 1/2" upper end of the left leg inner side. Multiple contusion of different (illegible) size middle 1/3rd of the left leg infront. Lac. wound (two) 1" x 1/2" x 1/5" and 1/4" x 1/4" x 1/5th" each left leg middle (torned). Lac. wound 1" x 1" x 1/2" between great toe and second toe of left foot and fracture at the root of the great toe. Contusion 4" x 3" back of the left thigh. Contusion 1" x 1/2" on the right leg upper third infront. Lacerated wound 11/2" x 1/3" x 1/10" Rt. leg center infront. Contusion 2" x 2" Rt. anklemedial side Contusion 1/2" x 1/3" Rt. leg center infront. Contusion 1" x 1/3" Rt. thigh center outer side. Contusion 11/2" x 11/2" above the right knee outer side. Multiple contusions of different sizes on the back of right thigh. Innumerous contusion of different sizes coalescing together on the right hip. Several contusions of different sizes on the lower part of the back, Lateral sides of the back and waist region. Contusion 2" x 2" nape of the naked lower part and upper part of the back center. Multiple contusions of different on the left hip all over.

14. It may be mentioned here that, although the evidence of <NAME> and some other witnesses against the accused is of a general character without specification of parts played in the beating by the various accused, yet, there was no cross-examination directed against their testimony to discredit their evidence on this ground. Moreover, <NAME>, P.W. 6 gave the following description which certainly clarifies the part played by each accused :

<NAME> was coming after taking bath at Kund which is at a distance of four-five fields from the village. When he came to the field of Champoliya, accused <NAME> was going from the side of the village. <NAME> felled <NAME> down by kicking him with the foot (Talli Iagakar patak diya). Thereafter <NAME>, <NAME>, <NAME>, <NAME>, Khayali went on inflicting Lathi blows to <NAME>. <NAME> kept on holding him. When he stopped moving his hands and legs the accused went on towards the village leaving him there.

In view of the injury report is not unbelieved that the accused went on beating the deceased even after he had fallen. Such conduct would only go to prove the strength of the feelings of the accused against the murdered man.

15. It seems also worth mentioning in this case that the appellant led no evidence to substantiate their pleas of alibi.

16. It is difficult, after considering the totality of evidence, to hold that the concurrent findings of fact given by the <ORG> below as regards the proof of guilt of each accused beyond reasonable doubt are really erroneous. One may not agree with the assessment of the evidence of each witness individually either by <ORG> or by <ORG>. Yet, we do not think that this is a fit case for interference under Article 136 of the Constitution. Consequently, we uphold the convictions and sentences of the appellants and dismiss this appeal.


JUDGMENT <NAME>, J.

1. The facts found and/or admitted in these proceedings are shortly as follows :

<ORG>, Calcutta, is the Indian subsidiary of <ORG> <ORG>, a non-resident company incorporated in the United Kingdom. At the material period the assesses was engaged in executing a contract awarded by <ORG>, a <ORG> 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 <ORG> 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 <ORG> was, inter alia, informed that the loan amount was needed to finance the said contract of <ORG>.

(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 <ORG> for the loan was required immediately so that the assessee could meet the urgent taxation liabilities without default.

3. Necessary permission was granted by <ORG> 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 <ORG> 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 <ORG>, 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 <ORG> 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 being a dealer in foreign exchange, the loss was not incidental to its business or in the carrying on of that. Accordingly, the <ORG> confirmed the disallowance of the loss.

6. The assessee preferred further appeal to the <ORG>. It was contended on behalf of the assessee in the appeal that the said amount should have been allowed as a deductible expenditure under Section 37(1) of the I.T. Act, 1961, as a loss incidental to the business. It was contended further that, although the loan had not been repaid during the year in question as the assessee's accounts were kept according to the mercantile system, the liability having arisen in the year by reason of the devaluation, it was in the nature of an expenditure incurred by the assessee and, therefore, allowable under Section 37 . It was contended that the expenditure for the purpose of business included the payment of the assessee's statutory dues and taxes. It was submitted that the loan had been taken by the assessee for the. purposes of its business and the loss occasioned by devaluation was suffered in the business.

7. The revenue on the other hand contended that the alleged expenditure and/or loss was not allowable inasmuch as : (a) no expenditure had been incurred ; (b) even if such expenditure was incurred it had not been laid out or expended wholly or exclusively for the purpose of the assessee's business; and (c) the expenditure and/or loss was capital in nature inasmuch as it went to increase the amount of loan which the assessee was required to pay to its principal. It was contended that, in any event, the loss arising out of devaluation could not be allowed as a loss incidental to business. It was finally submitted that the loss, if any, was of a capital nature. There was no change in the amount of loan and the provision for a higher amount for repaying the loan could not be called a revenue expenditure as it was related to capital and was connected with the return thereof.

8. The <ORG>, inter alia, noted that no evidence had been adduced to show the probable date of repayment of the said loan. On the date of the devaluation the original period for repayment, i.e., one year, had already expired. Accordingly, the <ORG> held that the assessee was not required to repay the loan on the 6th June, 1966, or that any liability for the expenditure of the extra amount of Rs. 2,83,614 arose on that date. The <ORG> held further that the liability to pay the extra amount, if any, was a contingent liability.

9. On the authority of <ORG> in Indian Molasses Co. (P.) <CITATION>  37 ITR 66, the Tribunal held that the assessee did not actually incur any expenditure which would qualify for allowance under Section 37 .

10. The <ORG> also found that the assessee required additional funds and obtained the said loan not only for financing its business but also to meet an immediate taxation liability of Rs. 10 lakhs as admitted in the letter dated 18th January, 1965, addressed to <ORG>. There being no evidence as to which part of the taxation liabilities was met out of the loan, the <ORG> concluded from the said letter that the major requirement of the assessee was to meet the taxation liabilities. Following a decision of this court in <CITATION>  58 ITR 84 (Cal), the <ORG> held that the expenditure it incurred was in connection with the payment of tax and could not be allowed under Section 37 .

11. The Tribunal held that, as no repayment was made to the principal-

company in the assessment year, there was no question of claiming any loss in that year. The <ORG> also held, following a decision of this court in <CITATION> , that the loss in exchange having arisen due to devaluation, which was an act of the <ORG> and an act of the Sovereign, was not a loss springing directly from the carrying on nor incidental to the carrying on of the business of the assessee and, therefore, could not be allowed also on this ground,

12. On the application of the assessee under Section 256(1) of the I.T. Act, 1961, and also Section 18 of the Companies (Profits) Surtax Act, 1964, the <ORG> has drawn up a statement of case and has referred the following questions for the opinion of this court as questions of law arising from its order :

Under the Income-tax Act , 1961:

"1. Whether, on the facts and in the circumstances of the case, and on a proper construction of the assessee's letter of 18th January, 1965, the <ORG> was right in holding that the assessee's major requirement for its loan was to meet its taxation liabilities ?

2. Whether, on the facts and in the circumstances of the case, the <ORG> was right in holding that the amount of Rs. 2,83,614 was not deductible in computing the assessee's profits and gains of business ?"

Under the Companies (Profits) Surtax Act , 1964 :

"Whether, on the facts and in the circumstances of the case, the <ORG> was right in holding that the amount of Rs. 2,83,614 was not deductible in computing the chargeable profits for the purposes of the surtax assessment for the year 1967-68 ?"

13. Mr. <NAME>, learned counsel for the assessee, in his submissions on question No. 1 before us contended that on a proper construction of the assessee's letter dated the 18th January, 1965, it could not be said that the major requirement of the assessee in obtaining the said loan was to meet its taxation liabilities as on that date. He contended that it was clearly seen from the letter of the foreign principal that the loan was being advanced to the assessee to enable it to finance the current <ORG> contract and not to meet the assessee's taxation liabilities. In the assessee's letter to <ORG> it was also reiterated that the loan was necessary for the purpose of financing the contract. It also appeared from the said letter that the subject of the loan was broached prior to the 17th June, 1964, and prior to the taxation liability of 1965. On a proper construction of the said letter, which was a question of law, Mr. <NAME> submitted that it could not be said that the major requirement of the assessee for the loan was for meeting taxation liability.

14. Mr. <NAME>, learned counsel for the revenue, contended on the other hand, that the finding of the <ORG> that the major requirement of the assessee was to meet the taxation liabilities was a finding of fact which had not been challenged in these proceedings as perverse or based on no evidence. He submitted that construction of ordinary correspondence did not give rise to questions of law which could arise only where legal documents Were being construed. In the instant case the <ORG> has drawn a factual conclusion from the letter.

15. It appears to us that the question No. 1 is an academic question. In the earlier part of its order the <ORG> records as follows : ".........The above facts as emerged from the letter dated 18-l-65 go to show that the major requirement before the company was to meet the taxation liabilities". But in the latter part of the order it is recorded as follows ; "17. Besides, as we have already stated above, the loss has arisen, if not substantially at least to a great extent, in the discharge of the assessee's income-tax liabilities......" The latter part of the <ORG>'s order which does not mention the assessee's major requirement has not been challenged and, therefore, the challenge to the earlier construction of the letter by itself does not advance the assessee's case further.

16. For the reasons given above we decline to answer question No. 1. On question No, 2 Mr. <NAME> for the assessee contended first that the extra amount of Rs. 2,83,614, which the assessee had to provide as a result of devaluation, was in the nature of an ordinary business expenditure. It was as much an expenditure as bank or postal charges which might have had to be incurred by the assessee if the amount was remitted by post or through bank for repayment of the loan. In terms of sterling the amount of loan remained fixed but in obtaining the foreign currency the assessee had to incur an extra expenditure in rupees. This, according to Mr. <NAME>, was a normal and proper business expenditure allowable under Section 37 of the Act.

17. Mr. <NAME> submitted next that as the assessee at the relevant time maintained its accounts under the mercantile system, this expenditure was incurred during the relevant year. The moment devaluation took place, the liability for the extra amount was incurred by the assessee and had to be debited in the assessee's profit and loss account in that year. Alternatively, in providing for the extra amount on account of the devaluation, the assessee suffered a loss and such loss was connected with, incidental to and was incurred for the purpose of the assessee's business. It was a loss of a revenue nature and not of a capital nature.

18. Mr. <NAME>, lastly, submitted that even if it was admitted that the object of the assessee in obtaining the loan was to meet its income-tax liabilities, the extra expenditure incurred in connection with such loan would also come within the ambit of the expression "purpose of the assessee's business" in Section 37 of the Act. Mr. <NAME> submitted that by reason of the subsequent decisions of <ORG>, the decision of this court in <NAME> case  58 ITR 84 (Cal) was no longer good law.

19. Mr. <NAME>, for the revenue, has contended to the contrary. He submitted first that the assessee did not incur any expenditure. Expenditure meant an actual and current disbursement. In the facts of the instant case, the assessee not having determined any particular date for repayment of the loan, no question arose of its spending anything.

20. Mr. <NAME> next contended that the loss of the assessee, if any, by reason of the devaluation was not the loss suffered in the year. In any event, assuming that the assessee suffered a loss, the same was a capital loss and not a revenue loss and the assessee was not entitled to any deduction thereof.

21. Lastly, Mr. <NAME> submitted that <NAME> case [1965] 58 ITR 84 (Cal) was still good law and the assessee having obtained the loan with the object of meeting its income-tax liabilities did not incur any expenditure solely or exclusively for the purpose of its business nor suffered any loss therein and, therefore, was not entitled to any deduction of the extra amounts repaid on account thereof.

22. In support of the respective contentions of the parties a large number of decisions were cited at the <ORG>. We shall refer to the following which in our opinion are of relevance in the present reference.

(a) <CITATION>  23 ITR 230. This decision of <ORG> was cited on behalf of the assessee for the following observations of Bhagwati J. at page 239 on mercantile system of accounting :

"The mercantile system of accounting or what is otherwise known as the double entry system......brings into credit what is due, immediately it becomes legally due and before it is actually received and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed."

(b) <CITATION>  37 ITR 1. This decision of <ORG> was also cited by the assessee on mercantile system of accounting.

In this case the assessee had sold land in plots for building purposes undertaking to develop them by laying out roads, providing a drainage system and installing lights, etc. The purchaser paid only a portion of the price and undertook to pay the balance in instalments. The assessee in its turn undertook to carry out the development within six months. In the relevant accounting year the assessee in accordance with the mercantile system of accounts adopted by it, credited its accounts with the full sale price of the lands though it incurred only a part and at the same time debited an estimated sum by way of expenditure for the development undertaken though nothing had been actually spent. On these facts <ORG>, inter alia, held as follows at page 10 of the report 3 :

"....we find that the sum of Rs. 24,809 represented the estimated expenditure which had to be incurred by the appellant in discharging a liability which it had already undertaken under the terms of the deeds of sale of the lands in question and was an accrued liability which according to the mercantile system of accounting the appellant was entitled to debit in its books of account for the accounting year as against the receipts of Rs. 43,692-11-9 which represented the sale proceeds of the said lands."

(c) <ORG> v. C1T [1959] 37 ITR 66. This decision of <ORG> was also cited on behalf of the assessee for the following observations at page 76 :

"Thus, in finding out what profits there be, the normal accountancy practice may be to allow as expense any sum in respect of liabilities which have accrued over the accounting period and to deduct such sums from profits. But the income-tax laws do not take every such allowance as legitimate for purposes of tax. A distinction is made between an actual liability in praesenti and a liability de future which, for the time being, is only contingent. The former is deductible but not the latter......What a prudent trader sets apart to meet a liability, not actually present but only contingent, cannot bear the character of expense till the liability becomes real."

(d) <CITATION>  73 ITR 53. This decision of <ORG> was cited by the assessee. It was held in this case that an estimated liability, amounting to a contingent liability and not a debt under the W.T. Act, if it could be properly ascertainable and its present value could be fairly discounted, would be deductible from the gross receipts while preparing the profit and loss account.

(e) <ORG> v. IRC [1924] 12 TC 773. This English decision was cited on behalf of the revenue. The facts in this case were that the accounting period of the assessee ended on the 30th April, 1921. Prior to that date the assessee had entered into contracts to purchase quantities of goods to be delivered between November, 1920, and December, 1921. After the contract was entered into prices fell. The assessee had received only a portion of goods by the 30th April, 1921, but in the computation of excess profits duty the assessee claimed to deduct the difference between the contract price and the market price of the undelivered goods as estimated loss. On these facts it was held on a reference that loss plaimed was only an apprehended future loss and not one suffered during the accounting period and, therefore, the deduction claimed was inadmissible.

(f) Whimster & Co. v. <ORG> [1925] 12 TC 813. This decision was also cited on behalf of the revenue. Here the loss claimed by the assessee on unexpired time-charter of ships on the basis of an anticipated fall of freight was disallowed as a deduction.

(g) Alien v. Farquharson Brothers & Co. [1932] 17 TC 59 (KB). This decision was cited by the revenue for the following observations of Finlay J. at page 64 of the report to illustrate the distinction between an expenditure and a loss :

"Now a case might be put in which it was not very easy to say whether a thing was a disbursement or expense or was a loss. It is conceivable--such things sometimes happen--that there may be cases in which a thing might fall alternately......But, none the less, I do think that there is a distinction to be drawn between the two. (a) relates to disbursements ; that means something or other which the trader pays out ; I think some sort of volition is indicated. He chooses to pay out some disbursement; it is an expense; it is something which comes out of his pocket. A loss is something different. That is not a thing which he expends or disburses. That is a thing which, so to speak, comes upon him ab extra."

(h) <CITATION>  55 ITR 716 was cited by the revenue for an observation of <ORG> similar to the above as follows :

"The word 'expenditure' in rule 6 of the Schedule to the Indian Income-tax Act , 1922, meant 'disbursement' and did not include depreciation."

(i) Landes Brothers v. <NAME> [1934] 19 TC 62 (KB). This decision was cited on behalf of the revenue. In this case the assessee, the sole commission agent of a company for sale in Britain, which imported furs under the terms of the agency, had to advance to its principal a part of the value of each consignment to be adjusted after the sale thereof. The transactions were conducted on dollar basis and when the assessee recouped itself for the advances a profit accrued as a result of fluctuation in the rate of exchange. Such profits were held to be a part of the trading receipts of the assessee arising in the course of its business and hence taxable.

(j) <ORG> v. IRC [1938] 22 TC 106 (CA). This decision was cited on behalf of the assessee. The facts in this case were that an English company was granted a licence to distribute within a definite territory the films of an American company. The agreement provided that the English company would pay to its American company 70% of the gross receipts less certain stipulated deductions but was silent as to the exchange basis which was to govern the transactions. At an earlier stage, the English company had been instructed to keep the accounts on the basis of a fixed rate of exchange and the difference between that rate and the rate prevailing at the end of the week in which the transaction took place was directed to be passed on to a suspense account. The books of the English company were maintained throughout on this basis. Owing to a delay in the adjustment of accounts between the two companies and a fall in the value of sterling in relation to dollar large adverse differences were shown in the suspense account. The English company was initially assessed to income-tax without regard to the suspense account but subsequently preferred claims for relief on the ground that the adverse differences in exchange as shown in the suspense account were deductible in computing its profits. It was held by <ORG> that the contractual relationship of the parties established that the English company's debts to the American company were dollar debts and, therefore, the reliefs claimed should be allowed.

(k) Davies v. Shell Company of China Ltd. [1952] 22 ITR (Supp) 1; [1951] 32 TC 133 (CA). In this case, cited by the revenue the assessee was a British company which carried on business of sale and distribution of petroleum products in China through agents from whom the assessee obtained deposits at the termination of the agency. When hostilities between China and Japan broke out the assessee transferred the amounts of deposits to the United Kingdom and retained the same in sterling. Owing to subsequent depreciation of Chinese dollars in relation to sterling, the amounts eventually required to repay the deposits in Chinese currency were much less than the amounts held by the assessee and a substantial profit accrued to the latter. It was held that such profits were capital profits and hence not taxable. The relevant observations in the judgment of <ORG> at pages 147 and 156 are set out as follows :

"The sum paid is a deposit...It is not however a payment in advance...It has the character of a loan in that it is repayable at the determination of the agency by the company, and also in that it has to carry interest at a fixed rate per cent. per annum. "

P. 156 : "It is to be available during the period of the agency for making good the agent's defaults in the event of any default by him ; but otherwise it remains, as I see it, simply as a loan owing by the company to the agent and repayable on the termination of the agency ; and I do not see how the fact that the purpose for which it is given is to provide a security against any possible default by the agent can invest it with the character of a trading receipt."

(l) <CITATION> . The facts in this case cited by the revenue were that the assessee who carried on business in yarns received from its customers sums which they claimed to be "borrowed money" within the meaning of the Excess Profits Tax Act and as such not chargeable to excess profits tax. The revenue authorities, the <ORG> and <ORG> rejected the contentions of the assessee. On a final appeal, <ORG>, however, found that a part of the deposits from the customers of the assessee had no connection with the price of the yarn to be supplied, but were to be held as security for due performance of the contract and that the assessee had to pay the interest on the amounts. Ultimately, unless there was adjustment against liability, the amount had to be returned.

<ORG> held that the transaction was essentially a contract of loan. <ORG> considered <ORG> [1952] 22 ITR (Supp) 1; [1951] 32 TC 133 (CA), and noted that similar deposits were treated as capital receipts and profits thereon by reason of fluctuation of the exchange rate would be capital gain.

(m) <CITATION>  35 ITR 519 was also cited by the revenue, where <ORG> again considered Shell Company of China Ltd.  22 ITR (Supp) 1;  32 TC 133 (CA) and construed it in the same manner as in <ORG> .

(n) <CITATION> was cited on behalf of the assessee. It was contended that this decision had a departure from Shell Company of China Ltd.  22 ITR (Supp) 1 ;  32 TC 133(CA).

In this case, the assessee spent a substantial sum towards stamp duty, registration fees, lawyer's fees, etc., in obtaining a loan from <ORG> secured by a charge on its fixed assets. <ORG> upheld the assessee's claim that the said expenditure was deductible as a revenue expenditure (p. 63) :

"...we are of the opinion that : (a) the loan obtained is not an asset or advantage of an enduring nature ; (b) that the expenditure was made for securing the use of money for a certain period ; and (c) that it is irrelevant to consider the object with which the loan was obtained. Consequently, in the circumstances of the case, the expenditure was revenue expenditure within Section 10(2)(xv) . "

(o) <CITATION> .  71 ITR 761 (Bom). This decision of <ORG> was cited by the assessee. In the relevant assessment year the assessee, an insurance company, claimed deduction of a loss. It was alleged that such loss had been incurred by reason of devaluation of the Pakistan currency on the 31st July, 1955. On that date an amount in Pakistan rupees was due from the Pakistan Government to the assessee on account of advance payment of income-tax. An amount was also due and payable to the assessee under the double taxation avoidance agreement between India and Pakistan. As a result of devaluation the amounts so due and payable were reduced. The assessee alleged that it had suffered a loss and claimed a deduction thereof from its business income. <ORG> held as follows (p. 797):

"It is clear, therefore, that when the difference arose it was a difference which was entirely independent of the volition of the assessee. At no stage did the assessee intend to lay out this amount for any expenditure but, on the other hand, it was fortuitous circumstance that Pakistan devalued its currency that resulted in this difference. It was, therefore, upon the tests laid down in the authorities, clearly a business loss which the assessee incurred."

23. In the facts of this case as found we are unable to accept the contention of the revenue that notionally the expenditure, if any, incurred by or any loss accruing to the assessee by reason of the devaluation did not arise in the year of assessment. The assessee admittedly maintained its accounts on mercantile basis. On devaluation of the Indian currency the liability of the assessee immediately increased to the extent the rupee was devalued and the assessee became liable to pay and/or spend an extra amount in rupees in order to pay its dues. This liability accrued during the relevant period. In the event this debt would be remitted or would become irrecoverable from the assessee in future then under Section 41 of the I.T. Act, 1961, the same would again be treated as income accruing to the assessee. The liability of the assessee during the relevant period cannot be said to be a contingent liability or an anticipated future loss. On such facts the instant case is clearly distinguishable from the decisions cited by the revenue, i.e., <ORG>  12 TC 773 and <ORG>12 TC 813 and the principles laid down in the said decisions have no application in the instant case.

24. The enquiry as to whether by reason of the devaluation the assessee has incurred an expenditure or has suffered a business loss is, in our view, of little relevance. No doubt, an expenditure is something which directly goes out or is deemed to go out of the pocket or till and a loss may fall on a business without any immediate liability to pay or disburse anything. There also may be cases where a loss arising from causes ab extra may necessitate immediate expenditure. But in all such cases, the expenditure as also the losses, if they are business losses, have to be taken into account and deducted in determining the profit. Therefore, the distinction between loss suffered without any immediate disbursement and an expenditure incurred would be of not much significance.

25. The question which in our view is of real importance in the instant case is whether the loss or expenditure of the assessee as a result of the devaluation is of a capital nature or of a revenue nature. Mr. <NAME>, for the assessee, has contended in the course of his submissions that a loss has to be considered in a different way from a gain in computing business profits. There may be cases where a loss de hors the business is allowed as a business loss, whereas a gain arising in similar circumstances will never be a business gain. In our view this distinction again is of little significance as the gain or the loss, as the case may be, has to be connected with the business before the same can enter into the computation of profits.

26. On a scrutiny of the facts of the instant case it appears to us that as a result of the devaluation which befell the assessee, it became immediately liable to an extra liability in terms of its rupee assets for repayment of its debts. This extra expenditure, deemed or otherwise, or this loss, is inextricably connected with the assessee's indebtedness and did not arise de hors the indebtedness nor was it incurred for the purposes of the loan and it was, as, if, from the date of the devaluation the dues from the assessee to its creditors in rupees were increased. We are unable to accept the contentions of Mr. <NAME> that the extra amount which the assessee had to provide for as a result of the devaluation is to be considered as extra expenditure to be incurred for meeting the debt just as postal expenses or bank charges or this extra expenditure which would result in a business loss of a revenue nature.

27. In our view, the propositions laid down in the case of <ORG> [1952] 22 ITR (Supp.) 1 ; [1951] 32 TC 133 (CA) apply on all fours to the instant case. If there would have been a devaluation in favour of the rupee as a result of which the assessee had to pay less to its creditors, the surplus arising would have been of capital nature and could not have been assessed in the hands of the assessee as a business profit. Conversely as a result of the exchange rate going against the assessee the loss which the assessee incurred cannot be held to be a revenue loss. <ORG> considered <ORG> [1952] 22 ITR (Supp.) 1 ; [1951] 32 TC 133 (CA) in K.M.S. Lakshmanier & Sons and <ORG> . The ratio in the said English decision and the principle laid down therein were accepted and approved by <ORG>. The instant case can also be distinguished from the decision of <ORG> in <ORG> . It was decided in that case that any expenditure incurred for securing the use of money for a certain period, i.e., for the purpose of obtaining a loan which was not an asset or advantage of an enduring nature, was a revenue expenditure, and that the purpose for which the loan was obtained was irrelevant in deciding whether such expenditure would be a capital expenditure or a revenue expenditure. In the instant case it is not contended by the assessee that it had incurred the extra expenditure in order to secure the loan. The loan had already been obtained. It is at the point of repayment that the assessee has to provide an extra amount in rupees by reason of the devaluation.

28. For the reasons given above We answer question No. 2 in the affirmative and in favour of the revenue.

29. A large number of decisions were cited and extensive submissions were made on the aspect whether an expenditure incurred or a loss suffered in respect of money borrowed for the purpose of payment of income-tax would be deductible as a business expenditure or a business loss. Inasmuch as we hold that the loss suffered or expenditure incurred is not deductible as it is of capital nature, it is not necessary for us to consider this aspect of the matter any further.

30. The question referred to under the Companies (Profit) Surtax Act, 1964, is a question consequential to question No. 2. By reason of the answer given to question No. 2, we answer this question also in the affirmative and in favour of the revenue. There will be no order as to costs.

<NAME>, J.

31. I agree.