JUDGMENT <NAME>, J.

1. In this reference, under Sub-section (1) of Section 256 of the I.T. Act, 1961, for the assessment year 1967-68, the following questions have been referred to this court for answer ;

"1. Whether, on the facts and in the circumstances of the case, <ORG> was justified in holding that the increase in liability of Rs. 1,75,99,854 due to devaluation was not deductible in computing the assessee's business income ?

2. If the answer to question No. 1 is in the affirmative, whether, on the facts and in the circumstances of the case, <ORG> was justified in holding that the alternative claim of the assessee-company for development rebate under section 33 of the ' Income-tax Act , 1961, on Rs. 1,09,24,832 was not admissible under the provisions of the Act ?"

2. In order to appreciate these questions, it is necessary to state certain facts. The assessee is a limited company and, as mentioned hereinbefore, the reference relates to the assessment year 1967-68. The assessee-company under an agreement dated August 16, 1963, had taken a loan from <ORG> for making payment in the United States of America of the price of capital plant and machinery purchased for the new project, viz., a petrochemical undertaking. The loan was taken and repayable in dollars. This is an important fact which is to be borne in mind. Out of this loan, which the assessee-company took from <ORG>, payment was made for capital plant and machinery purchased from the various suppliers in the United States of America and the plant and machinery so purchased were shipped to India for installation in the petrochemical undertaking. On June 6, 1966, there was devaluation of the Indian rupee and, therefore, the liability of the assessee-company for repayment of loan to <ORG> in dollars increased in terms of rupees to Rs. 1,75,99,854. This increased liability was accounted for by the assessee-company by crediting <ORG> and debiting Rs. 1,09,24,932 to the plant and machinery account, Rs. 98,766 to the building account and Rs. 65,74,256 to the capital work-in-progress. The assessee-company claimed before the <ORG> that the increased liability of Rs. 1,75,99,854 arising out of devaluation of the Indian rupee on June 6, 1966, should be allowed as deduction in computing the business income. Alternatively, it was claimed by the assessee-company that the amount of Rs. 1,09,24,832, attributable to the plant and machinery account, development rebate should be allowed. The <ORG> rejected both these claims. The assessee-company thereafter preferred an appeal before the <ORG>. The <ORG>, relying on some other point, upheld the findings of the <ORG> on these two aspects. The assessee-company thereafter preferred a further appeal before the <ORG>. The <ORG>, on a consideration of the rival contentions made before it, had held as follows:

"5. We have considered the rival submissions. On the first issue whether the loss arising out of devaluation on account of loan from <ORG> was an allowable deduction in computing the business income, even though a number of case law have been cited before us by both the sides, the answer to the question is self-evident from the ruling of the hon'ble <ORG> in the case of <CITATION> . . In that case, the hon'ble <ORG> has laid down that where profit or loss arising from change in exchange rate of foreign currency was on the balance outstanding in connection with the purchase of capital goods, the profit or loss is of the nature of capital. Viewed in this context, it was not under dispute in the present case that the loan from <ORG> was taken for the purchase in the USA of capital plant and machinery in the new project of petrochemical undertaking. The loan outstanding to <ORG> on the devaluation date was thus for a capital purpose, i.e., purchase of capital plant and machinery in the new project of petrochemical undertaking. It follows, therefore, that if there was any profit or loss on account of devaluation in respect of this liability it was on capital account. We, therefore, following the ruling of the hon'ble <ORG> in the case of <ORG> , which is a binding authority for us and with which we are in respectful agreement, hold that the loss arising from devaluation attributable to <ORG> was of the nature of capital loss. This could not, therefore, be allowed as a deduction in computing the business profit and was rightly disallowed by the revenue authorities. We will now deal with the alternative issue raised by the assessee-company that even if the loss on devaluation was considered to be capital loss, development rebate should have been allowed on the increased liability arising out of devaluation attributable to plant and machinery installed during the previous year amounting to Rs. 1,09,24,832. Here again, it is not under dispute that out of the loan taken from <ORG> payments were made to suppliers of capital plant and machinery in the USA and the plant and machinery which were installed during the previous year were those items of plant and machinery in respect of which payments had already been made by the assessee-company before the date of devaluation. This means that the actual amount which the assessee-company had to pay for the plant and machinery which was installed during the previous year was at the pre-devaluation rates and the increased liability on account of devaluation was in respect of loan taken in the USA which was outstanding on the devaluation date, and not in respect of purchase of capital plant and machinery. In these circumstances, even according to the criterion of actual cost as submitted before us by the assessee's learned counsel, <NAME>, the increased liability on account of devaluation will have nothing to do with what the assessee company had to pay for acquiring capital plant and/or machinery or for bringing them into working condition. No part of the increased liability on account of devaluation can, therefore, be included in the actual cost of plant or machinery which was installed during the previous year. The judgment of <ORG> in I.T. A, No. 2027 of 1971-72 will, therefore, not be applicable here. If resort is had to the provisions of Section 43A , Sub-section (2) of Section 43A clearly lays down that the variation in actual cost worked out under this section, will have no effect of development rebate admissible under Section 33 of the Income-tax Act, 1961. Thus, the alternative plea of the assessee also fails and the revenue authorities, in our view, were justified in not allowing development rebate on the increased liability arising out of devaluation which was debited by the assessee to the plant and machinery account on both the issues. Therefore, the appeal of the assessee-company fails."

3. Upon this, the aforesaid questions have been referred to us.

4. The first aspect of the question, therefore, is whether the <ORG> was justified in holding that the increased liability of Rs. 1,75,99,854 due to devaluation was not deductible in computing the assessee's business income. The <ORG> held that, inasmuch as the increased liability was on account of the plant and machinery, this was on account of capital and as such could not be deducted in computing the income of the assessee. A large number of decisions were cited at the bar in support of the rival contentions. The question is whether the increased liability due to devaluation which had to be discharged by the assessee by borrowing, say, assets or liability which could be considered to be capital. As mentioned hereinbefore, a large number of decisions were cited and we shall note the decisions before we come to our conclusion.

5. Reliance was placed on the observations of <ORG> in the case of <CITATION>  55 ITR 736. There, the assessee-company which had been carrying on business of manufacturing cloth, pursuant to the authority under its memorandum of association to invest its funds in loans to others, resolved to invest its surplus funds with its managing agents at 6 per cent, interest. The managing agents on behalf of the company borrowed large sums of money from outsiders, entered them in the company's books of account, withdrew the sums and utilized those for their own purposes. The managing agents went into liquidation in 1933. In computing its profits for the purpose of industrial tax under the Indore Industrial Tax Rules, 1927, for the assessment year 1941, the assessee-company had claimed deduction of the sums which could not be recovered from the managing agents as bad debts and as trading loss. It was held by <ORG> that the money borrowed by the managing agents which would become irrecoverable was a trading loss deductible in computing the profits of the managing company for the assessment year ; it was a loss incidental to the company's business. The fact that the managing agents brought into the company's till larger amounts than what the company's business demanded at a particular moment of time did not make the dealing or lending of money themselves any the less incidental to the sanctioned business operation. There, Mr. Justice <NAME>, learned Chief Justice as he then was, at page 740 of the report, observed that the question was not whether the managing agents committed a fraud on the company, but whether the amounts borrowed were the funds of the company. If the creditors had filed a suit against the company, could it have resisted the suit on the ground that the managing agents had no power to borrow the amounts for the reason that at the time they had borrowed the money they were in excess of the requirements of the business ? The learned judge further observed that the answer was in the negative. There would not have been any defence to such a suit. Thereafter the learned judge observed, "after the borrowing the money became the company's money".

6. Reliance was placed on behalf of the revenue in aid of the submission that borrowed money after borrowing would become the assessee's money and if the principle of law was that the assessee's money, if utilised for capital purposes and in respect of the same there was any increased liability due to devolution, then such increased liability was on capital account and not on revenue account. In the case of <CITATION> , where, sitting singly, I had an occasion to rely on this observation of <ORG>, but it will be necessary to refer to the context of such reliance. Under Section 295 of the I.T. Act, 1961, the <ORG> was only authorised, it was held, to make rules to carry out the purposes of the Act. The rules so framed could only be for carrying out the provisions of the Act and could not take away what was conferred by the Act or whittle down its effect. Section 296 of the Act, no doubt, enjoined that the Rules framed by the Central <ORG>. should be placed before <ORG> and the same might be modified by <ORG>. However, by this process, the Rules framed by the delegate did not become legislation of <ORG>. There, the court was considering Rule 19A(3) of the I.T. Rules, 1962, which provided that the borrowed capital employed in the new industrial undertaking except to the extent indicated in Sub-rules (a) and (b) could not be taken into consideration in computing the capital employed for the purpose of granting any relief as contemplated under Section 80J . But Section 80J of the I.T. Act, 1961, it was held, did not provide that the capital employed should be out of the money belonging to the assessee. Therefore, it was held, borrowed money, if it was employed as capital in a new industrial undertaking, was entitled to be taken into computation. In so holding, reliance was placed on the observations of <ORG> in the case of <CITATION> . . But it has to be emphasised that it was so held in considering whether the borrowed capital become capital of the company for certain purpose. In neither of these two cases, however, the question whether a loan as such could become an asset of enduring nature or an expense for a loan either in the shape of either procuring or for the purpose of repayment of it would be capital expenditure or revenue expenditure fell for consideration. The expression that " after borrowing the money became company's money", as mentioned by <ORG>, in the passage quoted, was made--it must be emphasised--entirely in a different context.

7. The next case which requires consideration is the decision of <ORG> in the case of <ORG> (1953} <CITATION>  56 ITR 52. There, Mr. Justice <NAME> and Mr. Justice <NAME>, in a Bench of three, held that the expression " capital " used in Section 10(2)(iii) of the Indian I.T. Act, 1922, in the context in which it occured, meant money and not any other assets. There was in truth no capital borrowed by the assessee in that case. The agreement to pay the balance of consideration due by the purchaser did not, according to the majority of the judges, give rise to a loan. Therefore, the claim for deduction of the amount of interest under Section 10(2)(iii) was not admissible. It was further held by the full court that interest paid by the assessee was business expenditure and was allowable as a deduction under Section 10(2)(xv) . The transaction of acquisition of assets was closely related to the commencement and carrying on of the assessee's business and interest paid on the unpaid balance of the consideration for the assets acquired, in the facts of that case, was held, in the normal course, had to be regarded as expenses for the purpose of business which was carried on in the accounting period. The expenditure might indicate a transaction which was so closely related to the business, as was found by <ORG> in that case, that it should be viewed as an integral part of the conduct of the business, might be regarded as revenue expenditure laid out wholly and exclusively for the purpose of business. The expenditure for satisfying liability unrelated to the business even if incurred for avoiding danger, apprehended or real, to the conduct of the business could not be said to be a revenue expenditure. <ORG> reiterated that in consideration whether the expenditure was revenue expenditure, the court had to consider the nature and the ordinary course of business and the object for which the expenditure was incurred. The question was whether a particular expenditure was a revenue expenditure incurred for the purpose of business must be viewed in the particular context of business interest or expediency. If the outgoing or an expenditure was so related to the carrying on or conduct of the business that it might be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which was a condition to the carrying on of the' business, the expenditure might be regarded as revenue expenditure. Similar provision like Section 10(2)(iii) of the Indian I.T. Act, 1922, has been provided under Section 33 of the I.T. Act, 1961.

8. But mainly reliance was placed on behalf of the assessee on a decision of <ORG> in the case of <ORG> v. <ORG> v. CIT [1966] 60 ITR 52 CIT [1966] 60 ITR 52. There the assessee had obtained a loan of Rs. 40 lakhs from <ORG> secured by a charge on its fixed assets. In connection therewith, it spent a sum of Rs. 84,633 towards stamp duty, registration fees, lawyer's fees, etc., and claimed this amount as business expenditure. But <ORG> held that the amount spent was not in the nature of capital expenditure and was laid out or expended wholly and exclusively for the purpose of the assessee's business and was, therefore, allowable as a deduction under Section 10(2)(xv) of the Indian I.T. Act, 1922. The act of borrowing money was incidental to the carrying on of business, the loan obtained was not an asset or an advantage of enduring nature, the expenditure was made for securing the use of money for a certain period, and it was irrelevant to consider the object with which the loan was obtained. There at page 62 of the report, <ORG> has referred to various decisions. <ORG> referred to the decision of this court in the case of <ORG> v. CIT  54 ITR 592, where Mr. Justice <NAME> held that the loan of Rs. 10 lakhs obtained by the company was an asset or advantage for the enduring benefit of the business of the assessee. The learned judge placed reliance on a number of cases, some of which were also discussed by <ORG>. But <ORG> observed that it was unable to agree that a loan obtained could be treated as an asset or advantage for the enduring benefit of the business of the assessee. A loan, according to <ORG>, was a liability and had to be repaid and, in their opinion, it was erroneous to consider a liability as an asset or an advantage within the test laid down by Viscount <NAME> and approved and applied by <ORG> in several decisions. <ORG> further noted that Justice <NAME>, after referring to a number of cases, felt that the raising of capital by issue of debentures was a recognised mode of raising capital and he further held that the decided cases had laid down the proposition that borrowing money by the issue of debentures was an acquisition of capital asset and that any commission or expenditure incurred in respect thereof was of a capital nature and not to be considered as in the nature of revenue. <ORG> referred to the decision in the case of <CITATION>  57 ITR 455 (Bom), in view of the fact that strong reliance was placed by the assessee on that decision. It is relevant to refer to the material portion of the judgment there at page 62. <ORG> observed as follows :

" <CITATION>  57 ITR 455, <ORG> held that the expenditure incurred for raising loan for the carrying on of a business cannot in all cases be regarded as an expenditure of a capital nature. On the facts of the case, they held that as construction and sale of the building was the sole business of the firm and the building was its stock-in-trade, and the loan was raised and used wholly for the purpose of acquiring this stock-in-trade and not for obtaining any fixed assets or raising any initial capital or for expansion of the assessee's business, the expenditure incurred for the raising of loan was not an expenditure of capital nature but revenue expenditure. Although the conclusion of <ORG> was correct, we are not able to agree with the principle that the nature of the expenditure incurred in raising a loan would depend upon the nature and purpose of the loan. A loan may be intended to be used for the purchase of raw material when it is negotiated, but the company may, after raising the loan, change its mind and spend it on securing capital assets. Is the purpose at the time 'the loan is negotiated to be taken into consideration or the purpose for which it is actually used ? Further, suppose that in the accounting year the purpose is to borrow and buy raw material but in the assessment year the company finds it unnecessary to buy raw material and spends it on capital assets. Will the Income-tax Officer decide the case with reference to what happened in the accounting year or what happened in the assessment year ? In our opinion, it was rightly held by <ORG> in <CITATION>  6 ITC 28 (Nag), that the purpose for which the new loan was required was irrelevant to the consideration of the question whether the expenditure for obtaining the loan was revenue expenditure or capital expenditure.

9. To summarise this part of the case, 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) . "

9. It was emphasised by the learned advocate for the assessee that <ORG> had held that the loan could never be an asset and if that was so, the purpose of which loan was utilised, namely, whether it was for acquisition of the capital asset or for revenue purpose was irrelevant. Therefore, any increased liability of the assessee for repayment of the loan would never be on the capital account and must always be considered on the revenue account. It has, however, to be emphasised in view of the several subsequent decisions of <ORG> that there <ORG> was not concerned actually with any interest to be paid on account of borrowed money. There <ORG> was concerned with the act of borrowing and the incidental acts thereto, that is to say, that the acts incidental to the obtaining of the loan and in that context it is material to emphasise that in the third test <ORG> has significantly used the expression" it is irrelevant to consider the object with which the loan was obtained". Therefore, the object for which the loan was obtained was irrelevant for consideration in view of the fact that the loan was, when obtained, a liability for the purpose of consideration of the incidental expenses relating thereto as revenue expenses. But <ORG> was not considering the position as to the manner after the loan was obtained whether the user of the loan in a particular fashion not for the purpose of which the loan was obtained in any way materially altered or affected the position. This distinction has to be borne in mind, in our opinion, in the order to reconcile this observation with those of several other subsequent observations with which we shall presently deal with. But before we do so, we may note that this court had occasion to consider the ratio of this decision by <ORG> of this court in the case of <CITATION>  Tax LR 395, where the court was concerned with whether the expenditure incurred for obtaining the overdraft facility of a loan was allowable under Section 10(2)(xv) of the Indian I.T. Act, 1922. There, it has to be emphasised, the court was considering the question of expenditure incurred in obtaining the loan. In that context, reference was made to the observations of <ORG> that the ratio of the aforesaid decision of <ORG> was that the loan was a liability and the loan obtained had to be repaid though the period of repayment might be either long or short. The loan was, therefore, not an asset or advantage having regard to the observations of <ORG> and having regard to the facts found by the <ORG> that by incurring the expenditure the company had only obtained an overdraft facility for loan. Then the court came to the opinion that this was an expenditure which was allowable under Section 10(2)(xv) of the Indian I.T. Act, 1922.

10. In the case of <CITATION> . , a decision upon which the learned advocate for the revenue strongly relied on, was that the assessee which carried on business in the manufacture of locomotive boilers and locomotives for the purpose of its manufacturing activity had to make purchases of plant and machinery in the U.S.A. with the sanction of the exchange control authorities, It had remitted to its agent in the U.S.A. $33,850 for the purpose of purchasing capital goods and other expenses. As selling agent of <ORG> for the sale of their products in India, the assessee incurred expenses on their behalf in India and also earned commission of $36,123. With the sanction of the exchange control authorities the amounts paid by <ORG> in reimbursement of the expenses and towards commission were retained with its agent in the U.S.A. for the purchase of capital goods there. The pound sterling and with it the Indian rupee were devalued on September 16, 1949. Thereafter, the assessee found it more expensive to buy American goods and, as the Govt. of India also imposed some restrictions on imports from the U.S.A., the assessee, with the permission of <ORG>, repatriated $49,500. This resulted in a surplus and the <ORG> assessed it as profit arising to the assessee and incidental to its carrying on business. <ORG>, however, held that only that part of the surplus which was attributable to $36,123 received from <ORG> was a trading profit. On a reference, <ORG> held that the surplus attributable to $36,123 was an accretion to the assessee's fixed capital and was not liable to tax. It was held by <ORG> that the Act of retaining the monies in the U.S.A. for capital purposes after obtaining the sanction of <ORG> was not a trading transaction in the business of manufacture of locomotive boilers and locomotives. It was clearly a transaction of accumulating dollars to pay for capital goods, the first step in the acquisition of capital goods. The surplus attributable to $36,123 was capital accretion and not profit taxable in the hands of the assessee. It was emphasised on behalf of the revenue that this was an authority for the proposition that any accretion of dollar in foreign country due to devaluation was on a capital account. It is sought to be distinguished by the learned advocate for the assessee on the ground that there <ORG> was not concerned with borrowed money or loan. There <ORG> was concerned with the accretion accruing to an assessee in respect of his own money held in a foreign country which was utilised for the purpose of buying capital goods. In this connection, reference was also made to the decision in <ORG> in England in the case of <NAME> (H. M. Inspector of Taxes) v. <ORG>  22 ITR (Supp) 1 (CA). There, what had happened was that the assessee-company was a British company carrying on the business of sale and distribution of petroleum products in China and it employed a number of Chinese agents to whom petroleum products were consigned for which the payments were not made beforehand. They were, however, required by the terms of the contract to deposit with the company certain sums in Chinese dollars and the company was empowered to take out of the deposit any amounts which might become due from the agents in the event of their default. The deposit was repayable at the determination of the agency by the company and it was to carry interest at a fixed rate per cent. per annum. The company was empowered to use the deposit in any way it liked; but it kept in Shanghai banks Chinese dollars deposits of an amount equivalent roughly to the sum which the company had acquired from these agents at any given time. When war broke out between China and Japan the company sold the Chinese dollars for sterling at the then current rate of exchange, transferred the resultant sterling amount to the bank and placed the amount of deposit with its parent company. Subsequently, the company closed down its operations through its agents in China. There was then a depreciation of the Chinese dollars with respect to sterling and the amounts required to repay the deposits of the agents in Chinese dollars were much less than the amounts held by the company to meet their claims. The question was whether the profit thus made by the company was assessable to income-tax. The Special Commissioners of Inland Revenue in England held that it was a capital profit and not subject to income-tax. <NAME> held that the question was whether it was a trading profit or a merely capital profit was a question of fact on which there was evidence to support the conclusion of the Special Commissioners arid that he was, therefore, not entitled to interfere with their finding. On appeal, it went to <ORG>. <ORG> was of the view that the question whether the Special Commissioners were right in holding that the exchange profit was a capital profit not subject to income-tax was properly framed by them as a question of law and that it was open to the court to go into that question. It further held, and it is important for us, that it was not a trading profit but it was simply the equivalent of an appreciation in a capital asset not forming part of the assets employed as a circulating capital in the trade and it was, therefore, not assessable to tax. Now, in this case, strong reliance was placed by the learned advocate for the assessee on the observations of Lord Justice <NAME> of <ORG>, at page 18 of the report, where he had set out the relevant facts and thereupon observed as follows:

"As regards the law to be applied there is a considerable measure of agreement between the parties. Mr. <NAME> for the company does not dispute that where a British company in the course of its trade engages in a trading transaction such as the purchase of goods abroad, which involves, as a necessary incident of the transaction itself, the purchase of currency of the foreign country concerned, then any profit resulting from an appreciation or loss resulting from a depreciation of the foreign currency embarked in the transactions compared with sterling will prima facie be a trading profit or a trading loss for income tax purposes as an integral part of the trading transaction. That concession or admission by Mr. <NAME> is amply justified by the cases to which we have been referred. There is the case of <ORG> <NAME> [1934] 19 TC 62 (KB), which is a decision of my brother <NAME> as a judge of first instance. There the appellants, who carried on business as fur and skin merchants and as agents, were appointed sole commission agents of a company for the sale in Britain and elsewhere of furs exported from Russia on the terms, inter alia, that they should advance to the company a part of the value of each consignment. All the transactions between the appellants and the company were conducted on a dollar basis and owing to fluctuations in the rate of exchange between the dates when advances in dollars were made by the appellants to the company against goods consigned and the dates when the appellants recouped themselves for the advances on the sales of the goods, a profit accrued to the appellants on the conversion of repaid advances into sterling. The decision was that the exchange profits arose directly in the course of the appellants' business with the company and formed part of the appellants' trading receipts for the purpose of computing their profits assessable to income tax under Case I of Schedule D. My brother <NAME>, on page 69 of the report, cited the case of <ORG> [1926] 10 TC 372 (KB), to which I will refer in a moment, and then made this comment upon it: 'I pause there to say that in my view the profit which arises in the present case is a profit arising directly from the business which had to be done, because, as is found in paragraph 6 of the case, the business was conducted on a dollar basis and the appellants had, therefore, to buy dollars in order to make the advances against the goods as prescribed by the agreements. The profit accrued in this case because they had to do that, thereafter as a trading concern in this country re-transferring or re-exchanging into sterling.' That is accepted by both parties as correctly stating the law, and if I may say so in my view it was clearly a right decision on the facts of that case. The question is whether it can be said to have any bearing on the very different facts of the present case."

11. Jenkins J., thereafter, referred to the cases of <ORG> v. <NAME> [1943] 25 TC 292 (CA), McKinlay v. H. T. Jenkins and Son Ltd. [1926] 10 TC 372 (KB), John Smith and Son v. <NAME> [1921] 12 TC 266 (HL) and, dealing with the arguments of Sir <NAME>, observed as follows (pp. 25 & 26):

"'Next', Sir <NAME> says, ' look at the character of the agent's deposit itself and the terms of the agreement under which it was, made'. He points out that on the face of the agreement the deposit was made to secure the due performance by the agent of his obligations ; to secure, in other words, the due discharge of the liabilities which might arise from time to time from the agent to the company as a result of the agent carrying on business as agent for the company, selling the company's petroleum and so forth. Sir <NAME> argued that a deposit so closely linked with the actual trading operations to be carried on by the agent must itself be regarded as a trading receipt. In that I venture to differ from him. If the agent's deposit had in truth been a payment in advance to be applied by the company in discharging the sums from time to time due from the agent in respect of the petroleum products transferred to the agent and sold by him, the case might well be different and might well fall within the ratio decidendi of <ORG> v. <NAME> [1934] 19 TC 62 (KB) and <ORG> v. <NAME> [1943] 25 TC 292 (CA). But that is not the character of the deposits here in question. The intention manifested by the terms of the agreement is that the deposit should be retained by the company carrying interest for the benefit of the depositor throughout the terms of the agency. 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.

Mr. <NAME> described the agent's deposits as part of the company's trading structure, not trade receipts but anterior to the stage of trade receipts, and I think that is a fair description of them. It seems to me that it would be an abuse of language to describe one of these agents, after he had made a deposit, as a trade creditor of the company ; he is a creditor of the company in respect of the deposit, not on account of any goods supplied or services rendered by him in the course of its trade, but simply by virtue of the fact that he has been appointed an agent of the company with a view to his trading on its behalf, and as a condition of his appointment has deposited with or, in other words, lent to the company the amount of his stipulated deposit.

After paying the best attention I can to the arguments for the <ORG> and those for the respondent company, I find nothing in the facts of this case to divest those deposits of the character which it seems to me they originally bore, that is to say, the character of loans by the agents to the company, given no doubt to provide the company with a security, but nevertheless loans. As loans it seems to me they must prima facie be loans on capital not revenue account; which perhaps is only another way of saying that they must prima facie be considered as part of the company's fixed and not of its circulating capital. As appears from what I have said above, the evidence does not show that there was anything in the company's mode of dealing with the deposits when received to displace this prima facie conclusion.

In my view, therefore, the conversion of the company's balances of Chinese dollars into sterling and the subsequent repurchase of Chinese dollars at a lower rate, which enabled the company to pay off its agent's deposits at a smaller cost in sterling than the amount it had realised by converting the deposits into sterling, was not a trading profit, but it was simply the equivalent of an appreciation in a capital asset not forming part of the assets employed as circulating capital in the trade. That being so it was a profit of the nature not properly taxable under Schedule D, and the Special Commissioners in my view came to a right conclusion, which was rightly affirmed by the learned judge, and I would, therefore, dismiss the appeal. "

12. Here also though, as I have said before, subsequent decisions had dealt with this case, the actual distinction is sought to be urged before us, whether the user of the assessee's own money or user of the borrowed money of the assessee was for capital or for revenue purpose made any difference does not seem to have been stressed. But this decision, as we shall indicate, has been later on followed. If this decision is understood in the light of the expression "when any cost or expenses incurred for obtaining a loan before it was used" then it could be treated as a capital, then the principle of this decision is absolutely irreconcilable with the observations of <ORG> in the case of <CITATION>  60 ITR 52. Reliance was also placed on the decision of <ORG>, where the observations in the case of <ORG>  22 ITR (Supp) 1 (CA) were approved in the case of <CITATION> , the Chief Justice, <NAME>, had referred to the case of Davies v. <ORG> of China  22 ITR (Supp) 1 (CA) with approval and quoted the observations of <ORG>, as mentioned hereinbefore.

13. Reliance was also placed on the case of <ORG> (1929} <CITATION> on behalf of the asseesee. There, the assessee-company had incurred an expenditure to secure overdraft facilities with the bank for the purpose of its business. It was held that the expenditure was of a revenue nature allowable under Section 10(2)(xv) of the Indian I.T. Act, 1922. It was held that the absence of any finding regarding the extent of the overdraft facility the period for which it was granted and the terms on which the overdraft facilities were secured did not affect the position. There the observations of <ORG> in the case of <CITATION>  60 ITR 52 was also referred to in aid of its conclusion reached by the court. As we have mentioned before that was a case where the question was about the expenditure for securing overdraft facilities for the purpose of its business and in that connection it had incurred an expenditure. Reliance was also placed on the case of <CITATION> . There, the assessee-company had been carrying on a business as distiller of country liquor and sold the produce of its distillery to licensed wholesalers. After the war started the difficulty was felt in finding the bottles in which the liquor was to be sold. To relieve the scarcity the <ORG> devised a scheme whereby the distiller was entitled to charge the wholesaler a price for the bottles in which the liquor was supplied, at rates fixed by the <ORG>, which they were bound to repay when the bottles were returned.. In addition to the price fixed under the <ORG> scheme, the assessee took from the wholesalers certain further amounts described as security deposits without the <ORG>'s sanction and entirely as a condition imposed by the assessee itself for the sale of its liquor. The moneys described as security deposits were also returned as and when the bottles were returned. But in this case, the entire sum taken in one transaction was refunded when 99 per cent. of the bottles covered by it were returned. The price of the bottles received by the assessee was entered in it in its general trading account while the additional sum was entered in the general ledger under the heading "Empty bottles return security deposit account". The question was whether the assessee could be assessed to tax on the balance of the amounts of these additional sums left after the refunds made. It was held that in realising the additional amount described as security deposit the assessee was charging extra prices for the bottles. Therefore, the additional amounts taken were an integral part of the commercial transaction of the sale of liquor in bottles and when they were paid were the moneys of the assessee and remained thereafter the moneys of the assessee, they were the assessee's trading receipts and, therefore, the balance of these additional sums left after the refunds made thereout were assessable to tax. In the context of this case, this decision will not be of much assistance to us. Reliance was also placed on the case of <CITATION> .  46 ITR 590 (Bom). There, it was held that the foreign fund of the assessee was allowed to remain unused where it lies the mere circumstance that there had been fluctuation in the currency resulting in appreciation of the fund in terms of the coin of another country would not result in profit to the owner of the fund. But, if the fund was utilised in the course of business for a trading purpose there would be realisation of the profit arising out of devaluation and the profit would be taxable. If, on the other hand, the fund was not utilised for a business operation or for the purposes of trade but for a common business operation like payment of income-tax in the foreign country there was no profit and the difference in exchange could not be assessed to income-

tax. The matter of taxability could not be decided on the basis of the entries which the assessee might choose to make in his accounts but had to be decided in accordance with the provisions of law. What would determine the taxability was not whether the assessee had shown a particular item as profit or loss in the accounting year but whether such an item could be regarded as a profit or loss under the provisions of the I.T. Act .

14. Next reliance was placed on a <ORG> decision in the case of <ORG> v. CIT [1979] 116 ITR 1. There the <ORG> observed that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by him, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss, if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of a capital nature. The <ORG> further held that it is now well settled that the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. The assessee may, by making entries which are not in conformity with the proper principles of accountancy, conceal profit or show loss and the entries made by him cannot, therefore, be regarded as conclusive one way or the other. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee. The assessee had a cotton mill in West Pakistan where it manufactured and sold cotton fabrics. During the financial year ending 31st March, 1954, relevant to the assessment year 1954-55, the assessee had made large profits amounting to Indian Rs. 1,68,97,232 converted at the then prevailing rate of exchange of 100 Pakistani rupees to 144 Indian rupees. On 8th August, 1955, Pakistan devalued is rupee restoring the parity between in Indian rupee and the Pakistani rupee. Thereafter, during the accounting periods relevant to the assessment years 1957-58 and 1959-60, the assessee obtained permission of <ORG> and remitted to India Rs. 25 lakhs and Rs. 12 1/2 lakhs, respectively. The assessee had claimed that on remittance the assessee had suffered respectively a loss of Rs. 11 lakhs and Rs. 5 1/2 lakhs, but the claim was rejected by the department and the <ORG> sustained the disallowance. On a reference, this court held that no loss was sustained by the assessee on remittance of the amounts from West Pakistan and that, in any event, the loss could not be said to be a business loss because it was not a loss arising in the course of the business of the assessee, but it was one caused by devaluation which was an act of <ORG>. The <ORG>, on appeal, setting aside the decision of <ORG> and remanding the case to the <ORG>, held that, (i) the assessee suffered a loss of Rs. 11 lakhs and Rs. 5 1/2 lakhs in the process of conversion on account of alteration in the rate of exchange ; and (ii) the question whether the loss suffered by the assessee was a trading loss or a capital loss could not be answered unless it was first determined whether the two amounts of Rs. 25 lakhs and Rs. 12 1/2 lakhs were held by the assessee on capital account or on revenue account and, since the <ORG> had not enquired into this, the matter had to be remanded to the <ORG> to determine whether the amounts were held in West Pakistan as capital asset or as trading asset and then whether the loss suffered by the assessee was a trading loss or a capital loss. Therefore, it was emphasised on behalf of the revenue that, in this case, the <ORG> held that this user of the money either on capital account or revenue account on the loss gained on devaluation would be taxable or non-taxable would depend on that question. There Mr. Justice <NAME>, while delivering the judgment of the court, at page 6 of the report, had discussed the relevant authorities and then, at page 13 of [1979] 116 ITR observed as follows :

"The law may, therefore, now be taken to be well settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of a capital nature. Now, in the present case, no finding appears to have been given by the <ORG> as to whether the sums of Rs. 25 lakhs and Rs. 12,50,000 were held by the assessee in West Pakistan on capital account or revenue account and whether they were part of fixed capital or of circulating capital embarked and adventured in the business in West Pakistan. If these two amounts were employed in the business in West Pakistan and formed part of the circulating capital of that business, the loss of Rs. 11 lakhs and Rs. 5,50,000 resulting to the assessee on remission of those two amounts to India, on account of alteration in the rate of exchange, would be a trading loss, but if, instead, these two amounts were held on capital account and were part of fixed capital the loss would plainly be a capital loss. The question whether the loss suffered by the assessee was a trading loss or a capital loss cannot, therefore, be answered unless it is first determined whether these two amounts were held by the assessee on capital account or on revenue account or, to put it differently, as part of fixed capital or of circulating capital. We would have ordinarily, in these circumstances, called for a supplementary statement of case from the <ORG> giving its finding on this question, but both the parties agreed before us that their attention was not directed to this aspect of the matter when the case was heard before the revenue authorities and the <ORG> and hence it would be desirable that the matter should go back to the <ORG> with a direction to the <ORG> either to take additional evidence itself or to direct the ITO to take additional evidence and make a report to it, on the question whether the sums of Rs. 25 lakhs and Rs. 12,50,000 were held in West Pakistan as capital asset or as trading asset or, in other words, as part of fixed capital or part of circulating capital in the business. The <ORG> will, on the basis of this additional evidence and in the light of the law laid down by us in this judgment, determine whether the loss suffered by the assessee on remittance of the two sums of Rs. 25 lakhs and Rs. 12,50,000 was a trading loss or a capital loss."

15. The aforesaid passage was emphasised on behalf of the revenue representing the settled law that when profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But if, on the other hand, the foreign currency is held as a capital- asset or as fixed capital, such profit or loss would be of capital nature. It was, in this connection, emphasised that where it was sustenance money or borrowed money, after borrowing it becomes its own money. The learned advocate for the assessee also emphasized that there <ORG> was dealing essentially with the assessee's own money. Therefore, according to him, <ORG> had no occasion to advert to this aspect of the matter, where in a case the assessee was dealing with borrowed money.

16. Perhaps, in this light, <ORG> of this court decided this question in the case of <CITATION> . There, what happened was that the assessee, an Indian subsidiary of a nonresident company incorporated in the United Kingdom, was engaged in executing a contract awarded by a Govt. of India undertaking. In executing the said contract, the funds of the assessee to the extent of over Rs. 24 lakhs became blocked. The assessee, therefore, 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 the assessoe by its letter dated January 18, 1965, sought the approval of <ORG> for the 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. The permission was granted by <ORG> for the loan and the assessee received the loan on February 25, 1965. The loan was not repaid at the expiry of one year and remained outstanding in the books of the assessee up to 6th June, 1966, on which date the Indian rupee was devalued. As a result of the devaluation, the assessee 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. After deducting a gain of about Rs. 4,078 on the assessee's sterling deposit in the 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 sterling loan was of a capital nature and could not be allowed as a revenue expense. On appeal, the <ORG> also held that the loss on account of devaluation in connection with a loan could not, under any circumstances, be considered to be revenue loss, that accretion in the amount of the borrowing was not admissible as a deduction, that the assessee not being a dealer in foreign exchange, the loss was not incidental to its business or in carrying on the same, and confirmed the disallowance of the loss. On further appeal to the <ORG>, the assessee contended that the amount should be allowed as business expenditure under Section 37(1) of the, I.T. Act , 1961, as a loss incidental to the business, that although the loan had not been repaid during the relevant year, as the assessee's accounts were kept on the mercantile system, the liability having arisen in the relevant year by reason of the devaluation, it was in the nature of an expenditure incurred by the assessee and allowable under Section 37 , that the expenditure for the purpose of business included the payment of the assessee's statutory dues and taxes and that the loan had been taken by the assessee for the purpose of its business and the loss occasioned by devaluation was suffered in the business. It was held by this court that the contention of the revenue that notionally the expenditure, if any, incurred by any loss accruing to the assessee by reason of the devaluation did not arise in the year of assessment could not be accepted. The assessee 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 the rupee in order to pay its dues. The liability of the assessee arose during the assessment year and could not be said to be a contingent liability or an anticipated future loss. However, the extra expenditure, deemed or otherwise, or the loss, was inextricably connected with the assessee's indebtedness and did not arise de liors the indebtedness. Therefore, the extra amount which the assessee had to provide for as a result of devaluation cannot be considered as extra expenditure to be incurred for meeting the debt like postal expenses or bank charges or as extra expenditure resulting in a business loss of a revenue nature. If there was 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. In that case, it was not the contention of the assessee that it had incurred the extra expenditure in order to secure the loan. The loan had already been obtained. It was at the point of repayment that the assessee had to provide an extra amount in rupees by reason of the devaluation. Hence, it was not expenditure incurred for securing the use of money for a certain period which could be treated as revenue expenditure. Therefore, 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. There the <ORG> was also 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 assessment year 1967-68. There the two questions with which the court was concerned were as follows ;

"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 ? "

17. The learned advocate for the assessee contended that the taxation liability had always been considered as a class by itself. There the principle whether it was revenue or capital was not very material. It was further held that the observation on this aspect was obiter in nature. We are, however, unable to agree with this contention. It is true that <ORG> in the case of <CITATION>  60 ITR 52, referred to hereinbefore, held that a loan was not liability and, in that context, the purpose with which the loan was obtained was immaterial in considering whether the expenses in connection with the loan should be considered as revenue expenses. But apart from that, the purpose for which, after obtaining the loan, it is used and if during the user there is an accretion of liability because of the devaluation then the full money would be held on capital account. In view of the consistent view of <ORG> and in view of the decision of this court in the last mentioned case, the assessce's contention cannot be accepted by us. In that view of the matter, we answer question No. 1 in the affirmative and in favour of the revenue.

18. This brings us to the consideration of the second question, that is to say, whether the <ORG> was justified in holding that the alternative claim of the assessee-company for development rebate under Section 33 of the I.T. Act, 1961, on Rs. 1,09,24, 832 was not admissible under the provisions of the Act.

19. In this connection, reference may be made to the provisions of Section 33 of the I.T. Act, 1961, which deals with "development rebate" and provides that, "In respect of a new ship or new machinery or plant (other than office appliances or road transport vehicles) which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this section and of Section 34 , be allowed a deduction, in respect of the previous year in which the ship was acquired or the machinery or plant was installed or, if the ship, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of the previous year, a sum by way of development rebate as specified in Clause (b) ". Then certain percentage is mentioned under Clause (b) of Sub-section (1) of Section 33 with which we are not concerned. The figures are also not in dispute before us.

20. We may also incidentally refer to Section 32 of the I.T. Act, 1961, which deals with the " depreciation ", also to Section 43(1) which defines "actual cost " and also to Sub-section (6) of Section 43 which provides the " written down value ". Section 43A is a section upon which the <ORG> has repelled the assessee's claim. Section 43A provides as follows :

" 43A. Special provisions consequential to changes in rate of exchange of currency.--(1) Notwithstanding anything" contained in any other provision of this Act, where an assessee has acquired any asset from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange at any time after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment towards the whole or a part of the cost of the asset or for repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset (being in either case the liability existing immediately before the date on which the change in the rate of exchange takes effect), the amount by which the liability aforesaid is so increased or reduced during the 'previous year shall be added to, or, as the case may be, deducted from, the actual cost of the asset as defined in Clause (1) of Section 43 or the amount of expenditure of a capital nature referred to in Clause (iv) of Sub-section (1) of Section 35 or in Section 35A or in Clause (ix) of Sub-section (1) of Section 36 , or, in the case of a capital asset (not being a capital asset referred to in Section 50 ), the cost of acquisition thereof for the purposes of Section 48 , and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset as aforesaid.

Explanation I.--In this sub-section, unless the context otherwise requires,--

(a) 'rate of exchange' means the rate of exchange determined or recognised by <ORG> for the conversion of Indian currency into foreign currency or foreign currency into Indian currency;

(b) 'foreign currency' and 'Indian currency' have the meanings respectively assigned to them in Section 2 of the Foreign Exchange Regulation Act, 1947 (VII of 1947).

Explanation 2.--Where the whole or any part of the liability aforesaid is met, not by the assessee, but, directly or indirectly, by any other person or authority, the liability so met shall not be taken into account for the purposes of this sub-section.

Explanation 3.--Where the assessee has entered into a contract with an authorised dealer as defined in Section 2 of the Foreign Exchange Regulation Act, 1947 (VII of 1947), for providing him with a specified sum in a foreign currency on or after a stipulated future date at the rate of exchange specified in the contract to enable him to meet the whole or any part of the liability aforesaid, the amount, if any, to be added to, or deducted from, the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset under this sub-section shall, in respect of so much of the sum specified in the contract as is available for discharging the liability aforesaid, be computed with reference to the rate of exchange specified therein.

(2) The provisions of Sub-section (1) shall not be taken into account in computing the actual cost of an asset for the purpose of the deduction on account of development rebate under Section 33 ."

21. In the Finance (No. 2) Bill, 1967, which introduced Section 43A , Clause 17 of the Notes on Clauses, sought to explain the purpose of such insertion, which reads as follows ( 64 ITR (St.) 109, 169):

"Clause 17 seeks to insert a new section 43A in the Income-tax Act . The proposed Section 43A , in substance, secures that where an assessee had acquired any capital asset from a country outside India for the purposes of his business, or profession on deferred payment terms or against a foreign loan, before the date of devaluation of the rupee, the additional rupee liability incurred by him in meeting the instalments of the cost of the asset or of the foreign loan, as the case may be, falling due for payment after the date of devaluation, will be allowed to be added to the original actual cost of the asset for the purpose of calculating the allowance on account of depreciation in computing the profits for the assessment year 1967-68 and subsequent assessment years. Similar increase in the original actual cost will be allowed to be made in respect of the capital assets acquired by the assessee to be used in scientific research related to the class of business carried on by him or patent rights or copyrights acquired from abroad or any capital asset acquired by a company for the purpose of promoting family planning amongst its employees. Further, in computing the capital gains arising to the assessee on the sale or transfer of a capital asset acquired by him from abroad on deferred payment terms or against a foreign loan, the additional rupee liability incurred by him in repaying the instalments of the cost or the foreign loan, as the case may be, after the date of devaluation of the rupee, will be added to the original actual cost of the asset. The proposed section also secures that where there is a decrease in the rupee liability of the assessee in respect of assets acquired by him from abroad due to a change in the exchange value of the rupee, the original actual cost of the asset will be correspondingly reduced.

The additional rupee liability incurred on imported capital assets or, as the case may be, any decrease in such liability, in the circumstances stated in the earlier paragraph, will not, however, be taken into account in computing the actual cost of the asset for the purpose of deduction on account of development rebate."

22. Basing on the aforesaid notes, on behalf of the revenue, it was contended mainly that the purpose of Section 43A was to deal with all devaluation cases. Therefore, any appreciation or depreciation in value of assets, as a result of devaluation in profit or loss arising therefrom, must be governed by the special provisions of Section 43A . A special provision has been made that this is the only provision to guide the matter. Before we deal with that aspect of the matter, we must refer to Section 43(a) which uses a non obstante clause. <ORG> had observed in the case of <ORG> (P.) <CITATION> , explaining the purpose of such a clause at page 215 dealing with Article 372 of the Constitution of India (p. 89 of 15 STC):

" That apart, even if Article 372 continues the pre-Constitution laws of taxation, that provision is expressly made subject to the other provisions of the Constitution. The expression 'subject to' conveys the idea of a provision yielding place to another provision or other provisions to which it is made subject. Further, Article 278 opens out with a non obstante clause. The phrase ' notwithstanding anything in the Constitution', is equivalent to saying that in spite of the other articles of the Constitution, or that the other articles shall not be an impediment to the operation of Article 278. While Article 372 is subject to Article 278 , Article 278 operates in its own sphere in spite of Article 372. The result is that Article 278 overrides Article 372; that is to say, notwithstanding the fact that a pre-Constitution taxation law continues in force under Article 372 , the <ORG> and the State Governments can enter into an agreement in terms of Article 278 in respect of Part B States depriving the State law of its efficacy. In one view, Article 277 excludes the operation of Article 372 , and in the other view, an agreement in terms of Article 278 overrides Article 372. In either view, the result is the same, namely, that at any rate during the period covered by the agreement the States ceased to have any power to impose the tax in respect of ' works contracts'."

23. It states in essence that in spite of what is contained previously this clause would be operative. Another significant fact has to be borne in mind that Sub-section (1) of Section 43A deals with the expression " acquisition " which deals with the situation where there is a change in the valuation of foreign currency after acquisition. But in the case of development rebate, it has to be emphasized that acquisition is not relevant on the material date, but the date of installation is the most material date.

24. In the case of <CITATION>  98 ITR 167 <ORG> had the occasion to deal with the expression "actual cost". There <ORG> had observed that interest paid before the commencement of production on amounts borrowed by the assessee for the acquisition and installation of plant and machinery forms part of the " actual cost" of the assets to the assessee within the meaning of the expression in Section 10(5) of the Indian I.T. Act, 1922, and the assessee will be entitled to depreciation allowance and development rebate with reference to such interest also. As the expression "actual cost" had not been defined, it should be construed in the sense which no commercial man would misunderstand. For this purpose, it should be necessary to ascertain the connotation of the expression in accordance with the normal rules of accountancy prevailing in commerce and industry. The accepted accountancy rule for determining cost of fixed assets was to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money was borrowed by a newly started company which was in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money could be capitalised and added to the cost of the fixed assets created as a result of such exenditure.

25. Though that meaning was given in the background of the old Act, the same principle would be applicable in the instant case. There <ORG> had observed that for determining the cost of expenditure, question of depreciation would be taken into the written down value;

and the question was again considered from different aspects by <ORG> in the case of Addl. <CITATION> .) Ltd.  109 ITR 646, where the assessee had claimed development rebate on the value of newly added plant and machinery. The ITO had found that on account of the devaluation of Indian currency, there was an increase of Rs. 48,342 in the actual cost of the acquisition of certain Russian machinery. He negatived the claim for development rebate on the increase in cost due to change in rate of exchange as, in his view, Section 43A(2) of the I.T. Act, 1961, excluded such changes in actual cost for the purpose of granting development rebate under Section 33 . This was upheld by the <ORG>. The <ORG>, however, held that the expression "actual cost" as denned in Section 43(1) applied to the present case and, hence, the assessee was entitled to include the sum of Rs. 48,342 as part of the actual cost for claiming development rebate. On a reference to <ORG>, at the instance of the department, <ORG> held that as the effect of Sub-section (2) of Section 43A of the I.T. Act, 1961, was only to exclude the applicability of Sub-section (1) thereof to the computation of the actual cost for determining the development rebate allowable under Section 33 , in computing the actual cost of an asset for the purpose of development rebate, the only statutory provision relevant was Section 43(1) denning "actual cost" which, admittedly, included the sum of Rs. 48,342. Therefore, the assessee was entitled to development rebate on the amount of Rs. 48,342 also, which was payable as a result of change in the rate of exchange of currency.

26. In the instant case before us, the contract stipulated repayment in dollars. Therefore, the actual cost of the assessee must be computed on the dollar value. Therefore, anything which went into that repayment, that is to say, any cost which actually went in repaying the debt, must be, in our opinion, on the principle of computation of the actual cost, which, irrespective of Section 43A , would be entitled to development rebate under Section 33A and inasmuch as Sub-section (2) of Section 43A only excludes the portion of Sub-section (1) of Section 43A , in our opinion, this position would not be inadmissible that the assessee would be entitled to obtain the development rebate. In the instant case, we are concerned with the question whether Section 43 was at all meant for dealing with the case where there is no question of installation involved, but only acquisition was the relevant fact. We are unable to find any support for the argument on behalf of the revenue that in all the devaluation cases, whether of increase or decrease, the result of devaluation must be guided by Section 43A and under Section 43A alone. The same view was reiterated by <ORG> in the case of <CITATION>  112 ITR 64, There, the expression "actual cost" in the context of the statutory provisions, Sections 33(1) and 43A of the I.T. Act, 1961, it was held must be understood in the sense in which no commercial man would misunderstand. The word "cost" was not synonymous with "price". Besides the price of machinery or plant, "cost" took in many other items of expenditure such as for instance freight, warehouse or insurance charges, legal expenses, etc., incurred in connection with its acquisition and interest incurred before the commencement of production on the capital contributed or borrowed to acquire such asset. In other words, in determining the "actual cost" of a fixed asset, all expenditure necessary to bring such asset into existence and to put it in working condition might legitimately be taken into account. There, - the assessee-textile mill, a public limited company, proposed to expand its capacity and, for that pupose, negotiated to import machineries from various foreign countries. The assessee entered into an agreement with <ORG> on June 25, 1965, where-under the latter agreed to lend moneys to the assessee in foreign currencies to pay the price of the imported machinery and the assessee agreed to pay back the moneys in the same currencies in which they were borrowed. Besides, the assessee also agreed to pay interest, redemption premium, commitment charges, etc., in foreign currency. Even if <ORG> exercised the option to accept payment in rupees in lieu of foreign currencies, the rupee sum was to be determined by actual cost to <ORG> of purchasing with rupees the respective amounts of the foreign currencies becoming due and payable.

27. Now, in that case, on behalf of the revenue, it was conceded that the contract was for payment in the foreign currency and it was further stipulated that in determining the valuation it must be paid for by the buyer. Even though there was no specific clause signifying the payment of difference, the payment of the money had to be made according to the facts found by the <ORG> in terms of dollars. In aid of the submission, the counsel for the revenue drew our attention to Schedule 6, the form of balance-sheet, of the Companies Act , 1956, where Expln. 2 has dealt with this question. The point of the learned advocate of the revenue was that these amendments as well as other amendments to the I.T. Act , 1961, were brought simultaneously in order to deal with all the devaluation cases. In this light, the subsequent decision of <ORG> understood the section, viz., Section 43A of the Act. Reference may be made to the decision of <ORG> in the case of <CITATION> . CIT  116 ITR 819.

28. There, the assessee entered into an agreement on August 6, 1964, with a foreign ship building yard for the construction and supply of two ships. The agreement provided for payment of 15% of the cost of the ships on the signing of the agreement and the balance of 85% in equal half yearly instalments, the first of them to commence six months after the delivery of the ships. The agreement further provided for the ship building yard to negotiate with a German bank to have credit for the 85% extended to it subject to the approval of the assessee. In accordance with this clause in the agreement, a loan agreement was entered into between the assessee and the consortium of West German banks with whom the ship building yard had entered into an agreement and the consortium disbursed the 85% to the ship building yard. Subsequent to such disbursement, the Indian rupee was devalued so that the assessee's liability to the consortium increased. The assessee's claim that the extra amount which it had to pay consequent on the devaluation would have to be included as an addition to the cost of the vessels acquired for purposes of grant of development rebate under Section 33 of the I.T. Act, 1961, was negatived by the departmental authorities and the <ORG>.

29. <ORG> held that in view of the specific provisions contained in Sub-section (2) of Section 43A which specifically provided that variations in the cost of acquisition of an asset arising out of devaluation of the rupee should not be taken into consideration for the purpose of grant of development rebate under Section 33 , the general principle that the additional liability arising out of the devaluation of the Indian rupee would become part of the cost of the ships, cannot be applied for purpose of granting development rebate under Section 33 . Accordingly, the conclusion of the <ORG> was upheld.

30. In so far as this case dealt with the question of ships, different considerations might apply. In so far as the decision took the view that in respect of all devaluation cases irrespective of whether the stipulated payment in the matter of foreign currency should be made under Section 43A alone, with great respect we are unable to agree and we prefer to adhere to the former view of <ORG> and the other view of <ORG> as mentioned hereinbefore. On behalf of the assessee, it was contended that Section 43A has been introduced to meet with the situation of computing depreciation year after year where the price in terms of Indian rupee fluctuates on account of change in the rate of exchange. But since no such situation arises in the cases of development rebate which is granted once and for all, the said provision has not been made applicable to the computation of development rebate. The development rebate continues to be computed on the basis of the provisions of Section 33 as before. It was linked with the actual cost of the machinery or plant to the assessee. The actual cost of the machinery or plant should be the cost on the relevant date. Therefore, on the relevant date, when the contract was entered into it was entered into with the direction to pay back in dollars and whatever was necessary to pay back must be treated as actual cost to the assessee.

31. In that view of the matter, we are of the opinion that the assessee was entitled to development rebate in accordance with Section 33 of the Act on the sum of Rs. 1,09,00,000 and the <ORG> was wrong in rejecting this contention. This question is answered in the negative and in favour of the assessee. In the facts and circumstances of the case, each party will pay and bear its own costs.

<NAME>, J.

32. I agree.


CASE NO.: Appeal (crl.) 87 of 2004 PETITIONER: <NAME> & Ors. RESPONDENT: State of Kerala DATE OF JUDGMENT: 21/01/2004 BENCH: <NAME> & <NAME> JUDGMENT:

J U D G M E N T (Arising out of SLP (Crl.) No. 3634/2003) ARIJIT PASAYAT,J.

Leave granted.

The four appellants faced trial for allegedly having caused homicidal death of one <NAME> (hereinafter referred to as 'the deceased') on 16.6.1994. They were tried for commission of offence punishable under Section 302 read with Section 34 of Indian Penal Code, 1860 (in short 'the IPC '). The learned Sessions Judge, <NAME>, found all the four accused persons guilty and convicted and sentenced them for the offence punishable under Section 302 read with Section 34  and sentenced each of them to undergo imprisonment for life. Fine of Rs.10,000/- with default stipulation was also imposed. The accused-appellants unsuccessfully challenged their conviction and sentence before <ORG> which dismissed the same by the impugned judgment.

Prosecution version as unfolded during trial is as follows:

There was previous enmity between accused persons and the deceased. In furtherance of their common intention because of such enmity, the accused persons chased and assaulted the deceased on 16.6.1994 at about 11 p.m. A-2 beat the deceased with an iron rod on his back and when deceased ran away to save his life, all the accused persons chased him and near a road side junction, A-4 lighted the torch carried by him which enabled the other accused persons to beat the deceased with handles of axe and spade, and iron rod on different parts of the body. The injuries were caused mostly on the hands, legs and ribs. Only one injury was inflicted on the head which was the fatal injury. Though the deceased was taken to the hospital he breathed his last at about 2.25 a.m. on 17.6.1994. 10 witnesses were examined to further the prosecution version. <NAME> (PW-2) was said to be an eyewitness. The information was lodged with the police by <NAME> (PW-1). <NAME> (PW-3) was the brother-in-law of the deceased who was informed about the quarrel between deceased and the accused persons. The deceased allegedly made a dying declaration before them implicating the accused persons. The accused persons pleaded innocence. They pleaded that the actual occurrence was suppressed by the prosecution and, in fact, the deceased attacked them and caused injuries on A-1 and A-2. Since the accused persons were attacked, they exercised their right of private defence and tried to protect themselves and if on account of that the deceased sustained injuries there was no offence involved. <ORG> after analyzing the evidence on record came to hold that the plea of right of private defence was not established. A-1 to A-4 were the authors of the crime. It also did not accept the contention of A-4 that no overt act was attributed to him and there was no material to bring him within the field of Section 34 . The Trial court held that evidence of PW-2 inspire confidence. He was a reliable witness and on his evidence alone the conviction has to be recorded, though additionally the dying declaration was there.

In appeal, <ORG> held that merely because the accused persons have sustained some injuries, that cannot ipso facto be a ground for throwing out the prosecution case. Non-explanation of injuries on the accused persons in all cases is not a ground for discarding the prosecution version. It also did not find any substance in the plea of the accused-appellants that on the basis of solitary witness's evidence conviction cannot be recorded. Finally, the plea that offence under Section 302 read with Section 34  was not made out did not find acceptance by <ORG>. It also did not accept the plea that there was no material for applying Section 34 to A-4. It was noticed that he was the person who focused the light on the deceased, facilitating the assaults.

In support of the appeal, learned counsel for the appellant submitted that <ORG> and <ORG> have lost sight of relevant factors. The prosecution version itself indicated that there was quarrel between the deceased and the accused and since the assaults allegedly took place in course of a sudden quarrel, that too in exercise of right of private defence, the accused persons should not have been found guilty. It was pointed out that the prosecution version primarily stands on the solitary evidence of PW-2. The occurrence, according to the prosecution took place late in the night and it was completely dark and necessitated focusing of torch by A-4. These materials adduced by the prosecution go to show that no particular injury was intended. In fact, the post-mortem shows that injuries were on non-vital parts of the body. The reference to these aspects was highlighted to substantiate the plea that Section 302 has not attracted. Alternatively, it is submitted that no offence under Section 34  is made out and so far as accused A-4 is concerned, as admittedly no assault was done by him and, therefore, he should not have been convicted.

Per contra, learned counsel for the <ORG> submitted that <ORG> and <ORG> have given adequate reasons for finding the accused persons guilty and sentencing them. As they have analysed the factual position in great detail and have come to the conclusion regarding guilt of the accused, there is no scope for any interference. According to him the case is squarely covered by Section 302 .

Coming to the question whether on the basis of a solitary evidence conviction can be maintained. A bare reference of Section 134 of the Indian Evidence Act, 1872 (in short 'the Evidence Act ') would suffice. The provision clearly states that no particular number of witnesses is required to establish the case. Conviction can be based on the testimony of single witness if he is wholly reliable. Corroboration may be necessary when he is only partially reliable. If the evidence is unblemished and beyond all possible criticism and the <ORG> is satisfied that the witness was speaking the truth then on his evidence alone conviction can be maintained. Undisputedly, there were injuries found on the body of the accused persons on medical evidence. That per se cannot be a ground to totally discard the prosecution version. This is a factor which has to be weighed along with other materials to see whether the prosecution version is reliable, cogent and trustworthy. When the case of the prosecution is supported by an eyewitness who is found to be truthful, as well, mere non- explanation of the injuries on the accused persons cannot be a foundation for discarding the prosecution version. Additionally, the dying declaration was found to be acceptable.

Other plea emphasized related to alleged exercise of right of private defence. Merely because there was a quarrel and two accused persons sustained injuries, that does not confer a right of private defence extending to the extent of causing death as in this case. Though such right cannot be weighed in golden scales, it has to be established that the accused persons were under such grave apprehension about the safety of their life and property that retaliation to the extent done was absolutely necessary. No evidence much less cogent and credible was adduced in this regard. The right of private defence as claimed by the accused persons have been rightly discarded.

This brings us to the crucial question as to which was the appropriate provision to be applied. In the scheme of IPC culpable homicide is the genus and "murder", its specie. All "murder" is "culpable homicide" but not vice versa. Speaking generally, "culpable homicide" sans "special characteristics of murder is culpable homicide not amounting to murder". For the purpose of fixing punishment, proportionate to the gravity of the generic offence, IPC practically recognizes three degrees of culpable homicide. The first is, what may be called, "culpable homicide of the first degree". This is the gravest form of culpable homicide, which is defined in Section 300 as "murder". The second may be termed as "culpable homicide of the second degree". This is punishable under the first part of Section

304. Then, there is "culpable homicide of the third degree". This is the lowest type of culpable homicide and the punishment provided for it is also the lowest among the punishments provided for the three grades. Culpable homicide of this degree is punishable under the second part of Section 304 .

The academic distinction between "murder" and "culpable homicide not amounting to murder" has always vexed the courts. The confusion is caused, if courts losing sight of the true scope and meaning of the terms used by the legislature in these sections, allow themselves to be drawn into minute abstractions. The safest way of approach to the interpretation and application of these provisions seems to be to keep in focus the keywords used in the various clauses of Sections 299 and 300 . The following comparative table will be helpful in appreciating the points of distinction between the two offences :

Section 299 Section 300 A person commits Subject to certain exceptions

culpable homicide if the act by culpable homicide is murder if the the death is caused is act by which the death is caused done - is done -

INTENTION

(a) with the intention of causing (1) with the intention of causing death; or death; or

(b) with the intention (2) with the intention of causing of causing such such bodily injury as the bodily injury as is offender knows to be likely to likely to cause death; or cause the death of the person to whom the harm is caused; or (3)With the intention of causing bodily injury to any person and the bodily injury intended to be inflicted is sufficient in the ordinary course of nature to cause death; or KNOWLEDGE

(c) with the (4) with the knowledge that the knowledge that act is so imminently the act is likely to dangerous that it must in all cause death. probability cause death or such bodily injury as is likely to cause death, and commits such act without any excuse for incurring the risk of causing death or such injury as is mentioned above.

Clause (b) of Section 299 corresponds with clauses (2) and (3) of Section 300 . The distinguishing feature of the mens rea requisite under clause (2) is the knowledge possessed by the offender regarding the particular victim being in such a peculiar condition or state of health that the internal harm caused to him is likely to be fatal, notwithstanding the fact that such harm would not in the ordinary way of nature be sufficient to cause death of a person in normal health or condition. It is noteworthy that the "intention to cause death" is not an essential requirement of clause (2). Only the intention of causing the bodily injury coupled with the offender's knowledge of the likelihood of such injury causing the death of the particular victim, is sufficient to bring the killing within the ambit of this clause. This aspect of clause (2) is borne out by Illustration (b) appended to Section 300 . Clause (b) of Section 299 does not postulate any such knowledge on the part of the offender. Instances of cases falling under clause (2) of Section 300 can be where the assailant causes death by a fist-blow intentionally given knowing that the victim is suffering from an enlarged liver, or enlarged spleen or diseased heart and such blow is likely to cause death of that particular person as a result of the rupture of the liver, or spleen or the failure of the heart, as the case may be. If the assailant had no such knowledge about the disease or special frailty of the victim, nor an intention to cause death or bodily injury sufficient in the ordinary course of nature to cause death, the offence will not be murder, even if the injury which caused the death, was intentionally given. In clause (3) of Section 300 , instead of the words "likely to cause death" occurring in the corresponding clause (b) of Section 299 , the words "sufficient in the ordinary course of nature" have been used. Obviously, the distinction lies between a bodily injury likely to cause death and a bodily injury sufficient in the ordinary course of nature to cause death. The distinction is fine but real and if overlooked, may result in miscarriage of justice. The difference between clause (b) of Section 299 and clause (3) of Section 300 is one of degree of probability of death resulting from the intended bodily injury. To put it more broadly, it is the degree of probability of death which determines whether a culpable homicide is of the gravest, medium or the lowest degree. The word "likely" in clause (b) of Section 299 conveys the sense of probability as distinguished from a mere possibility. The words "bodily injury ... sufficient in the ordinary course of nature to cause death" mean that death will be the "most probable" result of the injury, having regard to the ordinary course of nature.

For cases to fall within clause (3), it is not necessary that the offender intended to cause death, so long as the death ensues from the intentional bodily injury or injuries sufficient to cause death in the ordinary course of nature. <NAME> v. State of Kerala (AIR 1966 SC 1874) is an apt illustration of this point.

<CITATION> (AIR 1958 SC 465) <NAME>, J. speaking for the <ORG>, explained the meaning and scope of clause (3). It was observed that the prosecution must prove the following facts before it can bring a case under Section 300 "thirdly". First, it must establish quite objectively, that a bodily injury is present; secondly, the nature of the injury must be proved. These are purely objective investigations. Thirdly, it must be proved that there was an intention to inflict that particular injury, that is to say, that it was not accidental or unintentional or that some other kind of injury was intended. Once these three elements are proved to be present, the enquiry proceeds further, and fourthly, it must be proved that the injury of the type just described made up of the three elements set out above was sufficient to cause death in the ordinary course of nature. This part of the enquiry is purely objective and inferential and has nothing to do with the intention of the offender. The ingredients of clause "thirdly" of Section 300  were brought out by the illustrious Judge in his terse language as follows :

"12. To put it shortly, the prosecution must prove the following facts before it can bring a case under Section 300 'thirdly'; First, it must establish, quite objectively, that a bodily injury is present;

Secondly, the nature of the injury must be proved; These are purely objective investigations.

Thirdly, it must be proved that there was an intention to inflict that particular bodily injury, that is to say, that it was not accidental or unintentional, or that some other kind of injury was intended.

Once these three elements are proved to be present, the enquiry proceeds further and, Fourthly, it must be proved that the injury of the type just described made up of the three elements set out above is sufficient to cause death in the ordinary course of nature. This part of the enquiry is purely objective and inferential and has nothing to do with the intention of the offender."

The learned Judge explained the third ingredient in the following words (at page 468):

"The question is not whether the prisoner intended to inflict a serious injury or a trivial one but whether he intended to inflict the injury that is proved to be present. If he can show that he did not, or if the totality of the circumstances justify such an inference, then, of course, the intent that the section requires is not proved. But if there is nothing beyond the injury and the fact that the appellant inflicted it, the only possible inference is that he intended to inflict it. Whether he knew of its seriousness, or intended serious consequences, is neither here nor there. The question, so far as the intention is concerned, is not whether he intended to kill, or to inflict an injury of a particular degree of seriousness, but whether he intended to inflict the injury in question; and once the existence of the injury is proved the intention to cause it will be presumed unless the evidence or the circumstances warrant an opposite conclusion."

These observations of <NAME>, <NAME> have become locus classicus. The test laid down by <NAME> case (supra) for the applicability of clause "thirdly" is now ingrained in our legal system and has become part of the rule of law. Under clause thirdly of Section 300 , culpable homicide is murder, if both the following conditions are satisfied i.e. (a) that the act which causes death is done with the intention of causing death or is done with the intention of causing a bodily injury; and (b) that the injury intended to be inflicted is sufficient in the ordinary course of nature to cause death. It must be proved that there was an intention to inflict that particular bodily injury which, in the ordinary course of nature, was sufficient to cause death viz. that the injury found to be present was the injury that was intended to be inflicted.

Thus, according to the rule laid down in <NAME> case (supra) even if the intention of the accused was limited to the infliction of a bodily injury sufficient to cause death in the ordinary course of nature, and did not extend to the intention of causing death, the offence would be murder. Illustration (c) appended to Section 300 clearly brings out this point.

Clause (c) of Section 299 and clause (4) of Section 300 both require knowledge of the probability of the act causing death. It is not necessary for the purpose of this case to dilate much on the distinction between these corresponding clauses. It will be sufficient to say that clause (4) of Section 300 would be applicable where the knowledge of the offender as to the probability of death of a person or persons in general as distinguished from a particular person or persons - being caused from his imminently dangerous act, approximates to a practical certainty. Such knowledge on the part of the offender must be of the highest degree of probability, the act having been committed by the offender without any excuse for incurring the risk of causing death or such injury as aforesaid.

The above are only broad guidelines and not cast-iron imperatives. In most cases, their observance will facilitate the task of the court. But sometimes the facts are so intertwined and the second and the third stages so telescoped into each, that it may not be convenient to give a separate and clear cut treatment to the matters involved in the second and third stages.

The position was illuminatingly highlighted by this Court in <CITATION> (1976 (4) SCC 382 and <NAME> alias <CITATION> . (2002 (7) SCC 175).

The factual scenario goes to show that late at night in a stage of complete darkness, the occurrence took place. According to the prosecution itself for visibility A-4 used the torch and focused the light on the deceased so that the other accused persons could assault him. The distance from which the light was focused is also not very small. It was no doubt possible on the part of the accused persons to place the deceased and assault him; but taking into account the fact that almost all the injuries were on non-vital parts and only one was on head, it cannot be definitely said that any particular injury was intended. As noticed by Courts below weapons used were not of considerable weight or length. They axe or spade was not used but their handles of small length and weight were used. Taking the totality of the evidence into consideration and the special features noticed, it would be appropriate to convict the accused persons under Section 304 Part I read with Section 34  instead of Section 302 . A-4 has been rightly roped in under Section 34 . He accompanied the accused persons, and actively facilitated the assaults to be effectively made on the accused by focusing the torch. His conduct prior and subsequent to the occurrence clearly shows that he shared the common intention so far as the assaults on the deceased is concerned. Custodial sentence of 10 years would meet the ends of justice. The appeal is partly allowed to the extent indicated.


Court No. - 19 Case :- CONSOLIDATION No. - 322 of 2010 Petitioner :- Rajeshwari Prasad S/O Ram Shanker Respondent :- Deputy Director Of Consolidation, Faizabad Petitioner Counsel :- <NAME> Respondent Counsel :- C.Sc..,R.R. Upadhyaya Hon'ble S.C. Chaurasia,J.

<NAME>, learned counsel for opposite party is reported to be on sanctioned leave.

List after the expiry of his sanctioned leave. Interim order, if any, shall continue till the date of next listing. Order Date :- 12.7.2010 psd