1973 PLP 444 (PTD)

Date of hearing: 14th June 1972. MUSHTAQ HUSSAIN, J.‑--Dissatisfied with a judgment of the income‑tax Appellate Tribunal, the Commissioner of Income‑tax (Investigation), Karachi, applied to the Tribunal for reference of certain questions of law arising out of their judgment in Colony Textile Mills Ltd., Multan v. I. T. O., Circle IV, Lahore, dated 25‑10‑1964. After consideration of its applications, the trib unal has referred the following two questions for our opinion :‑ (1) Whether on the facts and circumstances of the case, the Tribunal was justified in granting depreciation under sec tion 10(2)(vi)(a) to buildings not covered by explanation to sub‑clause (aa). (2) Whether the Tribunal was justified in treating the extra payment of Rs. 3,19,036 in consequence of Devaluation of Pak currency as additional cost of the machinery and plant and thus to include in capital computation for the purpose of section 15‑B of Income‑tax Act. Mr. Muhammad Amin Butt, Advocate for the Textile Mill has conceded the first question and, therefore, we answer it in the negative. We are, therefore, left with the second question only. Our answer to it is in the affirmative. Our reasons follow: During the year 1953‑54, the assessee imported machinery from Japan through Government agency. The price of the machinery was to be paid in Japanese Yen and when converted into Pakistani rupees on the rate of exchange prevalent in that year the amount came to Rs. 24,14,706 which was duly debited in the account books. The price was to be remitted under the deferred payment system. The Pakistani currency was meanwhile devalued and larger amounts had, therefore, to be remitted by the assessee to make up the difference caused by the devaluation. The extra amount thus remitted came to Rs. 3,19,036 which was duly debited to the plant and machinery account and additional depreciation was claimed upon it. The Income‑tax Officer disallowed this claim arising out of devaluation. The ground on which the learned I. T. O. came to this conclusion was that the method of accounting adopted by the assessee was the Mercantile System the valuation of imported machinery was final and irrevocable on the date the entries were incorporated in the accounts. The departmental case is that depreciation could be allowed only on capital assets and since the extra payment made on account of devaluation was in the nature of a capital loss no depreciation could be allowed upon It, The Tribunal came to the conclusion that‑ "There can be no dispute with the proposition that the additional payment that have to be made by the appellant because of fluctuations in the exchange rate related to the cost of the machinery which to this extent was increased." The finding given by the Tribunal on this point is absolutely an accord with law. The basic fact which has to be remembered is that the contract regarding the purchase of machinery stipulated payment of Its price in Japanese Yen. The mere fact that the assessee while maintaining his accounts converted that amount into Pak Currency at the prevalent rate of exchange did not change the term of the contract itself. Suppose, the assessee had maintained the account in respect of the purchase of this machinery in Japanese Yen would it then have beer open to the Department to decline to accept the extra payment in Pak Currency on account of its devaluation as an increase in the price of the machinery as calculated in Pak Currency The answer is obviously 'No'. The question whether the account was being kept in the Merchatile or the Cash system would then have been of no avail. It is difficult for us, therefore, to imagine that for the simple reason that the account was kept in the Pak Currency the effect of its devaluation would be different and the extra amount paid on this account would nor be included in the case of the machinery, The price entered in the account was the equivalent of the actual price which had to be paid in Japanese currency. Any devaluation of the Pakistani Currency had, therefore, to be accounted for by adding to the price of the machinery.