K.C. SRIVASTAVA, A.M. ORDER This appeal by assessee is directed against order of CIT (A) for asst. yr. 1973-74. assessee-company is 100 per cent subsidiary of ONGC. relevant accounting year is calendar year 1972 starting from 1st Jan., 1972 to 31st Dec., 1972. assessee-company had been assigned contract by ONGC in which latter had joined hands with AGIP of Italy and Phillips Petroleum Co. of USA for exploration, development and production of oil in Iran. These three parties had entered into contract in 1965 with National Iranian Oil Co. terms of contract were that these three companies will do exploration at their own expenses and on discovery of oil development and production sales will start in which National Iranian Oil Co. ("NIOC" in short) was to participate to extent of 50 per cent in expenses as well as in share of oil produced. For operation of this agreement non-profit company called Iranian Marine International Oil Co. ("IMINOCO" in short) had been brought into existence. accounts maintained by "IMINOCO" are sent to constituents and share of expenditure is remitted by these constituents to Tehran. 2. At time of making assessment ITO found that assessee had claimed amount of Rs. 34,45,153 as loss on devaluation whereas profit of Rs. 15,01,423 had been shown as difference in exchange credited to P&L a/c. It was explained before ITO that for operations in Iran large amount of foreign exchange was required and at time of record of actual transactions whenever there was difference between official rate of exchange and Bank rate there used to be credit or debit which used to be shown as "difference in exchange". These credits or debits were made only at time of actual receipt or remittance and represented difference between actual amount paid and received and amount recorded in books of account on basis of fixed rate of exchange. AO, therefore, found that assessee was following system of adjusting increase or decrease on actual expenditure or receipt that was reflected in books. This was disclosed in overall credit balance of Rs. 15,01,423 and has been credited in P&L a/c. There was no dispute regarding this item. 3. As against this loss on devaluation shown at Rs. 34,45,153 was result of devaluation of Dollar on 22nd Dec., 1971. As result of this devaluation value of one Dollar was changed from Rs. 7.50 to Rs. 7.279. company had on 20th Dec., 1971 certain balances in Dollars as well as in Rials. They were either unspent balance left with AGIP or balance left with "IMINOCO" and also in form of balances in Dollars account or Rial account in Tehran. company did not carry out any change in these balances as on date of devaluation that is 20th Dec., 1971, but decided to convert balances on 1st Jan., 1972, which incidentally fell in other accounting period. This was mainly done for convenience and for ensuring actual information about balances. In case of sale proceeds, however, company changed rate of exchange from 20th Dec., 1971 itself and this change was effected in accounts for 1971. 4 . Before IAC question arose about allowance of this loss on devaluation. He held that as assessee was showing in account known as "difference in exchange" on basis of actual transactions, payments or rebates, there was no justification for showing this notional loss merely because of notification of new rates as result of devaluation. AO further observed that loss if any could be allowed on basis of actual transactions. 5 . When matter came before CIT (A), he found that amounts outstanding in different accounts receivable in foreign exchange on 31st Dec., 1971 were modified on 1st Jan., 1972 to adjust variation between standard rate and bank rate. CIT (A) considered decisions in case of Sutlej Cotton Mills Ltd. vs. CIT 1978 CTR (SC) 155 : (1979) 116 ITR 1(SC), in cases of CIT vs. Samuel Osborn (India) Ltd. (1982) 26 CTR (Cal) 294 : (1982) 135 ITR 699 (Cal.) and Oil India Co. Ltd. vs. CIT (1982) 9 Taxman 24 8 (Cal.). He found these cases to be distinguishable as according to him, claim of loss was by way of provision and was not in conformity with regular accounting practice followed by assessee from year to year. main principles considered in this case was that loss incurred in respect of amounts held on revenue account were to be treated as trading losses and where funds were related to capital assets or were held on capital account loss was to be considered as on capital account. In respect of remittance of profits or loss on devaluation was to be allowed and profit was to be assessed. CIT (A) was of view that assessee had not suffered any actual loss on devaluation as loss has not been booked at time of actual remittance or meeting liability and it was merely provision for future possible loss. According to CIT (A), claim of loss was not in conformity with accounting system followed by assessee as was apparent from exchange differences shown in earlier years. He upheld order of AO. 6 . learned counsel for assessee drew our attention to note prepared by Chief Accountant, which explained background for this claim. He pointed out that assessee was following mercantile system and, therefore, there was nothing wrong in claiming loss on devaluation without waiting for actual transactions to take place. learned counsel explained that it was true that difference in exchange and resultant profit or loss was being reflected on actual transactions of receipt and payment and it was being shown in accounts on basis of advice received from banks. He, however, submitted that this account was different from account on devaluation. According to him, devaluation of currency is more permanent event and rate of exchange gets fixed at particular level as result of this devaluation. This could also result in profit or loss depending on nature of holding of foreign exchange or of liability in foreign exchange. learned counsel has filed before us working of this loss on devaluation as it is explained that there were loans to National Iranian Oil Co. and balances were there on 1st Jan., 1972 which were modified on basis of new rate resulting in increase in liability of assessee, and thus resulting in loss to assessee. It was pointed out that in one of accounts called "IMINOCO" there were in fact profit but overall there was loss as result of devaluation. amount of Rs. 34,45,153 was explained as follows: Debit Credit Rs. Rs. Rs. Rs. Loss on devaluation 33,61,046 3,48,460 Rs. Loss in development 2,16,179 expenditure Rs. Loss under income-tax 2,16,387 Rs. Rs. Balance net loss 37,93,613 34,45,153 learned counsel submitted that loss incurred by company in respect of income-tax could not be allowed and same may be disallowed. However, he pressed his claim for balance of loss. It was contended by him that in 1966 when there was devaluation assessee-company had made similar entries in books and gain as result of devaluation was reflected in books. He contended that as assessee became liable to pay larger amount or to receive smaller amount, this resulted in loss and was allowable as assessee was following mercantile system of accounting. Besides cases relied upon before CIT (A), referred to decision of Supreme Court in case ofState Bank of India vs. CIT (1985) 49 CTR (SC) 379 : (1986) 157 ITR 67. In this case it was held that as foreign exchange was stock-in- trade of assessee increase in value of foreign currency was incidental to banking business carried on by assessee, foreign currency had increased in value in terms of Rupee and increased amount had been utilised by assessee by repatriation. In view of this it was held that profit earned by Bank was revenue receipt in its hands. He also referred to decision of Calcutta High Court in case ofSamuel Osborn (India) Ltd.(supra) which had already been considered by CIT (A). In this case it was held that assessee's liability to foreign company on date of devaluation arose out of import of its stock-in-trade which was directly connected with assessee's business and was allowable as trading loss. 7 . Departmental Representative, on other hand, submitted that there was no actual loss to assessee and loss claimed was merely notional as this loss had not arisen on particular transaction of payment or receipt. He referred to exchange difference account as maintained by assessee from year to year and submitted that assessee had been showing losses on taking place of actual transaction. It was submitted that assessee could not claim merely provision as there was no actual liability merely as result of devaluation. He submitted that assessee could not be allowed to have different system for claiming this loss when he had been showing loss or profit on basis of actual transactions in this year as well as in earlier years. According to Departmental Representative loss had not been incurred by assessee in present case. He also pointed out that AO had made it clear that loss could be allowed to assessee on actual transactions taking place and thus company would not lose if loss was allowed not at point of devaluation but at time when result of that devaluation becomes effective in respect of different transactions. 8 . We have considered rival submissions. It is accepted position before us that assessee had been showing result of difference in exchange on basis of actual transactions or when profit or gain was communicated to assessee by bank. In present case, however, assessee has made departure and has made entry about this devaluation loss at one time without waiting for effect of this devaluation on different transactions. submission of learned counsel for assessee that same system was followed by assessee in year 1966 when profit was shown is of no practical significance as assessee-company was not filing its returns at that time and was not in fact carrying on any actual activity. credit shown on basis of devaluation was shown against various capital expenses incurred by company. For first time, assessee-company filed returns in asst. yr. 1969-70 and from that period he had been indicating t h e loss on fluctuation of foreign exchange on actual transactions taking place or on receipt of intimation from banks. There does not appear to be any justification for showing this loss without any reference to assessee's actually meeting higher liability or receiving smaller amount as result of devaluation. There is force in inference drawn by CIT (A) that it appeared to be merely provision for future possible loss. 9. In present case assessee has to face one more difficulty for 9. In present case assessee has to face one more difficulty for allowance of this loss. learned counsel had relied on decision of Calcutta High Court in case of Samuel Osborn (India) Ltd. (supra) for proposition that loss could take place on date of devaluation. In present case, unfortunately for assessee, devaluation had taken place on 20th Dec., 1971 and thus even if assessee's arguments were to be accepted, loss could be considered in that accounting period, which ended on 31st Dec., 1971. liability of assessee could arise only as result of happening of some event and that event, according to assessee, was devaluation. This event having taken place in earlier accounting period, assessee could have made claim in asst. yr. 1972-73 for which accounting period ended on 31st Dec., 1971. It was for sake of accounting convenience that assessee decided to postpone entry as on 1st Jan., 1972. Whatever may be justification for assessee's accounts, company could not make claim for loss in next assessment year merely on ground that company had made entry in respect of this loss on first day of accounting period though relevant event had taken place 10 days prior to close of accounting period. Thus, in any case, this loss could not be allowed to assessee in this assessment year. 10. While we are considering this issue, we may observe that there has been no finding by Revenue authorities whether credit or debit as result of devaluation was in respect of funds which were on revenue account or on capital account. treatment has been as if that issue was of no importance in this case. AO has already observed that on occurrence of actual loss, same was to be allowed to assessee and in view of this finding also, assessee-company does not stand to lose particularly in view of fact that it has been incurring huge losses or unabsorbed depreciation, which have merely to be carried forward. We, therefore, uphold order of CIT (A). 11. In result, appeal is dismissed. *** HYDROCARBONS INDIA LTD. v. INSPECTING ASSISTANT COMMISSIONER