SUHAS CHANDRA SEN, J. ( 1 ) THE following question of law has been referred to this court by the Tribunal under Section 256 (1) of the Income-tax Act: "whether, on the facts and in the circumstances of the case, the sum of Rs. 9,21,233 was areserve within the meaning of the Second Schedule to the Companies (Profits) Surtax Act, 1964, and was rightly included by the Income-tax Officer in computing the capital under the said Schedule ?" ( 2 ) THE assessment year involved in this reference is the assessment year 1974-75, for which the relevant accounting period is the year ended on December 25, 1973. ( 3 ) THE facts of the case, as found by the Tribunal, are stated as under : the General Reserve as on the first day of the relevant previous year included a sum of Rs. 9,21,238 which was credited to the General Reserve in the year 1971. The assessee had, earlier, taken a dollar loan from the Export-Import Bank, Washington, and purchased plant and machinery for its "chemex" unit. The loan was being repaid with interest on deferred payment basis in instalments. In 1971, the dollar was devalued and the asses-see gained a sum of Rs. 9,21,238 on account of it. In its accounts for that year, the assessee had reduced its loan liability by this amount but, instead of correspondingly crediting plant and machinery account with this amount, the General Reserve was credited. In the corresponding income-tax assessment, the written down value of plant and machinery was reduced by Rs. 9,21,238 in terms of Section 43a of the Income-tax Act, 1961. The Commissioner of Income-tax was of the view that:"the increase of Rs. 9,21,238 in the General Reserve cannot be said to have come out of the company's taxed profits as provided in Clause (iii) of rule 1 of the Second Schedule and hence this appreciation in the General Reserve should have been ignored for the purpose of computation of capital for levy of surtax. " ( 4 ) THE Commissioner of Income-tax was of the further view that the order of the Income-tax Officer was erroneous and prejudicial to the interests of the Revenue. He, therefore, issued a notice upon the assessee to show cause why an order under Section 16 of the Companies (Profits) Surtax Act, 1964, should not be passed. " ( 4 ) THE Commissioner of Income-tax was of the further view that the order of the Income-tax Officer was erroneous and prejudicial to the interests of the Revenue. He, therefore, issued a notice upon the assessee to show cause why an order under Section 16 of the Companies (Profits) Surtax Act, 1964, should not be passed. ( 5 ) AFTER hearing the advocate on behalf of the assessee, the Commissioner of Income-tax held :"that only such reserves (other than development rebate reserve) as have come out of 'taxed profits' can be included in the capital base. The sum of Rs. 9,21,238 credited to the general reserve has not come out of taxed profits. Hence this amount should be excluded from the General Reserve for the purpose of computing the capital". ( 6 ) ON further appeal, the Appellate Tribunal held as follows :"the assessee, undoubtedly, derived exchange gain as a result of devaluation of the dollar. This gain was not allowed as a deduction of the dollar (sic ). This gain was not allowed as a deduction in computing the taxable profits. It is true that this gain related to the plant and machinery account and should have been credited to that account, but the assessee, instead, credited the said amount to the general reserve account. This act, on the part of the assessee, in our view, does not alter the position and we fail to see how the said exchange gain could be reduced from the general reserve account. The exchange gain has not been allowed as deduction in computing the income of the company and, therefore, no benefit has been received by the assessee, so far as its income, for the purpose of income-tax is concerned. On the contrary, by reason of the provisions of Section 43a of the Act, the written down value of plant and machinery block has been reduced resulting in lesser allowance of depreciation to the assessee-company and consequently higher income has been determined for the purpose of assessment. In our view, therefore, the reduction of general reserve by the amount of exchange gain is not at all called for on the facts of the case. " ( 7 ) THE capital of the company for the purpose of the Companies (Profits) Surtax Act, 1964, has to be computed in accordance with the Rules framed in the Second Schedule to that Act. " ( 7 ) THE capital of the company for the purpose of the Companies (Profits) Surtax Act, 1964, has to be computed in accordance with the Rules framed in the Second Schedule to that Act. Rule 1, Sub-rule (iii), of the Second Schedule is as follows :"rule 1. (iii) its other reserves as reduced by the amounts credited to such reserves as have been allowed as a deduction in computing the. income of the company for the purposes of the Indian Income-tax Act, 1922 (11 of 1922), or the Income-tax Act, 1961 (43 of 1961 ). " ( 8 ) THEREFORE, the only question is whether this amount in dispute should have been allowed as deduction in computing the income under the provisions of the Indian Income-tax Act, 1922, or the Income-tax Act, 1961. The clear finding of the Tribunal on this aspect of the matter is that this amount had not been allowed as deduction in computing the assessee's income for the purpose of Income-tax. If that be so, on what ground can this sum be excluded ? Mr. Bhattacharyya, appearing for the Revenue, has not been able to give any clear reason. He was also not very clear as to how this amount should have been shown in the accounts. ( 9 ) MOREOVER, it is not a question of accountancy practice. The assessee had taken dollar loans to purchase plant and machinery. The loans had to be repaid with interest. Because of devaluation of the dollar in 1971, the assessee was a gainer by a sum of Rs. 9,21,238. This gain arose because the assessee had to pay less in rupee term for repayment of the loan. The fortuitous event of devaluation reduced the assessee's liability on capital account. The profit made by the assessee was on capital account. The assessee did not make any capital gain by transfer of any capital asset. Therefore, the amount cannot be excluded from the capital of the company for the purposes of the Companies (Profits) Surtax Act, 1964. ( 10 ) IN view of the aforesaid, the question is answered in the affirmative and in favour of the assessee. There will be no order as to costs.