SHIVASHANKAR BHAT, J. ( 1 ) THE following questions have been referred under Section 256 (2) of the Income Tax Act, 1961: (I) "whether on the facts and in the circumstances of the case, the Appellate tribunal was right in upholding the cit (A)'s order who directed the Income Tax Officer to re-compute the sur-tax liability after converting the foreign loan at the rate of exchange available on the relevant date? (II) "whether on the facts and in the circumstances of the case, the Appellate tribunal was right in law in upholding the CIT (A)'s order who directed the ito to make adjustment for relief allowed in the I. T. assessment?"it is admitted by both sides that the answer to the second question depends upon the answer to the first question and if the answer to the first question is against the Revenue the second question will also have to be answered against the revenue. The assessee obtained long term loan from the Industrial Credit and Investment Corporation of India and claimed the benefit for the assessment years 1975-76 and 1976-77. The borrowing were for the purchase of machinery by importing the same from abroad. The loan was taken in foreign exchange and it was a long term borrowing. The question arises under the Sur-tax Act. The borrowing to the extent it is outstanding is treated as a part of the capital of the company and a particular percentage thereof is allowed depreciation. The relevant date to compute the capital is the first day of the accounting year and in this case it is 1st January. There is no dispute about the actual amount borrowed and outstanding in foreign exchange terms. The assessee while claiming the benefit, converted the foreign exchange liability into 'rupee liability' by applying the exchange rate prevalent as on the 'relevant date' (1st day of the accounting year ). However, the revenue contended that the exchange rate that prevailed on the date of the actual borrowing should be applied and any subsequent variation will have to be ignored. The Income Tax Officer did not grant the benefit of the prevalent exchange rate to the assessee. However, the Commissioner of Income Tax (Appeals-I) allowed the assessee's appeals and thereafter directed the come Tax Officer to recompute the capital. The Income Tax Officer did not grant the benefit of the prevalent exchange rate to the assessee. However, the Commissioner of Income Tax (Appeals-I) allowed the assessee's appeals and thereafter directed the come Tax Officer to recompute the capital. Hence the revenue appealed to the Appellate tribunal contending that (i) the interpretation of the company's profits under the Sur Tax Act made by the Commissioner of Appeals was erroneous and the order of the assessing authority should be restored and (ii) the Commissioner of appeals had no authority to direct recomputation of the capital. The Tribunal affirmed the order of the Commissioner of Appeals. Hence these references at the instance of the Revenue. Mr. Chandrakumar, learned counsel for the revenue, referred to the Second Schedule to the act wherein the Rules for computing the capital of a company for the purpose of sur-tax are found. Clause (v) of Rule 1 reads thus:" (1) Subject to the other provisions contained in this Schedule, the capital of a company shall be the aggregate of the amounts, as on the first day of the previous year relevant to the assessment years, of (i) to (iv) omitted as unnecessary, (v) any moneys borrowed by it from government or the Industrial Finance corporation of India or the Industrial credit and Investment Corporation of india or any other financial institution which the Central Government may notify in this behalf in the Official gazette or any banking institution (not being a financial institution notified as aforesaid) or any person in a country outside India: (rest omitted as unnecessary)"according to the learned counsel for the revenue what is to be paid is the moneys borrowed by the assessee. For the purpose of computation, the capital of the company and the borrowings of the company (in the process of aggregation) shall be included as on the first day of the previous year relevant to the assessment year. Therefore, when the borrowing is complete and is stated in terms of Indian rupee, and is crystallized the said quantum cannot be varied. The contention advanced by Mr. Chandrakumar does not flow from the rule referred by him. The rule simply states that the borrowings as on the first day of the accounting year will be aggregated to arrive at the capital. The contention advanced by Mr. Chandrakumar does not flow from the rule referred by him. The rule simply states that the borrowings as on the first day of the accounting year will be aggregated to arrive at the capital. What is relevant is that there should be borrowing which necessarily shows that there should be an outstanding payable to the creditor. The borrowing herein is in foreign exchange, (foreign currency ). It is that sum which has to be paid to the foreign creditor; that forms the capital of the company under Rule 1 referred to above. With the fluctuation in the foreign exchange rates, its liability in terms of Indian rupee would fluctuate. The liability in terms of foreign currency is not varied. In reality, therefore, the liability of the company when computed in Indian currency will have to be arrived at by applying the existing foreign exchange rate as on the relevant date. Any other interpretation will lead to an absurd result. For example, if the borrowing is held to be crystallized in Indian currency, the repayment made by the company in the course of 4 or 5 years may wipe out the said outstanding in Indian rupee, though in reality the company still owes to the foreign creditor. The view we have expressed above is also finds support from a decision of the Bombay high Court in Commissioner of Income Tax v national Rayon Corporation Ltd. , 160 ITR 723. In the said case the Bombay High Court accepted the claim of the assessee that the assessee was entitled to add on the liability in Indian rupees by virtue of the liability incurred by the assessee on account of rupee devaluation. Consequently, our answers to the questions are in the affirmative and against the Revenue. --- *** --- .