TMI Blog1985 (4) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... ure incurred by reason of exchange fluctuation in respect of the payment of the instalments of loan in Japanese yen obtained for the purchase of machinery on deferred payment basis was capital or revenue expenditure ? " The facts relating to the first question are stated hereafter. The assessee had borrowed certain capital in Japanese yen for the setting up of a capital asset. The said loan was also repayable in instalments in Japanese yen. For the instalments in Japanese yen payable towards the purchase price of the machinery purchased on deferred payment basis, the assessee, over and above the amount of those instalments in Indian rupees, had to pay Rs. 8,939 more in view of the day to day fluctuations in the exchange rate. The claim of the assessee for the deduction of the said amount under section 43A of the Act has been negatived by the Income-tax Officer on the ground that the said loss was capital and not revenue in nature because the loss arose in making instalment payments of the purchase price of the machineries which were capital assets of the assessee. Aggrieved by the said disallowance, the assessee brought the matter by way of appeal before the Appellate Assista ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uation and a case where the loss arises due to day to day fluctuation in the rate of currency. In a case of loss or liability arising because of fluctuations in the rate of exchange, it must be treated as incidental to the carrying on of the business. It is his contention that in the instant case whatever extra payment in terms of rupees was made by the assessee must be taken to be an unavoidable expenditure in connection with the loan. He has relied on the decision of this court in Union Carbide India Ltd. v. CIT [1981] 130 ITR 351. On the other hand, Mr. Naha, learned advocate for the Revenue, has contended that there cannot be any difference in principle so far as the nature of the liability is concerned, one arising on devaluation and the other by reason of fluctuation. He has relied on various decisions in support of his contention. The respective contentions have to be considered in the light of the decisions cited before us. Mr. Naha has cited before us a decision of the Supreme Court in CIT v. Tata Locomotive and Engineering Co. Ltd. [1966] 60 ITR 405, where the Supreme Court observed as follows (p. 410): " A number of cases have been cited before us, but it seems to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture. Now, in the present case, no finding appears to have been given by the Tribunal 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. II lakhs and Rs. 5, 50,000 resulting to the assessee on the remittance 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, is part of fixed capital or of circulating capital." The next decision cited by Mr. Naha is the decision of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in terms of British sterling calculated at the prevalent exchange rate between sterling and the U.S. dollar and if there should be variation in the exchange rate, the same should be separately settled with credit notes in rupees or in lire in favour respectively of the Italian company or the assessee, as the case may be. In pursuance of the above agreement, during the accounting years ending on December 31, 1961, and December 31, 1962, the Italian company drew four bills of exchange on the assessee, the total amount payable according to the then prevailing rate of exchange being Rs. 2,95,35,020.38. However, due to the fluctuations in the rate of exchange, the assessee had to pay Rs. 2,98,15,915.41. Similarly, the assessee had to pay a larger amount on account of fluctuations in exchange rate in respect of other instalments in 1964. Consequently, the assessee had to pay during the period relevant to the assessment years 1963-64 and 1965-66, Rs. 1,93,509 and Rs. 1,08,302 respectively in excess of the amount that would have been payable if the exchange rates were stationary as at the time the agreement Was entered into. In its returns for these two assessment years 1963-64 and 1965- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Division Bench of this court decided this question in the case of Bestobell (India) Ltd. v. CIT [1979] 117 ITR 789 (Cal)." Then, this court considered the scope of section 43A of the Act. At page 374, the court referred to the object of the Finance Bill which introduced section 43A. " In the Finance (No. 2) Bill, 1967, which introduced s. 43A, clause 17 of the Notes on Clauses sought to explain the purpose of such insertion, which reads as follows : '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, is 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. 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 Union 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 " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore. 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." Having regard to the principles laid down by the aforesaid decisions, we are unable to accept the contention of Mr. Bajoria. There is no qualitative difference in the additional expenditure incurred due to the devaluation or fluctuation in the rate of exchange. In b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee had taken a loan from the Export Import Bank of Washington for making payment in the U.S.A. of the price of capital plant and machinery purchased for its project. The loan was taken and was repayable in dollars. One of the questions was whether the increase in liability of the assessee for repayment of loan due to devaluation was allowable deduction in computing the business income of the assessee. There, the court considered various decisions including the decision in the case of Bestobell (India) Limited [1979] 117 ITR 789 (Cal). This court considered in detail the judgment in Bestobell (India) Limited's case [1979] 117 ITR 789 and took note of what was said in Bestobell as follows (p. 372): " 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. " This court held that " in view of the consistent view of the Supreme Court and in view of the decision in Bestobell (India) Limited " [1979] 117 ITR 789 (Cal), the increased liability in terms of rupees for repayment of loan was not an allowable deduction as the said loss was on capital account. Thus whether there is devaluati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee-company and the offer is not accepted by the employee, the employee shall forfeit his leave to the extent of the period offered. Rule 6 of the said leave rules further provides the method for encashment of leave by different categories of employees. Rule 6A further provides that without prejudice to the aforesaid general provisions for encashment of leave, the management shall have the right, at its sole discretion, to permit encashment of any number of days of accumulated privilege leave not exceeding 120 days in cases like marriage/sickness/accident or other special circumstances beyond reasonable control of the person concerned like refusal of leave by the management, etc., but no staff member shall be entitled to claim it as a matter of right. It is also an admitted position that prior to the year under consideration, the assessee was claiming the deduction in the matter of payment on account of privilege leave when the same was encashed on retirement or on the termination of the services of the employees in a particular year. Though this was the practice in the past, the assessee in the accounts for the year made a provision in respect of its accrued liability for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only. Rule 6 has provided for encashment of leave. The management shall have the right, at its sole discretion, to permit encashment of any number of days of accumulated privilege leave not exceeding 120 days. Mr. Bajoria has also drawn our attention to rule 6C, which is in the following terms: "For the purpose of leave encashment, the leave record will be completed immediately after the end of every calendar year or financial year of the company and the benefit of unavailed or accumulated leave, if any, shall be given as per these Rules in the succeeding calendar year or financial year, as the case may be. " The question before us is whether provision for leave salary is an allowable deduction. The contention of Mr. Bajoria is that leave salary payable to an, employee can be ascertained at the end of the accounting year depending on the accumulated leave to the credit of an employee. It is his contention that it is not a contingent liability but a liability in praesenti. He has also submitted that out of the provision made, leave salary would be paid to the employees. He has also submitted that the leave encashment benefit is ascertainable it the end of the year in terms of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y under section 49B of the Factories Act to pay holiday wages depends on the arising of circumstances specified therein and since they may or may not arise, the liability is only a contingent and uncertain liability which may or may not have to be discharged. Chakraborty C.J., observed as follows (p. 278 of 62 ITR): "It should be clear from what I have stated above that such statutory liability for holiday wages Ls the Factories Act creates is only a contingent liability which mayor may not have to be discharged; and, secondly, the measure of that liability can never be known in advance. It cannot be so known, because it cannot be known in advance how many employees will avail themselves of how many holidays and when and, necessarily, at what rate, holiday wages would be payable. In those circumstances, it is perfectly clear that not only is the amount claimed not allowable as an item of expenditure, because, in fact, no expenditure had been incurred and not a pica had gone out of the funds of the company, but also that the amount does not even represent a certain liability which will have to be discharged in any event. It may be that although a particular amount is not actually ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a calculation can be made with accuracy. No one makes a provision for salary because salary is only payable after the employee renders the service and then only it will accrue to him. Similarly in the case of wages which are paid during the leave period, the employee becomes entitled to such leave wages only when he goes on leave. Accumulated leave to the extent of 120 days can only be encashed at the time of retirement or termination or determination of service. This is, therefore, a contingent liability and not a certain liability. Inspired by a decision of the Kerala High Court under the Wealth-tax Act in the case of CWT v. Prema Lakshman [1984] 150 ITR 170, Mr. Bajoria sought to contend that the liability to pay the leave wages is not a contingent liability. There the assessees were partners of a firm which was engaged in the business of processing and exporting cashew kernels. For the assessment year 1974-75 relevant to the valuation date, December 31, 1973, the assessees claimed deduction in respect of the amounts payable by the firm by way of leave with wages, in calculating their interest in the firm for purposes of wealth-tax. The Wealth-tax Officer disallowed the cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 53, cannot have any application in this case. The Supreme Court in that case was concerned, inter alia, with the question whether it is legitimate in a scheme of gratuity to estimate the liability on actuarial valuation and deduct such estimated liability in the profit and loss account while working out the net profit. The Supreme Court held that if the liability is properly ascertainable and if it is possible to arrive at its discounted present value, even if the liability is a contingent liability, it can be taken into account. That question does not arise here. There cannot be actuarial valuation regarding the liability for payment of leave wages. It cannot be equated with the gratuity liability under the Gratuity Act. The rate of leave salary will depend on the salary a person draws at the time when he goes on leave and not when the leave is accumulated. So far as the leave encashment is concerned, the employees are entitled to encashment of their privilege leave to the extent of 120 days. Such encashment can be made only at the time of retirement or termination or determination of the services of an employee. If any employee avails of the leave, he will be entitled to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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