1995 (2) TMI 4 - HC - Income Tax

Capital Expenditure Commencement Of Business Fluctuation In Rate Foreign Exchange Revenue Expenditure

Summary

Issues Involved:
1. Whether the fluctuation in the rate of exchange paid by the assessee to the Industrial Credit and Investment Corporation of India Limited (ICICI) is a revenue expenditure and should accordingly be allowed.
2. Whether the excess payment made by the assessee to ICICI on account of fluctuation in the rate of exchange can be treated as part of the cost of the capital assets imported by the assessee from West Germany.
3. Whether the provisions of section 43A of the Income-tax Act, 1961, would apply to the assessee's case.

Detailed Analysis:

Issue 1: Revenue Expenditure
The Tribunal held that the amounts paid due to fluctuation in the exchange rate in the assessment years were revenue in nature and, therefore, deductible from the reported income. The Tribunal distinguished the case from CIT v. South India Viscose Ltd. [1979] 120 ITR 451 where payments due to exchange rate fluctuations were considered capital expenditures. The Tribunal found that the payments in the present case were related to the repayment of a loan and not directly to the purchase price of machinery.

Issue 2: Cost of Capital Assets
The Tribunal concluded that the excess payment due to exchange rate fluctuation should not be treated as part of the cost of the capital assets. This was contested by the Revenue, which argued that any additional amount paid towards the cost of machinery due to exchange fluctuations should be considered capital expenditure. The Revenue cited several cases, including Union Carbide India Ltd. v. CIT [1981] 130 ITR 351 (Cal), where similar payments were treated as capital expenditure.

Issue 3: Applicability of Section 43A
The Tribunal held that section 43A of the Income-tax Act, 1961, which deals with the treatment of exchange rate fluctuations in the cost of assets, was not applicable to the assessee's case. The Revenue argued that section 43A should apply, as it specifically addresses the impact of exchange rate fluctuations on the cost of imported assets. The Tribunal's decision was challenged based on precedents, including Vazir Sultan Tobacco Co. Ltd. v. CIT [1989] 177 ITR 532 (AP) and Mopeds India Ltd. v. CIT [1988] 172 ITR 552 (AP), where section 43A was applied to similar circumstances.

Court's Conclusion:
The court examined various precedents and found that the Tribunal's decision was not consistent with established legal principles. The court cited South India Viscose Ltd., Union Carbide India Ltd., and Kesoram Industries and Cotton Mills Ltd. v. CIT [1992] 196 ITR 845, among others, which treated such additional payments due to exchange rate fluctuations as capital expenditures.

The court concluded that:
1. The additional amount paid due to fluctuation in the exchange rate is capital expenditure.
2. The excess payment should be treated as part of the cost of the capital assets.
3. Section 43A of the Income-tax Act, 1961, is applicable to the assessee's case.

Accordingly, the court answered the questions referred to it in the negative and in favor of the Department, thereby overturning the Tribunal's decision. The counsel's fee was fixed at Rs. 1,000.