TMI Blog1995 (2) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... ding that the excess payment made by the assessee to the Industrial Credit and Investment Corporation of India Limited, on account of fluctuation in the rate of exchange cannot be treated as part of the cost of the capital assets imported by the assessee from West Germany? " Tax Case No. 36 of 1983 (1976-77) : " (i) Whether, on the facts and in the circumstances of the case and having regard to the provisions of section 43A of the Act, the Appellate Tribunal was right in law in holding that the fluctuation in the rate of exchange paid by the assessee to the Industrial Credit and Investment Corporation of India Limited, is a revenue expenditure and should accordingly be allowed ? (ii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the excess payment made by the assessee to the Industrial Credit and Investment Corporation of India Limited on account of fluctuation in the rate of exchange cannot be treated as part of the cost of the capital assets imported by the assessee from West Germany? (iii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment of the price but related only to a repayment of a loan, and, therefore, it was allowable as a revenue expenditure. (ii) That the decision in the case of Sivakami Mills Ltd. v. CIT [1979] 120 ITR 211 (Mad) should be applied and not the decision in the case of South India Viscose Ltd. [1979] 120 ITR 451 (Mad) which was distinguishable on facts, (iii) that section 43A cannot be applied to the facts of the case. The contentions of the Revenue were that, (i) the extra expenditure must be regarded as increasing the amount of the loan, and, therefore, the repayment of the principal amount of the loan should be considered as capital expenditure and disallowed, (ii) in the alternative it was contended that section 43A had to be applied even if it is treated as revenue expenditure so as to sustain the disallowance without granting development allowance. The Revenue relied on the decision of the Calcutta High Court in the case of Union Carbide India Ltd. v. CIT [1981] 130 ITR 351." The Appellate Tribunal accepted the submissions made by the assessee and held that the amounts paid due to fluctuation in the exchange rate in the assessment year, are revenue in nature and, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, the Tribunal was not correct in holding that section 43A would not be applicable to the facts of this case. On the other hand, learned counsel, appearing for the assessee submitted that the additional amount paid was not only related to the payment of price of the machinery but also related to the repayment of loan and hence, it was allowable as a revenue expenditure. There is no connection between the purchase of the machinery and the payment of the additional amount to the I.C.I.C.I. due to fluctuation in the exchange rate. The additional amount paid was in the nature of payment of interest on the principal amount or like the payment for the guarantee given by the I.C.I.C.I. for the repayment of the loan. The provision of section 43A will not be applicable to the facts of this case. The provision of section 43A would be applicable where the finance arrangement was made prior to the production since it recognised the principle that such expenses are to be added to the cost of the assets purchased. There is nothing in section 43A to treat what is generally accepted as revenue expenditure also as part of the cost of the asset for the purpose of that section except the non obst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r pointed out that this decision is concerned with the guarantee commission paid by the assessee to the State Bank of India which stood as a guarantor for the repayment of the purchase money. But it remains to be seen that what was paid by way of additional amount by the assessee to the company was for the purchase of machinery. The fact that in the present case the assessee had paid the additional amount due to fluctuation in the exchange rate to the financier I.C.I.C.I. would also go towards the cost of the purchase of the machinery since the I.C.I.C.I. in turn paid the additional amount to the seller through the foreign financier. Therefore, it cannot be said that the decision in the case of South India Viscose Ltd. [1979] 120 ITR 451 (Mad), cannot be made applicable to the facts of this case. In the case of Union Carbide India Ltd. v. CIT [1981] 130 ITR 351 (Cal), the following question was referred to the Calcutta High Court for its opinion viz.: " Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the increase in liability of Rs. 1,75,99,854 due to devaluation was not deductible in computing the assessee's busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ards the amount borrowed by an assessee from any person directly or indirectly in any foreign currency specifically for the purpose of acquiring assets should be treated as capital in nature. The fluctuation was one of the factors to be taken into account to determine the value of the capital asset. Therefore, the mere fluctuation in the rate of exchange was not a ground for the assessee to claim the allowance as a revenue expenditure. Section 43A of the Act itself provides for fluctuation in the exchange rate. Therefore, the loss of Rs. 10,485 incurred by the assessee due to the exchange fluctuation was not allowable as revenue expenditure. In Mopeds India Ltd. v. CIT [1988] 172 ITR 552 (AP), the following question of law has been referred to the hon'ble judges (page 553) : " Whether, on the facts and in the circumstances of the case, the sum of Rs. 10,558 paid by the assessee as exchange difference cannot be allowed as a revenue loss ? " While answering this question, the Andhra Pradesh High Court held that the statement of case stated that the payment was part of the instalments payable to the French company for the supply of plant and machinery. The extra amount was not p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of exchange was not allowable as revenue expenditure in computing the income of the applicant for the assessment year 1975-76, it was held that the original expenditure for the machinery was capital expenditure. Hence, the enhanced payment represented by the difference due to the fluctuation in exchange rate was also capital in nature. In the case of CIT v. Hindustan Aluminium Corporation Ltd. [1994] 207 ITR 670, the following question was referred to the Bombay High Court, for its opinion (page 671) : " Whether, on the facts and in the circumstances of the case, the loss of Rs. 13,59,790 suffered due to the fluctuations in the rate of exchange at the time of remitting the instalments of a loan acquired for purchasing capital assets is admissible as revenue expense while computing the business income of the assessee ? " While answering the above question, the Bombay High Court held that whether the loss suffered by the assessee was a trading loss or not would depend on the answer to the question whether the loss was in respect of a trading asset or a capital asset. It would be a trading loss in the former case and a capital loss in the latter. It makes no difference whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee in obtaining the loan or any part thereof is an allowable expenditure. While answering this question, the court held that the amount spent was not in the nature of capital expenditure and was laid out or expended wholly and exclusively for the purpose of the assessee's business and was therefore allowable as a deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922. The act of borrowing money was incidental to the carrying on of the business, the loan obtained was not an asset or an advantage of enduring nature, the expenditure was made for securing the use of money for a certain period, and it was irrelevant to consider the object with which the loan was obtained. The facts arising in the abovesaid case, are entirely different from the facts arising in this case. Therefore, it would not render any assistance for establishing his case. Learned counsel for the assessee also relied upon a decision in the case of Bombay Steam Navigation Co. (1953) Pvt. Ltd. v. CIT [1965] 56 ITR 52 (SC). In that decision, the Supreme Court held that in considering whether expenditure is revenue expenditure, the court has to consider the nature and the ordinary course of business and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreed price. If such increase is between dates of the agreement and the acquisition of any such asset, the case is covered under section 43(1) and the escalation in price would go to increase the actual cost under those provisions. On the other hand, if the variation in the value of currency is after the date of acquisition, there might have arisen some question as to, after fulfilment of an agreement of sale by delivery, how the actual cost could be affected by such variation. It seems that in order to avoid such a question, the Legislature enacted section 43A, with effect from April 1, 1967, providing that the escalation in such a case would go to swell the actual cost in a similar manner. What is true for escalation holds good also in the case of de-escalation. Therefore, the submission made by learned counsel for the assessee, that the sale transaction was already over and de hors the sale transaction, the additional amount arising because of fluctuation in the exchange rate was paid only to the I.C.I.C.I. and, therefore, such payment should be considered as an expenditure incurred after business was commenced cannot be accepted especially when there are direct decisions on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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