TMI Blog1986 (1) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... ctuation in the rate of exchange as revenue expenditure in computing its income for the assessment year 1976-77 ? (2) Whether, on the facts and circumstances of the case, Rs. 21,31,104 being the secured loans and Rs. 3,68,090 being the unsecured loans should not be deducted from the value of the assets of the assessee in computing the capital employed for the purpose of determining the quantum of deduction allowable under section 80J of the Income-tax Act, 1961, for the assessment year 1976-77 ? (3) Whether, on the facts and circumstances of the case, Rs. 5,59,689 being the value of the work-in-progress should be excluded in the computation of the capital employed for the purpose of determining the amount of deduction allowable under se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in its profit and loss account and claimed the said sum as a revenue deduction. The Income-tax Officer rejected the claim on the ground that it was a capital expenditure. In computing the capital employed for the purpose of ascertaining the deduction permissible under section 80J, the Income-tax Officer excluded from the aggregate value of the assets a sum of Rs. 43,59,539 made up of secured loans, unsecured loans and current liabilities. The assessee's claim for relief under section 80J in respect of Rs. 5,59,689, being the value of the work-in-progress, was also rejected. The Income-tax Officer did not accept the assessee's claim for inclusion of the pre-commissioning expenses and the payment made for the process know-how in the total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of the Tribunal. Question No. 1.-The additional expenses incurred for repayment of foreign loan for the reason of the variation in exchange rate will squarely fall under section 43A as it is an expenditure of a capital nature. In CIT v. Tata Locomotive and Engineering Co. Ltd. [1966] 60 ITR 405, the Supreme Court held that the surplus obtained on devaluation of rupee on the accumulated dollars intended for purchase of capital goods is a capital accretion and is not taxable as profits in the hands of the assessee. In Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1, the Supreme Court stated at page 13: "The law may, therefore, now be taken to be well settled that where profit or loss arises to an assessee on account of appreciatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a deduction in computing its business income was held to be unsustainable. After an elaborate consideration of the case law on the point, Sabyasachi Mukharji J. on behalf of the Bench stated thus at page 372 : " If there was a devaluation in favour of the rupee as a result of which the assessee had to pay less to its creditors, the surplus arising would have been of capital nature and could not have been assessed in the hands of the assessee as a business profit. 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." We are, therefore, of the view that the extra expenses incurred for repayment of the loan raised for the purpose of payment of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in CIT v. Indian Oxygen Ltd. [1978] 113 ITR 109 held that the moment capital is utilised for the purpose of acquiring any asset for a business, such capital becomes employed in the business, whether the asset is actually used in the business or not. The work-in-progress would, therefore, fall under section 80J(1A) as forming part of the capital employed in the industrial undertaking. It would take in matters specified in sub-clauses (ii) and (iii) of clause (11) of subsection(1A). The same view is expressed by the Karnataka High Court in Ravi Machine Tools (P) Ltd. v. CIT [1978] 114 ITR 459. Referring to the corresponding provision in rule 19A, the Gujarat High Court in CIT v. Cibatul Ltd. [1978] 115 ITR 879 stated at page 882: " I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness consisting of this or that asset. These tests have been applied both by the Calcutta High Court and by the Karnataka High Court in the two cases referred to above. In any event, so far as our statute and the rules before us are concerned, it is clear that in the light of rule 19A(2)(ii), there is no doubt that, in computing assets for the purpose of computing capital, uninstalled machinery which has been acquired by purchase must be taken into consideration while computing capital." The Tribunal in paragraph 10 of its order notices that similar claims under section 80J had been allowed during the earlier periods of assessment. We are, therefore, clearly of the view that the cost of work-in-progress forms part of the capital employ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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