TMI Blog1980 (4) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee is a limited company and, as mentioned hereinbefore, the reference relates to the assessment year 1967-68. The assessee-company under an agreement dated August 16, 1963, had taken a loan from the Export Import Bank of Washington for making payment in the United States of America of the price of capital plant and machinery purchased for the new project, viz., a petrochemical undertaking. The loan was taken and repayable in dollars. This is an important fact which is to be borne in mind. Out of this loan, which the assessee-company took from the Export Import Bank, payment was made for capital plant and machinery purchased from the various suppliers in the United States of America and the plant and machinery so purchased were shipped to India for installation in the petrochemical undertaking. On June 6, 1966, there was devaluation of the Indian rupee and, therefore, the liability of the assesseecompany for repayment of loan to the Export Import Bank in dollars increased in terms of rupees to Rs. 1,75,99,854. This increased liability was accounted for by the assessee-company by crediting the Export Import Bank and debiting Rs. 1,09,24,932 to the plant and machinery account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which we are in respectful agreement, hold that the loss arising from devaluation attributable to the Export Import Bank was of the nature of capital loss. This could not, therefore, be allowed as a deduction in computing the business profit and was rightly disallowed by the revenue authorities. We will now deal with the alternative issue raised by the assessee-company that even if the loss on devaluation was considered to be capital loss, development rebate should have been allowed on the increased liability arising out of devaluation attributable to plant and machinery installed during the previous year amounting to Rs. 1,09,24,832. Here again, it is not under dispute that out of the loan taken from the Export Import Bank payments were made to suppliers of capital plant and machinery in the USA and the plant and machinery which were installed during the previous year were those items of plant and machinery in respect of which payments had already been made by the assessee-company before the date of devaluation. This means that the actual amount which the assessee-company had to pay for the plant and machinery which was installed during the previous year was at the pre-devaluation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... servations of the Supreme Court in the case of Indore Malwa United Mills Ltd. v. State of Madhya Pradesh [1965] 55 ITR 736. There, the assessee-company which had been carrying on business of manufacturing cloth, pursuant to the authority under its memorandum of association to invest its funds in loans to others, resolved to invest its surplus funds with its managing agents at 6 per cent. interest. The managing agents on behalf of the company borrowed large sums of money from outsiders, entered them in the company's books of account, withdrew the sums and utilized those for their own purposes. The managing agents went into liquidation in 1933. In computing its profits for the purpose of industrial tax under the Indore Industrial Tax Rules, 1927, for the assessment year 1941, the assessee-company had claimed deduction of the sums which could not be recovered from the managing agents as bad debts and as trading loss. It was held by the Supreme Court that the money borrowed by the managing agents which would become irrecoverable was a trading loss deductible in computing the profits of the managing company for the assessment year; it was a loss incidental to the company's business. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) and (b) could not be taken into consideration in computing the capital employed for the purpose of granting any relief as contemplated under s. 80J. But s. 80J of the I.T. Act, 1961, it was held, did not provide that the capital employed should be out of the money belonging to the assessee. Therefore, it was held, borrowed money, if it was employed as capital in a new industrial undertaking, was entitled to be taken into computation. In so holding, reliance was placed on the observations of the Supreme Court in the case of Indore Malwa United Mills Ltd. v. State Of M.P. [1965] 55 ITR 736 at 740. But it has to be emphasised that it was so held in considering whether the borrowed capital become capital of the company for certain purpose. In neither of these two cases, however, the question whether a loan as such could become an asset of enduring nature or an expense for a loan either in the shape of either procuring or for the purpose of repayment of it would be capital expenditure or revenue expenditure fell for consideration. The expression that " after borrowing the money became company's money ", as mentioned by the Supreme Court, in the passage quoted, was made it must be em ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uisition of an asset or a right of a permanent character, the possession of which was a condition to the carrying on of the business the expenditure might be regarded as revenue expenditure. Similar provision like s. 10(2)(iii) of the Indian I.T. Act, 1922, has been provided under s. 33 of the I.T. Act, 1961. But mainly reliance was placed on behalf of the assessee on a decision of the Supreme Court in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52. There the assessee had obtained a loan of Rs. 40 lakhs from the Industrial Finance Corporation secured by a charge on its fixed assets. In connection therewith, it spent a sum of Rs. 84,633 towards stamp duty, registration fees, lawyer's fees, etc., and claimed this amount as business expenditure. But the Supreme 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 s. 10(2)(xv) of the Indian I.T. Act, 1922. The act of borrowing money was incidental to the carrying on of business, the loan obtained was not an asset or an advantage of enduring nature, the expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and not for obtaining any fixed assets or raising any initial capital or for expansion of the assessee's business, the expenditure incurred for the raising of loan was not an expenditure of capital nature but revenue expenditure. Although the conclusion of the High Court was correct, we are, not able to agree with the principle that the nature of the expenditure incurred in raising a loan would depend upon the nature and purpose of the loan. A loan may be intended to be used for the purchase of raw material when it is negotiated, but the company may, after raising the loan, change its mind and spend it on securing capital assets. Is the purpose at the time the loan is negotiated to be taken into consideration or the purpose for which it is actually used ? Further, suppose that in the accounting year the purpose is to borrow and buy raw material but in the assessment year the company finds it unnecessary to buy raw material and spends it on capital assets. Will the Income-tax Officer decide the case with reference to what happened in the accounting year or what happened in the assessment year ? In our opinion, it was rightly held by the Nagpur judicial Commissioner in Nagpur Electri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observations with which we shall presently deal with. But before we do so, we may note that this court had occasion to consider the ratio of this decision by the Division Bench of this court in the case of Rampooria Cotton Mills Ltd. v. CIT [1974] Tax LR 395, where the court was concerned with whether the expenditure incurred for obtaining the overdraft facility of a loan was allowable under s. 10(2)(xv) of the Indian I.T. Act, 1922. There, it has to be emphasised, the court was considering the question of expenditure incurred in obtaining the loan. In that context, reference was made to the observations of the Supreme Court that the ratio of the aforesaid decision of the Supreme Court was that the loan was a liability and the loan obtained had to be repaid though the period of repayment might be either long or short. The loan was, therefore, not an asset or advantage having regard to the observations of the Supreme Court and having regard to the facts found by the Tribunal that by incurring the expenditure the company had only obtained an overdraft facility for loan. Then the court came to the opinion that this was an expenditure which was allowable under s. 10(2)(xv) of the India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to devaluation was on a capital account. It is sought to be distinguished by the learned advocate for the assessee on the ground that there the Supreme Court was not concerned with borrowed money or loan. There the Supreme Court was concerned with the accretion accruing to an assessee in respect of his own money held in a foreign country which was utilised for the purpose of buying capital goods. In this connection, reference was also made to the decision in the Court of Appeal in England in the case of Davies (H. M. Inspector of Taxes) v. Shell Company of China Ltd. [1952] 22 ITR (Supp) 1 (CA). There, what had happened was that the assessee-company was a British company carrying on the business of sale and distribution of petroleum products in China and it employed a number of Chinese agents to whom petroleum products were consigned for which the payments were not made before hand. They were, however, required by the terms of the contract to deposit with the company certain sums in Chinese dollars and the company was empowered to take out of the, deposit any amounts which might become due from the agents in the event of their default. The deposit was repayable at the determinati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... British company in the course of its trade engages in a trading transaction such as the purchase of goods abroad, which involves, as a necessary incident of the transaction itself, the purchase of currency of the foreign country concerned, then any profit resulting from an appreciation or loss resulting from a depreciation of the foreign currency embarked in the transaction as compared with sterling will prima facie be a trading profit or a trading loss for income tax purposes as an integral part of the trading transaction. That concession or admission by Mr. Grant is amply justified by the cases to which we have been referred. There is the case of Landes Brothers v. Simpson [1934] 19 TC 62 (KB), which is a decision of my brother Singleton as a judge of first instance. There the appellants, who carried on business as fur and skin merchants and as agents, were appointed sole commission agents of a company for the sale in Britain and elsewhere of furs exported from Russia on the terms, inter alia, that they should advance to the company a part of the value of each consignment. All the transactions between the appellants and the company were conducted on a dollar basis and owing to fl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and so forth. Sir Andrew argued that a deposit so closely linked with the actual trading operations to be carried on by the agent must itself be regarded as a trading receipt. In that I venture to differ from him. If the agent's deposit had in truth been a payment in advance to be applied by the company in discharging the sums from time to time due from the agent in respect of the petroleum products transferred to the agent and sold by him, the case might well be different and might well fall within the ratio decidendi of Landes Bros. v. Simpson [1934] 19 TC 62 (KB) and Imperial Tobacco Co. v. Kelly [1943] 25 TC 292 (CA). But that is not the character of the deposits here in question. The intention manifested by the terms of the agreement is that the deposit should be retained by the company, carrying interest for the benefit of the depositor throughout the terms of the agency. It is to be available during the period of the agency for making good the agent's defaults in the event of any default by him: but otherwise it remains, as I see it, simply as a loan owing by the company to the agent and repayable on the termination of the agency ; and I do not see how the fact that the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y affirmed by the learned judge, and I would, therefore, dismiss the appeal. " Here also though, as I have said before, subsequent decisions had dealt with this case, the actual distinction is sought to be urged before us, whether the user of the assessee's own money or user Of the borrowed money of the assessee was for capital or for revenue purpose made any difference does not seem to have been stressed. But this decision, as we shall indicate, has been later on followed. If this decision is understood in the light of the expression " when any cost or expenses incurred for obtaining a loan before it was used" then it could be treated as a capital, then the principle of this decision is absolutely irreconcilable with the observations of the Supreme Court in the case of India Cements Ltd. v. CIT (1966] 60 ITR 52. Reliance was also placed on the decision of the Supreme Court, where the observations in the case of Shell Company [1952] 22 ITR (Supp) 1 (CA) were approved in the case of K. M. S. Lakshmanier and Sons v. CIT [1953] 23 ITR 202 (SC), where at page 210, the Chief justice, Patanjali Sastri, had referred to the case of Davies v. Shell Company of China [1952] 22 ITR (Supp) 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... security deposit account ". The question was whether the assessee could be assessed to tax on the balance of the amounts of these additional sums left after the refunds made. It was held that in realising the additional amount described as security deposit the assessee was charging extra prices for the bottles. Therefore, the additional amounts taken were an integral part of the commercial transaction of the sale of liquor in bottles and when they were paid were the moneys of the assessee and remained thereafter the moneys of the assessee, they were the assessee's trading receipts and, therefore, the balance of these additional sums left after the refunds made thereout were assessable to tax. In the context of this case, this decision will not be of much assistance to us. Reliance was also placed on the case of CIT v. Mogul Line Ltd. [1962] 46 ITR 590 (Bom). There, it was held that the foreign fund of the assessee was allowed to remain unused where it lies the mere circumstance that there had been fluctuation in the currency resulting in appreciation of the fund in terms of the coin of another country would not result in profit to the owner of the fund. But, if the fund was utilis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 68,97,232 converted at the then prevailing rate of exchange of 100 Pakistani rupees to 144 Indian rupees. On 8th August, 1955, Pakistan devalued its rupee restoring the parity between in Indian rupee and the Pakistani rupee. Thereafter, during the accounting periods relevant to the assessment years 1957-58 and 1959-60, the assessee obtained permission of the Reserve Bank of Pakistan and remitted to India Rs. 25 lakhs and Rs. 12 1/2 lakhs, respectively. The assessee had claimed that on remittance the assessee had suffered respectively a loss of Rs. 11 lakhs and Rs. 5 1/2 lakhs, but the claim was rejected by the department and the Tribunal sustained the disallowance. On a reference, this court held that no loss was sustained by the assessee on remittance of the amounts from West Pakistan and that, in any event, the loss could not be said to be a business loss because it was not a loss arising in the course of the business of the assessee, but it was one caused by devaluation which was an act of State. The Supreme Court, on appeal, setting aside the decision of the High Court and remanding the case to the Tribunal, held that, (i) the assessee suffered a loss of Rs. 11 lakhs and Rs. 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unts 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, as part of fixed capital or of circulating capital. We would have ordinarily, in these circumstances, called for supplementary statement of case from the Tribunal giving its finding on this question, but both the parties agreed before us that their attention was not directed to this aspect of the matter when the case was heard before the revenue authorities and the Tribunal and hence it would be desirable that the matter should go back to the Tribunal with a direction to the Tribunal either to take additional evidence itself or to direct the ITO to take additional evidence and make a report to it, on the question whether the sums of Rs. 25 lakhs and Rs. 12,50,000 were held in West Pakistan as capital asset or as trading asset or, in other words, as part of fixed capital or part of circulating capital in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not repaid at the expiry of one year and remained outstanding in the books of the assessee up to 6th June, 1966, on which date the Indian rupee was devalued. As a result of the devaluation, the assessee had to arrange for a sum of Rs. 7,87,692 to repay the original loan of i 37,500, and, consequently, an extra amount of Rs. 2,87,692 was necessary to repay the original loan of Rs. 5 lakhs. After deducting a gain of about Rs. 4,078 on the assessee's sterling deposit in the London bank, the assessee debited its profit and loss account with a sum of Rs. 2,83,614 for the assessment year 1967-68, and claimed deduction of this amount. The ITO rejected the claim of the assessee on the ground that the increase of liability arising from devaluation on account of sterling loan was of a capital nature and could not be allowed as a revenue expense. On appeal, the AAC also held that the loss on account of devaluation in connection with a loan could not, under any circumstances, be considered to be revenue loss, that accretion in the amount of the borrowing was not admissible as a deduction, that the assessee not being a dealer in foreign exchange, the loss was not incidental to its business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee that it had incurred the extra expenditure in order to secure the loan. The loan had already been obtained. It was at the point of repayment that the assessee had to provide an extra amount in rupees by reason of the devaluation. Hence, it was not expenditure incurred for securing the use of money for a certain period which could be treated as revenue expenditure. Therefore, the Tribunal was right in holding that the amount of Rs. 2,83,614 was not deductible in computing the assessee's profits and gains of business. There the Tribunal was also right in holding that the amount of Rs. 2,83,614 was not deductible in computing the chargeable profits for the purposes of the surtax assessment for the assessment year 1967-68. There the two questions with which the court was concerned were as follows : " 1. Whether, on the facts and in the circumstances of the case, and on a proper construction of the assessee's letter of 18th January, 1965, the Tribunal was right in holding that the assessee's major requirement for its loan was to meet its taxation liabilities ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioned under cl. (b) of sub-s. (1) of s. 33 with which we are not concerned. The figures are also not in dispute before us. We may also incidentally refer to s. 32 of the I.T. Act, 1961, which deals with the " depreciation ", also to s. 43(1) which defines " actual cost and also to sub-s. (6) of s. 43 which provides the " written down value ". Section 43A is a section upon which the Tribunal has repelled the assessee's claim. Section 43A provides as follows : " 43A. Special Provisions consequential to changes in rate of exchange of currency. -(1) Notwithstanding any thing contained in any other provision of this Act, where an assessee has acquired any asset from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange at any time after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment towards the whole or a part of the cost of the asset or for repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence to the rate of exchange specified therein. (2) The provisions of sub-section (1) shall not be taken into account in computing the actual cost of an asset for the purpose of the deduction on account of development rebate under section 33." In the Finance (No. 2) Bill, 1967, which introduced s. 43A, cl. 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 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, as 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 and subsequent assessment years. Similar inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision 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 art. 278. While art. 372 is subject to art. 278, art. 278 operates in its own sphere in spite of art. 372. The result is that art. 278 overrides art. 372; that is to say, notwithstanding the fact that a pre-Constitution taxation law continues in force under art. 372, the Union and the State Governments can enter into an agreement in terms of art. 278 in respect of Part B States depriving the State law of its efficacy. In one view, art. 277 excludes the operation of art. 372, and in the other view, an agreement in terms of art. 278 overrides art. 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 'works contracts'." It states in essence that in spite of what is contained previously this clause wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the devaluation of Indian currency, there was an increase of Rs. 48,342 in the actual cost of the acquisition of certain Russian machinery. He negatived the claim for development rebate on the increase in cost due to change in rate of exchange as, in his view, s. 43A(2) of the I.T. Act, 1961, excluded such changes in actual cost for the purpose of granting development rebate under s. 33. This was upheld by the AAC. The Tribunal, however, held that the expression " actual cost " as defined in s. 43(1) applied to the present case and, hence," the assessee was entitled to include the sum of Rs. 48,342 as part of the actual cost for claiming development rebate. On a reference to the High Court, at the instance of the department, the Madras High Court held that as the effect of sub-s. (2) of s. 43A of the I. T. Act, 1961, was only to exclude the applicability of sub-s. (1) thereof to the computation, of the actual cost for determining the development rebate allowable under s. 33, in computing the actual cost of an asset for the purpose of development rebate, the only statutory provision relevant was s. 43(1) defining " actual cost " which, admittedly, included the sum of Rs. 48,342. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CI on June 25, 1965, where' under the latter agreed to lend moneys to the assessee in foreign currencies to pay the price of the imported machinery and the assessee agreed to pay back the moneys in the same currencies in which they were borrowed. Besides, the assessee also agreed to pay interest, redemption premium, commitment charges, etc., in foreign currency. Even if ICICI exercised the option to accept payment in rupees in lieu of foreign currencies, the rupee sum was to be determined by actual cost to ICICI of purchasing with rupees the respective amounts of the foreign currencies becoming due and payable. Now, in that case, on behalf of the revenue, it was conceded that the contract was for payment in the foreign currency and it was further stipulated that in determining the valuation it must be paid for by the buyer. Even though there was no specific clause signifying the payment of difference, the payment of the money had to be made according to the facts found by the Tribunal in terms of dollars. In aid of the submission, the counsel for the revenue drew out attention to Sch. 6, the form of balance sheet, of the Companies Act, 1956, where Expln. 2 has dealt with this que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considerations might apply. In so far as the decision took the view that in respect of all devaluation cases irrespective of whether the stipulated payment in the matter of foreign currency should be made under s. 43A alone, with great respect we are unable to agree and we prefer to adhere to the former view of the Madras High Court and the other view of the Gujarat High Court as mentioned hereinbefore. On behalf of the assessee, it was contended that s. 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 s. 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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