TMI Blog1979 (2) TMI 56X X X X Extracts X X X X X X X X Extracts X X X X ..... machinery by the assessee, due to fluctuation in exchange rate, daring the accounting years ending with December 31, 1962, and December 31, 1964, are allowable as revenue expenditure for the assessment years 1963-64 and 1965-66, respectively ? " The assessee is a public limited company, carrying on business in the manufacture and sale of staple fibre, rayon yarn, etc. It has entered into an agreement with M/s. Italiviscosa Eastern Trading S. P. A. (hereinafter referred to as " the Italian company ") on December 3, 1958, for purchase of machinery of the total value of pound 11,397,000 (sic) working out to Rs. 2,93,25,000.39 in Indian currency at the then ruling rate of exchange. The agreement provided that the Italian company should invoic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 2,98,15,917.41, with reference to the instalments during the year ended on December 31, 1962. Similarly, the assessee had to pay a large amount on account of fluctuations in exchange in other instalments in 1964. The result was that the assessee had to pay in the two years under reference, Rs. 1,93,509 and Rs. 1,08,302 in excess of the amount that would be due if the exchange rates were stationary as at the time when the agreement was entered into. In the returns for these assessment years, viz., 1963-64 and 1965-66, the assessee claimed these two amounts, viz., Rs. 1,93,509 and Rs. 1,08,302, as difference in exchange incurred on revenue account. The ITO held that this expenditure related to acquisition of machinery, a capital asset, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lire in favour, respectively, of the Italian company and of the Indian company. " The reason as to why the amount due as a result of the exchange fluctuation is provided for is set out in the agreement itself. It states that it is in consideration of the fact that the quotations and prices were given by the Italian company in U.S.A. dollars. Thus, the amounts actually paid by the assessee related to the purchase price of the machinery. The price was originally fixed on the basis of the prevailing rate of exchange between the Indian currency and the two foreign currencies, viz., dollar and sterling. However, it was contemplated by the parties that there may be fluctuations in the rates of exchange, and it was, therefore, provided that apa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and liable to be taken into account for the purpose of allowance of depreciation, etc., but, in respect of the entire period, i.e., prior to the enactment of s. 43(A), there would be no justification for the disallowance. Section 43A was inserted by s. 17 of the Finance (No. 2) Act of 1967 with effect from 1st April, 1967. The fact that Parliament provided for the fluctuation in the exchange rates being taken into account in arriving at the cost of the asset does not in any way affect the point in issue before us. The point in issue before us has to be considered in the light of the actual nature of payment that had to be made and in the light of the provisions in force. As seen already, the nature of payment is only the payment of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f exchange and that the question whether the loss suffered by the appellant was a trading loss or a capital loss could not be answered unless it was first determined whether the two amounts of Rs. 25 lakhs and Rs. 12 1/2 lakhs were held by the assessee on capital account or on revenue account. The matter was, therefore, remitted for consideration of the question whether the amounts were held on capital account or on revenue account. That case also held that if the loss was in respect of a capital asset, it would be a capital loss. In the present case, there can be no dispute about the fact that the amount which was payable to the foreign company was on capital account, and, therefore, any fluctuation in the exchange rate would have to be ca ..... X X X X Extracts X X X X X X X X Extracts X X X X
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