TMI Blog1977 (7) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... repay the loan in the same currencies in agreed instalments commencing from Tune 1, 1967. In the calendar years 1965 and 1966, the assessee acquired and installed some of the imported machineries in its textile unit. Some time in the middle of the relevant previous year, that is to say, on June 6, 1966, there was devaluation of the Indian rupee. As a result of the devaluation, the liability of the assessee in respect of the repayment of the instalments of loans borrowed by it from the ICICI for acquiring and installing the machineries in the calendar years 1965 and 1966 increased by Rs. 13,41,158 and an entry to that effect was made in the machinery account in the books of account of the assessee which were maintained according to the mercantile system. In the course of the proceedings for assessment to income-tax for the relevant assessment year, the assessee contended that the actual cost of the machinery to the assessee had increased on account of devaluation and that the whole of the additional liability incurred by it as aforesaid was required to be taken into account for the purpose of allowing depreciation allowance and that for the purpose of allowing development rebate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue expenditure under section 37 of the Act. The Tribunal rejected even this alternative contention and dismissed the appeal. At the instance of the assessee, the Tribunal his referred the following two questions for the opinion of this court : " (1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee would not be entitled to development rebate on the additional liability it incurred as a result of devaluation ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in rejecting the contention of the assessee that the additional liability as a result of devaluation is deductible from business profits either under section 28 or 37 of the Income-tax Act, 1961 ?" At the outset it may be made clear that on behalf of the assessee it was stated at the bar that the second question was not pressed. Under the circumstances, it is not necessary to express any opinion on the said question. In order to answer the first question, it would be necessary to refer briefly to the relevant provisions of the Act. Section 14 classifies income under various heads for the purposes of charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctly or indirectly by any other person or authority. There is a proviso and there are certain Explanations to the said subsection which are not relevant for the purposes of this case and they need not be read. Then comes section 43A which is relevant for the purposes of this case. It reads and always read as under : " 43A. (1) Notwithstanding anything 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 the asset (being in either case the liability existing immediately before the date on which the change in the rate of exchange takes effect), the amount by which the liability aforesaid is so increased or reduced during the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... development rebate under section 33." Having read the relevant statutory provisions let us now turn to the agreement entered into between the assessee and the ICICI. On a scrutiny of the said agreement, the following broad features emerge : (a) the ICICI agreed to grant a loan in foreign currencies equivalent to U. S. $390,000 (about Rs. 18.60 lakhs) to enable the assessee to meet the cost of a part of the equipment which it had to import from abroad in order to expand its spinning capacity and to renovate and modernise some of its manufacturing and processing departments ; (b) the actual amount of loan advanced in foreign currencies as aforesaid was determined by the International Bank for Reconstruction and Development (IBRD) in terms of a loan agreement between IBRD and ICICI; (c) if IBRD was able to provide to ICICI one or more of the foreign currencies required only after purchasing such foreign currency with some other currency, then the part of the loan so provided was repayable in that currency and the amount so repayable was to be the amount paid by IBRD on such purchase; (d) the repayment of the principal amount of loan and the payment of interest, redempt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pay the principal amount and other incidental charges to the ICICI from whom the assessee had borrowed monies in foreign currencies to pay the purchase price, and, therefore, such additional liability could not be taken into account in computing the actual cost of the asset to the assessee ; and (ii) that section 43A, which contains a non-obstante clause and which is a special provision occupying the field relating to increased liability on account of change in the rate of exchange at any time after acquisition of a capital asset must be treated as having superseded the provisions of section 33 and, therefore, even if such increased liability was comprehended within the meaning of the expression "actual cost " occurring in section 33, the special provision of section 43A must prevail over section 33 and, having regard to the provisions of sub-section (2) of section 43A, such increased liability cannot be taken into account in computing the actual cost of an asset for the purpose of deduction on account of development rebate. In order to resolve this controversy, it would be necessary to ascertain first as to on what basis precisely a deduction on account of development rebate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the cost of construction, similarly to legal expenses incurred on acquiring property or brokers' charges on purchasing investments. The final cost of construction work is accordingly made up of the cost of the machinery, materials, labour, supervision and establishment charges plus interest on the capital employed,which, but for its employment in that way, would be invested in good securities paying a reasonable rate of interest. Interest which could be taken into account in computing actual cost included not only actual interest paid but also interest payable in respect of borrowings which were used to finance capital expenditure. In other words, according to normal rules of accountancy as explained in those standard books, all expenditure incurred by a newly started company, before the production commences which is necessary to bring a capital asset into existence and to put it in working condition, is to be taken into account in computing the cost of such asset. Having referred to this recognised accountancy practice, the Supreme Court observed is under --See [1975] 98 ITR 167, 175 (SC) : " It would appear from the above that the accepted accountancy rule for determining t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany had commenced its business in September, 1954. In June, 1953, it had borrowed certain amount on debenture from the public, on which interest was to run from the date of borrowal. The amount so borrowed was used along with the finance internally generated by the company in setting up a refinery for which plant and machinery were imported from abroad and which started working on September 1, 1954. The assessee-company capitalised all the expenses during the period of construction, including interest amounting to Rs. 23,53,284 which had accrued from the date of borrowing to the date of the commencement of the business on the aforesaid loan. The question which arose in the context of these facts was whether the assessee was entitled to treat the sum of Rs. 23,53,284 being the amount of interest paid on moneys borrowed, as part of the actual cost for the purposes of depreciation allowances and development rebate. The Supreme Court, in the light of the interpretation placed by it upon the words " actual cost ", held that the interest incurred before the commencement of production on money borrowed for the purpose of acquiring and installing the machinery and plant could be validly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see in respect of the repayment of the loan, relatable to the machinery acquired and installed in the previous year, increased by Rs. 8,67,437 which assessee was maintaining its accounts according the mercantile system and it made an entry in its books of account in respect of such additional liability although the first instalment of repayment of loan was to commence from June 1, 1967. The claim of the assessee was that for the purpose of allowing development rebate, the additional liability in the sum of Rs. 8,67,437, which was relatable to the cost of the machinery acquired in the calendar year 1966 (previous year) was required to be taken into account. The claim was disallowed on the grounds set out earlier. The question, therefore, is whether the additional liability, which the assessee incurred on account of devaluation of rupee in the midst of the relevant previous year, in relation to the repayment of loan, which it had borrowed for acquiring the imported machinery during the said year, constituted an element in the actual cost of such machinery to the assessee for the purpose of allowing development rebate under section 33. It appears to us that the answer to the questio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n increased liability respect of the repect of loan cannot affect the purchase, and (ii) it is incurred before the asset was acquired. The revenue urged that these conditions are not satisfied herein. We are unable to agree. There are two prongs of this argument and let us examine each of them separately. The first prong of the argument makes an artificial distinction which is unrealistic and it also suffers from the fallacy of equating " cost " with " price ". The loan, in a case like the presents is borrowed in order to pay the price of the machinery in foreign currency. It is an unavoidable incident of purchase of machinery from a foreign market where price has to be paid in the currency which is current in such market. Employment of such borrowed monies for acquiring a capital asset and incidental expenditure incurred for the purpose of such borrowing prior to the commencement of production must be deemed to be capital outlay, having regard to the well settled principles. Whether someone had advanced the foreign currency to make the purchase of machinery or money was found by the assessee itself for the said purpose, is a matter of no consequence and it does not render the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pay off a prior debt which they had incurred in order to purchase a capital asset and partly for augmenting the working funds of the company. It is in the context of those facts that it was held that : (a) the loan obtained was not an asset or advantage of an enduring nature ; (b) that the expenditure was made for securing the use of money for a certain period; and (c) that it is irrelevant to consider the object with which the loan was obtained. Consequently, in the circumstances of the case, the expenditure was held to be revenue expenditure. In Challa Palli's case [1975] 98 ITR 167 (SC), the Supreme Court referred to the decision in India Cements Ltd.'s case [1966] 60 ITR 52 (SC) and pointed out that the loan in that case was obtained, not before the commencement of the production but at a later stage and that, therefore, the incidental expenses could not have been capitalised. In the present case, these features are not present. In our opinion, therefore, neither of the decisions on which the revalue relies is helpful to it. The second prong of the argument is equally untenable and in advancing the same, the terms of the loan and the circumstances under which the liability i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll the machinery necessary to commence production was fully installed in the year in question so that the newly established unit could have gone into production. Schedule II of the loan agreement which is a part of the statement of the case contains a recital that the commercial production from the new equipment is expected to commence from January, 1967 ". This argument, therefore, is misconceived. In the next place, an argument precisely in these terms does not appear to have been advanced before the Tribunal and it cannot be said to arise out of its order. In the last place, even assuming that the machinery in question had gone into production prior to the date of devaluation, the contention aforesaid founded on such eventuality cannot assist the revenue for the very reasons which we have just given. The increased liability on account of devaluation was within the contemplation of the parties as an integral part of the original transaction and the assessee must be held to have incurred such liability in respect of each instalment no sooner it started drawing upon the loan account, since the assessee maintained its accounts according to mercantile system. We do not think, therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view that since the payment of interest was to start after the assessee-company went into production, the sum of Rs. 3,65,040 could not have been allowed to be capitalised and no depreciation of allowance and development rebate could have been allowed on the said sum. Meanwhile, on account of devaluation of rupee on June 6, 1966, true assessee-company was required to incur additional liability of Rs. 4,62,851 including interest liability of Rs. 32,291 in respect of the aforesaid transaction. The assessee capitalised this additional amount in the previous year relevant to the assessment year 1967-68 and claimed depreciation allowance thereon. The claim for depreciation on the amount of additional interest was disallowed by the Income-tax Officer and the Appellate Assistant Commissioner. Before the Tribunal, the assessee succeeded in respect of both the amount of interest, namely, Rs. 3,65,040 and Rs. 32,291. The matter ultimately came to this court and two questions arose for its consideration. First, whether the amounts of Rs. 3,65,040 and Rs. 32,291 were capital expenditure or revenue expenditure and, secondly, whether depreciation allowance could be allowed on those amounts. It w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lli's case [1975] 98 ITR 167 (SC), the principle was approved that interest incurred before the commencement of production on borrowed money could be capitalized and added to the cost of the fixed assets which had been created as a result of such borrowings. Interest " incurred " meant actual interest paid or payable in respect of borrowings which are used to finance capital expenditure. Since the assessee-companv was maintaining its accounts according to mercantile system of accounting, even if the disbursements of interest might have take place in future, the obligation to pay interest must be treated as having been incurred immediately when according to the agreement, machinery and plant were supplied and transferred to the assessee-company. The assessee had in fact debited to the plant and machinery account the price of plant and machinery and interest in the calendar year 1962. The fact that disbursement of the liability was spread over a period of years was held to be of no effect. Having regard to the nature of the transaction and the circumstances of the case it was held that both the amounts of interest were required to be treated as capital expenditure on which depreciati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rate of exchange. However, a closer scrutiny will show that it applies only to such cases in which such increase or decrease arises for the first time, in consequence of a change in the rate of exchange at any time after the acquisition of the asset. Therefore, cases like the present where the increased liability is in fact incurred prior to acquisition of the asset and it, therefore, becomes part of the cost of acquisition in its ordinary signification, are not within the ambit of the said section. The said section may be attracted in cases such as, for example, when an assessee maintains his accounts on cash receipt basis and the increased liability in respect of repayment of instalments of purchase price or loan accrues or arises for the first time after the acquisition and installation of the asset. The section takes care of such cases and to give relief in such cases it gives an artificial meaning to the expression " actual cost of the asset ". In our opinion, therefore, the argument based on the enactment of section 43A cannot help the revenue. The last contention on behalf of the revenue--and this was also the view of the Tribunal--was that section 43A was a special pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be understood as operating to set aside as no longer valid anything contained in relevant existing laws which is inconsistent with the new enactment." (Underlining supplied). This is the approach to be adopted in the construction of the non-obstante clause in section 43A(1) and in judging its effect on all other relevant provisions of the Act which preceded the same. We have already adverted to the provisions of the enacting portion of sub-section (1) of section 43A. They do not cover cases where such increased liability is incurred before acquisition and it becomes part of the cost of the asset within the ordinary meaning of the said expression. Development rebate and depreciation allowance will be available thereon de hors section 43A(1) in such cases. The provisions of sections 32 and 33, which proceed upon the concept of " actual cost " in the sense in which we have explained above, being thus independent of and not inconsistent with the enacting part of sub-section (1) of section 43A, the question of subsection (1) of section 43A operating to set aside is no longer valid anything contained in sections 32 and 33 on the same subject-matter does not arise. In view of the for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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