Andhra Pradesh H.C : Whether, on the facts and in the circumstances of the case, the loss of Rs. 10,485 incurred by the assessee owing to exchange fluctuations in connection with the purchase of machinery from abroad is allowable in computing the assessee’s income ?

Sections 43A, 37, 28

Asst. Year 1973-74

Counsel Appeared

Y. Ratnakar, for the Assessee : M. Suryanarayana Murthy A& A.V. Krishna Koundinya, for the Revenue

K. RAMASWAMY, J. :

At the instance of the assessee, the following questions have been referred under s. 256(1) of the IT Act, 1961 (Act 43 of 1961 ), for short “the Act” :

“(i) Whether, on the facts and in the circumstances of the case, the loss of Rs. 10,485 incurred by the assessee owing to exchange fluctuations in connection with the purchase of machinery from abroad is allowable in computing the assessee’s income ?

(ii) Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction of surtax payable under the Companies (Profits) Surtax Act as business expenditure under s. 37 of the IT Act or alternatively as expenditure incidental to carrying on of business deductible under s. 28 of the Act while computing income under the head ‘Business’ “

2. The assessee, during the previous year relevant to the asst. yr. 1973-74, incurred a sum of Rs. 10,485 towards the liability to repay the loan taken from the National and Grindlays Bank Ltd. in foreign exchange for the purpose of purchasing machinery from abroad. This amount represents the value of the exchange rate. Therefore, it claimed allowance as a deduction treating it as a revenue expenditure. The ITO disallowed it and, on appeal, it was confirmed. On further second appeal, it was confirmed by the Tribunal. Thus’, at the instance of the assessee, the reference has been made. Equally, the assessee also claimed deduction of surtax payable under the Companies (Profits) Surtax Act, 1964, and it was disallowed.

3. With regard to the second question, it is already covered by a decision of this Court rendered in R. C. No. 133 of 1979 on January 28, 1987 ( Vazir Sultan Tobacco Co. Ltd. vs. CIT (1987) 63 CTR (AP) 331: (1988) 169 ITR 35). The second question is, therefore, answered against the assessee and in favour of the Revenue.

4. With regard to the first question, the facts are not in dispute. The assessee, with a view to purchase second-hand machinery, approached, with the permission of the Central Government and the Reserve Bank of India, the National and Grindlays Bank Ltd., London, and borrowed money in pound sterling. The assessee had to pay the value thereof in pound sterling in instalments. Before the final instalment was paid, there was fluctuation in the exchange rate. As a result, the assessee had to pay an additional sum of Rs. 10,485 which he accordingly paid during the relevant previous year and sought it as allowance. The relevant portion of s. 43A(1) of the Act postulates thus : “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 … 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 … the amount by which the liability aforesaid is so increased or reduced during the previous year shall be added to, or, as the case may be, deducted from, the actual cost of the asset as defined . . . . the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset as aforesaid.” Thus, it is clear that any amount expended to acquire any asset from a country outside India for the purpose of the business and any amount paid either in whole or in part borrowed by an assessee from any person directly or indirectly in any foreign currency specifically for the purpose of acquiring assets shall be treated as capital in nature. The fluctuation is one of the factors to be taken into account to determine the value of the capital asset and thereby has the advantage thereof in its value reduction. Therefore, the mere fluctuation in the rate of exchange is not a ground for the assessee to claim allowance as a revenue expenditure. s. 43A of the Act itself provides for the fluctuation in the exchange rate and, therefore, the contention of the assessee that it should be treated as revenue expenditure is devoid of substance. It is accordingly negatived. The same is the view taken in CIT vs. Tata Locomotive & Engineering Co. Ltd. 11966) 60 ITR 405 (SC) by the Supreme Court and in CIT vs. South India Viscose Ltd. ( 1979 ) 120 ITR 451 (SC) and CIT vs. South India Viscose Ltd.(1986) 55 CTR (Mad) 383: (1987) 163 ITR 674 (Mad) by the Madras High Court. We accordingly, hold that the amount expended by the assessee is capital in nature. It cannot, therefore, be deducted as revenue expenditure and allowance cannot be granted The reference is accordingly answered against the assessee and in favour of the Revenue. There shall be no order as to costs.

On question No. (ii), in similar circumstances in T. T. (P) Ltd. vs. CIT and Amco Batteries Ltd. vs. CIT (1984) 150 ITR (St.) 79, the Supreme Court granted special leave in S. L. P. (Civil) Nos. 274445 of 1984 and 2739 of 1984 to the assessee against the judgments dated October 25, 1983 of the Karnataka High Court in I. T. R. C. No. 76 and 77 of 1982 (see below) and dated November 7, 1983 in I. T. R. C. No. 51 of 1979 (infra p. 537) to appeal to the Supreme Court. Therefore, on the second question, we grant leave to the assessee to appeal to the Supreme Court.

[Citation : 177 ITR 532]