1998 (3) TMI 95 - HC - Income Tax

Summary

Issues Involved:
1. Entitlement to investment allowance on additional liability due to exchange rate fluctuation.
2. Entitlement to deduction u/s 35B for packing credit interest.
3. Classification of additional liability due to exchange rate fluctuation as revenue expenditure.

Summary:

Issue 1: Investment Allowance on Additional Liability due to Exchange Rate Fluctuation
The Tribunal concluded that the assessee was entitled to investment allowance on the additional liability of Rs. 80,414 arising due to foreign exchange rate fluctuations for machinery payments. However, the High Court disagreed, stating that the investment allowance is quantified in the year the machinery is installed and put to use. Any subsequent exchange rate fluctuation does not alter the already quantified investment allowance. The High Court held that the Tribunal erred in granting investment allowance on the additional liability, answering the question in the negative, in favor of the Revenue.

Issue 2: Deduction u/s 35B for Packing Credit Interest
The Tribunal accepted the assessee's claim for deduction u/s 35B for interest on packing credit. However, the High Court referred to its earlier decisions in CIT v. Jay Industries and CIT v. Girdharlal Vithaldas, which held that such expenditure incurred in India for supplying goods outside India does not qualify for weighted deduction u/s 35B. Consequently, the High Court ruled that the Tribunal erred in allowing the deduction, answering the question in the negative, in favor of the Revenue.

Issue 3: Classification of Additional Liability due to Exchange Rate Fluctuation as Revenue Expenditure
The Tribunal upheld that the additional liability of Rs. 80,414 due to exchange rate fluctuations for machinery loans was capital expenditure, not revenue expenditure. The High Court agreed, citing the Supreme Court's decision in Sutlej Cotton Mills Ltd. v. CIT, which distinguished between liabilities of a capital nature and those on revenue account. The High Court concluded that the additional liability was capital in nature and should be added to the actual cost of the asset u/s 43A(1). Thus, the question was answered in the affirmative, against the assessee and in favor of the Revenue.

Conclusion:
The High Court ruled against the assessee on all three issues, favoring the Revenue's stance on investment allowance, deduction u/s 35B, and the classification of additional liability due to exchange rate fluctuations.