1995 (10) TMI 35 - HC - Income Tax

Business Expenditure, Capital Or Revenue Expenditure, Fluctuation In Rate, Foreign Currency, Foreign Exchange

Summary

Issues Involved:
1. Exchange difference as revenue expenditure.
2. Royalty paid on the trade mark as revenue expenditure.
3. Interest under section 220(2) of the Income-tax Act as revenue expenditure.

Issue-wise Detailed Analysis:

1. Exchange Difference as Revenue Expenditure:
The Tribunal found that the assessee purchased machinery in 1965 and 1966, with the liability discharged through a foreign exchange loan from ICICI. Due to foreign exchange fluctuations, the assessee paid an extra Rs. 1,32,993, which was claimed as revenue expenditure. However, the court referenced previous judgments (New India Industries Ltd. v. CIT and CIT v. Hindustan Aluminium Corporation Ltd.) and section 43A of the Income-tax Act, 1961, which classify such payments due to foreign exchange fluctuations as capital expenditure. Therefore, the court held that the Tribunal was incorrect, and the exchange difference of Rs. 1,32,993 is not allowable as revenue expenditure. The answer to question No. 1 is in the negative, favoring the Revenue.

2. Royalty Paid on the Trade Mark as Revenue Expenditure:
The Tribunal found that the assessee paid Rs. 16,237 as royalty for using the trade mark "Tebilized" under an agreement with Mettur Beardsell Limited. The Income-tax Officer disallowed this claim, but the Commissioner (Appeals) and the Tribunal allowed it, stating that the payment was for business purposes and not for acquiring any permanent asset. The court considered various judgments, including CIT v. Ciba of India Ltd., Empire Jute Co. Ltd. v. CIT, and Alembic Chemical Works Co. Ltd. v. CIT, which emphasized the purpose of the expenditure and its business context. The court concluded that the royalty payment was for improving the quality and marketability of the existing product, thus qualifying as revenue expenditure. The answer to question No. 2 is in the affirmative, favoring the assessee.

3. Interest Under Section 220(2) of the Income-tax Act as Revenue Expenditure:
The court referenced its decision in Saurashtra Cement and Chemical Industries Ltd. v. CIT, which relied on the Supreme Court's view in Smt. Padmavati Jaikrishna v. Addl. CIT. It was held that interest paid under section 220(2) of the Act for late payment of income-tax is not deductible as revenue expenditure, distinguishing it from interest on late payment of indirect taxes like sales tax or excise duty. Therefore, the court concluded that the assessee is not entitled to claim this interest as revenue expenditure. The answer to question No. 3 is in the negative, favoring the Revenue.

Conclusion:
The court provided a detailed analysis of each issue, ultimately ruling in favor of the Revenue for issues 1 and 3, and in favor of the assessee for issue 2. There shall be no order as to costs.