1985 (4) TMI 29 - HC - Income Tax

Summary

Issues Involved:
1. Whether the additional expenditure incurred by reason of exchange fluctuation in respect of the payment of the instalments of loan in Japanese yen obtained for the purchase of machinery on deferred payment basis was capital or revenue expenditure?
2. Whether the assessee can claim as deduction the provision for payment of leave salary in the year under consideration?

Summary:

Issue 1: Exchange Fluctuation Expenditure
The assessee borrowed capital in Japanese yen for setting up a capital asset, repayable in instalments. Due to exchange rate fluctuations, the assessee incurred an additional expenditure of Rs. 8,939. The Income-tax Officer disallowed the deduction of this amount u/s 43A, treating it as capital expenditure. The Appellate Assistant Commissioner upheld this view, following the Tribunal's decision in Century Enka Ltd. However, the Tribunal later allowed the loss as revenue expenditure, distinguishing it from devaluation losses. The Tribunal's decision was influenced by its earlier order in Century Spinning Mills Limited and the Supreme Court's decision in India Cements Ltd. v. CIT [1966] 60 ITR 52.

The Revenue argued that there is no difference in principle between losses due to devaluation and exchange rate fluctuations, citing various decisions including CIT v. Tata Locomotive and Engineering Co. Ltd. [1966] 60 ITR 405 and Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1. The court held that the nature and character of the expenditure determine whether it is capital or revenue. Since the expenditure was incurred for repaying a loan used to purchase a capital asset, it was deemed capital expenditure. The court referred to Bestobell (India) Ltd. v. CIT [1979] 117 ITR 789 and Union Carbide India Ltd. v. CIT [1981] 130 ITR 351, concluding that the additional expenditure due to exchange fluctuation was capital expenditure.

Issue 2: Provision for Leave Salary
The assessee made a provision of Rs. 2,19,982 for accumulated leave salary, which was disallowed by the Income-tax Officer as contingent liability. The Appellate Assistant Commissioner upheld this view. The Tribunal, however, allowed the deduction, considering the liability as accrued and not contingent, referencing the Supreme Court's decision in Metal Box Co. of India Ltd. [1969] 73 ITR 53.

The court examined the leave rules, which allowed accumulation of leave up to 120 days and encashment under certain conditions. It found that the liability for leave salary arises only when an employee goes on leave or encashes the leave at retirement or termination. Citing decisions like Chhaganlal Textile Mills Private Ltd. v. CIT [1966] 62 ITR 274 and CIT v. Raj Kumar Mills Ltd. [1971] 80 ITR 244, the court held that the provision for leave salary was a contingent liability, not a present liability. The court also distinguished the case from CWT v. Prema Lakshman [1984] 150 ITR 170, where the liability was considered existing due to industry practice.

The court concluded that the provision for leave salary was not allowable as a deduction, answering the second question in the negative and in favour of the Revenue.