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Issues involved: Interpretation of whether the excess amounts paid to an Italian company due to fluctuation in exchange rates while honoring bills of exchange for machinery purchase are allowable as revenue expenditure for specific assessment years.
Summary: The case involved a public limited company entering into an agreement with an Italian company for the purchase of machinery, with payments to be made in pound sterling based on prevailing exchange rates. Due to fluctuation in exchange rates, the company had to pay excess amounts totaling Rs. 1,93,509 and Rs. 1,08,302 during specific accounting years. The company claimed these amounts as revenue expenditure, but the Income Tax Officer (ITO) considered it capital expenditure related to machinery acquisition. The Appellate Authority Commission (AAC) allowed the deduction, which was upheld by the Tribunal citing a Supreme Court decision. The court analyzed the agreement clauses, stating the excess payments were part of the purchase price due to exchange rate fluctuations. The court rejected the argument that the payments were discharge of a prior liability and noted the subsequent enactment of section 43A did not affect the capital nature of the excess payments. Referring to a Supreme Court case, the court determined the excess payments were capital in nature, not eligible for deduction as revenue expenditure. The court distinguished another Supreme Court case involving interest payments, concluding the excess payments in this case were not similar. Ultimately, the court ruled against the assessee, denying the deduction of the excess amounts as revenue expenditure. This judgment clarifies the distinction between revenue and capital expenditure in the context of exchange rate fluctuations affecting purchase price payments, emphasizing the capital nature of such excess payments.
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