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TMI Blog1988 (1) TMI 64X X X X Extracts X X X X X X X X Extracts X X X X ..... e had purchased plant and machinery from M/s. General Electric Company, New York, on deferred payment basis. The payment of the instalments was to be made in US Dollars, and not in Indian currency, as per the agreement under which the plant and machinery had been purchased on deferred payment basis. In the accounting year relevant to the assessment year 1976-77, the assessee had to remit $ 4,08,324 to M/s. General Electric, New York, on account of the instalment of the unpaid price of plant and machinery. In its books, the assessee-company had capitalized the cost of plant and machinery (including interest payable on deferred instalments) at the rate of exchange prevalent at the time when the plant and machinery were purchased. The rate of exchange at that time was Rs. 7,279 per dollar. The cost price of the plant and machinery had been entered by the assessee in its books of account by converting into rupees the dollars payable by it at this rate of exchange. Since then, the rate of exchange underwent variation. The rate of exchange, at the time of remittance of the instalment of $ 4,08,324, was Rs. 8.9874 per dollar. As stated above, the rate of exchange, when the plant and machi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the assessee is entitled to get depreciation and development rebate on this capital expenditure. 7. We have considered the matter carefully. As per the agreement, on the basis of which plant and machinery had been obtained by the assessee-company on deferred payment basis, the instalments of unpaid purchase consideration and the interest thereon were to be paid in dollars. The rate of exchange, when the plant and machinery were obtained, was Rs. 7.279 per dollar. It was at this rate that the assessee converted the dollars that were payable on account of the purchase price of plant and machinery (including interest payable on deferred instalment) into rupees and the cost of the plant and machinery was entered in the books of account on that basis. However, as a result of the fluctuations in the rate of exchange, at the time of making remittance on account of the instalments of the unpaid consideration, the assessee had to pay rupees more than the rupees which had been entered in the books as cost. The question that has arisen for consideration is whether this additional liability should be allowed as a deduction on revenue account or should this be considered as being on capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or not in computing the profit will depend on whether the expenditure is on capital account or revenue account. It is the nature and character of the expenditure which would determine the question. ** ** ** .... It was at the point of repayment of the loan that the assessee had to provide an extra amount in rupees by reason of the fluctuation in the rate of exchange. Further, the assessee had purchased a capital asset and the purchase price was converted into loan which was repayable in instalments. Thus the expenditure was on capital account and was not deductible." The Supreme Court has dismissed the assessee's Special Leave Petition against the judgment of the Calcutta High Court [1988] (Bharat General Textile Industries v. CIT [SLP (Civil) No. 15202 of 1986]). 10. We may also refer to the decision of the Supreme Court in the case of CIT v. Tata Locomotive Engineering Co. Ltd. [1966] 60 ITR 405. In that case, the Hon'ble Supreme Court had laid down that where profit or loss arising from change in the exchange rate of foreign currency was on the amounts outstanding in connection with the purchase of capital goods, the profit and loss was of the nature of capital. 11. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of fluctuation in the rate of exchange, was on capital account. The argument advanced on behalf of the assessee that, in view of the decision of the Supreme Court in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52, the expenditure in connection with the repayment of the loan was allowable, was not found to be acceptable. In the case of India Cements Ltd., it was held by the Supreme Court that expenses like stamp duty, registration fees, etc., incurred for raising a loan, regardless of the purpose for which the loan was taken, were allowable as revenue expenses. By analogy, it was argued on behalf of the assessee that expenses in connection with the repayment of the loan were also allowable. The Tribunal, however, held that there was a material distinction between the nature of the expenditure incurred in obtaining the loan and the expenditure incurred at the time of the repayment of the loan. It was held by the Tribunal that, whereas for the allowance of the expenditure incurred in obtaining the loan, it was not necessary to enquire whether the loan was used for acquiring the capital asset or current asset, such as stock in trade, but the expenditure incurred for repaying th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital assets, the loss is of the capital nature. The CIT (A) had given relief for the assessment years under consideration on the basis of the Tribunal's order dated 25-2-1981 in ITA No. 2084 (All.) of 1979, pertaining to assessment year 1973-74 in the case of the assessee. The law has changed since then and hence with respect we will differ with the view taken by the Tribunal earlier. Respectfully following the decisions which have been discussed above, it is held by us in the present appeals, that the CIT (A) was not justified in allowing the loss arising on the payment of the instalment of the unpaid purchase price of machinery on account of the fluctuation in the rate of exchange as on revenue account. It is held by us that the loss is of capital nature and a deduction for it in the computation of the total income of the assessee cannot be given. 14. Another important aspect is to be taken into consideration. From the facts on records, it becomes apparent that the assessee-company had purchased the machinery on deferred payment basis. The company had not taken a loan from any third party to pay for the price of the machinery to the foreign supplier. It was paying instalments o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vious year, then, in respect of that previous year, a sum by way of development rebate as specified in clause (b)." From the above, it is clear that deduction for development rebate is allowed in the year in which the machinery or plant was installed and put to use or in the immediately succeeding year, if the machinery was first put to use in that year. Development rebate cannot be allowed in any later year. Development rebate is to be allowed on the 'actual cost' of the machinery or plant. In the case under consideration, machinery had been installed many years back. Development rebate had been allowed on the actual cost as entered by the assessee in its books of account, by converting into rupees the dollars payable for the purchase of the machinery, at the rate of exchange existent at that time. If, in a subsequent year, some additional rupees are paid by the assessee, there is no provision for allowing further development rebate on the additional amount paid. The question of allowing development rebate for the subsequent year in which additional liability was incurred does not arise, as development rebate can only be given for the year in which the machinery is installed an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee due to devaluation of the rupees was Rs. 4.27 crores. The assessee claimed development rebate on the total amount of the Indian currency, inclusive of the additional liability incurred on account of the devaluation of the Indian rupee. The Department was of the view that inclusion of the additional liability on account of devaluation for calculating the "actual cost" of the machinery for the purposes of allowing development rebate was not permissible. The Department was of the view that the general provisions about the actual cost contained in section 33 read with section 43 would not apply in view of the specific provisions of section 43A. According to the Department, there was a specific provision made in section 43A to deal with the cases where an additional liability arose on account of the fluctuation in the rate of exchange and hence this specific provision excluded the operation of section 43. As per sub-section 2 of section 43A, the additional liability incurred by the assessee consequent upon the devaluation of currency was not to be included for ascertaining the "actual cost" for the purpose of allowing development rebate though it has to be included for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost." Hence, we turn down the claim of the assessee for the allowance of development rebate. 20. We will, however, accept the claim of the assessee for the allowance of depreciation on the additional expenditure incurred on account of the fluctuation in the rate of exchange in view of the provisions of sect ion 43A. This section provides for the recomputation of the cost for the purposes of depreciation where as a result of change in the rate of exchange there is an increase or reduction in the liability of the assessee in terms of Indian rupees to pay the price of any asset payable in foreign exchange or to repay moneys borrowed in foreign currency specifically for the purposes of acquiring the asset. But, in view of sub-section (2) of section 43A, the claim of the assessee for development rebate cannot be entertained. 21. Another ground in these appeals is that the CIT (A) was not justified to vacate the disallowance of a portion of the interest, as had been made by the IAC (Asstt.). The assessee had borrowed funds from United Commercial Bank. For the assessment year 1976-77, the assessee had paid interest of Rs. 8,88,987 to United Commercial Bank on account of the borrowin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1973) 89 ITR 17. The assessee carried the matter in appeal before CIT (A). The CIT (A) deleted the additions. The CIT (A) gave the finding that the moneys had been borrowed by the assessee for the purpose of its own business and non-realisation of the dues on account of supply of electricity to the holding company for a period of less than six months could not be said to amount to the diversion of borrowings by the assessee-company to the holding company. In the appeals filed before us, the Department has assailed this finding of the CIT (A). It was contended by the learned Departmental Representative that the non-realisation of the dues from the holding company in time was tantamount to the diversion of the funds borrowed by the assessee-company to the holding company and to that extent the borrowed funds could not be considered to have been utilised by the assessee-company for the purposes of its own business and, as such, interest relating to those borrowings could not be allowed as a deduction in the computation of the taxable income of the assessee-company. 22. On the other hand, the learned counsel for the assessee contended that the borrowings raised by the assessee-compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case under our consideration, there is no such diversion of the borrowed funds. We are not inclined to accept this view of the Department. The non-realisation of the dues for a period up to six months is a normal happening in business. The department has not made out that there is any device. The holding company also pays tax. If the holding company were to incur expenditure on payment of interest, it would have got a deduction for it in the computation of its own taxable income. Moreover, as far as the non-collection of the electricity duty is concerned, there is absolutely on justification to take an adverse view of it, as the assessee itself had not yet paid any duty to the State Government. 24. The authorised representative of the assessee had drawn our attention to the decision of the Bombay High Court in the case of CIT v. Bombay Samachar Ltd. (1969) 74 ITR 723. It had been held by the Bombay High Court : "The view that if the assessee had collected the outstandings which were due to it from others, it would have been able to reduce its indebtedness and thus save a part of the interest which it had to pay on its own borrowings, that the assessee would not be justi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years over UNABSORBED development years in the matter of set off. The CIT (A) had relied on the decision of the Income tax Appellate Tribunal, Madras Bench-B, in Seshasayee Paper Boards Ltd. v. ITO [1979] 2 Taxman 84 wherein it had been held that absorbed development rebate of earlier years was to be given priority over unabsorbed depreciation of earlier years. The Tribunal took not of the fact that the unabsorbed development rebate was to be carried forward only for a period of 8 years, whereas unabsorbed depreciation could be carried forward indefinitely. The tribunal stated : "It is also seen that there is no provision in the Act providing for any priority as between the abovementioned two allowances that are to be granted in computing the business income, namely unabsorbed development rebate of he earlier years and unabsorbed bed depreciation of earlier years. But there is a provision according to which unabsorbed development rebate can be carried for against the income during the course of 8 years. If it could not be absorbed against the income during the course of 8 years. It could not be allowed thereafter. There is no such description in the case of unabsorbed depreciat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any trading loss as it is ordinarily understand. The section is intended to give an incentive to businessmen to invest on new machinery or in modernising plant and equipment. In order to ran development the assessee has to satisfy certain other conditions which are provided under section 34 of the Act and the unabsorbed development rebate cannot be carried forward beyond eight years as provided by the Act. Hence, the unabsorbed development rebate cannot be treated under section 72(1) of the Act and given priority over the absorbed depreciation allowance of the previous years." 28. The Madras High Court also held accordingly in the case of CIT v. Coromandel Steels Ltd. [1981] 130 ITR 856 as under. "In order to earn development rebate the assessee has to satisfy the conditions prescribed by section 34. Thus, it is not an absolute or unconditional allowance. The allowance of the development rebate is so limited as to reduce the total income of 'nil'. In other words, it is not tested as one of the kinds of deduction contemplated by section 30 to 43. It stands in a class by itself The competition in the matter of allowance between unabsorbed business loss and unabsorbed depreciatio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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