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TMI Blog1981 (8) TMI 93X X X X Extracts X X X X X X X X Extracts X X X X ..... ntered into an agreement dated 15-6-1971 with the Industrial Credit Investment Corporation of India Ltd. (ICICI) under which the latter granted certain loans in US dollars for the purpose of enabling the assessee to purchase machinery from abroad. The assessee was to repay the loan with interest in instalments in US dollars. In accordance with the above arrangement, the assessee obtained the loan, purchased the machinery and started repaying the instalments in US dollars as agreed upon. There were some other loan agreements also with similar terms and conditions. During the year under consideration, it so happened that the rate of exchange moved adversely to the assessee. In other words, the assessee had to pay a higher amount of rupees in order to repay the instalments fixed in terms of the US dollars because the US dollars became dearer in terms of rupees. The additional amount in terms of rupees that the assessee had to pay in order to repay the loan instalments came to Rs. 56,068 and the assessee claimed the said amount to be deducted as revenue expense while computing the income from its business. The ITO disallowed the claim of the assessee on the ground that the loan was b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment basis. What the assessee did was that it borrowed from ICICI and used the loan for purchasing the machinery from the foreign supplier. The assessee became indebted to the ICICI for the amount of the loan which was to be repaid in instalments in foreign currency. Whenever an instalment fell due for payment, the assessee had to pay the requisite amount of Indian currency necessary to buy the fixed amount of foreign currency. As the rupee value of the US dollars went up, the assessee had to pay certain extra amount in terms of rupees to repay the instalment which fell due during the previous year under consideration. He emphasised the fact that there was a distinction between paying in instalments the prices of the machinery directly to the foreign supplier and repaying a loan obtained from a third party. He pointed out that the interest on the loan as well as the commitment charges payable on the loan have been allowed as revenue expenses, and it was only the loan arising out of the fluctuation in the rate of exchange that has been disallowed as capital expense. 5. He referred to the decision in the case of India Cements Ltd. and stated that the said case laid down certain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital to acquire an asset. His point was that the position might have been different had the assessee been indebted directly to the supplier. But as the assessee had borrowed the loan from a third party, all expenses relating to the said loan becomes admissible expenditure on the authority of India Cements Ltd.'s case. In this connection, he referred to the decision in the case of CIT v. Tensile Steel Ltd. [1976] 104 ITR 581 (Guj.) wherein the interest on deferred payment of the purchase price was held to be a capital expense following the decision in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC) because it was a case of direct purchase from the supplier, He pointed out that the facts were similar in the case of Ballarpur Paper Straw Board Mills Ltd. v. CIT [1979] 118 ITR 613 (Bom.). 8. Further, he referred to the decision in the case of Addl. CIT v. Akkamba Textiles Ltd. [1979] 117 ITR 294 (AP) wherein the guarantee commission paid to acquire a loan on deferred payment basis, which was raised for purchasing assets for a going concern, was allowed as a revenue expense on the ground that it was related to the carrying on of the business in such a way that it m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hri Dastur that case was not concerned with expenses incurred in connection with acquiring or repaying a loan, which was the subject-matter of the decisions in the cases of India Cements Ltd. and Bombay Steam Navigation Co. Coming to South India Viscose Ltd. he stated that in that case a contract was entered into directly with the supplier of the machinery and the price was fixed tentatively, in the sense that it would vary according to the rate of exchange prevailing on the date of remitting the instalments. The facts of that case showed that the loss arose out of the contract itself and was not independent of it. Hence, the Court held that the loss has been incurred on the capital account. According to him, that case did not apply to the facts of the present case where a loan was taken from a third party on different terms and conditions. In other words, the reported case relates to the payment of the purchase price while the instant case is one of repayment of a loan. 10. Coming to the case of Bestobell (India) Ltd. he stated that the ratio of this case is not binding because it has ignored the observations of the Supreme Court in the case of India Cements Ltd. to the effect t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the decision of the Punjab and Haryana High Court in the case of Groz-Beckert Saboo Ltd. v. CIT [1981] 127 ITR 608. In this case, because of fluctuation in the rate of exchange, the liability of the assessee to repay the loan borrowed from abroad in foreign currency went up and the question was whether the excess liability could be allowed as a revenue expenditure. The High Court, after considering the tests laid down in the cases of CIT v. Tata Locomotives Engineering Co. Ltd. [1966] 60 ITR 405 (SC) and Sutlej Cotton Mills Ltd., held that the answer to the question would depend upon whether the loan was utilised for acquiring capital asset or incurring revenue expenditure. The case was remanded to the Tribunal just as in the case of Sutlej Cotton Mills Ltd. or determining the said factual position. As stated earlier, Shri Dastur referred to this case for the limited purpose of showing that the Calcutta High Court decision in the case of Bestobell (India) Ltd. is not binding. 12. He also referred to the decision in the case of CIT v. A.S.A. Concern [1937] 5 ITR 456 (Rang.) in support of his contention. 13. Coming to section 43A, Shri Dastur urged that the said section was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Cements Ltd. as no application to the facts of this case for two reasons, firstly, there is a distinction between expenditure and loss, inasmuch as expenditure connotes an outgoing which is within the volition of the assessee, whereas loss results from events beyond the volition of the assessee. Secondly, the acquiring of a loan is different from the repayment of the loan and both these things cannot be equated. He stated that the case of India Cements Ltd. lays down the principle that a loan is not an asset because it is a liability. But, that decision does not abolish the distinction between capital expense and revenue expense. He emphasised the fact that the said distinction still exists and in every case the well recognised tests for distinguishing the one from the other has to be applied for the purpose of determining whether an outgoing is deductible or not. He relied on the decision in the case of Jeewanlal (1929) Ltd. v. CIT [1969] 74 ITR 753 (SC) in support of his contention. Then, he referred to the decision of the Bombay High Court in the case of Calico Dyeing Printing Works v. CIT [1958] 34 ITR 265 and referred to the observations at page 271 to the effect that ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court referred to the decision in India Cements Ltd. and pointed out that the loan in the latter case was obtained not before the commencement of the production but at a later stage and, therefore, the incidental expenses could not be capitalised. In the case of Challapalli Sugars Ltd., the interest was capitalised because the loan was obtained prior to the commencement of production. According to Shri Joshi, the High Court in the case of Arvind Mills Ltd. did consider the second question referred to it, namely, whether the additional liability as a result of devaluation is deductible from business profits either under section 28 or 37 and decided the matter against the assessee even though at the end of the decision it is stated that Question No. 2 was not pressed. The reason is, as stated earlier, that the High Court has held the additional liability to be on the capital account, as held in Challapalli Sugars Ltd.'s case and not on the revenue account as held in India Cements Ltd.'s case. 19. He next referred to the decision in the case of Bestobell (India) Ltd. which is in favour of the revenue. He referred to the observations appearing at page 803 in that decision, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fluctuation can be on capital account or on revenue account and that a change in the rate of exchange does not affect the value of the debt as such but only its worth to the assessee. 23. Shri Joshi contended before us that there is no authority for equating the taking of a loan with the repayment of a loan on the basis of the English mortgage referred to by the learned counsel for the assessee. According to him, the taking of a loan is a different activity and the principles applicable thereto cannot be applied to a case of a repayment of the loan. He pointed to the decision in the case of Bestobell (India) Ltd. which has recognised such a distinction. 24. He then relied on the recent decisions of the Tribunal, rendered after considering the decisions in the cases of Sutlej Cotton Mills Ltd. and South India Viscose Ltd., namely, decision dated 24-1-1980 of the Tribunal in IT Appeal No. 683 (Bom.) of 1979 in the case of Bombay Suburban Electric Supply Co. Ltd., the decision dated 26-3-1980 in IT Appeal No. 1233 (Bom.) of 1976-77 in the case of Sandoz India Ltd., and the decision dated 8-12-1980 in IT Appeal No. 732 (Bom.) of 1979 in the case of Precision Fasteners Ltd. For the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vigation Co. is not a case of interest but it was a case of a debt. Similarly the case of India Cements Ltd. is not a case of interest. Finally, he stated that the only question we should ask ourselves while deciding the issue before us is whether there is any prohibition for allowing the claim of the assessee and if there is no such prohibition, the same should be allowed. 27. We have carefully considered the rival contentions. There cannot be any dispute after the Supreme Court's decision in the case of India Cements Ltd. that unlike the English Income Tax Act, the Income-tax Act in our country does not make any distinction between the capital borrowed for the purpose of acquiring current assets, such as, stock-in-trade of the business or capital assets. Interest payable on the borrowed capital for the purpose of the business is, in either case, allowable as deduction under section 36(1)(iii). The loan/borrowed capital is not an asset or an advantage for the enduring benefit of the business and is a liability. As a result, not only the interest payable on the loan/borrowed capital for the purpose of the business but also the expenditure incurred in obtaining or arranging such a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned counsel for the assessee, there is no material difference between the nature of the expenditure incurred for raising the loan and the expenditure incurred in making repayment or in discharging the loan which is a liability. He explains his point by giving an illustration. He says that in a case where the loan is obtained by mortgaging an immovable property, the expenditure on, or in connection with, the execution of the mortgage deed will, admittedly, be allowed as deduction in view of the Supreme Court's decision in India Cements Ltd. The expenditure on, or in connection with, the execution of the release deed/reconveyance of the mortgage deed at the time of the repayment of or discharging the loan, he stated, cannot be considered on a different footing. The analogy to him is obvious and requires no argument. Shri Joshi, the learned standing counsel, on the other band, strongly contended that the nature of the expenditure for raising the loan and the expenditure for making repayment or discharging the loan is different and in any event, such a difference has been noted and recognised by the Calcutta High Court in its decision in Bestobell (India) Ltd. The Supreme Court's deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and there is no suggestion that any other High Court or the Supreme Court has held that there is no such distinction or that such a distinction is not material. Accordingly, we proceed on the basis that there is a material distinction between the expenditure incurred in obtaining the loan and the expenditure incurred at the time of the repayment of the loan and hold respectfully following the aforesaid Calcutta High Court's decision, that the Supreme Court decision in India Cements Ltd., is distinguishable. 31. It may be stated that the Calcutta High Court has distinguished the Supreme Court's decision in India Cements Ltd., by pointing out the aforesaid factual distinction and has, after going through and analysing a number of the Supreme Court, High Courts and English decisions, held : "... However, the extra expenditure, deemed or otherwise, or the loss, was inextricably connected with the assessee's indebtedness and did not arise de hors the indebtedness. Therefore, the extra amount which the assessee had to provide for as a result of devaluation cannot be considered as extra expenditure to be incurred for meeting the debt like postal expenses or bank charges or as extra e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia Ltd. v. CIT [1981] 130 ITR 351. There again, the view taken by their Lordships in Bestobell (India) Ltd. has been reiterated. In the latter case their Lordships have more or less adopted the reasons given by the Punjab and Haryana High Court in Groz-Beckert Saboo Ltd. and have referred to and applied the Supreme Court's decision in the case of Sutlej Cotton Mills Ltd. No doubt, as pointed out by Shri Dastur, the subject-matter of consideration in Sutlej Cotton Mills Ltd.'s case was not a liability but an asset, i.e., an amount standing to the assessee's credit in foreign country. All the same, both the Calcutta and Punjab and Haryana High Courts have considered the ratio of the said Supreme Court's decision to be that for considering the allowability of the expenditure incurred for making repayment of the loan liability on capital or revenue account, the purpose for which the loan is utilised is very important and relevant. 33. Having regard to the above discussion, we, therefore, hold that the Supreme Court's decision in the case of India Cements Ltd. is not applicable to the facts of the case. Further, as laid down by the Calcutta and Punjab and Haryana High Courts in their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost as defined in section 43(1), etc. In other words, his contention is that this section contains an enabling and not a restrictive provision. He states that the section does not specifically provide that such an expenditure cannot or should not be allowed as a deduction under section 37 or as loss under section 28. 35. We have carefully gone through the provisions of section 43A and the Tribunal's decision. Keeping in view the proposition laid down by the Supreme Court in A.K. Ghosh v. A. Bose AIR 1952 SC 369, namely : "It should first be ascertained what the enacting part of the section provides on a fair construction of the words used according to their natural and ordinary meaning, and the non obstante clause is to be understood as operating to set aside as no longer valid anything contained in the relevant existing laws which is inconsistent with the new enactment." We have examined the provisions of section 43A carefully afresh. Section 43A, as stated earlier, uses the expression "Notwithstanding anything contained in any other provisions of this Act where . . ." It, inter alia, provides that the excess or short payment on account of fluctuation in the rate of exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal, the Commissioner (Appeals) observed that the expenditure under consideration was in the nature of entertainment especially when no details about the persons on whom the expenses were incurred and the business procured therefrom were not produced before him. Shri B.N. Pardiwala, the learned representative for the assessee, urged before us that the disallowance was not justified. He referred to the decision dated 31-8-1979 of the Tribunal in the assessee's own case for the assessment year 1972-73 where this question was considered and the bulk of the expenses incurred for sales promotion was allowed as admissible deductions. Shri T.S. Srinivasan, the learned representative for the department, on the other hand, supported the disallowance. We have considered the contention of both the parties as well as the facts on record. We find that the Tribunal in their order dated 31-8-1979, referred to above, have held that, barring a few exceptions, the rest of the sales promotion expenses were incurred as a matter of common courtesy on tea, snacks, etc., supplied to the business customers. We have gone through the details of the expenses under this head incurred during this year and we f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. has also come to a similar conclusion relying on the decision of the Supreme Court in the case of CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140. Regarding the nature of the expenditure incurred during this year, we find that the assessee was having plant and machinery in a rented premises and had to shift them to its own premises in order to make the unit at the new site complete and efficient. The Commissioner (Appeals) has allowed a part of the expenses. Considering all the facts and circumstances of the case, we see no justification in sustaining the disallowance of Rs. 6,776. So, we delete the same. 38. The next ground states that the Commissioner (Appeals) erred in disallowing a sum of Rs. 3,500 spent as entrance fees to various clubs for its employees and directors. This ground also states that the disallowance of another sum of Rs. 5,000 paid as company's membership to Lotus Club was not justified. Shri Pardiwala urged before us that the expenses should have been allowed as having been incurred for the purpose of the assessee's business. Shri Srinivasan, on the other hand, supported the disallowance on the ground that there was no direct nexus between the expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration and has directed the ITO to correctly compute the disallowable amount under rule 6D afresh after hearing the assessee. We find nothing irregular or improper in the direction given by the Commissioner (Appeals) and so we see no reason to interfere. 40. The last ground in the appeal for the assessment year 1973-74 is that the Commissioner (Appeals) had erred in stating that no appeal lay against the charging of interest under section 214 of the Act. It is pertinent that the Commissioner (Appeals) has given a finding that by raising the ground the assessee was not denying its liability to interest under section 215 as such and that only the quantum was in dispute. He has for the purpose relied on a number of decisions of the High Courts and of the Tribunal without mentioning names. 41. Placing reliance on the Delhi High Court's decision in the case of CIT v. Mahabir Parshad Sons [1980] 125 ITR 165, Shri Dastur has submitted that the Commissioner (Appeals) was not justified in not entertaining this ground. He has pointed out that in all other decisions what was considered is whether the objection to charging interest under section 215 fell within the expression 'denying ..... X X X X Extracts X X X X X X X X Extracts X X X X
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