Capital outlay, statutory reserves and bonus set-asides were not deductible; surtax and foreign exchange machinery cost also failed.

Additional foreign exchange cost on imported machinery was treated as part of the capital outlay and not as revenue expenditure, so no deduction was available under section 43A on the facts stated. Amounts transferred to reserve under section 205(2A) of the Companies Act, 1956 were held to be appropriations out of accrued profits, not a diversion by overriding title or a deductible outgoing. Surtax liability under the Companies (Profits) Surtax Act, 1964 was not allowable as a business deduction. Amounts set aside under section 15 of the Payment of Bonus Act were regarded as a statutory appropriation for a future contingent liability and not as expenditure, loss, or a trading liability of the year.

---

---

Issues: (i) Whether additional expenditure arising from foreign exchange fluctuation in respect of the cost of imported machinery was allowable as revenue expenditure or deductible under section 43A; (ii) Whether amounts transferred to reserve under section 205(2A) of the Companies Act, 1956 were deductible or formed part of assessable income; (iii) Whether surtax liability under the Companies (Profits) Surtax Act, 1964 was allowable as a deduction; (iv) Whether amounts set on under section 15 of the Payment of Bonus Act were deductible in the year of transfer.

Issue (i): Whether additional expenditure arising from foreign exchange fluctuation in respect of the cost of imported machinery was allowable as revenue expenditure or deductible under section 43A.

Analysis: The expenditure was incurred in discharging the liability for purchase of a capital asset, namely machinery, and the increase in liability arose only because of exchange fluctuation. Such a payment was treated as part of the capital outlay and not as expenditure laid out for the business as revenue expenditure. The statutory claim under section 43A also did not assist the assessee on the facts found.

Conclusion: The issue was decided against the assessee; the expenditure was capital in nature and not allowable as revenue deduction.

Issue (ii): Whether amounts transferred to reserve under section 205(2A) of the Companies Act, 1956 were deductible or formed part of assessable income.

Analysis: The transfer to reserve was made out of the assessee's own profits after income had accrued. There was no diversion of income by overriding title, nor did the amount constitute expenditure or loss. The statutory requirement only restricted distribution of dividends and did not create a deductible outgoing.

Conclusion: The issue was decided against the assessee; the reserve transfer was not deductible.

Issue (iii): Whether surtax liability under the Companies (Profits) Surtax Act, 1964 was allowable as a deduction.

Analysis: The question was governed by the settled position that surtax paid is not an allowable deduction in computing business income.

Conclusion: The issue was decided against the assessee; surtax liability was not deductible.

Issue (iv): Whether amounts set on under section 15 of the Payment of Bonus Act were deductible in the year of transfer.

Analysis: The amount set on was only a statutory appropriation to meet a future and contingent bonus liability. The employees had no present right to the fund, the amount remained under the assessee's control for future business use subject to the statute, and the setting apart occurred after profits were ascertained. It was therefore neither a diversion of income by overriding title nor an expenditure, loss, or trading liability of the year.

Conclusion: The issue was decided in favour of the Revenue; the amount set on was not deductible.

Final Conclusion: The reference was answered mostly against the assessee, with only the revenue's fifth question succeeding and the remaining questions answered against the assessee.

Ratio Decidendi: Amounts incurred in acquiring or discharging liability for capital assets are capital in nature; sums transferred from ascertained profits to statutory reserves or set apart for future contingent liabilities do not amount to diversion of income by overriding title or deductible expenditure unless a present, enforceable liability exists.

---