1997 (11) TMI 48 - HC - Income Tax

Court rules exchange rate fluctuation expenses as capital, denying deductions under tax laws. Judgment favors Revenue.

The court held that the additional expenditure due to exchange rate fluctuation was considered capital expenditure, not revenue expenditure. The assessee ... Capital Expenditure, Revenue Expenditure, Foreign Exchange, Exchange Fluctuation, General Reserve, Surtax Issues Involved:1. Whether the additional expenditure due to exchange rate fluctuation is allowable as revenue expenditure.2. Entitlement to claim deduction under section 43A of the Income-tax Act.3. Deductibility of sums transferred to reserve under section 205(2A) of the Companies Act.4. Deductibility of surtax liability under the Companies (Profits) Surtax Act.5. Deductibility of amounts set on under section 15(1) of the Payment of Bonus Act.Issue-wise Detailed Analysis:1. Additional Expenditure Due to Exchange Rate Fluctuation:The assessee claimed certain expenditures due to exchange rate fluctuations on loans borrowed from ICICI and a Swedish Credit Institution for purchasing machinery. The Tribunal held this expenditure as capital expenditure, not revenue expenditure. The court referenced CIT v. Elgi Rubber Products Limited [1996] 219 ITR 109, concluding that such expenditure is capital in nature. Therefore, the first and second questions were answered against the assessee.2. Entitlement to Claim Deduction under Section 43A of the Income-tax Act:The Tribunal held that the assessee is not entitled to claim deduction under section 43A for the additional expenditure due to exchange rate fluctuation. Following the precedent set in CIT v. Elgi Rubber Products Limited, the court affirmed that such expenditure is capital expenditure. Consequently, the second question was answered against the assessee.3. Deductibility of Sums Transferred to Reserve under Section 205(2A) of the Companies Act:The assessee transferred certain amounts to the general reserve under section 205(2A) and claimed these as deductions. The Tribunal rejected this claim, and the court agreed, stating that the transfer to reserve does not constitute a diversion of income by overriding title nor an allowable expenditure. The third question was answered in the affirmative and against the assessee.4. Deductibility of Surtax Liability under the Companies (Profits) Surtax Act:For the assessment years 1975-76 and 1976-77, the assessee claimed deduction of surtax liability. The Tribunal denied this claim, supported by the Supreme Court decision in Smith Kline and French (I) Ltd. v. CIT [1996] 219 ITR 581, which held that surtax paid is not deductible in computing business income. Thus, the fourth question was answered against the assessee.5. Deductibility of Amounts Set On under Section 15(1) of the Payment of Bonus Act:The assessee claimed deductions for amounts set on under the Payment of Bonus Act for the assessment years 1975-76 and 1976-77. The Tribunal allowed this claim, but the court disagreed, referencing decisions from various High Courts and the Supreme Court. The court concluded that the amount set on is not an expenditure, loss, or trading liability but a contingent liability. Therefore, the fifth question was answered in favor of the Revenue.Final Judgment:(a) Questions of law Nos. 1 and 2: Answered in the negative and against the assessee.(b) Question of law No. 3: Answered in the affirmative and against the assessee.(c) Question of law No. 4: Answered in the affirmative and against the assessee.(d) Question of law No. 5: Answered in the negative and in favor of the Revenue.No order as to costs.