Court ruling: Foreign loan exchange expenses are capital; work-in-progress included for depreciation

Periyar Chemicals Limited Versus Commissioner Of Income-Tax

Periyar Chemicals Limited Versus Commissioner Of Income-Tax - [1986] 162 ITR 163, 59 CTR 223, 33 TAXMANN 446 Issues Involved: The judgment addresses the following issues:
1. Deduction of additional amount paid due to fluctuation in exchange rate as revenue expenditure.
2. Deduction of secured and unsecured loans from capital employed for section 80J.
3. Exclusion of work-in-progress value in computing capital employed for section 80J.
4. Consideration of pre-commissioning expenses and process know-how in computing depreciation.

Issue 1 - Deduction of Additional Amount Paid: The court held that the extra expenses incurred for repayment of a foreign loan due to exchange rate variation are of a capital nature and not revenue expenditure. Citing precedents, the court emphasized that such expenses are considered capital expenditure, not eligible for revenue deduction.

Issue 2 - Deduction of Secured and Unsecured Loans: The court referred to the decision in Lohia Machines Ltd. v. Union of India, stating that the question is covered against the assessee, thus ruling in favor of the Revenue.

Issue 3 - Exclusion of Work-in-Progress Value: The court determined that the value of work-in-progress is part of the capital employed, as per section 80J(1A) of the Income-tax Act. Various court decisions were cited to support this interpretation, concluding that work-in-progress is integral to the capital employed in the industrial undertaking.

Issue 4 - Consideration of Pre-Commissioning Expenses: The court upheld the inclusion of pre-commissioning expenses and process know-how in the actual cost of assets for computing depreciation under section 32 of the Income-tax Act. Referring to previous orders and legal principles, the court affirmed that such expenses are depreciable assets, supporting the assessee's claim.

The judgment provides detailed analysis and legal reasoning for each issue, ultimately ruling against the assessee on the first two questions and in favor of the assessee on the latter two issues. The decision is signed by Judge Balakrishna Menon and includes references to relevant legal precedents and interpretations of the Income-tax Act.