Exchange-loss on foreign-currency machinery loan and contingent leave salary provision were both held non-deductible.

Exchange-loss liability arising from repayment of a foreign-currency loan used to acquire machinery on deferred payment basis was treated as capital expenditure because the additional rupee burden formed part of the asset cost; it was not deductible as revenue expenditure, and section 43A did not assist on these facts. A provision for leave salary on accumulated privilege leave was also disallowed because the liability depended on leave actually being taken or encashed and had not crystallised into a present, certain obligation. Both questions were answered against the assessee.

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Issues: (i) Whether the additional expenditure incurred because of exchange fluctuation in repayment of instalments of a foreign-currency loan taken for purchase of machinery on deferred payment basis was capital or revenue expenditure. (ii) Whether a provision for payment of leave salary in respect of accumulated privilege leave was an allowable deduction.

Issue (i): Whether the additional expenditure incurred because of exchange fluctuation in repayment of instalments of a foreign-currency loan taken for purchase of machinery on deferred payment basis was capital or revenue expenditure.

Analysis: The liability arose at the stage of repayment of borrowings used for acquiring capital assets. The nature of the expenditure was held to depend on whether the additional liability was on capital or revenue account, and not on whether it arose from devaluation or ordinary exchange fluctuation. The Court applied the principle that extra rupee liability connected with acquisition of capital machinery and repayment of foreign-currency obligations forms part of the cost of the capital asset. Section 43A did not assist the assessee on these facts.

Conclusion: The additional expenditure was capital expenditure and not deductible as revenue expenditure.

Issue (ii): Whether a provision for payment of leave salary in respect of accumulated privilege leave was an allowable deduction.

Analysis: The leave rules showed that privilege leave depended on managerial discretion and actual availing or encashment by employees. The liability to pay leave salary or leave encashment arose only when leave was actually taken or encashed, and could not be treated as a liability in praesenti. The Court distinguished cases involving crystallised or actuarially ascertainable liabilities and held that this provision lacked the certainty required for deduction.

Conclusion: The provision for leave salary was not an allowable deduction.

Final Conclusion: Both questions were answered against the assessee, and the reference was disposed of in favour of the Revenue.

Ratio Decidendi: An exchange-loss liability incurred in repaying foreign currency borrowed for acquiring a capital asset is capital in nature, and a provision is deductible only when the liability has accrued as a present and certain obligation, not when it remains contingent on future events.

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