1980 (4) TMI 36 - HC - Income Tax

Increased liability not deductible as business expense, but development rebate claim allowed under section 33.

The Tribunal held that the increased liability due to devaluation was not deductible in computing the assessee's business income, citing capital nature of ... Actual Cost, Business Expenditure, Developement Rebate Issues Involved:1. Deductibility of increased liability due to devaluation in computing business income.2. Admissibility of development rebate on increased liability under section 33 of the Income-tax Act, 1961.Detailed Analysis:Issue 1: Deductibility of Increased Liability Due to DevaluationThe primary question was whether the increased liability of Rs. 1,75,99,854 due to the devaluation of the Indian rupee could be deducted in computing the assessee's business income. The Tribunal held that the increased liability was on account of capital plant and machinery, thus constituting a capital loss, not deductible in computing business income.The Tribunal relied on the Supreme Court ruling in Commissioner of Income-tax v. Tata Locomotive and Engineering Co. Ltd. [1966] 60 ITR 405, which established that profit or loss arising from changes in exchange rates related to capital goods is of a capital nature. Therefore, the loss due to devaluation was not deductible as it was a capital loss.Further, the Tribunal considered various case laws, including Indore Malwa United Mills Ltd. v. State of Madhya Pradesh [1965] 55 ITR 736, which discussed whether borrowed money becomes the company's money and how it should be treated in terms of capital or revenue. The Tribunal also referenced Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT [1965] 56 ITR 52 and India Cements Ltd. v. CIT [1966] 60 ITR 52, emphasizing that the purpose of borrowing is irrelevant in determining whether the expenditure is capital or revenue.The Tribunal concluded that the increased liability due to devaluation was on capital account and not allowable as a deduction in computing business income. This conclusion was supported by the Supreme Court's decision in Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1, which stated that profit or loss due to exchange rate changes depends on whether the foreign currency is held as a capital asset or trading asset.Conclusion: The Tribunal was justified in holding that the increased liability due to devaluation was not deductible in computing the assessee's business income. The question was answered in the affirmative and in favor of the revenue.Issue 2: Admissibility of Development Rebate on Increased LiabilityThe second question was whether the alternative claim for development rebate under section 33 on Rs. 1,09,24,832 was admissible. The Tribunal held that the increased liability due to devaluation could not be included in the actual cost of plant and machinery for the purpose of claiming development rebate.Section 43A of the Income-tax Act, 1961, which deals with changes in the rate of exchange of currency, was pivotal in this determination. Sub-section (2) of section 43A explicitly states that variations in the actual cost due to exchange rate changes should not affect the development rebate admissible under section 33.The Tribunal referred to the Madras High Court decision in Addl. CIT v. Kwality Spinning Mills (P.) Ltd. [1977] 109 ITR 646, which held that the increased liability due to devaluation should be included in the actual cost for claiming development rebate. However, the Tribunal distinguished this case, emphasizing that section 43A(2) specifically excludes such variations for development rebate purposes.The Tribunal also cited the Gujarat High Court decision in Arvind Mills Ltd. v. CIT [1978] 112 ITR 64, which supported the view that the actual cost should include all expenditures necessary to bring the asset into existence and working condition, but section 43A(2) excludes this for development rebate.Conclusion: The Tribunal was not justified in holding that the alternative claim for development rebate on Rs. 1,09,24,832 was not admissible. The question was answered in the negative and in favor of the assessee.Final Judgment:The Tribunal's decision on the first issue was upheld, affirming that the increased liability due to devaluation was not deductible in computing business income. However, the Tribunal's decision on the second issue was overturned, allowing the development rebate on the increased liability. Each party was ordered to bear its own costs.