1988 (1) TMI 64 - AT - Income Tax

Tribunal decision: Exchange rate losses as capital expenditure, set-off priority, interest disallowance upheld.

The Tribunal ruled in favor of the Department, holding that losses due to exchange rate fluctuations should be treated as capital expenditure, not revenue ... Business Expenditure, Allowable Expenditure, Developement Rebate, Depreciation Issues Involved:1. Deduction for loss due to fluctuation in the rate of exchange.2. Disallowance of a portion of the interest paid to United Commercial Bank.3. Priority of set-off between unabsorbed depreciation and unabsorbed development rebate.Issue-wise Detailed Analysis:1. Deduction for Loss Due to Fluctuation in the Rate of Exchange:The Department challenged the CIT (A)'s decision allowing the assessee to deduct losses incurred due to exchange rate fluctuations as revenue losses. The assessee had purchased plant and machinery on a deferred payment basis, resulting in additional liabilities due to exchange rate changes. The CIT (A) had followed a previous Tribunal decision to allow these as revenue losses. However, the Department argued that such losses were capital in nature, citing various case laws, including decisions from the Kerala High Court, Calcutta High Court, and the Special Bench of the Tribunal, which held that losses related to the repayment of loans for capital assets were capital losses.The Tribunal reviewed the matter and concluded that the loss due to exchange rate fluctuations should be treated as capital expenditure, not revenue expenditure. The Tribunal reasoned that since the additional liability arose from the repayment of the unpaid purchase price of machinery, it was of capital nature. Consequently, the Tribunal reversed the CIT (A)'s order and held that the loss could not be deducted from the assessee's total income.2. Disallowance of a Portion of the Interest Paid to United Commercial Bank:The Department also contested the CIT (A)'s decision to vacate the disallowance of a portion of the interest paid by the assessee to United Commercial Bank. The IAC (Asstt.) had disallowed part of the interest on the grounds that the assessee had delayed recovering dues from its holding company, M/s Hindustan Aluminium Corporation Ltd., implying that the borrowed funds were indirectly used by the holding company. The CIT (A) found that the borrowings were for the assessee's business purposes and that the delay in recovering dues did not amount to a diversion of funds.The Tribunal agreed with the CIT (A), stating that non-realisation of dues for up to six months was a normal business occurrence and did not indicate a diversion of borrowed funds. The Tribunal distinguished the present case from the Mysore High Court's decision in United Breweries, where funds were directly advanced to subsidiaries. The Tribunal upheld the CIT (A)'s decision, rejecting the Department's appeal on this ground.3. Priority of Set-off Between Unabsorbed Depreciation and Unabsorbed Development Rebate:The Department argued against the CIT (A)'s directive to prioritize the set-off of unabsorbed development rebate over unabsorbed depreciation. The CIT (A) had relied on a Tribunal decision that favored prioritizing unabsorbed development rebate due to its limited carry-forward period compared to unabsorbed depreciation, which could be carried forward indefinitely.The Tribunal reviewed relevant case laws from various High Courts, including the Karnataka High Court, Madras High Court, and Kerala High Court, which held that unabsorbed depreciation should be set off first, followed by unabsorbed development rebate. The Tribunal agreed with these decisions, stating that the unabsorbed depreciation of earlier years should be allowed first, and only thereafter should the unabsorbed development rebate be set off. Consequently, the Tribunal set aside the CIT (A)'s order and accepted the Department's appeal on this ground.Conclusion:The Tribunal ruled in favor of the Department on the issues of the exchange rate fluctuation loss and the priority of set-off between unabsorbed depreciation and unabsorbed development rebate. However, it upheld the CIT (A)'s decision regarding the disallowance of interest paid to United Commercial Bank.