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1997 Supreme(Mad) 1394
High Court of Judicature at Madras
THE HONOURABLE MR. JUSTICE N.V. BALASUBRAMANIAN AND THE HONOURABLE MR. JUSTICE P. THANGAVEL
Seshasayee Paper Boards Limited - Appellant
Versus
Commissioner of Income Tax - Respondents
Tax Case Nos. 109 to 114 of 1985 Reference Nos. 34 to 39 of 1985
Decided On : 28 November 1997
Various expenditures and deductions claimed by the assessee were not allowable under the Income Tax Act.
Headnote:
INCOME TAX - DEDUCTIONS - ADDITIONAL EXPENDITURE INCURRED DUE TO FLUCTUATION IN EXCHANGE RATE - NOT ALLOWABLE AS REVENUE EXPENDITURE - TRANSFER TO RESERVE AS REQUIRED BY SECTION 205(2A) OF THE COMPANIES ACT, 1956 - NOT DEDUCTIBLE - SURTAX LIABILITY UNDER THE COMPANIES (PROFITS) SURTAX ACT, 1964 - NOT DEDUCTIBLE - AMOUNT SET ON UNDER SECTION 15 OF THE PAYMENT OF BONUS ACT - NOT DEDUCTIBLE.
Fact of the Case:
The assessee, engaged in the manufacture of paper and paper boards, claimed certain expenditure on additional payments made due to fluctuation in exchange rate, deduction for amounts transferred to general reserve under section 205(2A) of the Companies Act, deduction for surtax liability under the Companies (Profits) Surtax Act, 1964, and deduction for amount set on under section 15 of the Payment of Bonus Act.
Finding of the Court:
1. The additional expenditure incurred due to fluctuation in exchange rate was not allowable as revenue expenditure. 2. The transfer to reserve as required by section 205(2A) of the Companies Act, 1956, was not deductible. 3. The surtax liability under the Companies (Profits) Surtax Act, 1964, was not deductible. 4. The amount set on under section 15 of the Payment of Bonus Act was not deductible.
Issues: 1. Whether the additional expenditure incurred due to fluctuation in exchange rate was allowable as revenue expenditure? 2. Whether the transfer to reserve as required by section 205(2A) of the Companies Act, 1956, was deductible? 3. Whether the surtax liability under the Companies (Profits) Surtax Act, 1964, was deductible? 4. Whether the amount set on under section 15 of the Payment of Bonus Act was deductible?
Ratio Decidendi: 1. The expenditure incurred in the discharge of the liability towards the purchase of capital assets on account of fluctuation in currency was capital expenditure and not revenue expenditure. 2. The transfer to reserve under section 205(2A) of the Companies Act was not a diversion of income by overriding title, nor was it an expenditure or a loss. 3. The surtax paid was not an allowable deduction in the computation of business income. 4. The amount set on under section 15 of the Payment of Bonus Act was not an expenditure, nor was it a loss, nor could it be regarded as a trading liability. It was a contingent liability and could not be deducted.
Final Decision: All the questions of law were answered against the assessee.
1. The questions of law referred to us both at the instance of the assessee as well as at the instance of the revenue for the assessment years 1975-76, 1976-77, 1978-79 and 1979-80 run as under:
At the instance of the assessee : (For all assessment years)
"1. Whether, on the facts and in the circumstances of the case, the decision of the Tribunal that the amounts representing the additional expenditure which the assessee had to incur on account of the fluctuation in the exchange rate is not liable to be allowed as revenue expenditure incidental to its business, is correct ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that the assessee is not entitled to claim deduction in computing its profits for the assessment year by reason of section 43A of the Income-tax Act ?
3. Whether the Tribunal is justified in law in holding that the sums transferred to reserve as required by section 205(2A) of the Companies Act, 1956, is not liable to be taken into account in computation of the total income of the assessee for the assessment years concerned or in the alternative it is liable to be allowed as deduction under section 37(1) of the Income-tax Act ?
(For the assessment years 1975-76 and 1976-77)"
4. Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the surtax liability of the assessee under the Companies (Profits) Surtax Act, 1964, is not eligible for deduction in computing the assessee's income from business ?
"At the instance of the revenue : (For the assessment years 1975-76 and 1976-77)"
5. Whether, on the facts and, circumstances of the case, the Appellate Tribunal is right in law in holding that the amount set on under section 15(1) of the Payment of Bonus Act to meet the bonus liability of the subsequent years and actually paid in subsequent years should be deducted in computing the assessee's profit for the concerned years ?
"2. The assessee is engaged in the manufacture of paper and paper boards. Now we will take up for consideration the first and the second questions. The assessee claimed during the assessment years 1975-76 to 1979-80 certain expenditure on certain additional payments which it had to make with reference to the loans borrowed from the Industrial Credit and Investment Corporation of India (ICICI) and also from Swedish Credit Institution. The assessee had purchased a machinery on credit from Sweden and the purchase was partly advanced by ICICI and a Swedish Corporation. The assessee has to pay to these institutions the amount borrowed in a phased manner and due to fluctuation in the value of Indian currency, the amount payable by the assessee became larger than the amount calculated at the rate of exchange between two countries prevailing at the time when the machinery was purchased. The assessee claimed the difference between the two amounts as revenue expenditure which was rejected by the Assessing Officer, which was upheld by the Commissioner (Appeals). The Tribunal also held that the said expenditure would constitute capital expenditure and rejected the claim of the assessee and on this finding the Tribunal has referred, at the instance of the assessee, the first and second questions of law set out above
3. Insofar as the expenditure incurred in the discharge of the liability towards the purchase of the capital assets on account of fluctuation in currency is concerned, the decision of this Court in CIT v. Elgi Rubber Products Ltd. would apply, wherein this Court held that such expenditure cannot be regarded as the revenue expenditure, but only as capital expenditure. Following the said decision, the first and second questions of law relating to the liability on the expenditure on account of fluctuation of currency have to be answered against the assessee.
4. Now we will take up for consideration the third question. The assessee during the previous years relevant to the said assessment years transf
