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1979 Supreme(P&H) 169
PUNJAB & HARYANA HIGH COURT
Rajendra Nath Mittal and J.V.Gupta JJ.
Groz-beckert Saboo Ltd.
Versus
Commissioner Of Income-tax
Income tax Reference No. 9 of 1974,
Decided On : SEPTEMBER 14, 1979
The utilization of the loan is to be seen in the relevant assessment year to determine whether it is a trading loss or a capital loss.
Headnote:
INCOME TAX - Loss on account of increase in liability of loans payable in foreign exchange - Whether allowable deduction - Held, yes.
Fact of the Case:
The assessee, an Indian company, received a loan from its collaborators, Groz-Beckert International A.G., a Swiss company, to meet the additional cost of its initial project. The loan was repayable in three equal and yearly installments after 10 years and carried interest at the rate of 8% per annum subject to Indian taxes. The Indian currency was devalued in 1966, resulting in an increased liability for the assessee in rupees. The assessee claimed the loss as a revenue loss, but the ITO disallowed it, holding that it was a capital loss on exchange fluctuation in capital account. The AAC dismissed the assessee's appeal, and the Tribunal upheld the disallowance.
Finding of the Court:
The Tribunal erred in holding that the loan was part of the fixed capital and that the loss was therefore a capital loss. The Tribunal took into consideration irrelevant matters, namely, the loan was received from the supplier of the machinery and that it was received towards the beginning of the career of the company. The crucial thing is regarding the utilization of the loan. The Tribunal, however, did not consider the matter from this point of view.
Issues: Whether the loss on account of increase in liability of loans payable in foreign exchange is an allowable deduction.
Ratio Decidendi: Circulating capital can be utilized towards capital account and vice versa. The purpose for which the amount is being utilized is to be seen in the relevant assessment year. The finding of fact arrived at by the Tribunal by taking into consideration irrelevant matters is not binding in a reference.
Final Decision: The case was sent back to the Tribunal to dispose of the matter in accordance with the observations made by the court.
Rajendra Nath Mittal, J.
1. The Income-tax Appellate Tribunal, Chandigarh Bench, Chandigarh, has referred the following question of law under Section 256(1) of the I.T. Act, 1961 (hereinafter referred to as "the Act"), for the opinion of this court:
"Whether, on the facts and in the circumstances of the case, the loss of Rs. 2,30,000 on account of increase in the liability of the loans payable in foreign exchange is an allowable deduction ?"
2. The relevant facts giving rise to the reference are as follows :
The assessee is an Indian company set up in collaboration with Groz-Beckert International A.G. and is engaged in the manufacture and sale of hosiery and knitting machine needles. The company was incorporated after the sanction, from the Government, of the collaboration agreement, on October 15, 1960. The collaboration agreement provided as follows : (1) that the collaborators were to supply machinery and shares worth Rs. 9 lakhs were to be allotted to them as against the price of the machinery.
(2) that the Indian promoters were to make available the amount of Rs. 6 lakhs for building indigenous machinery and air conditioning plant, etc.
3. The collaborators and the Indian promoters fulfilled their part of the obligation. The cost of the initial project was estimated at Rs. 15,00,000 and the capital was formed accordingly. Later, at the time of working out the details of the project, it was revealed that an amount of Rs. 23 lakhs would be required for the total project initially. To meet the additional cost of Rs. 8 lakhs, the assessee considered the possibility of raising a loan in India. It could, however, be raised from any finance institution by putting a charge on the machines. The collaborators were not agreeable to put the machines under a charge for reasons of trade secrecy of machines. They, however, agreed to grant a loan to the assessee to the extent of Rs. 5.5 lakhs at 7 1/2% per annum as interest. The assessee, vide letter dated April 20, 1961, informed the Govt. of India, Ministry of Finance (Dept. of Economic Affairs), of this position and sought their approval for the loan. It was proposed in the letter that 1/3 loan received from the collaborators would be paid back together with the accrued interest by December 31, 1963, £ of the loan with the accrued interest by December 31, 1964, and the remaining & of the loan interest by December 31, 1965.
4. The Govt. of India, Ministry of Finance (Dept. of Economic Affairs), by their letter dated July 20, 1961, approved the assessees proposal of obtaining a loan of Rs. 6.5 lakhs from M/s. Groz-Beckert International, a Swiss company of the assessees collaborators, M/s. Groz-Beckert, West Germany. It was, however, said that the loan would be repayable in three equal and yearly instalments after 10 years and would carry interest at the rate of 8% per annum subject to Indian taxes. The Reserve Bank gave its approval, vide letter dated August 25, 1961. Thereafter, the assessee received 1,84,000 Swiss francs on August 10, 1961, from M/s. Groz-Beckert International A. G. and a further amount of 1,84,000 Swiss francs on September 5, 1961. The exchange ratio at the relevant time was such that the sum of 1,84,000 Swiss francs was equivalent to Rs. 2,00,000.
5. The Indian currency was devalued with effect from June 5, 1966, at a ratio of 57.5%. On that date, the assessee owed to M/s. Groz-Beckert International A.G. a sum of 3,84,000 Swiss francs plus interest of 26,000 Swiss francs. The result of the devaluation was that the assessee was required to pay an increased sum in rupees and the increase was Rs. 2,43,300 (Rs. 2,30,000 on account of loan and Rs. 13,800 on account of additional interest). The assessee at that time had also foreign assets in the shape of bills realisable. It earned a profit of Rs. 1,02,632 due to the devaluation of the rupee on the outstanding foreign bills. This amount was due because of supplying goods in the trade account outside India. The re
