Income-tax

----Capital or revenue expenditure---Foreign exchange---Long-term loans taken for purchase of plant and machinery from foreign country--- Repayment of loan and interest in foreign exchange---Fluctuation in rate of exchange--: Expenditure---Indian Income Tax Act, 1961, S.43A.

The assessee had taken a long-term loan for investing in machinery imported from abroad. On account of fluctuation in the rates of foreign exchange, the assessee had incurred an extraamount of Rs.49,108 towards payment of principal and Rs.2,315 toward payment of interest. The assessee claimed deduction of these amounts as revenue expenditure fox the assessment year 1978-79. The Tribunal disallowed the claim of the assessee. On a reference:

Held, that the Tribunal was correct in holding that the extra amount payable on account of principal and the interest payable thereon, on account of exchange fluctuation in respect of long-term loans taken for purchase of plant and machinery, could note be deducted in computing the total income for the assessment year 1978-79.

CIT v. South India Viscose Ltd. (1979) 120 ITR 451 (Mad.) and CIT v. Elgi-Rubber Products Ltd. (1996) 219 ITR 109 (Mad) fol.

Bombay Steam Navigation Co. (1953) (Pvt.) Ltd. v. CIT (1965) 56 ITR 52 (SC) ref.

R. Venkataram for the Assessee.

C. V. Rajan for the Commissioner

JUDGMENT

K. A. THANIKKACHALAM, J.---At the instance. of the assessee, the Tribunal referred the following question of law for the opinion of this Court under section 256(1) of the Income Tax Act, 1961:

"Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduct a sum of Rs.49,108 and Rs.2,315 being extra amount and interest respectively payable on account of exchange fluctuation in respect of long-term loans taken for purchase of plant and machinery?"

The assessee had taken a long-term loan for investing in machinery imported from abroad. Since the repayment of the loan and interest had to be done in foreign exchange and the rate of exchange was fluctuating the assessee had incurred an extra amount of Rs.49,108 towards payment of principal and Rs.2,315 towards payment of interest in the previous year ended December 31, 1977. The assessee claimed that this difference in exchange value should be allowed as a revenue deduction in computing the total income for the assessment year 1978-79. The Revenue contended that this expenditure was capital in nature and could not be allowed to be deduct. The Tribunal applied the decision of the Madras High Court in CIT v. South India. Viscose Ltd.(1979) 120 ITR 451 and held that the claim of the assessee to deduct the expenditure as revenue expenditure was rightly disallowed.

Before us, learned counsel appearing for the assessee submitted that the interest payment of Rs.2,315 should at least be allowed as revenue deduction. This -was claimed on the basis of the decision of the Supreme Court in Bombay Steam Navigation Co. (1953) (Pvt.) Ltd. v. CIT (1965) 56 ITR 52. The question that arose in that case was whether the interest paid by the assessee on unpaid purchase price, for the acquisition of assets was an expenditure allowable under section 10(2)(xv). The Supreme Court held that "no capital had been borrowed by the assessee and that an agreement to pay the balance of consideration due by the purchaser did not, in truth, give rise to a loan. Therefore, the claim for deduction of the amount of interest under section 10(2)(iii) was not admissible". It was, however, held that interest paid was liable to be allowed as deduction under section 10(2)(xv) and for coming to this conclusion the Supreme Court held that the nature of the payment was interest and, therefore, was liable to be allowed as deduction.

According to the facts arising in the present case, the assessee claimed depreciation by treating the interest payment as capital and now in view of the above said decision of the Supreme Court, the assessee claimed that it should be treated as revenue expenditure. The same item of expenditure cannot be treated for one purpose as capital in nature and for another purpose as revenue in nature. Inasmuch as the assessee itself treated the interest payment as capital in nature, it is not open to the assessee to ask for deduction as revenue expenditure. Accordingly, the Tribunal was correct in holding that in view of the decisions of this Court" in CIT v South India Viscose Ltd.(1979) 120 ITR 451 acid the decision of this- Court in T.C. Nos.422 and 423 of 1982 and 36 of 1983 (CIT v. Elgi Rubber Products Ltd. (1996) 219 ITR 109) (judgment, dated February 17, 1995), the difference in exchange value and the interest payable thereon cannot be deducted in computing the total income for the assessment year 1978-79.

In that view of the matter, we answer the question in the negative and against the assessee. No costs.

M.B.A./3240/FCReference answered.