JUDGMENT R.K. Gulati, J.
1. This is a reference under Section 256(1) of the Income-tax Act, 1961 (for short "the Act"), for the consecutive assessment years 1973-74 to 1975-76 at the instance of the Commissioner of Income-tax, Allahabad. The Income-tax Appellate Tribunal, Allahabad Bench, Allahabad, has referred the following common question of law for the opinion of this court :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that Rs. 12,99,806, Rs. 7,82,467 and Rs. 11,19,327 were revenue expenditure and were allowable in computing the total income of the assessee for the years under reference ?"
2. The brief facts are these : The respondent-assessee is a subsidiary of Hindustan Aluminium Corporation Limited, Renukoot, Mirzapur. It generates power for the consumption of its holding company. In the computation of its total income for the assessment years 1973-74 to 1975-76, the assessee claimed deduction of Rs. 12,99,806, Rs. 7,82,467 and Rs. 11,19,327, respectively as revenue expenditure. It was explained that the said expenditure was incurred on account of difference in foreign exchange rate in making the remittances to IGE Export Division, General Electric Company, New York and General Electric Technical Service Co. Inc., New York, against instalments under the deferred payment contracts Nos. IGE-9584 and GETS-1451 in foreign currency. The case of the assessee was that parity rate of dollar was fixed by the Reserve Bank of India, yet at the time of making actual remittances, dollars had to be arranged from the open market through the bankers duly registered who dealt in foreign exchange, which resulted in extra expenditure on account of fluctuations in the exchange rate. Further, the exchange loss was not on account of any official devaluation/revaluation of the currency and, as such, the expenditure in question was purely incidental to the carrying on of the business arising from the remittances in the foreign exchange. In response to a query from the Income-tax Officer in the assessment year 1973-74, the assessee stated as under :
". . . we had already submitted before you, the plant and machinery for the company's thermal power plant had been purchased on package deal basis under the deferred payment contract. The value of the plant and machinery accordingly has been capitalised on the basis of calculations made at the official rate of exchange. We have, therefore, to submit that the amount of Rs. 12,99,806 is purely incidental and has been expended wholly and exclusively for the purpose of business and has rightly been claimed as trade expenses."
3. The Income-tax Officer, however, disallowed the claim of the assessee in each of the three years on the finding that the expenditure in question represented the repayment of instalments towards cost of plant and machinery and any extra expenditure incurred in respect thereof, due to fluctuation in currency rate, was capital expenditure which could not be allowed as a set off against the profit and loss account of the assessee.
4. The assessee contested the matter in appeal before the Commissioner of Income-tax (Appeals) but the assessment orders on this count were upheld. In rejecting the claim, the appellate authority held that the assessee was to make the payment for the price of machinery purchased from foreign parties in foreign currency in deferred instalments. Because of rate fluctuation, the assessee spent more amount in Indian currency in order to meet its commitments for the instalments representing part of the cost of capital assets acquired. The payment is of the price or part of the price of a capital asset and there is no known principle of accountancy or any precedence by which such payment could be called revenue expenditure. The appellate authority then observed in its order for the assessment year 1973-74 as under :
"The appellant could have claimed the benefit of Section 43A on the ground of enhanced liability with respect to capital assets on fluctuations of exchange. But before the Income-tax Officer no such claim was made. Even before me the learned representative for the company vehemently argued that this provision was not applicable because this could be applicable only when there was a devaluation by the Government of India. I would, therefore, refrain from giving any finding on this point but content myself by upholding the Income-tax Officer's action in treating the liability as a capital one. The ground, therefore, fails."
5. The assessee thereafter pursued the matter further in the second appeal before the Income-tax Appellate Tribunal which upheld its claim. In doing so, the Tribunal merely relied upon certain decisions of other Benches of the Tribunal where in similar circumstances the view taken was that such an expenditure was allowable as a revenue expenditure.
6. We have heard learned counsel for the parties. Learned standing counsel for the Revenue contended that any increase in the liability of the assessee expressed in terms of Indian currency for remitting the instalments towards the cost of plant and machinery under the deferred payment agreement, is an expenditure on capital account. The extra expenditure in such circumstances, it was urged, will have the effect of increasing the actual cost of the capital asset. Learned counsel further submitted that the cause which occasioned such loss whether owing to day-today fluctuation in the rate of exchange or devaluation brought about by the act of the State, was of no importance in deciding whether the expenditure was revenue or capital expenditure.
7. On the other hand, learned counsel for the assessee submitted that a distinction is to be made between a case where the loss or extra liability was incurred on account of devaluation by an act of the State and such a loss arising due to day-to-day fluctuation in the rate of currency. Learned counsel continued to argue that the amounts of instalments in terms of foreign currency remained the same but due to fluctuation in the rate of exchange between the rupee and foreign currency the assessee had to incur extra liability in terms of rupees, which was due to market factors and cannot be treated on capital account. To put it differently, the liability for extra expenditure was incurred not because the official rate of exchange was altered but because of fluctuation in the market rate of exchange even though the official rate of exchange remained at the same figure and such an expenditure was revenue in nature.
8. It is evident that the assessee had purchased certain plant and machinery from foreign sellers on deferred payment to be made in foreign currency only spread over in instalments. The cost of plant and machinery was maintained in the books of the assessee in terms of rupees at the exchange rate prevailing when the machinery/plant was purchased. During the years in dispute, for remitting the instalments that had fallen due, an extra liability was incurred for the purchase of dollars which had become dearer in terms of rupees due to fluctuation in the exchange rate. In these circumstances, the assessee was required to pay the aforesaid amounts over and above the amount originally envisaged. The question is whether such expenditure could be allowed as incidental to the carrying on of the business by the assessee.
9. Now the question whether the increase in liability on account of fluctuation in the currency rate is a permissible deduction or not in the computation of total income, would depend on a further question whether such extra liability related to a trading or capital asset. This legal position is well settled because of a decision of the Supreme Court in Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1. The test stated by the Supreme Court is that the cause which occasions the loss would be immaterial ; the loss being in respect of a trading asset would be a trading loss. To put it in the words of the Supreme Court, it was observed (page 6) :
"Whether the loss suffered by the assessee was a trading loss or not would depend on the answer to the question, whether the loss was in respect of a trading asset or a capital asset. In the former case, it would be a trading loss but not so in the latter."
10. In that very decision an argument like the one advanced before us--that the distinction should be maintained between the loss caused by fluctuation in the exchange rates due to market forces and the loss caused on account of devaluation which was an act of the State, was repelled by the Supreme Court. The Supreme Court observed that it makes no difference whether a loss is occasioned by devaluation brought about by the act of the State or because of the fluctuation in the day-to-day exchange rate on account of other circumstances. It was emphasised that the circumstances which caused such fluctuations and the resultant loss to the assessee is not material for determining whether the character of loss is revenue or capital. It is the utilisation or intended utilisation of the foreign currency that makes the difference in determining whether the loss resulting from depreciation in value on account of variation in the rate of exchange would be a trading loss or a capital loss. To put it differently, there is no qualitative difference in the additional expenditure incurred due to the devaluation or fluctuation in the rate of exchange. In both the cases, whether the additional liability would be allowable or not in computing the profits, will depend upon whether the expenditure was on account of capital account or revenue account. It is the nature and character of the expenditure which would determine the question. This legal position clearly emerges from the following passage from the aforesaid decision in Sutlej Cotton Mills Ltd. [1979] 116 ITR 1 (SC), where it was held as under (page 7) :
"The test may also be formulated in another way by asking the question whether the loss was in respect of circulating capital or in respect of fixed capital. This is the formulation of the test which is to be found in some of the English decisions. It is, of course, not easy to define precisely what is the line of demarcation between fixed capital and circulating capital, but there is a well recognised distinction between the two concepts. Adam Smith in his Wealth of Nations describes 'fixed capital' as what the owner turns to profit by keeping it in his own possession and 'circulating capital' as what he makes profit of by parting with it and letting it change masters. 'Circulating capital' means capital employed in the trading operations of the business and the dealings with it comprise trading receipts and trading disbursements, while 'fixed capital' means capital not so employed in the business, though it may be used for the purposes of a manufacturing business, but does not constitute capital employed in the trading operations of the business. Vide Golden Horse Shoe (New) Ltd. v. Thurgood [1933] 18 TC 280 (CA). If there is any loss resulting from depreciation of the foreign currency which is embarked or adventured in the business and is part of the circulating capital, it would be a trading loss, but depreciation of fixed capital on account of alteration in exchange rate would be a capital loss. Putting it differently, if the amount in foreign currency is utilised or intended to be utilised in the course of business or for a trading purpose or for effecting a transaction on revenue account, loss arising from depreciation in its value on account of alteration in the rate of exchange would be a trading loss, but if the amount is held as a capital asset, loss arising from depreciation would be a capital loss"
11. It is evident that whether the increased liability due to fluctuation in currency rate would be revenue or capital, would depend on the circumstances of each case. In the instant case, the assessee has no case that the payment of instalments made in foreign currency was on revenue account or as a trading asset or as a part of circulating capital embarked in the business. Any payment towards the increase in liability of the assessee while repaying the cost of the capital asset due to fluctuation in foreign exchange rates, is in the nature of capital expenditure. It is not the case of the assessee that the original expenditure for the purchase of machinery/ plant is not a capital expenditure. The accretion to such an expenditure or enhanced payment represented by the difference due to fluctuation in the currency rate also should be of capital nature. Increase in liability due to fluctuation of currency rates arising out of devaluation or otherwise bears the same character as the original liability and it cannot be taken to have a different character. The machinery and plant had already been purchased. It was at the point of payment of the purchase price or part thereof, in instalments in foreign currency, that the assessee had to provide an extra amount in rupees by reason of fluctuation in the rate of exchange, which in our opinion, would be a capital expenditure, deduction of which cannot be claimed by the assessee as revenue expenditure.
12. We are supported in our view by a decision of the Kerala High Court in Ashok Textiles Ltd. v. CIT [1989] 178 ITR 94. In that case, the assessee had purchased certain machinery from a foreign company on a deferred payment scheme. On account of fluctuations in the exchange rate the assessee had to pay during the relevant assessment year more in terms of rupees than that was originally contemplated under the agreement as the payment happened to be made in terms of yen. The extra expenditure was claimed as a revenue expenditure which was disallowed by the Income-tax Officer and was upheld by the Tribunal. On a reference, it was held that the original expenditure for the machinery was capital expenditure, hence the enhanced payment represented by the difference due to the fluctuation in exchange rate was also capital in nature.
13. There are a number of decisions of different High Courts also wherein a similar controversy has been dealt with. Reference may be made to the decisions in Bestobell (India) Ltd. v. CIT [1979] 117 ITR 789 (Cal) ; Union Carbide India Ltd. v. CIT [1981] 130 ITR 351 (Cal); Acropolymers (P.) Ltd. v. CIT [1985] 151 ITR 158 (P & H); CIT v. Calcutta Electric Supply Corporation Ltd. [1987] 166 ITR 797 (Cal) ; CIT v. Cochin Refineries Ltd. [1988] 173 ITR 461 (Ker) ; Stumpp and Schuele GmbH v. CIT [1986] 160 ITR 581 (Kar) and CIT v. V.S. Dempo and Co. Pvt. Ltd. [1994] 206 ITR 291 (Bom). In all these cases the view that has appealed to us, has been expressed.
14. For what has been stated above, the decision of the Income-tax Appellate Tribunal cannot be upheld. In our opinion, the Tribunal was not right in taking the view that the amounts referred to in the question referred were permissible as revenue expenditure in computing the income of the assessee for the three years in dispute.
15. The question referred to this court is accordingly answered in the negative, in favour of the Revenue and against the assessee.