S. G. CHEMICALS AND PHARMAC--EUTICALS LTD. vs. COMMISSSIONER OF INCOME-TAX

ITR/8/1988HC GujaratGJHC24013086198808 March 2001Author: HONOURABLE MR. JUSTICE J.M.PANCHAL,HONOURABLE MR. JUSTICE MOHIT S. SHAH3 pages
AI SummaryPartly Allowed

What were the facts?

This case involves an Income Tax Reference concerning Assessment Year 1979-80, arising from a decision of the Income Tax Appellate Tribunal, Ahmedabad Bench "B". The reference was made at the instance of both the assessee, S.G. Chemicals and Pharmaceuticals Ltd., and the Revenue (Commissioner of Income-tax). The core dispute revolves around the tax treatment of exchange fluctuation differences amounting to Rs. 29,59,402/- and the deductibility of interest paid under Section 220(2) of the Income Tax Act. The Tribunal's order, which is under challenge, had made certain findings on these issues that are now being reviewed by the High Court.

What did the High Court hold?

The High Court addressed each question. Regarding the revenue's question on investment allowance/depreciation for the Rs. 29,59,402/- expenditure, the Court, relying on CIT vs. Windsor Foods Ltd. (1999) 235 ITR 249, held that investment allowance is allowable in the previous year of installation or first use, based on the actual cost at that time. Subsequent exchange rate fluctuations do not alter this. Therefore, the Tribunal was not right in allowing it, and this question was answered in favour of the Revenue. For the assessee's first question on exchange fluctuation as revenue expenditure, the Court again referred to CIT vs. Windsor Foods Ltd. (supra), which held that such additional liability due to exchange rate fluctuation is capital in nature and should be added to the actual cost of the asset. Thus, the Tribunal was justified in holding it as not allowable revenue expenditure, answering this question in favour of the Revenue. Concerning the assessee's second question on interest paid under Section 220(2), the Court, citing Saraspur Mills Ltd. vs. CIT (1997) 226 ITR 533, held that interest for late payment of income tax is not allowable expenditure as it's not incurred wholly and exclusively for business purposes. The Tribunal was justified in rejecting this claim, answering the question in favour of the Revenue.

What were the issues?

The High Court was asked to decide three questions of law: 1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the difference in exchange fluctuation rate amounting to Rs. 29,59,402/- was not allowable as revenue expenditure? (Assessee's question) 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in rejecting the claim of deduction of interest paid under Section 220(2) of the Act? (Assessee's question) 3. Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in holding that the assessee is entitled to investment allowance/depreciation in respect of the expenditure of Rs. 29,59,402/- despite the fact that the machineries were installed prior to 1.4.1976 and the assessment year in question was 1979-80? (Revenue's question) Assessee's Contentions: The assessee argued that the exchange fluctuation difference was allowable as revenue expenditure and that interest paid under Section 220(2) was deductible. Revenue's Contentions: The revenue contended that investment allowance/depreciation should not be allowed on the expenditure of Rs. 29,59,402/- as the machinery was installed prior to the relevant date.

Which sections of the Income-tax Act were involved?

Section 35B,Section 220(2)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

INCOME TAX REFERENCE No 8 of 1988

For Approval and Signature:

Hon'ble MR.JUSTICE J.M.PANCHAL and Hon'ble MR.JUSTICE M.S.SHAH

============================================================ 1. Whether Reporters of Local Papers may be allowed : NO to see the judgements?

2.

To be referred to the Reporter or not? : NO 3. Whether Their Lordships wish to see the fair copy : NO of the judgement?

4.

Whether this case involves a substantial question : NO of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder?

5.

Whether it is to be circulated to the Civil Judge? : NO

The order continues below.

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