WINDSOR FOODS LTD. vs. COMMISSIONER OF INCOME-TAX

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ITR/205/1990HC GujaratGJHC24013391199015 April 1998Author: HONOURABLE MR. JUSTICE R.K.ABICHANDANI,HONOURABLE MR. JUSTICE KUNDAN SINGH2 pages
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What did the High Court hold?

The High Court held that the Tribunal was correct in concluding that the additional liability on account of exchange fluctuation in the repayment of foreign exchange loans for the purchase of machinery was not a revenue expenditure. The Court reasoned that this additional liability was clearly referable to liabilities of a capital nature, not revenue account. Following its previous decision in the assessee's own case for AY 1980-81 (ITR No. 227 of 1985 decided on 5.3.98), the Court reiterated that such additional liability must be added to the actual cost of the assets in view of Section 43A(1) of the Income-tax Act, 1961. Therefore, the additional liability could not be treated as revenue expenditure. The question referred to the Court was answered in the affirmative, against the assessee and in favour of the Revenue. The reference stood disposed of.

What were the facts?

The assessee, Windsor Foods Ltd., claimed a deduction for additional liability arising from exchange rate fluctuations on a foreign exchange loan taken to purchase machinery. The Inspecting Assistant Commissioner and the CIT(Appeals) rejected this claim. The CIT(Appeals) relied on the Tribunal's order in the assessee's own case for Assessment Year 1980-81. The Tribunal upheld the CIT(Appeals)'s jurisdiction. A reference by the Revenue concerning AY 1980-81, similar to the present issue, was decided by the High Court on March 5, 1998. The High Court held that such additional liability was referable to capital nature liabilities and should be added to the actual cost of assets under Section 43A(1) of the Act, not treated as revenue expenditure.

What were the issues?

1. Whether, on the facts and in the circumstances of the case and in law, the Tribunal was right in holding that the additional liability on account of exchange fluctuation in repayment of foreign exchange loans from financial institutions for the purchase of machinery was not a revenue expenditure? Assessee's Contention: The assessee claimed the additional liability due to exchange fluctuation as a revenue expenditure, implying it should be deductible. The judgment does not explicitly record the assessee's arguments before the High Court, but the question framed indicates their stance. Revenue's Contention: The revenue contended that the additional liability was not a revenue expenditure. The judgment notes that the High Court, in a similar case for AY 1980-81, held that such additional liability was of a capital nature and should be added to the actual cost of assets under Section 43A(1), thereby not being a revenue expenditure. This implies the revenue's position was upheld.

Which sections of the Income-tax Act were involved?

Section 256(1),Section 43A(1)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

INCOME TAX REFERENCE No 205 of 1990

For Approval and Signature:

Hon'ble MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE KUNDAN SINGH ============================================================ 1. Whether Reporters of Local Papers may be allowed to see the judgements?

2.

To be referred to the Reporter or not?

3.

Whether Their Lordships wish to see the fair copy of the judgement?

4.

Whether this case involves a substantial question 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?

-------------------------------------------------------------- WINDSOR FOODS LTD. Versus COMMISSIONER OF INCOME-TAX -------------------------------------------------------------- Appearance: Mr. B.D.Karia and Mr. R.K.Patel for MR RK PATEL for Petitioner Mr. Mihir Joshi MR MANISH R BHATT for Respondent No. 1

--------------------------------------------------------------

CORAM : MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE KUNDAN SINGH Date of decision: 15/04/98

ORAL JUDGEMENT (Per R.K.Abichandani,J)

The Income-tax Appellate Tribunal has referred the following questions 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 and in law, the Tribunal was right in holding that the additional liability on account of exchange fluctuation in repayment of foreign exchange loans from financial institution for purchase of machinery was not a revenue expenditure?

2.

The assessee had claimed deduction for additional liability on account of exchange fluctuation in repayment of foreign exchange loan from the financial Institutions for the purchase of machinery. The Inspecting Assistant Commissioner (Assessment) rejected the assessee's claim. On appeal, CIT(Appeals), also rejected the assessee's claim following the Tribunal's order in assessee's own case for the assessment year 1980-81. The Tribunal upheld the juri iction of CIT (Appeals). There was a Reference made from the decision of the Tribunal in respect of the assessment year 1980-81 by the Revenue in the assessee's own case being ITR No.227 of 1985 which came to be decided by this Bench on 5.3. 98. This Court held in connection with the question which was similar to the present one that the additional liability that had arisen due to fluctuation in exchange rate in the previous year was clearly referable to the liabilities of the capital nature and not to the liability of Revenue account and the additional liability was required to be added in the actual cost of the assets in view of the provisions of section 43A(1) of the Act. It was therefore, held that the additional liability was not of capaital nature and could never be treated on revenue account. We accordingly hold that the Tribunal was right in coming to the conclusion that such additional liability on account of exchange fluctuation was not revenue expenditure. The question referred is therefore, answered in the affirmative against the assessee in favour of the Revenue. The Reference stands disposed of accordingly with no order as to costs.

.... ***darji

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