COMMISSIONER OF INCOME-TAX vs. WINDSOR FOODS LTD.

ITR/227/1985HC GujaratGJHC24012357198505 March 1998Author: HONOURABLE MR. JUSTICE R.K.ABICHANDANI,HONOURABLE MR. JUSTICE KUNDAN SINGH17 pages
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What were the facts?

The assessee, Windsor Foods Ltd., filed its return for Assessment Year 1980-81. The company claimed a loss of Rs. 80,414/- due to foreign exchange rate fluctuations on repayment of loans taken for machinery. The Assessing Officer (AO) treated this as a capital loss, disallowing it as revenue expenditure and also denied investment allowance under Section 32A, as the machinery was installed earlier. The assessee also claimed weighted deduction under Section 35B on Rs. 14,105/- interest on packing credit, which the AO rejected. The CIT(A) upheld the AO's view on the exchange fluctuation loss and investment allowance but allowed weighted deduction on 25% of the interest on packing credit. The Tribunal held the exchange fluctuation to be part of the machinery cost, eligible for investment allowance in the year the additional liability arose, and allowed the Section 35B claim.

What did the High Court hold?

The High Court answered Question No. 1 in the negative, in favour of the Revenue and against the assessee. It held that investment allowance, if granted in the first year of use on the basis of the conversion of foreign currency to Indian currency at the then prevailing exchange rate, would require modification based on the correct cost determined finally. The additional liability incurred due to exchange rate fluctuation was considered part of the cost of machinery. However, the Court found that Section 43A(1) impacts the actual cost only in the year the increase or decrease in liability arises. Since the machinery was installed and investment allowance was quantified in a prior year, the additional liability arising in a subsequent year due to fluctuation could not be used to disturb the earlier quantification of investment allowance. The Court found no doubt in the interpretation of Section 32A(1) and Section 43A, stating that the language of these provisions was clear. The judgment does not explicitly address Question No. 2 and Question No. 3 in the final operative part, but the reasoning implies they were considered in the context of the overall appeal.

What were the issues?

1. Whether on the facts and in the circumstances of the case and in law, the Tribunal was right in concluding that the assessee was entitled to investment allowance on Rs. 80,414/-, being the additional liability arising due to foreign exchange rate fluctuation in respect of outstanding machinery instalments? (Revenue's contention: Investment allowance is not available as machinery was installed in a prior year. Assessee's contention: The additional liability is part of the machinery cost and eligible for investment allowance in the year it arose.) 2. Whether on the facts and in the circumstances of the case and in law, the Tribunal was right in concluding that the assessee was entitled to deduction under Section 35B of Rs. 14,105/- for packing credit? (Revenue's contention: Section 35B deduction is not allowable on packing credit interest. Assessee's contention: The deduction is allowable as per Tribunal's earlier decision.) 3. 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 fluctuations in repayment of foreign exchange loans for machinery purchase was not revenue expenditure? (Assessee's contention: The expenditure is on loan repayment, not asset acquisition, hence revenue. Revenue's contention: The fluctuation relates to a capital asset, hence capital expenditure.)

Which sections of the Income-tax Act were involved?

Section 256(1),Section 143(2),Section 43A,Section 32A,Section 35B

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

INCOME TAX REFERENCE No 227 of 1985

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?

The order continues below.

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