LEO FASTENERS,PONDICHERRY vs. DCIT, PONDICHERRY CIRCLE , PONDICHERRY

The Apex Court finally found that the expression “expenditure” used in Section 37 of the Act in the circumstances of particular case, cover an amount which is really a “loss” even though the said amount has not gone out of the assessee. In fact, the Apex Court observed as follows at para 13 of its order:- “13. As stated above, one of the main arguments advanced by the learned Additional Solicitor General on behalf of the Department before us was that the word "expenditure" in section 37(1) connotes " what is paid out" and that which has gone irretrievably. In this connection, heavy reliance was placed on the judgment of this court in the case of Indian Molasses Company P. Ltd. [1959] 37 ITR 66. Relying on the said judgment, it was sought to be argued that the increase in liability at any point of time prior to the date of payment cannot be said to have gone irretrievably as it can always come back. According to the learned counsel, in the case of increase in liability due to foreign exchange fluctuations, if there is a revaluation of the rupee vis-a-vis foreign exchange at or prior to the point of payment, then there would be no question of money having gone irretrievably and consequently, the requirement of “expenditure" is not met. Consequently, the additional liability arising on account of fluctuation in the rate of foreign exchange was merely a contingent/notional liability which does not crystallize till payment. In that case, the Supreme Court was considering the meaning of the expression “expenditure incurred" while dealing with the question as to whether there was a distinction between the actual liability in praesenti and a liability de futuro. The word “expenditure" is not defined in the 1961 Act. The word “expenditure" is, therefore, required to be understood in the context in which it is used. Section 37 enjoins that any expenditure not being expenditure of the nature described in sections 30 to 36 laid out or expended wholly and exclusively for the purposes of the business should be allowed in computing the income chargeable under the head " Profits and gains of business" . In sections 30 to 36, the expressions “expenses incurred" as well as “allowances and depreciation" have also been used. For example, depreciation and allowances are dealt with in section 32. Therefore, Parliament has used the expression " any expenditure" in section 37 to cover both. Therefore, the expression " expenditure" as used in section 37 may, in the circumstances of a particular case, cover an amount which is really a " loss" even though the said amount has not gone out from the pocket of the assessee.”

This judgment of Apex Court was subsequently followed by this Tribunal in Hyundai Motor India Ltd. (supra). In the case on our hand, the assessee admittedly borrowed loan in Indian currency for the purpose of acquiring new windmill in order to expand its business. Subsequently, the loan was converted into foreign currency. The assessee offered the profit due to foreign exchange fluctuation in all the earlier years. During the year under consideration, the assessee suffered loss, therefore, by respectfully following the judgment of Apex Court in Woodward Governor India (P) Ltd. (supra), we hold that the loss suffered by the assessee has to be allowed under Section 37(1) of the Act. Accordingly, the orders of both the authorities below are set aside and the addition made by the Assessing Officer is deleted.”

In view of the above, we are unable to uphold the order of the lower authority. We hold that the loss suffered by the assessee on foreign exchange fluctuation has to be allowed under Section 37(1) of the Act. Accordingly, orders of both the authorities below are set aside and the addition made by the Assessing Officer for both the assessment years under consideration is deleted.

In the result, both the appeals filed by the assessee stand allowed.