1. This appeal has been filed by the asscssee against the order dated 14-2-1980 of the Commissioner (Appeals). The first ground in this appeal states that the Commissioner (Appeals) erred in confirming the disallowance of a sum of Rs. 54,068 being the extra amount that the assessee was called upon to pay on account of fluctuation in the rate of exchange. As there were some differences of opinion between some of the Benches of the Tribunal on this issue, especially after certain recent judicial pronouncements, the President was pleased to constitute a Special Bench to adjudicate upon this issue and that is how the matter has come up before us.
2. The assessee is a company deriving income from business in the manufacture and sale of tin containers. The assessment year with which we are concerned in this appeal is 1973-74 with the year ended 31-3-1974 as the relevant previous year. The assessee entered into an agreement dated 15-6-1971 with the Industrial Credit & Investment Corporation of India Ltd. (ICICI) under which the latter granted certain loans in US dollars for the purpose of enabling the assessee to purchase machinery from abroad. The assessee was to repay the loan with interest in instalments in US dollars. In accordance with the above arrangement, the assessee obtained the loan, purchased the machinery and started repaying the instalments in US dollars as agreed upon.
There were some other loan agreements also with similar terms and conditions. During the year under consideration, it so happened that the rate of exchange moved adversely to the assessee. In other words, the assessee had to pay a higher amount of rupees in order to repay the instalments fixed in terms of the US dollars because the US dollars became dearer in terms of rupees. The additional amount in terms of rupees that the assessee had to pay in order to repay the loan instalments came to Rs. 56,068 and the assessee claimed the said amount to be deducted as revenue expense while computing the income from its business. The ITO disallowed the claim of the assessee on the ground that the loan was borrowed for the purpose of acquiring machinery which was a capital asset and so any expenditure relating to the said loan was also capital in nature.
3. The assessee appealed to the Commissioner (Appeals) and contended that its claim should have been accepted. Reliance was placed on some orders of the Tribunal, wherein loss on account of fluctuation in the rate of the exchange had been allowed as revenue expenditure. The Commissioner (Appeals) did not agree with the contention of the assessee. According to him, the position in law relating to the loss arising out of exchange fluctuations has considerably changed since the dates of the orders of the Tribunal relied upon by the assessee. He referred to the decision of the Calcutta High Court in the case of Bestobell (India) Ltd. v. CIT [1979] 117 ITR 789 wherein such expenses have been held to be capital in nature. The case of India Cements Ltd. v. C1T[ 1966] 60 ITR 52 (SC) has been distinguished in the aforesaid decision on the ground that India Cements Ltd. v. CIT (supra) applies to a case of taking a loan and does not apply to a case of repayment of the loan. The Commissioner (Appeals) also referred to the decision of the Madras High Court in the case of CIT v. South India Viscose Ltd. [1979] 120 ITR 451 wherein the loss arising out of fluctuations in the rate of exchange at the time of repayment of a loan used for the purchase of capital assets had been held to be capital in nature. He then referred to the decision of the Bombay High Court in the case of CIT v. Godavaridevi Saraf [1978] 113 ITR 589 wherein it has been held that the decision of a High Court is binding on the subordinate authorities in the absence of a decision to the contrary by any other High Court or the Supreme Court. Following the decisions in the cases of Bestobell (India) Ltd. (supra) and South India Viscose Ltd. (supra), he held the loss under consideration as having arisen on capital account. Thus, he confirmed the disallowance made by the ITO. However, he directed the ITO to adjust the written down value of the machinery in terms of Section 43A of the Income-tax Act (hereinafter referred to as 'the Act').
4. Shri S.E. Dastur, the learned representative for the assessee, urged before us that the action of the revenue authorities was not justified.
He stated that the assessee did not purchase the machineries direct from the foreign supplier on deferred payment basis. What the assessee did was that it borrowed from 1CICI and used the loan for purchasing the machinery from the foreign supplier. The assessee became indebted to the ICICI for the amount of the loan which was to be repaid in instalments in foreign currency. Whenever an instalment fell due for payment, the assessee had to pay the requisite amount of Indian currency necessary to buy the fixed amount of foreign currency. As the rupee value of the US dollars went up, the assessee had to pay certain extra amount in terms of rupees to repay the instalment which fell due during the previous year under consideration. He emphasised the fact that there was a distinction between paying in instalments the prices of the machinery directly to the foreign supplier and repaying a loan obtained from a third party. He pointed out that the interest on the loan as well as the commitment charges payable on the loan have been allowed as revenue expenses, and it was only the loan arising out of the fluctuation in the rate of exchange that has been disallowed as capital expense.
5. He referred to the decision in the case of India Cements Ltd. (supra) and stated that the said case laid down certain principles, namely, that a loan is a liability and hence it is not an asset and that the purpose for which the loan is taken is not relevant for determining its deductibility. He stated that in that case, expenses like stamp duty, registration fees, etc., incurred for raising a loan were allowed as revenue expenses. If that be so, he contended, the expenses in connection with the repayment of the loan are also allowable on the same analogy. He explained that under an English mortgage, the expenses for conveying the mortgaged property are deductible on the authority of India Cements Ltd.'s case (supra) and on the same authority it cannot be said that the expenses in reconveying the property at the end of the mortgage period are not deductible. In other words, his point was that the case of India Cements Ltd. (supra) laid down that the cost of raising a loan is deductible and the purpose for which the loan was used is irrelevant for determining the deductibility of such expenses.
6. Next, Shri S.E. Dastur stated that the case of India Cements Ltd. (supra) laid down another principle, namely, that the English decisions cannot be applied to the Indian cases because the law in England is different from that in India. He referred to the observations at page 61 in India Cements Ltd.'s case (supra) wherein the reliance of the Bombay High Court on the English case of Texas Land & Mortgage Co. 3 TC 255 has been held to be wrong.
7. He then referred to the decision in the case of Bombay Steam Navigation Co. (1953) (P.) Ltd. v. CAT [1965] 56 ITR 52 for the proposition that if an expenditure is so related to the carrying on or conduct of the business that it may be regarded as an integral part of the profit-earning process, and not for acquisition of an asset or right of a permanent character, the possession of which is a condition precedent to the carrying on of the business, the expenditure may be regarded as revenue expenditure. Shri S.E. Dastur contended that the loss under consideration did not bring into existence any asset or right of a permanent character and it was incurred as an integral part of the profit-earning process and so it should have been aliowed as a revenue expense. He then referred to the decision in the case of CIT v.Alembic Glass Industries Ltd. [1976] 103 ITR 715 (Guj.) for the proposition that the act of borrowing capital is distinct from the act of investment of the capital to acquire an asset. His point was that the position might have been different had the assessee been indebted directly to the supplier. But as the assessee had borrowed the loan from a third party, all expenses relating to the said loan becomes admissible expenditure on the authority of India Cements Ltd.'s case (supra). In this connection, he referred to the decision in the case of CIT v. Tensile Steel Ltd. [1976] 104 ITR 581 (Guj.) wherein the interest on deferred payment of the purchase price was held to be a capital expense following the decision in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC) because it was a case of direct purchase from the supplier. He pointed out that the facts were similar in the case of Ballarpur Paper & Straw Board Mills Ltd. v. CIT [1979] 118 ITR 613 (Bom.).
8. Further, he referred to the decision in the case of Addl. CIT v.Akkamba Textiles Ltd. [1979] 117 ITR 294 (AP) wherein the guarantee commission paid to acquire a loan on deferred payment basis, which was raised for purchasing assets for a going concern, was allowed as a revenue expense on the ground that it was related to the carrying on of the business in such a way that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset of a permanent character, the possession of which is a condition precedent to the carrying on of the business, as laid down by the Supreme Court in Bombay Steam Navigation Co.'s case (supra). Next, he referred to the decision of the Madras High Court in the case of Sivakami Mills Ltd. v.CIT [1979] 120 ITR 211. In this case, the assessee purchased from abroad some items of machinery on deferred payment basis. For assuring the due payment of instalments, the assessee obtained a bank guarantee in favour of the sellers of the machinery and had to pay guarantee commission to the bank. It was held that the payment of guarantee commission was unrelated to the working out of the cost of acquisition of the machinery and it was incurred in the course of carrying on of the business and not prior to commencement of the business, Following the decision in the case of Bombay Steam Navigation Co. (supra), the commission was allowed as revenue expenditure on the ground that it could be viewed as an integral part of the conduct of the business not bringing into existence any asset of an enduring nature. Finally, he referred to the decision of the Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 for the proposition that the expense under consideration in this case did not bring into existence any asset in the capital field and so the same is allowable as revenue expense.
9. At this stage, Shri S.E. Dastur explained that the loss, arising out of fluctuations in the rate of exchange at the time of remitting instalments of the loan, incurred while purchasing capital assets from abroad, were being allowed by the Tribunal in the past. However, he stated that in the recent past the aforesaid trend has been reversed and the Tribunal has been holding the aforesaid expenses as capital expenditure, relying on three decisions, namely, Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC), CIT v. South India Viscose Ltd.'s case (supra) and Bestobell (India) Ltd.'s case (supra). He stated that none of these three cases justified the reversal of the earlier trend.
Coming to the case of Sutlej Cotton Mills Ltd. (supra), he stated that in that case a certain amount of money was held as an asset abroad and the question was whether the asset was held on capital account or on revenue account. According to Shri Dastur that case was not concerned with expenses incurred in connection with acquiring or repaying a loan, which was the subject-matter of the decisions in the cases of India Cements Ltd. (supra) and Bombay Steam Navigation Co. (supra). Coming to South India Viscose Ltd. (supra) he stated that in that case a contract was entered into directly with the supplier of the machinery and the price was fixed tentatively, in the sense that it would vary according to the rate of exchange prevailing on the date of remitting the instalments. The facts of that case showed that the loss arose out of the contract itself and was not independent of it. Hence, the Court held that the loss has been incurred on the capital account. According to him, that case did not apply to the facts of the present case where a loan was taken from a third party on different terms and conditions.
In other words, the reported case relates to the payment of the purchase price while the instant case is one of repayment of a loan.
10. Coming to the case of Bestobell (India) Ltd. (supra), he stated that the ratio of this case is not binding because it has ignored the observations of the Supreme Court in the case of India Cements Ltd. (supra) to the effect that the English decisions are not applicable in deciding the question about revenue and capital expenditure under the Income-tax Act. He referred to the observations appearing at page 60 in the case of India Cements Ltd. (supra) wherein the Supreme Court observed that the statute law in England is different from the law in India and the observations of the learned judges in the English cases must be appreciated in the light of the background of the English Income-tax Act. The Court was referring to the case of Texas Land & Mortgage Co. (supra). He then pointed out that the Calcutta High Court, at page 803, in the case of Bestobell (India) Ltd. (supra), has relied on the English decision of Davies (H.M. Inspector of Taxes) v. Shell Co. of China Ltd. [1952] 22 ITR (Supp.) 1 (CA) overlooking the observations of the Supreme Court in the case of India Cements Ltd. (supra). Secondly, he stated that in the Calcutta High Court's case (supra) a distinction has been made between taking of a loan and the repayment of a loan on the ground that a contract for loan is a contract for acquiring an asset which has been negatived by the Supreme Court in the case of India Cements Ltd. (supra). He also referred to the two cases mentioned in the Calcutta High Court decision in which the Supreme Court has been stated to have approved the English decision in the case of Shell Co. of China Ltd. (supra). These two cases are K.M.S. Lakshmanier v. CIT [1953] 23 ITR 202 (SC) and Punjab Distilling Industries Ltd. v. CIT [1959] 35 ITR 519 (SC). According to Shri Dastur in these two cases, the Supreme Court did not approve the case of Shell Co. of China Ltd. (supra) and it was really concerned with a different question in each case. In the case of K.M.S. Lakshmanier (supra), the Court was dealing with the question as to whether a deposit is a loan and the Court held that a deposit was indeed a loan. In the case of Punjab Distilling Industries Ltd. (supra), certain deposits received by the assessee from its customers were held to be trading receipts.
11. Shri Dastur stated that there is yet another reason as to why the decision in the case of Bestobell (India) Ltd. (supra) should not be binding. The reason is that a different High Court has applied a different reasoning to decide the same question. According to him, when two High Courts adopt two different approaches to the same question, then, the decision arrived at by one of them need not be binding. Shri Dastur was referring to the decision of the Punjab and Haryana High Court in the case of Groz-Beckert Saboo Ltd. v. CIT [1981] 127 ITR 608.
In this case, because of fluctuation in the rate of exchange, the liability of the assessee to repay the loan borrowed from abroad in foreign currency went up and the question was whether the excess liability could be allowed as a revenue expenditure. The High Court, after considering the tests laid down in the cases of CIT v. Tata Locomotives & Engineering Co. Ltd. [1966] 60 ITR 405 (SC) and Sutlej Cotton Mills Ltd. (supra), held that the answer to the question would depend upon whether the loan was utilised for acquiring capital asset or incurring revenue expenditure. The case was remanded to the Tribunal just as in the case of Sutlej Cotton Mills Ltd. (supra) for determining the said factual position. As stated earlier, Shri Dastur referred to this case for the limited purpose of showing that the Calcutta High Court decision in the case of Bestobell (India) Ltd. (supra) is not binding.
12. He also referred to the decision in the case of CIT v. A.S.A.Concern [1937] 5 ITR 456 (Rang.) in support of his contention.
13. Coming to Section 43A, Shri Dastur urged that the said section was no bar for allowing the expense under consideration as a revenue expense either under Section 28 or under Section 37 of the Act.
According to him, Section 43A is an enabling provision and it enacts an additional advantage in addition to any other advantage which may be available to the assessee under the other provisions of the Act. He referred to the decision dated 23-7-1979 of the Tribunal in IT Appeal Nos. 468 and 469 (Bom.) of 1978-79 in the case of Choksi Tube Co. Ltd. in support of this contention. He also referred in this connection to the decision in the case of CIT v. Kalyanji Mavji & Co. [1980] 122 ITR 49 (SC) for the observations appearing at page 53 to the effect that the mention of 'current repairs' in an earlier sub-section does not preclude the allowance of repairs under the residuary sub-section. His point was that the rule that 'the special excludes the general' does not come into operation while adjusting the gains or losses arising out of exchange fluctuations to the actual cost of the asset under Section 43A.14. Finally, he referred to the pamphlet issued by the Institute of Chartered Accountants of India on Accounting for foreign currency translation and stated that the Institute has stated therein that the difference arising out of exchange fluctuations should be adjusted in the profit and loss account as revenue expenditure. He relied on the decision in the case of Challa-palli Sugars Ltd. (supra) for the proposition that the established accounting procedure should be followed in determining the question raised in the instant case.
15. Shri S.P. Mehta, the learned counsel for Choksi Tube Co. Ltd., interveners, urged before us that the question before us should be decided by applying the standard tests to distinguish capital expense from revenue expense, as laid down by the Supreme Court from time to time. He urged that the amount under consideration in this case did not bring into existence any asset or advantage of an enduring nature and so the same has to be considered only on revenue account. Further, he stated that what applies to the taking of a loan also applies to its repayment and so the decision in the case of India Cements Ltd. (supra) supports the contention of the assessee.
16. Shri R.J. Joshi, the learned counsel for the department, on the other hand, supported the order of the Commissioner (Appeals). He stated that the case of India Cements Ltd. (supra) has no application to the facts of this case for two reasons, firstly, there is a distinction between expenditure and loss, inasmuch as expenditure connotes an outgoing which is within the volition of the assessee, whereas loss results from events beyond the volition of the assessee.
Secondly, the acquiring of a loan is different from the repayment of the loan and both these things cannot be equated. He stated that the case of India Cements Ltd. (supra) lays down the principle that a loan is not an asset because it is a liability. But, that decision does not abolish the distinction between capital expense and revenue expense. He emphasised the fact that the said distinction still exists and in every case the well recognised tests for distinguishing the one from the other has to be applied for the purpose of determining whether an outgoing is deductible or not. He relied on the decision in the case of Jeewanlal (1929) Ltd. v. CIT [1969] 74 ITR 753 (SC) in support of his contention. Then, he referred to the decision of the Bombay High Court in the case of Calico Dyeing & Printing Works v. CIT [1958] 34 ITR 265 and referred to the observations at page 271 to the effect that there is no warrant for drawing a distinction between capital borrowed for the purpose of acquiring a capital asset and capital borrowed for acquiring a revenue asset. In both the cases, interest payable on the capital borrowed was allowed as deduction. His point was that the distinction between capital and revenue expenditure is not relevant only for the purpose of deducting interest, but the said distinction continues to remain very relevant for all expenses other than interest even after the decision in the case of India Cements Ltd. (supra).
17. Next, he referred to the decision in the case of Ram Kishan Oil Mills v. CIT [1965] 56 ITR 186 (MP) wherein, at page 190, it has been observed that the case of Calico Dyeing & Printing Works (supra) laid down the principle that interest under Section 10(2)(iii) of the 1922 Act is admissible as deduction if the capital was borrowed for the purpose of the assessee's business and not necessarily to acquire a revenue asset.
18. He then referred to Section 43A and urged that this section recognises the distinction between revenue expense and capital expense.
Section 43A is a special provision governing cases of fluctuation in the rate of exchange and it specifically directs that differences arising out of such fluctuations should be adjusted in the capital account. He contended that the Act itself has treated such expenses to be on the capital account and so there is no question of allowing the same as revenue expenditure. In this connection, he referred to the decision of the Gujarat High Court in the case of Arvind Mills Ltd. v.CIT [1978] 112 ITR 64. In that case, the assessee had to pay for the imported machinery acquired by it and for that purpose, the assessee took a loan from ICICI. The repayment of the loan was to be made in the succeeding year in foreign currency. During the year, the rupee was devalued and so the assessee had to pay an additional amount in terms of rupees in respect of the loan of the same amount expressed in foreign currency. It was held by the Court that the additional liability on account of the fluctuation of the exchange rate was relatable to the machinery acquired in the year of account and so formed part of the actual cost of the machinery. He referred to the observations in that case at page 80, wherein the decision in India Cements Ltd. (supra) has been distinguished. In Challapalli Sugars Ltd.'s case (supra), the Supreme Court referred to the decision in India Cements Ltd. (supra) and pointed out that the loan in the latter case was obtained not before the commencement of the production but at a later stage and, therefore, the incidental expenses could not be capitalised. In the case of Challapalli Sugars Ltd. (supra), the interest was capitalised because the loan was obtained prior to the commencement of production. According to Shri Joshi, the High Court in the case of Arvind Mills Ltd. (supra) did consider the second question referred to it, namely, whether the additional liability as a result of devaluation is deductible from business profits either under Section 28 or 37 and decided the matter against the assessee even though at the end of the decision it is stated that Question No. 2 was not pressed.
The reason is, as stated earlier, that the High Court has held the additional liability to be on the capital account, as held in Challapalli Sugars Ltd.'s case (supra) and not on the revenue account as held in India Cements Ltd.'s case (supra).
19. He next referred to the decision in the case of Bestobell (India) Ltd. (supra) which is in favour of the revenue. He referred to the observations appearing at page 803 in that decision, wherein it has been held that securing a loan is different from the repayment of the loan and the principles which decide the deductibility of expenses in connection with the former are not applicable while considering the deductions of amounts relating to the latter. He also referred to the two Supreme Court decisions referred to by the Calcutta High Court and urged that the Supreme Court has accepted and approved the principle laid down in the case of Shell Co. of China Ltd. (supra).
20. He also referred to the case of Hart stone Stiles [1977] TC 1047 which recognises the distinction between a debt on capital account and a debt on revenue account and reiterated his stand that the said distinction has not been wiped out by the case of India Cements Ltd. (supra). He stated that as far as interest is concerned, the distinction is wiped out by the express provision of the Act, but so far as other expenses are concerned, the distinction remains valid even in respect of a loan which has been held to be a liability by the decision in India Cements Ltd. (supra).
21. He then referred to the other decisions relied on by the learned counsel for the assessee, namely, Bombay Steam Navigation Co. (supra) and Alembic Glass Works (supra) and stated that they were all cases of 'interest' and are not relevant for deciding the question before us. He relied on the decision in the cases of South India Viscose Ltd. (supra) and Sutlej Cotton Mills Ltd. (supra) in support of the proposition that loss arising out of exchange fluctuations will be on capital account if the necessity to pay in foreign currency arose in connection with the acquiring of any capital asset. He also strongly relied on the decision in the case of Groz-Beckert Saboo Ltd. (supra) which has followed the test laid down in the case of Sutlej Cotton Mills Ltd. (supra).
22. He relied on the decision of the Supreme Court in the case of CIT v. S.C. Kothari [1971] 82 ITR 794 and that of the Bombay High Court in the case of CIT v. New India Assurance Co. Ltd. [1969] 71 ITR 761 for the proposition that there is clear distinction between 'expenditure' and 'loss'. He drew our attention to the observations appearing at page 795 in the latter case that an expenditure is voluntarily incurred while a business loss is fortuitous. He further referred to the decision in the case of CIT v. Mehboob Productions (P.) Ltd. [1969] 74 ITR 676 (Bom.) wherein it has been held that profit or loss on exchange fluctuation can be on capital account or on revenue account and that a change in the rate of exchange does not affect the value of the debt as such but only its worth to the assessee.
23. Shri Joshi contended before us that there is no authority for equating the taking of a loan with the repayment of a loan on the basis of the English mortgage referred to by the learned counsel for the assessee. According to him, the taking of a loan is a different activity and the principles applicable thereto cannot be applied to a case of a repayment of the loan. He pointed to the decision in the case of Bestobell (India) Ltd. (supra) which has recognised such a distinction.
24. He then relied on the recent decisions of the Tribunal, rendered after considering the decisions in the cases of Sutlej Cotton Mills Ltd. (supra) and South India Viscose Ltd. (supra), namely, decision dated 24-1-1980 of the Tribunal in IT Appeal No. 683 (Bom.) of 1979 in the case of Bombay Suburban Electric Supply Co. Ltd., the decision dated 26-3-1980 in IT Appeal No. 1233 (Bom.) of 1976-77 in the case of Sandoz India Ltd. and the decision dated 8-12-1980 in IT Appeal No. 732 (Bom.) of 1979 in the case of Precision Fasteners Ltd. For the above reasons, he contended that the decision of the Commissioner (Appeals) is quite correct and deserves to be upheld.25. In reply, Shri S.E. Dastur stated that the distinction between expenditure and loss is not very relevant because even if it is a loss, it is deductible under Section 28. He pointed to the observations at page 801 in the case of S.C. Kothari (supra) wherein it has been observed that a loss, which springs directly from the carrying on of the business and is incidental to it, is admissible as a deduction, as held in the case of Badridas Daga v. CIT [1958] 34 ITR 10 (SC). Coming to the decision of the Madras High Court in the case of South India Viscose Ltd. (supra), he stated that the said case was one of direct purchase from the foreign supplier and so is distinguishable on the basis of the dichotomy laid down in the case of Tensile Steel Ltd. (supra). Regarding the decision of the Calcutta High Court in the case of Bestobell (India) Ltd. (supra), he stated that the very fact that the Punjab and Haryana High Court in the case of Groz-Beckert Saboo Ltd. (supra), applied a different test shows that the Calcutta High Court decision is not binding. According to him, if two High Courts applied two different principles, regarding the same issue, then, neither of them need be followed. Further, the Calcutta High Court has proceeded on the footing that the loan is always on capital account which is contrary to the observations in the case of India Cements Ltd. (supra). He urged that Bestobell India Ltd. (supra) was a case of devaluation and in the case of Arvind Mills Ltd. (supra), it is stated that the Section 43A does not apply to devaluation. Further, he reiterated that Section 43A is not a proviso to Section 37 and the former does not cut down the ambit of the latter, as pointed out by the brochure issued by the Institute of Chartered Accountants.
26. Regarding the distinction between the taking of a loan and its repayment, he urged that there is no real difference between the two, as far as the deductibility of the expenses incurred in relation to the one or the other is concerned. Regarding the argument of the revenue based on the fact whether the debt is on revenue or capital account, he stated that this test really means an enquiry into the purpose for which the loan was raised which has been held to be irrelevant in the case of India Cements Ltd. (supra). Next, he pointed out that the case of Bombay Steam Navigation Co. (supra) is not a case of interest but it was a case of a debt. Similarly the case of India Cements Ltd. (supra) is not a case of interest. Finally, he stated that the only question we should ask ourselves while deciding the issue before us is whether there is any prohibition for allowing the claim of the assessee and if there is no such prohibition, the same should be allowed.
27. We have carefully considered the rival contentions. There cannot be any dispute after the Supreme Court's decision in the case of India Cements Ltd. (supra) that unlike the English Income Tax Act, the Income-tax Act in our country does not make any distinction between the capital borrowed for the purpose of acquiring current assets, such as, stock-in-trade of the business or capital assets. Interest payable on the borrowed capital for the purpose of the business is, in either case, allowable as deduction under Section 36(1)(iii). The loan/borrowed capital is not an asset or an advantage for the enduring benefit of the business and is a liability. As a result, not only the interest payable on the loan/borrowed capital for the purpose of the business but also the expenditure incurred in obtaining or arranging such a loan/borrowed capital, will be allowed as a deduction on revenue account. Thus, once it is established that the loan has been taken or that the capital has been borrowed for the purpose of the business, it is not necessary for considering the question of allowance of interest on loan or borrowed capital or of expenditure incurred in obtaining the loan to further enquire whether the loan or the borrowed capital is used for acquiring the capital asset or current asset, such as, stock-in-trade. Yet, there is not even a suggestion that all disputes relating to capital and revenue expenditure are now settled by the decision in the case of India Cements Ltd. (supra) and there is no disputed area left. Indeed, questions have arisen in situations different from what was obtaining in the aforesaid case where not only the High Courts but the Supreme Court has also considered it necessary to examine and decide such issues in a number of cases.
28. That is why it becomes necessary to appreciate the facts. The dispute before us is not as regards allowance of interest on loan or of expenditure incurred in raising the loan. It is regarding the loss suffered by the assessee on account of payment in excess of the amount credited in its books while discharging its liability in respect of certain instalments falling due during the previous year with regard to the loan obtained by it in US dollars. It may be mentioned that in response to a query from the Bench, Shri Joshi, the learned standing counsel for the department, fairly conceded that there was not sufficient material on record and, therefore, he would not urge that the obtaining of the loan and the purchase of the machinery by importing it in this case constituted one and the same transaction.
These were two separate transactions even though the loan was admittedly utilised for purchasing and importing the machinery which is a capital asset in the assessee's business. We will accordingly proceed on these premises. In the circumstances, we hold that the Madras High Court decision in the case of South India Viscose Ltd. (supra) which proceeded on the finding that the loss as a result of excess payment for discharging the loan liability arose out of contract for buying or importing the machinery itself and not independent of it, is distinguishable.
29. The controversy before us is, thus, very narrow. According to Shri Dastur, the learned counsel for the assessee, there is no material difference between the nature of the expenditure incurred for raising the loan and the expenditure incurred in making repayment or in discharging the loan which is a liability. He explains his point by giving an illustration. He says that in a case where the loan is obtained by mortgaging an immovable property, the expenditure on, or in connection with, the execution of the mortgage deed will, admittedly, be allowed as deduction in view of the Supreme Court's decision in India Cements Ltd. (supra). The expenditure on, or in connection with, the execution of the release deed/reconveyance of the mortgage deed at the time of the repayment of or discharging the loan, he stated, cannot be considered on a different footing. The analogy to him is obvious and requires no argument. Shri Joshi, the learned standing counsel, on the other hand, strongly contended that the nature of the expenditure for raising the loan and the expenditure for making repayment or discharging the loan is different and in any event, such a difference has been noted and recognised by the Calcutta High Court in its decision in Bestobell (India) Ltd. (supra). The Supreme Court's decision in the case of India Cements Ltd. (supra), which dealt with a different situation, he submits, is certainly not applicable to the facts of the case.
30. In fairness to the assessee's counsel, we may observe that if we were to decide the issue on the basis of our first impression, we would have, perhaps, accepted Shri Dastur's contention that there is no material difference between the nature of the expenditure incurred on raising the loan and the expenditure in discharging the loan. We might as well have accepted Shri S.P. Mehta's brief and to the point contention that by discharging a loan liability, one does not acquire any asset or an advantage at all, far less a capital or an advantage of enduring nature. However, unfortunately for the assessee, the Calcutta High Court has, as pointed out by Shri Joshi, in Bestobell (India) Ltd. (supra), noted and recognised the distinction between the expenditure incurred for obtaining the loan and the expenditure incurred at the time of repayment of the loan. No doubt, their Lordships have, at page 803, also observed that the ratio in the English decision in the case of Shell Co. of China Ltd. (supra) and the principle laid down therein were accepted and approved by the Supreme Court in the cases of K.M.S.Lakshmanier (supra) and the Punjab Distilling Industries Ltd. (supra) and that the propositions laid down in the case of Shell Co. of China Ltd. (supra), applied on all fours to the case before him and Shri Dastur has vehemently argued that these observations are not quite correct. Accordingly, we have very carefully gone through the Calcutta High Court's decision. According to our understanding of the decision, the distinction drawn by the Hon'ble High Court between the two types of expenditure as aforesaid is independent of the aforesaid observations. In the premises, we do not consider it really necessary to enter into the exercise of going into the various decisions to examine whether and to what extent the aforesaid observations of the High Court are in conflict with the Supreme Court's decision in India Cements Ltd. (supra), if at all. Therefore, even if we assume for argumemt's sake that the impugned observations in the Calcutta High Court decisions are, perhaps in conflict with the Supreme Court decision in India Cements Ltd. (supra), nothing much would turn on it as we are of the view that the Calcutta High Court has noted and recognised the distinction independently and there is no suggestion that any other High Court or the Supreme Court has held that there is no such distinction or that such a distinction is not material.
Accordingly, we proceed on the basis that there is a material distinction between the expenditure incurred in obtaining the loan and the expenditure incurred at the time of the repayment of the loan and hold respectfully following the aforesaid Calcutta High Court's decision, that the Supreme Court decision in India Cements Ltd. (supra), is distinguishable.
31. It may be stated that the Calcutta High Court has distinguished the Supreme Court's decision in India Cements Ltd. (supra), by pointing out the aforesaid factual distinction and has, after going through and analysing a number of the Supreme Court, High Courts and English decisions, held: ... However, the extra expenditure, deemed or otherwise, or the loss, was inextricably connected with the assessee's indebtedness and did not arise de hors the indebtedness. Therefore, the extra amount which the assessee had to provide for as a result of devaluation cannot be considered as extra expenditure to be incurred for meeting the debt like postal expenses or bank charges or as extra expenditure resulting in a business loss of a revenue nature.
(p. 790) Moreover, when this very issue came up for consideration before the Punjab and Haryana High Court in the case of Groz-Beckert Saboo Ltd. (supra) the Hon'ble Court held that the nature of the expenditure in discharging the loan liability on foreign currency would be on revenue or capital account depending upon the purpose for which the loan was utilised. Being of the view that the crucial thing was the utilisation of the loan and the Tribunal had not considered the matter from that point of view, the Hon'ble High Court remanded the case to the Tribunal with a direction that it should dispose of the matter in the light of the observations contained in the judgment. It may not be out of place to mention that their Lordships have, inter alia, followed the Supreme Court's decision in the case of Sutlej Cotton Mills Ltd. (supra). Thus, both the Calcutta and Punjab and Haryana High Courts have in their aforesaid two decisions held, though for somewhat different reasons, that the expenditure or loss incurred or suffered for repaying the loan in foreign currency would be on capital account if the loan was used for acquiring the capital asset.
32. Shri Dastur, the learned counsel for the assessee, it may be stated, had urged that the Tribunal should not follow the abovesaid two decisions as they have given different and contradictory reasons for coming to the conclusion. According to him, in a case like this, the ratio of the Bombay High Court's decision in the case of Godavaridevi Saraf (supra) would not apply. In our opinion, however, the argument, though ingenious, is fallacious. It is not that the two Hon'ble High Courts have come to contrary conclusions. The conclusion arrived at by them is the same, though it may be true that they have given somewhat different reasons for coming to the conclusion. On carefully going through the two decisions, it appears that the reasons given are not even contradictory. Both the Courts have held that the crucial thing in such a case was the utilisation of the loan. After all, there is no dispute that the machinery or the plant imported constituted capital asset and the excess price indirectly, if not directly, is referable to the acquisition of the aforesaid capital asset. In the meanwhile, we have come across the recent decision of the Calcutta High Court in the case of Union Carbide India Ltd. v. CIT [1981] 130 ITR 351. There again, the view taken by their Lordships in Bestobell (India) Ltd. (supra) has been reiterated, In the latter case their Lordships have more or less adopted the reasons given by the Punjab and Haryana High Court in Groz-Beckert Saboo Ltd. (supra) and have referred to and applied the Supreme Court's decision in the case of Sutlej Cotton Mills Ltd. (supra). No doubt, as pointed out by Shri Dastur, the subject-matter of consideration in Sutlej Cotton Mills Ltd.'s case (supra) was not a liability but an asset, i.e., an amount standing to the assessee's credit in foreign country. All the same, both the Calcutta and Punjab and Haryana High Courts have considered the ratio of the said Supreme Court's decision to be that for considering the allowability of the expenditure incurred for making repayment of the loan liability on capital or revenue account, the purpose for which the loan is utilised is very important and relevant.
33. Having regard to the above discussion, we, therefore, hold that the Supreme Court's decision in the case of India Cements Ltd. (supra) is not applicable to the facts of the case. Further, as laid down by the Calcutta and Punjab and Haryana High Courts in their aforesaid three cases--Bsstobell (India) Ltd. (supra), Groz-Beckert Saboo Ltd. (supra) and Union Carbide India Ltd. (supra) the expenditure incurred for repaying the loan in foreign currency would be allowable depending upon its utilisation for acquiring capital or for current assets. In view of the fact that the loan in this case was utilised for acquiring a capital asset, we further hold that the departmental authorities were justified in treating the sum of Rs. 54,068 being the excess amount that the assessee was called upon to pay on account of fluctuation in the rate of exchange for discharging its loan liability as on capital account. However, we may mention here that other cases cited before us are distinguishable as the dispute in these cases has been different.
34. Moreover, the relevant portion of Sub-section (1) of Section 43A, which has been brought into the statute book with effect from 1-4-1967, reads as under: (1) Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange at any time after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment towards the whole or a part of the cost of the asset or for repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset (being in either case the liability existing immediately before the date on which the change in the rate of exchange takes effect), the amount by which the liability aforesaid is so increased or reduced during the previous year shall be added to, or, as the case may be, ....
According to Shri Joshi Section 43A is an overriding provision and once an expenditure falls under this section and is treated as a capital expenditure forming part of the actual cost of the capital asset, the very expenditure cannot be considered at all under other provisions with a view to allow it on revenue account. On the other hand, strongly relying on the Tribunal's decision in the case of Choksi Tube Co. Ltd. (supra), to which one of us is a party, Shri Dastur submitted that Section 43A was non obstante only to the computation of actual cost as defined in Section 43(1), etc. In other words, his contention is that this section contains an enabling and not a restrictive provision. He states that the section does not specifically provide that such an expenditure cannot or should not be allowed as a deduction under Section 37 or as loss under Section 28. 35. We have carefully gone through the provisions of Section 43A and the Tribunal's decision (supra). Keeping in view the proposition laid down by the Supreme Court in A.K. Ghosh v. A. Bose, AIR 1952 SC 369, namely: It should first be ascertained what the enacting part of the section provides on a fair construction of the words used according to their natural and ordinary meaning, and the non obstante clause is to be understood as operating to set aside as no longer valid anything contained in the relevant existing laws which is inconsistent with the new enactment.
We have examined the provisions of Section 43A carefully afresh.
Section 43A, as stated earlier, uses the expression "Notwithstanding anything contained in any other provisions of this Act where ...." It, inter alia, provides that the excess or short payment on account of fluctuation in the rate of exchange while making payment in foreign currency to a supplier of the capital asset or to the financial institution from which the loan has been taken and utilised to acquire a capital asset, will be added to or reduced from the 'actual cost' of the capital asset. It, of course, does not specifically prohibit allowance of such an excess payment as a deduction under Section 37 or as loss under Section 28. The effect of Section 43A is that the excess payment as aforesaid, if any, is treated as capital expenditure forming part of the actual cost of the capital asset and, as stated by us earlier, the section clearly and categorically provides that the provisions of this section will prevail notwithstanding any provision to the contrary in the Act. Therefore, the controversy whether Section 43A is non obstante to the computation of actual cost only or to other provisions of the Act appears to us to have really no bearing. In our opinion, once an expenditure, because of the overriding provisions of Section 43A is to be capitalised and treated as part of the actual cost or actual amount, it becomes capital expenditure for all purposes so much so that it goes out of the purview of Section 37 automatically.
Section 37 it may be stated, covers only such cases of expenditure which are, inter alia, not in the nature of capital expenditure or the personal expenses of the assessee. This will also be a reason, according to us, for rejecting the assessee's claim for allowance of excess payment as business loss under Section 28 as it is not possible to treat the expenditure as capital expenditure forming part of the actual cost of the capital asset and at the same time a business loss.
However, as laid down in Section 43A itself, the excess payment of Rs. 54,068 will have to be added to the actual cost for the purpose of computing depreciation year after year as has been rightly held by the Commissioner (Appeals).
36. The above decision of ours disposes the issue for which the Special Bench was constituted. However, there are certain other grounds in this appeal which we now proceed to consider. The first of such other grounds states that the disallowance of Rs. 32,917 incurred by the assessee as sales promotion expenses was not justified. The ITO disallowed this amount on the ground that they represented entertainment expenses of the nature envisaged under Section 37(2B). On appeal, the Commissioner (Appeals) observed that the expenditure under consideration was in the nature of entertainment especially when no details about the persons on whom the expenses were incurred and the business procured therefrom were not produced before him. Shri B.N.Pardiwala, the learned representative for the assessee, urged before us that the disallowance was not justified. He referred to the decision dated 31-8-1979 of the Tribunal in the assessee's own case for the assessment year 1972-73 where this question was considered and the bulk of the expenses incurred for sales promotion was allowed as admissible deductions. Shri T.S. Srinivasan, the learned representative for the department, on the other hand, supported the disallowance. We have considered the contention of both the parties as well as the facts on record. We find that the Tribunal in their order dated 31-8-1979, referred to above, have held that, barring a few exceptions, the rest of the sales promotion expenses were incurred as a matter of common courtesy on tea, snacks, etc., supplied to the business customers. We have gone through the details of the expenses under this head incurred during this year and we find that these expenses, with a few exceptions, were of the same nature as found by the Tribunal in the earlier year. The exceptions are Rs. 1,367 (OPC 1,252), Rs. 1,256 (CV 965), Rs. 1,033 (CV 3,702), Rs. 1,820 (CV 4,202) and'Rs. 1,293 (CV 4,360). Hence, we confirm the disallowance of the sum of these five items which comes to Rs. 6,769 and allow the balance as admissible business expenditure not amounting to entertainment within the meaning of Section 37(2B) relying on the decision in the case of CIT v. Shah Nanji Nagsi [1979] 116 ITR 292 (Bom.).
37. The next ground relates to the disallowance of a sum of Rs. 6,776 incurred by the assessee on shifting of the plant and machinery from one location in Cochin to another location in the same city. The details of this expenditure were Rs. 2,008 incurred on loading and transportation charges, Rs. 3,500 on dismantling the electrical installations in the old premises and for reconnecting them in the new premises, and Rs. 3,276 on account of cost of materials in connection with the shifting. The ITO disallowed the expenditure without assigning any reason. On appeal, the Commissioner (Appeals) held that the first item of Rs. 2,008 was admissible but confirmed the disallowance of the other two items amounting to Rs. 6,776. Shri Pardiwala urged before us that the Commissioner (Appeals) was not justified in his decision. He relied on the decision of the Tribunal in the assessee's own case for the earlier assessment year 1972-73 and also on the decision in IT Appeal No. 4352 (Bom.) of 1970-71 in the case of Siemens India Ltd. in support of his contention that the entire expenses should have been allowed as revenue expenditure. Shri Srinivasan, on the other hand, supported the disallowance relying on the order of the Commissioner (Appeals). We have considered the contention of both the parties as well as the facts on record. We find that the Tribunal in their order dated 11-5-1977 in the assessee's own case for the assessment year 1972-73 had considered a similar point and had come to the conclusion that the expenditure on shifting a part of the plant and machinery from one premises to another (as distinguishable from the wholesale shifting of the factory itself), in the interest of efficient running of the business was in the nature of revenue expenditure. Further, we find that the Tribunal in the case of Siemens India Ltd. (supra) has also come to a similar conclusion relying on the decision of the Supreme Court in the case of CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140. Regarding the nature of the expenditure incurred during this year, we find that the assessee was having plant and machinery in a rented premises and had to shift them to its own premises in order to make the unit at the new site complete and efficient. The Commissioner (Appeals) has allowed a part of the expenses. Considering all the facts and circumstances of the case, we see no justification in sustaining the disallowance of Rs. 6,776. So, we delete the same.
38. The next ground states that the Commissioner (Appeals) erred in disallowing a sum of Rs. 3,500 spent as entrance fees to various clubs for its employees and directors. This ground also states that the disallowance of another sum of Rs. 5,000 paid as company's membership to Lotus Club was not justified. Shri Pardiwala urged before us that the expenses should have been allowed as having been incurred for the purpose of the assessee's business. Shri Srinivasan, on the other hand, supported the disallowance on the ground that there was no direct nexus between the expenses and the business carried on by the assessee. We have considered the contentions of both the parties as well as the facts in record. We find that the sum of Rs. 3,500 represented admission fees by the directors or employees of the assessee-company to two clubs. The sum of Rs. 5,000 . was paid as company's membership and entrance fees to the Lotus Club. All the three items represent the initial entrance fees and not annual subscriptions. The case of the assessee is that these amounts were spent in connection with the business carried on by the assessee and that they are in the nature of capital expenditure. After considering the nature of the expenditure, we hold that the assessee has not established that the expenses were wholly and exclusively incurred for carrying on its business or were incidental to it and did not represent capital expenditure. In the circumstances, we uphold the disallowance of these two amounts. Similar view has also been taken by the Tribunal in their order dated 31-3-1980 in IT Appeal Nos. 1375 and 1376 (Bom.) of 1979.
39. The next ground states that the Commissioner (Appeals) erred in issuing directions to the ITO for recomputing the disallowance made under rule 6D in the manner done by him. Shri Pardiwala urged before us that the Commissioner (Appeals) should have allowed the claim of the assessee in full while Shri Srinivasan supported the order of the Commissioner (Appeals) and pointed out that the Commissioner (Appeals) has only given a direction to the ITO to look into the matter afresh after giving an opportunity of being heard to the assessee so that the assessee could not have any grievance. The ITO made the disallowance of Rs. 9,495 in respect of several employees enumerated in his order applying the provisions of Rule 6D. The case of the assessee was that the exact amount disallowablc under Rule 6D in respect of each employee was furnished to the ITO and so the ITO was not justified in disallowing a higher amount. Further, the case of the assessee was that the expenditure incurred on telephone during tours was entirely for the purpose of the business and the same could not be disallowed while computing the allowable daily allowance. Similar was the case regarding the local conveyance used for the purpose of persons while on tour. We find that the Commissioner (Appeals) has taken this contention of the assessee into consideration and has directed the ITO to correctly compute the disallowable amount under Rule 6D afresh after hearing the assessee. We find nothing irregular or improper in the direction given by the Commissioner (Appeals) and so we see no reason to interfere.
40. The last ground in the appeal for the assessment year 1973-74 is that the Commissioner (Appeals) had erred in stating that no appeal lay against the charging of interest under Section 214 of the Act. It is pertinent that the Commissioner (Appeals) has given a rinding that by raising the ground the assessee was not denying its liability to interest under Section 215 as such and that only the quantum was in dispute. He has for the purpose relied on a number of decisions of the High Courts and of the Tribunal without mentioning names.
41. Placing reliance on the Delhi High Court's decision in the case of CJT v. Mahabir Parshad & Sons [1980] 125 ITR 165, Shri Dastur has submitted that the Commissioner (Appeals) was not justified in not entertaining this ground. He has pointed out that in all other decisions what was considered is whether the objection to charging interest under Section 215 fell within the expression 'denying his liability to be assessed under the Act' while the Delhi High Court has held that the appeal will lie against the charging of interest under Section 215 under the second part of Section 246(c) of the Act. Shri Joshi, for the revenue, has, on the other hand, reiterated that the issue is broadly covered by the Full Bench decision of the Bombay High Court in the case of CIT v. Daimler Benz A.G. [1977] 108 ITR 961 against the assessee.
42. We have carefully considered the rival contentions. It is true that the question whether interest charged under Section 215 is appealable or not has been considered by the various High Courts other than the Delhi High Court by examining the purport and scope of the expression 'denying his liability to be assessed under the Act' as found in Section 246(c). It is also true that the Delhi High Court has, for the purpose of holding that interest charged under Section 215 is appealable, interpreted the second part of Section 246(c), which, in the opinion of their Lordships, was wide enough to permit agitation of the issue of charging of interest under Section 139, etc., in regard to both its leviability and quantum. In this connection, it has to be borne in mind that the Bombay High Court's decision is binding on this Bench of the Tribunal. Moreover, the Bombay High Court's decision in the case of Daimler Benz (supra) is a Full Bench decision. No doubt, this particular aspect has not been considered by their Lordships of the Bombay High Court but the issue is broadly covered. In the circumstances, we do not think it is proper for us to distinguish the binding decision of the Bombay High Court on the ground that a particular aspect of the question was not considered by their Lordships as such. Incidentally, a Full Bench of the Allahabad High Court has also taken the same view as taken by the Bombay High Court in its decision in the case of CIT v. Geeta Ram Kali Ram [1980] 121 ITR 708.
Accordingly, respectfully following the aforesaid Bombay High Court's decision, we uphold the decision of the Commissioner (Appeals).