JUDGMENT
Sethuraman, J.
1. Under Section 256(1) of the I.T. Act, the following question has been referred at the instance of the Commissioner of Income-tax :
” Whether, on the facts and in the circumstances of the case, the amounts of Rs. 1,93,509 and Rs. 1,08,302 paid in excess by the assessee to the Italian company while honouring the bills of exchange drawn in connection with purchase of the machinery by the assessee, due to fluctuation in exchange rate, during the accounting years ending with December 31, 1962, and December 31, 1964, are allowable as revenue expenditure for the assessment years 1963-64 and 1965-66, respectively ? ”
2. The assessee is a public limited company, carrying on business in the manufacture and sale of staple fibre, rayon yarn, etc. It has entered into an agreement with M/s. Italiviscosa Eastern Trading S. P. A. (hereinafter referred to as ” the Italian company “) on December 3, 1958, for purchase of machinery of the total value of 11,397,000 (sic) working out to Rs. 2,93,25,000.39 in Indian currency at the then ruling rate of exchange. The agreement provided that the Italian company should invoice the machinery in pound sterling, that 85% of the value of the invoices of each shipment must be paid in eleven instalments and that the balance of 15% must be paid by allotment of equity shares by the assessee-company. To secure payment of instalments by the assessee on the due dates it was stipulated that the Italian company should draw bills of exchange on the assessee which were to be accepted by the assessee and the payments of which were
to be guaranteed by the State Bank of India. Under Clause 3(P)(c) of the agreement it was provided that all the payments should be made in terms of British sterling calculated at the prevalent exchange rate between sterling and the U.S.A. dollar and that if there should be a variation in the rate, the same should be separately settled with credit notes in rupees or lire in favour, respectively, of the Italian company or the assessee, as the case may be.
3. In pursuance of the agreement, the assessee obtained the necessary licence to import machinery and on the strength of the licence imported the machinery between May, 1960, and December 31, 1960, and the production commenced in 1961. During the accounting years ending with December 31, 1961, and December 31, 1962, the Italian company drew four bills of exchange on the assessee. The total amount payable on these bills of exchange which was at the rate prevailing at the time of the contract, was Rs. 2,95,35,020.38, but on account of fluctuation of the exchange rate, the assessee had to pay Rs. 2,98,15,917’41, with reference to the instalments during the year ended on December 31, 1962. Similarly, the assessee had to pay a large amount on account of fluctuations in exchange in other instalments in 1964. The result was that the assessee had to pay in the two years under reference, Rs. 1,93,509 and Rs. 1,08,302 in excess of the amount that would be due if the exchange rates were stationary as at the time when the agreement was entered into.
4. In the returns for these assessment years, viz., 1963-64 and 1965-66, the assessee claimed these two amounts, viz., Rs. 1,93,509 and Rs. 1,08,302, as difference in exchange incurred on revenue account. The ITO held that this expenditure related to acquisition of machinery, a capital asset, and hence was of capital nature. This disallowance was contested on appeal before the AAC. He upheld the claim of the assessee for deduction of these two amounts.
5. The department thereupon preferred an appeal to the Tribunal and the Tribunal, after referring to a decision of the Supreme Court in Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT [1965] 56 ITR 52, held that the two sums were admissible as deduction. The revenue challenges this conclusion of the Tribunal by obtaining reference of the question already set out.
6. The facts are clear to show that the present liability arises only in respect of the purchase price of the machinery. Sub-clauses (b) and (c) of Clause (P) of Article 3 of the agreement run as follows :
” The Italian company agrees and undertakes to do the following acts, deeds and things :……
(P) (b) to arrange for the payments of the drafts referring to the plant, machinery, equipment, etc., to be supplied by the Italian-company, as per
Article 3, para, (c) of this agreement, according to the repayment schedule which will be agreed upon with the Italian Finance Corporation.
(c) all the payments shall be made in terms of the British sterling, calculated at the present rate of exchange between the British sterling and the U. S. A. dollar, in consideration of the fact that the quotations and prices given or to be given by the Italian company are in U.S.A. dollars. Should a variation occur, same will be separately settled with credit notes in rupees or in lire in favour, respectively, of the Italian company and of the Indian company. ”
7. The reason as to why the amount due as a result of the exchange fluctuation is provided for is set out in the agreement itself. It states that it is in consideration of the fact that the quotations and prices were given by the Italian company in U.S.A. dollars. Thus, the amounts actually paid by the assessee related to the purchase price of the machinery. The price was originally fixed on the basis of the prevailing rate of exchange between the Indian currency and the two foreign currencies, viz., dollar and sterling. However, it was contemplated by the parties that there may be fluctuations in the rates of exchange, and it was, therefore, provided that apart from the original amount which may be due by the Indian company as a result of the exchange rates prevailing at the time of the agreement, amounts may be due to or due from the Indian company and for this purpose the prevalent rates of exchange at the time when the payments were to be made were to be taken into account. In other words, the price in terms of Indian currency, viz., Rs. 2,95,25,020.39 fixed under the agreement was only a tentative price, which had to be discharged at the prevailing rates of exchange at the time of the respective payments. Thus, the actual price would vary with the fluctuations in the rate of exchange.
8. Learned counsel for the assessee submitted that the two sums referred to in the question referred were expenditure incurred in discharge of a prior liability. We do not consider that this contention is well founded. The amount represents the actual payment of the purchase price. There is no independent liability apart from the amount payable as and by way of purchase price. Thus there is a definite identity between the purchase price and the actual payment and, therefore, this is a case in which the extra payment is relatable only to the cost of the machinery.
9. Learned counsel for the assessee then submitted that as a result of the provisions of Section 43A of the Act which came into force subsequently, the assessee would be eligible for the benefit of the extra amounts paid on account of the machinery being treated as part of the cost of the asset and liable to be taken into account for the purpose of allowance of depreciation, etc., but, in respect of the entire period, i.e., prior to the enactment of Section 43(A), there would be no justification for the disallowance.
10. Section 43A was inserted by Section 17 of the Finance (No. 2) Act of 1967 with effect from 1st April, 1967. The fact that Parliament provided for the fluctuation in the exchange rates being taken into account in arriving at the cost of the asset does not in any way affect the point in issue before us. The point in issue before us has to be considered in the light of the actual nature of payment that had to be made and in the light of the provisions in force. As seen already, the nature of payment is only the payment of the instalment of the purchase price which unfortunately turned out to be more than what was originally contemplated because of fluctuation in the exchange rates. The difference is thus wholly on capital account.
11. Learned counsel for the assessee invited our attention to a decision of the Supreme Court in Sutlej Cotton Mills Ltd. v. CIT [ 1979] 116 ITR 1. In that case, the assessee which had its head office in Calcutta, had a cotton mill situated in West Pakistan, where it manufactured and sold cotton fabrics. During the financial year ending 31st March, 1954, the assessee had made large profits amounting to Rs. 1,68,97,232 converted at the then prevailing rate of exchange of 100 Pakistan rupees to 144 Indian rupees. On August 8, 1955, there was devaluation of Pakistan currency, as a result of which there was parity between the Indian and Pakistan rupees. Thereafter, during the accounting periods relevant to the assessment years 1957-58 and 1959-60, the assessee obtained permission of the Reserve Bank of Pakistan and remitted to India Rs. 25 lakhs and Rs. 121/2 lakhs, respectively. The assessee claimed that on remittance the assessee had suffered respectively a loss of Rs. 11 lakhs and 51/2 lakhs. The ITO rejected the claim and the Tribunal also confirmed the disallowance.
12. When the matter came before the Supreme Court, the Supreme Court held that the assessee had suffered a loss of Rs. 11 lakhs and 51/2 lakhs in the process of conversion on account of alteration in the rate of exchange and that the question whether the loss suffered by the appellant was a trading loss or a capital loss could not be answered unless it was first determined whether the two amounts of Rs. 25 lakhs and Rs. 121/2 lakhs were held by the assessee on capital account or on revenue account. The matter was, therefore, remitted for consideration of the question whether the amounts were held on capital account or on revenue account. That case also held that if the loss was in respect of a capital asset, it would be a capital loss. In the present case, there can be no dispute about the fact that the amount which was payable to the foreign company was on capital account, and, therefore, any fluctuation in the exchange rate would have to be capital in nature, even on the basis of the decision cited.
13. The Tribunal referred to the decision of the Supreme Court in Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT [1965] 56 ITR 527. The question that arose in that case was whether the interest paid by the assessee on
unpaid purchase price for the acquisition of assets was an expenditure allowable under Section 10(2)(xv). The Supreme Court held that no capital had been borrowed by the assessee and that the agreement to pay the balance of consideration due by the purchaser did not in truth give raise to a loan. Therefore, the amount was held not to be admissible under Section 10(2)(iii). It was, however, held that the interest paid was liable to be allowed as deduction under Section 10(2)(xv) and for coming to this conclusion the Supreme Court held that the nature of the payment was interest and, therefore, was liable to be allowed as deduction. The two amounts under consideration are not in the nature of interest payments due in respect of any amount either (a) borrowed for the purpose of purchasing the machinery or (b) any unpaid instalment. Therefore, the said decision would have no application to the facts of the present case.
14. In the result, the question is answered in the negative and against the assessee. The Commissioner will be entitled to his costs. Counsel’s fee Rs. 500.
