Gnanambikai Mills Ltd. vs Commissioner of Income Tax

K.A. Thanikkachalam, J.—At the instance of the assessee, the Tribunal referred the following question of law for the opinion of this court

u/s 256(1) of the Income Tax Act, 1961 :

Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduct a sum of Rs. 49,108 and Rs. 2,315 being extra

amount and interest respectively payable on account of exchange fluctuation in respect of long-term loans taken for purchase of plant and

machinery ?

The assessee had taken a long-term loan for investing in machinery imported from abroad. Since the repayment of the loan and interest had to

be done in foreign exchange and the rate of exchange was fluctuating the assessee had incurred an extra amount of Rs. 49,108 towards payment of

principal and Rs. 2,315 towards payment of interest in the previous year ended December 31, 1977. The assessee claimed that this difference in

exchange value should be allowed as a revenue deduction in computing the total income for the assessment year 1978-79. The Revenue

contended that this expenditure was capital in nature and could not be allowed to be deducted. The Tribunal applied the decision of the Madras

High Court in Commissioner of Income Tax Vs. South India Viscose Ltd., and held that the claim of the assessee to deduct the expenditure as

revenue expenditure was rightly disallowed.

Before us, learned counsel appearing for the assessee submitted that the interest payment of Rs. 2,315 should at least be allowed as revenue

deduction. This was claimed on the basis of the decision of the Supreme Court in BOMBAY STEAM NAVIGATION CO. (1953) PRIVATE

LTD. Vs. COMMISSIONER OF Income Tax, BOMBAY., . 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 u/s 10(2)(xv). The Supreme Court held that ""no capital had

been borrowed by the assessee and that an agreement to pay the balance of consideration due by the purchaser did not in truth give rise to a loan.

Therefore, the claim for deduction of the amount of interest u/s 10(2)(iii) was not admissible"". It was, however, held that interest paid was liable to

be allowed as deduction u/s 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.

According to the facts arising in the present case, the assessee claimed depreciation by treating the interest payment as capital and now in view

of the abovesaid decision of the Supreme Court, the assessee claimed that it should be treated as revenue expenditure. The same item of

expenditure cannot be treated for one purpose as capital in nature and for another purpose as revenue in nature. Inasmuch as the assessee itself

treated the interest payment as capital in nature it is not open to the assessee to ask for deduction as revenue expenditure. Accordingly, the

Tribunal was correct in holding that in view of the decisions of this court in Commissioner of Income Tax Vs. South India Viscose Ltd., and the

decision of this court in T.C. Nos. 422 and 423 of 1982 and 36 of 1983 (CIT v. Elgi Rubber Products Ltd. [1996] 219 ITR 109 (judgment dated

February 17, 1995), the difference in exchange value and the interest payable thereon cannot be deducted in computing the total income for the

assessment year 1978-79.

In that view of the matter, we answer the question in the negative and against the assessee. No costs.