Law:

Section:

Section 37(1), read with section 43A(1), of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1973-74 - Assessee purchased machinery from abroad with a loan taken from a foreign bank and had to repay loan in pound sterling - Due to fluctuation in exchange rate, assessee incurred certain sum as additional liability towards repayment of loan and claimed same as revenue expenditure - Whether said amount constituted capital expenditure and was not allowable as a revenue expenditure - Held, yes FACTS The assessee purchased machinery from abroad with a loan taken from a foreign bank and had to repay the loan in instalments in pound sterling. Before the final instalment was paid, there was fluctuation in the exchange rate. As a result, during the previous year relevant to the assessment year 1973-74, the assessee paid an additional sum towards repayment of the loan and claimed the same as revenue expenditure. The ITO disallowed the assessee's claim. On appeal, the AAC and, on further appeal, the Tribunal upheld the order of the ITO. On reference: HELP On reading the provisions of section 43A(1) it is clear that any amount expended to acquire any asset from a country outside India for the purpose of the business and any amount paid either in whole or in part borrowed by an assessee from any person directly or indirectly in any foreign currency specifically for the purpose of acquiring assets shall be treated as capital in nature. The fluctuation is one of the factors to be taken into account to determine the value of the capital asset and thereby has the advantage thereof in its value reduction. Therefore, the mere fluctuation in the rate of exchange could not be a ground for the assessee to claim allowance as a revenue expenditure. Section 43A(1) itself provides for the fluctuation in the exchange rate. Therefore, the impugned amount incurred by the assessee owing to exchange fluctuations constituted capital expenditure and was not allowable as a revenue expenditure. The order of the Tribunal was, therefore, upheld. CASES REFERRED TO Vazir Sultan Tobacco Co. Ltd. v. CTT [1988] 169 ITR 35 (AP), CIT v. Tata Locomotive & Engg. Co.…

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