Law:

Section:

Schedule II to the Companies (Profits) Surtax Act, 1964 - Computation of Capital - Assessment years 1975-76 and 1976-77 - Assessee-company obtained long-term loan for purchase of machinery in foreign currency - Whether while computing capital to determine surtax liability, foreign exchange rate in respect of aforesaid loan would be applied as on first day of relevant accounting year - Held, yes FACTS The assessee-company obtained a long-term loan from the Industrial Credit and Investment Corporation of India and claimed the benefit for the assessment years 1975-76 and 1976-77. The borrowing was for the purchase of machinery by importing the same from abroad. The loan was taken in foreign exchange and it was a long-term borrowing. The borrowing to the extent it was outstanding was treated as a part of the capital of the assessee and a particular percentage thereof was allowed as depreciation. The relevant date to compute the capital was the first day of the accounting year and in the instant case it was 1st January. The assessee, while claiming the benefit, converted the foreign exchange liability into 'rupee liability' by applying the exchange rate prevalent as on the 'relevant date' (1st day of the accounting year). However, the revenue contended that the exchange rate that prevailed on the date of the actual borrowing should be applied and any subsequent variation was to be ignored. The ITO did not grant the benefit of the prevalent exchange rate to the assessee. However, the Commissioner (Appeals) allowed the assessee's appeals and, thereafter, directed the ITO to recompute the capital. On further appeal the Tribunal confirmed the order of the Commissioner (Appeals). On reference : HELD Rule 1 to the Second Schedule simply states that the borrowings as on the first day of the accounting year will be aggregated to arrive at the capital. What is relevant is that there should be borrowing which necessarily shows that there should be an outstanding payable to the creditor. The borrowing herein was in foreign exchange (foreign currency). It was that sum which has to be paid to the foreign creditor that forms the capital of the company under rule 1 referred to…

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