The Judgment of the Court was delivered by

Balakrishna Menon, J.:— The Income-tax Appellate Tribunal, Cochin Bench has referred the following questions to this court under S. 256(1) of the Income-tax Act:—

(1) Whether, on the facts and circumstances of the case, the assessee is entitled to deduction of Rs. 81,837 being the additional amount paid by it in connection with the repayment of the instalment of loan on account of fluctuation in the rate of exchange as revenue expenditure in computing its income for the assessment year 1976-1977?

(2) Whether, on the facts and circumstances of the case, Rs. 21,31,104 being the secured loans and Rs. 3,68,090 being the unsecured loans should not be deducted from the value of the assets of the assessee in computing the capital employed for the purpose of determining the amount of quantum of deduction allowable under S. 80J of the Income-tax Act, 1961 for the assessment year 1976-1977?

(3) Whether on the facts and circumstances of the case, Rs. 5,59,689 being the value of the work in progress should be excluded in the computation of the capital employed for the purpose of determining the amount of deduction allowable under S. 80J of the Income tax Act, 1961 for the assessment year under consideration?

(4) Whether, on the facts and circumstances of the case, the pre-commissioning expenses and the payment for process know-how should be considered as forming part of the actual cost of the concerned assets for the purpose of computing deprecitaion allowable thereon?

2. Question No. 1 is at the instance of the assessee and questions Nos. 2 to 4 are at the instance of the Revenue. The assessee is a public limited company carrying on the business of manufacture and sale of chemicals. The company imported machinery for its formic acid plant from Germany and for that purpose it had availed of foreign currency loan of Doutsche Marks 7,36,855-02 (equal to Rs. 16,53,818.63 in Indian currency) from a German Company by name “Karl Fischer Ltd.” through the Industrial Credit and Investment Corporation of India Ltd. The loan was to be repaid in German currency in instalments spread over a number of years. At the time when the loan was taken the exchange rate was Rs. 2-258 for one Doutsche Mark. During the accounting year ending on 30-6-1975 the assessee had paid an instalment of 1,13,700 Doutsche Marks. At the exchange rate prevailing on the date of the loan, the instalment paid during the accounting period would have worked out at Rs. 1,68,737/-. But on account of fluctuation in the exchange rate the assessee had to pay Rs. 2,40,574/-. The assessee debited the excess amount of Rs. 81,837/- paid in its profit and loss account and claimed the said sum as a revenue deduction. The Income-tax Officer rejected the claim on the ground that it was a capital expenditure.

3. In computing the capital employed for the purpose of ascertaining the deduction permissible under S. 80J, the Income-tax Officer excluded from the aggregate value of the assets a sum of Rs. 43,59,539/- made up of secured loans, unsecured loans and current liabilities. The assessee's claim for relief under S. 80J in respect of Rs. 5,59,689/- being the value of the work-in-progress was also rejected. The Income-tax Officer did not accept the assessee's claim for inclusion of the pre-commissioning expenses and the payment made for the process know-how in the total cost of the assets in the computation of depreciation permissible under S. 32 of the Act.

4. In appeal the Appellate Assistant Commissioner accepted all the contentions of the assessee except as regards the relief claimed under S. 80J in respect of the secured loans, unsecured loans and current liabilities. There were appeals to the Tribunal both by the assessee and the Department. The Tribunal rejected the assessee's claim for deduction of the excess amount paid to the foreign supplier of machinery for the reason of the variation in the foreign exchange rate as falling under S. 43A of the Income-Tax Act. Relief under S. 80J was granted in respect of the secured and unsecured loans and current liabilites as forming part of the capital employed in the business. In arriving at this conclusion the Tribunal relied on the decision of the Calcutta High Court in Century Enka Ltd. v. Income-tax Officer ((1977) 107 ITR 909) and of the Madras High Court in Madras Industrial Linings Ltd. v. I.T.O ((1977) 110 ITR 256). The claims for relief under S. 80J in respect of the work-in-progress and for depreciation with respect to the pre-commissioning expenses and the cost of the process know-how as forming part of the actual cost of the assets of the assessee were accepted and allowed on the basis of its earlier decision for similar reliefs for the assessment years 1972-1973, 1973-1974 and 1974-1975 produced as annexure F.

5. The above questions are referred to this Court as arising out of the order of the Tribunal.

Question No. 1

6. The additional expenses incurred for repayment of a foreign loan for, the reason of the variation in exchange rate will squarely fall under S. 43A as it is an expenditure of capital nature. In C.I.T v. Tata Locomotive and Engineering Co. Ltd. ((1966) 60 ITR 405) the Supreme Court held that the surplus obtained on devaluation of rupee on the accumulated dollars intended for purchase of capital goods is a capital accretion and is not taxable as profits in the hands of the assessee. In Sutlej Cotton Mills Ltd. v. C.I.T ((1979) 116 ITR 1) the Supreme Court stated at page 13:

“The law may, therefore, now be taken to be well settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it on coversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature.”

7. The assessee has no case that the instalment payment made in foreign currency was on revenue account or as a trading asset or as part of circulating capital embarked in the business. A similar question was considered by the Calcutta High Court in the decision reported in Union Carbide India Ltd. v. C.I.T ((1981) 130 ITR 351). In that case the assessee company under an agreement had taken a loan from the Export Import Bank of Washington for making payments in U.S.A of the price of capital, plant and machinery purchased for its new project. The loan was taken and repayable in dollars. Payments were made for capital, plant and machinery purchased from the various suppliers in U.S.A out of the loan. There was a devaluation of Indian rupee in June 1966, in consequence of which the liability of the assessee company for repayment of the loan to the Export Import Bank in dollars increased in terms of rupees. The claim of the assessee that the increased liability arising out of devaluation of the Indian rupee should be allowed as a deduction in computing its business income was held to be unsustainable. After an elaborate consideration of the case law on the point Sabyasachi Mukharji J. on behalf of the Bench stated thus at page 372:

“If there was a devaluation in favour of the rupee as a result of which the assessee had to pay less to its creditors, the surplus arising would have been of capital nature and could not have been assessed in the bands of the assessee as a business profit. Conversely, as a result of the exchange rate going against the assessee, the loss which the assessee incurred cannot be held to be a revenue loss.”

8. We are therefore of the view that the extra expenses incurred for repayment of the loan raised for the purpose of payment of price of the capital goods purchased from Germany is not of the nature of a revenue expenditure and can only be treated as capital expenditure.

Question No. 2

9. Counsel on both sides agree that question No. 2 is covered by the decision of the Supreme Court reported in Lohia Machines Ltd. v. Union of India ((1985) 152 ITR 308) against the assessee. That question has, therefore, to be answered in favour of the Revenue.

Question No. 3

10. We are clearly of the view that the value of the work-in-progress forms part of the capital employed in the industrial undertaking of the assessee within the meaning of sub-s. (1A) of S. 80J of the Income Tax Act. In the supplement to the seventh edition of the Law and Practice of Income Tax by Kanga and Palkhivala it is stated at page I 138:—

“Capital employed” includes work-in-progress, and also machinery, land or other assets acquired for the business though they may not be actually used in the accounting year (CIT v. Indian Oxygen Ltd. 113 ITR 109; Ravi Machine Tools Ltd. v. CIT 114 ITR 459; CIT v. Cibatul Ltd. 115 ITR 879; CIT v. Alcock Ashdown & Co. Ltd. 119 ITR 164; CIT v. Mohan Meakin Breweries Ltd. 122 ITR 203).”

11. The provisions of Rule 19A of the Income-tax Rules are substantially embodied in S. 80J (1A) with restrospective effect from the assessment year 1972-1973. Referring to the repealed S. 84 corresponding to the present S. 80J the Calcutta High Court in C.I.T v. Indian Oxygen Ltd. ((1978) 113 ITR 109) held that the moment capital is utilised for the purpose of acquiring any asset for a business, such capital becomes employed in the business, whether the asset is actually used in the business or not. The work-in-progress would, therefore, fall under S. 80J(1A) as forming part of the capital employed in the industrial undertaking. It would take in matters specified in sub-clauses (ii) and (iii) of clause (II) of sub-s. (1A). The same view is expressed by the Karnataka High Court in Ravi Machine Tools (P) Ltd. v. C.I.T ((1978) 114 ITR 459). Referring to the corresponding provision in Rule 19A the Gujarat High Court in C.I.T v. Cibatul Ltd. ((1978) 115 ITR 879) stated at page 882:—

“It may be pointed out that under R. 19A(2)(v), cash in hand or at bank is to be included in the assets and, therefore, when that cash is converted into assets, though in the shape of machinery which has not been installed, that should be included on the aseets side in computing the capital employed for the purpose of relief under S. 80J.

12. We may point out that the conclusion that we have reached has also been reached by the Calcutta High Court in CIT v. Indian Oxygen Ltd. (1978) 113 ITR 109 and by the Karnataka High Court in Ravi Machine Tools (P) Ltd. v. CIT (1978) 114 ITR 459. We may also point out that, as indicated by the Calcutta High Court in Indian Oxygen's case, the House of Lords in England in Birmingham Small Arms Co. Ltd. v. IRC (1951) 2 All ER 296, has by a majority interpreted the words “capital employed” to mean the money invested in the purchase price of the assets as distinguished from the actual user of the assets. Lord Tucker actually said that the words “capital employed” point to the conclusion that in their context they do not refer to the actual use made of a particular asset in the relevant accounl ting period once it is shown to have been a form of capital put into the business and stil there. Similarly, Lord Radcliffe pointed out in that case in the House of Lords that the test in computing capital is not whether an asset belonging to the proprietor of a business is employed in his business or not, but whether there is capital employed in his business consisting of this or that asset. These tests have been applied both by the Calcutta High Court and by the Karnataka High Court in the two cases referred to above. In any event, so far as our statute and the rules before us are concerned, it is clear that in the light of R. 19A(2)(ii), there is no doubt that, in computing assets for the purpose of computing capital, uninstalled machinery which has been acquired by purchase must betaken into consideration while computing capital.”

13. The Tribunal in paragraph 10 of its order notices that similar claims under S. 80J had been allowed during the earlier periods of assessment. We are therefore clearly of the view that the cost of the work-in-progress forms part of the capital employed in the assessee's industrial undertaking within the meaning of sub-s. (1A) of S. 80J of the Income-tax Act.

Question No. 4

14. The Tribunal relies on its previous order Annexure G relating to accounting years 1972-1973, 1973-1974 and 1974-1975 to uphold the assessee's claim for inclusion of the pre-commissioning expenses and the expenses incurred for process know-how as forming part of the actual cost of the concerned assets for the purpose of computing depreciation under S. 32 of the Income-tax Act. Paragraph 4 of Annexure G order shows that these items had been included during prior accounting periods as forming part of the cost of the machinery and plant in respect of which depreciation is admissible under S. 32 of the Act. The Supreme Court has in the decision in Scientific Engineering House P. Ltd. v. Commissioner of Income-tax, Andhra Pradesh (157 ITR 86) held that technical know-how in the shape of drawings, designs, charts, plans, processing data etc. fall within the meaning of the expression ‘plant’ and is therefore a depreciable asset. We answer question Nos. 1 and 2 in the negative, that is, against the assessee and in favour of the Revenue. We answer question No. 3 in the negative and question No. 4 in the affirmative—both the questions in favour of the assessee and against the Revenue.

15. A copy of this judgment under the seal of the Court and the signature of the Registrar will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.