Income Tax Appellate Tribunal - Allahabad
Inspecting Assistant Commissioner vs Renusagar Power Co. on 28 January, 1988
Equivalent citations: [1989]28ITD439(ALL)
ORDER
R.N. Purt, Accountant Member
1. The abovementioned two appeals have been filed by the Department. These appeals were, for the sake of convenience, consolidated and heard together. After considering the rival submissions, these appeals are being disposed of as under :
2. These appeals pertain to assessment years 1976-77 and 1977-78. The previous years relevant to these assessment years ended on 31-12-1975 and 31-12-1976 respectively. The assessee is a limited company. It is a cent per cent subsidiary of M/s. Hindustan Aluminium Corporation Limited. The business of the assessee-cOmpany is the production of electricity. It supplies electricity generated by it to M/s. Hindustan Aluminium Corporation Limited.
3. The first ground raised by the Department in these two appeals is that the CIT(A) had erred in allowing deduction for the loss due to fluctuation in the rate of exchange.
4. The assessee had purchased plant and machinery from M/s. General Electric Co., New York, on deferred payment basis. The payment of the instalments was to be made in US Dollars, and not in Indian currency, as per the agreement under which the plant and machinery had been purchased on deferred payment basis. In the accounting year relevant to. the assessment year 1976-77, the assessee had to remit $ 4,08,324 to M/s. General Electric, New York, on account of the instalment of the unpaid price of plant and machinery. In its books, the assessee-company had capitalised the cost of plant and machinery (including interest payable on deferred instalments) at the rate of exchange prevalent at the time when the plant and machinery were purchased. The rate of exchange at that time was Rs. 7,279 per dollar. The cost price of the plant and machinery had been entered by the assessee in its books of account by converting into rupees the dollars payable by it at this rate of exchange. Since then, the rate of exchange underwent variation. The rate of exchange, at the time of remittance of the instalment of $4,08,324, was Rs. 8.9874 per dollar. As stated above, the rate of exchange, when the plant and machinery had been purchased, was Rs. 7.279 per dollar. Thus, on account of the adverse fluctuation in the rate of exchange, the company had to pay more of Indian rupees than had been entered by it in its books as the cost. It had to incur an additional liability of Rs. 6,96,489 on account of the fluctuation in the rate of exchange. Similarly, it incurred an additional liability of Rs. 6,22,353 on account of payment of the instalment in the accounting period relevant to the assessment year 1977-78. The respective amounts of the additional liability were claimed by the assessee as revenue loss in the assessments for the two years. The IAC (Asstt.) disallowed the claim of the assessee on the ground that this loss was related to purchase of plant and machinery and, as such, was on capital account. The assessee carried the matter in appeal before the CIT(A). The CIT(A), following the decision dated 25-2-1981 of the Tribunal in lTA No. 2084 (All.) of 1979, relating to the assessment year 1973-74 in the case of the assessee, held that deduction was admissible on revenue account. The Department has felt aggrieved by the decision of the CIT(A) and has now come up in appeal before us. The contention of the Department is that this was a capital loss and the CIT(A) was in error to consider this as being loss on revenue account.
5. It was stated by the learned Departmental Representative that the decision of the Tribunal in respect of the assessment year 1973-74 in the case of the assessee, on the basis of which the CIT(A) had allowed the relief, needed re-consideration in view of the decision of the Special Bench of the Tribunal in the case of Poysha Industrial Co. Ltd. v. ITO [1983] 4 ITD 41 (Bom.). The Departmental Representative also relied on the decision of the Kerala High Court in the case of Periyar Chemicals Ltd. v. CIT [1986] 162 ITR 163 and the decision of Calcutta High Court in the case of Union Carbide India Ltd. v. CIT [1981] 130 ITR 351.
6. On the other hand, Dr. Devi Pal, learned counsel of the assessee, contended that the CIT(A) had rightly allowed the deduction on revenue account and no interference with the order of the CIT(A) was called for. In the alternative, he argued that in case it was to be held that the additional liability on account of the fluctuation in the rate of exchange was not to be allowed on revenue account, it should be held that the assessee is entitled to get depreciation and development rebate on this capital expenditure.
7. We have considered the matter carefully. As per the agreement, on the basis of which plant and machinery had been obtained by the assessee-company on deferred payment basis, the instalments of unpaid purchase consideration and the interest thereon were to be paid in dollars. The rate of exchange, when the plant and machinery were obtained, was Rs. 7.279 per dollar. It was at this rate that the assessee converted the dollars that were payable on account of the purchase price of plant and machinery (including interest payable on deferred instalment) into rupees and the cost of the plant and machinery was entered in the books of account on that basis. However, as a result of the fluctuations in the rate of exchange, at the time of making remittance on account of the instalments of the unpaid consideration, the assessee had to pay rupees more than the rupees which had been entered in the books as cost. The question that has arisen for consideration is whether this additional liability should be allowed as a deduction on revenue account or should this be considered as being on capital account. The further question is that if this is to be considered on capital account, should depreciation and development rebate be allowed on it.
8. In the case of Union Carbide India Ltd. (supra) the assessee-company had taken a loan from the Export Import Bank of Washington for making payment in the USA of the price of capital, plant and machinery purchased for the new project, vis. a petrochemical undertaking. The loan was taken, and was repayable, in dollars. Out of this loan, payment was made for capital, plant and machinery purchased from the various suppliers in the USA and the plant and machinery so purchased were shipped to India for installation in the petrochemical undertaking. On June 6, 1966, there was devaluation of the Indian rupee and, therefore, the liability of the assessee-company for repayment of loan to the Export Import Bank in dollars increased in terms of rupees by Rs. 1,75,99,854. This increased liability was accounted for by the assessee-company by crediting the Export Import Bank and debiting Rs. 1,09,24,832 to the plant and machinery account, Rs. 98,766 to the building account and Rs. 65,76,256 to the capital work-in-progress. The assessee-company claimed before the ITO that the increased liability of Rs. 1,75,99,854 arising out of devaluation of the Indian rupee on June 6, 1966, should be allowed as deduction in computing the business income. It was held by the Calcutta High Court that, in view of the fact that the loan had been utilised for purchase of capital assets, the increase in liability due to the devaluation of the rupees was on capital account.
9. In the case of CIT v. Bharat General & Textile Industries Ltd. [1986] 157 ITR 158, the Calcutta High Court again took the same view. In that case, the assessee had borrowed certain amount of Japanese Yen for setting up a capital asset. The said loan was repayable in instalments in Japanese Yen. On account of fluctuation in the exchange rate, the assessee had to pay an additional amount of rupees, The assessee's claim to deduct this expenditure was negatived by the High Court. The High Court held as under:
There is no qualitative difference in the additional expenditure incurred due to the devaluation or fluctuation in the rate of exchange. In both the cases, an additional liability is imposed. But whether the expenditure involving this additional liability will be allowable or not in computing the profit will depend on whether the expenditure is on capital account or revenue account. It is the nature and character of the expenditure which would determine the question. ?
** ** ** ...It was at the point of repayment of the loan that the assessee had to provide an extra amount in rupees by reason of the fluctuation in the rate of exchange. Further, the assessee had purchased a capital asset and the purchase price was converted into loan which was repayable in instalments. Thus the expenditure was on capital account and was not deductible.
The Supreme Court has dismissed the assessee's Special Leave Petition against the judgment of the Calcutta High Court [1988] .1.69 ITR Statutes P-12 (Bharat General & Textile Industries v. CIT [SLP (Civil) No. 15202 of 1986]).
10. We may also refer to the decision of the Supreme Court in the case of CIT v. Tata Locomotive & Engg. Co. Ltd. [1966] 60 ITR 405. In that case, the Hon'ble Supreme Court had laid down that where profit or loss arising from change in the exchange rate of foreign currency was on the amounts outstanding in connection with the purchase of capital goods, the profit or loss was of the nature of capital.
11. In the case of Periyar Chemicals Ltd. (supra) the assessee was a 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 a foreign currency loan of Deutsche Marks 7,36,855 (equal to Rs. 16,63,818 in Indian currency) from a German company 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 Deutsche Mark. During the accounting year ending on June 30, 1975, the assessee had paid an instalment of 1,13,700 Deutsche 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. It was held by the Kerala High Court that the extra expenses incurred for repayment of the loan raised for the purposes of payment of price of the capital was not of the nature of revenue expenditure and could only be treated as capital expenditure.
12. The Special Bench of the Tribunal had also taken this view that the loss on account of fluctuation in the rate of exchange incurred in the payment of the loan taken for the purpose of purchase of machinery was on capital account. In that case, the assessee, a manufacturer of tin containers, entered into an agreement on 15-6-1971 with the Industrial Credit and Investment Corporation of India Ltd., under which the latter granted certain loans to the assessee in US dollars for the purposes of purchasing machinery from abroad. The assessee was to repay the loan with interest in instalments in US dollars. During the course of repayment, the rate of exchange moved adversely to the assessee and consequently the assessee had to pay a higher amount in rupees in order to repay the loan. This additional amount came to Rs. 56,068 and the assessee claimed it as revenue expenditure. It was held by the Tribunal that, as the loan was utilised for acquiring a capital asset, the additional sum of Rs. 56,062 which the assessee had to pay on account of fluctuation in the rate of exchange, was on capital account. The argument advanced on behalf of the assessee that, in view of the decision of the Supreme Court in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52, the expenditure in connection with the repayment of the loan was allowable, was not found to be acceptable. In the case of India Cements Ltd. (supra), it was held by the Supreme Court that expenses like stamp duty, registration fees, etc., incurred for raising a loan, regardless of the purpose for which the loan was taken, were allowable as revenue expenses. By analogy, it was argued on behalf of the assessee that expenses in connection with the repayment of the loan were also allowable. The Tribunal, however, held that there was a material distinction between the nature of the expenditure incurred in obtaining the loan and the expenditure incurred at the time of the repayment of the loan. It was held by the Tribunal that, whereas for the allowance of the expenditure incurred in obtaining the loan, it was not necessary to enquire whether the loan was used for acquiring the capital asset or current asset, such as stock In trade, but the expenditure incurred for repaying the loan would be allowable depending upon whether it was utilised for acquiring capital or current asset. Such a distinction had already been made by the Calcutta High Court in the case of Bestobell (India) Ltd. v, CIT [1979] 117 ITR 789. The view taken in the case of Bestobell (India) Ltd. (supra) was reiterated by the Calcutta High Court in the case of Union Carbide India Ltd. (supra). Taking various case laws on the subject into consideration, it was ultimately held by the Special Bench of the Tribunal in the case of Poysha Industrial Co. Ltd. (supra) that the expenditure incurred for repaying the loan would be allowable depending upon the utilisation of the loan. It was held that if the loan was utilised for acquiring capital assets, the expenditure on the repayment of the loan would be on capital account and if the loan was utilised for acquiring current assets, the expenditure on the repayment of the loan would be on revenue account. The Tribunal also took into consideration the provisions of Section 43A according to which the excess payment on account of fluctuation in the rate of exchange was to be added to the "actual cost" of the capital asset. The Tribunal held that once an expenditure, because of the overriding provisions of Section 43A, was to be capitalised and treated as a part of the actual cost, it became capital expenditure for all purposes so much so that it went out of the purview of Section 37 automatically. The Tribunal also held that the excess payment on account of the fluctuation in the rate of exchange could neither be allowed as a business loss u/s 28(1), as it was not possible to treat the expenditure both as capital expenditure forming part of the actual cost of the capital asset and at the same time allow it as business loss.
13. Because of the foregoing discussion, it is abundantly clear that the law relating to the allowability of the loss arising on account of the excess payment as a result of the fluctuation in the rate of exchange, has changed since the date of the order of the Tribunal in respect of an earlier assessment year, in the case of the assessee. Now, the legal position, as established by the abovementioned decisions, is that if the loss is on account of the repayment of loan utilised for the acquisition of capital assets, the loss is of capital nature. The CIT(A) had given relief for the assessment years under consideration on the basis of the Tribunal's order dated 25-2-1981 in ITA No. 2084 (All.) of 1979, pertaining to assessment year 1973-74 in the case of the assessee. The law has changed since then and hence with respect we will differ with the view taken by the Tribunal earlier. Respectfully following the decisions which have been discussed above, it is held by us in the present appeals, that the CIT(A) was not justified in allowing the loss arising on the payment of the instalment of the unpaid purchase price of machinery on account of the fluctuation in the rate of exchange as on revenue account. It is held by us that the loss is of capital nature and a deduction for it in the computation of the total income of the assessee cannot be given.
14. Another important aspect is to be taken into consideration. From the facts on record, it becomes apparent that the assessee-company had purchased the machinery on deferred payment basis. The company had not taken a loan from any third party to pay for the price of the machinery to the foreign supplier. It was paying instalments of the unpaid purchase price of the machinery directly to the foreign supplier. It was not paying back by instalments, any loan taken by it. We think that a distinction has to be made between paying an instalment of the unpaid price of the machinery and repaying a loan taken from some party. Even in cases where the loan had been taken and the loss was incurred on the payment of the loan, on account of the excess payment required to be made as a result of the fluctuation in the rate of exchange, it was held that the loss will be on capital account, if the loan was utilised for the purpose of the acquisition of the capital asset. It was held that the decision of the Supreme Court in the case of India Cements Ltd. (supra) was with respect to the allowability of the expenses incurred in connection with the raising of the loan and the expenditure in the repayment of the loan stood on a different footing. In the case under consideration, since the loss had been incurred on the payment of the unpaid purchase price of the machinery, there is all the more reason for holding the loss to be on capital account. We hence reverse the order of the CIT(A) allowing the expenditure on revenue account. We hold the loss to be of capital nature.
15. It was, in the alternative, contended by the learned counsel of the assessee that in case the additional liability incurred by the assessee on account of the fluctuation in the rate of exchange was not to be allowed as a deduction on revenue account, depreciation and development rebate should be allowed on this additional expenditure.
16. We have considered the matter. We do not find it possible to accept the contention of the assessee that development rebate should be allowed. However, there is force in the contention of the assessee with regard to its claim for depreciation.
17. Sections 33(l)(a) states as under :
In respect of a new ship or new machinery or plant (other than office appliances or road transport vehicles) which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the pro-Visions of this Sections and of Sections 34, be allowed a deduction, in respect of the previous year in which the ship was acquired or the machinery or plant was installed or, if the ship, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year, a sum by way of development rebate as specified in Clause (b).
From the above, it is clear that deduction for development rebate is allowed in the year in which the machinery or plant was installed and put to use or in the immediately succeeding year, if the machinery was first put to use in that year. Development rebate cannot be allowed in any later year. Development rebate is to be allowed on the 'aetual cost' of the machinery or plant. In the case under consideration, machinery had been installed many years back. Development rebate had been allowed on the actual cost as entered by the assessee in its books of account, by converting into rupees the dollars payable for the purchase of the machinery, at the rate of exchange existent at that time. If, in a subsequent year, some additional rupees are paid by the assessee, there is no provision for allowing further development rebate on the additional amount paid. The question of allowing development rebate for the subsequent year in which additional liability was incurred does not arise, as development rebate can only be given for the year in which the machinery is installed and put to use, or in the year subsequent to the year of installation, if first put to use in that year, but not in any later year. Let us suppose that in a case development rebate was allowed for assessment year 1975-76 on the basis of the "actual cost" entered in the books of account at that time. Then in assessment year 1980-81, the assessee had to incur additional expenditure on account of the payment of the instalment of the unpaid purchase price. The question of allowing any further development rebate for the assessment year 1980-81, when the additional liability was incurred, just does not arise. It is hence obvious that the contention of the assessee for the allowance of development rebate on the additional expenditure incurred by it on the payment of the instalments of the unpaid purchase price during the years under consideration, cannot be accepted.
18. The assessee had relied on the decision of the Andhra Pradesh High Court in the case of C1T v. Coromandel Fertilisers Ltd. [1985] 156 ITR 283. We have considered this decision carefully. It was altogether a different controversy that was resolved in that case. Hence, that decision will be of no help to the assessee. In that case, the additional liability on account of change in the rate of exchange had already been incurred and the question was whether development rebate was to be allowed on the cost of machinery, inclusive of the additional liability on account of the devaluation of the Indian rupees, or on the cost of machinery after excluding the additional liability on account of the devaluation of the Indian rupee. The Department had agreed that as per general principles, "actual cost" as per Sections 43, on which development rebate was to be allowed, would include the additional amount that became payable on account of devaluation, as well. But the contention of the Department was that, since there was on the statute a specific provision, namely Sections 43A, dealing with devaluation, the matter was required to be dealt with as provided under Sections 43A. In that case, machinery had been installed in 1968, which was the previous year for the relevant assessment year under consideration. The assessee had purchased machinery from USA prior to June 6, 1966, on deferred payment basis. Amount was to be paid in U.S. Dollars. Indian rupee was devalued on June 6, 1966. The increase in the liability of the assessee due to devaluation of the rupees was Rs. 4.27 crores. The assessee claimed development rebate on the total amount of the Indian currency, inclusive of the additional liability incurred on account of the devaluation of the Indian rupee. The Department was of the view that inclusion of the additional liability on account of devaluation for calculating the "actual cost" of the machinery for the purposes of allowing development rebate was not permissible. The Department was of the view that the general provisions about the actual cost contained in Sections 33 read with Sections 43 would not apply in view of the specific provisions of Sections 43A. According to the Department, there was a specific provision made in Sections 43A to deal with the cases where an additional liability arose on account of the fluctuation in the rate of exchange and hence this specific provision excluded the operation of Sections 43. As per Sub-sections (2) of Sections 43A, the additional liability incurred by the assessee consequent upon the devaluation of currency was not to be included for ascertaining the "actual cost" for the purpose of allowing development rebate, though it has to be included for the purposes of allowing depreciation. This was, however, conceded by the Department that the "actual cost" as per the general provisions of Sections 33 read with Sections 43 would include the additional liability on account of devaluation. Hence the question that had actually cropped up for determination was whether the specific provisions of Sections 43A excluded the operation of the general provisions of Section 43. The contention of the Department was not accepted by the High Court. The High Court held that Sections 43A did not constitute a,n exception or proviso to Section 43. The High Court was of the view that the purpose of insertion of Section 43A was to provide additional relief and it was not intended to tak§ a way the benefit conferred by Section 43 itself.
19. Hence, it will be apparent that the question that had cropped up in that case was altogether a different one and hence the decision in that case will be of no help in deciding the issue with which we are confronted. The question which we have to decide is whether, as claimed by the assessee, development rebate would be admissible on the additional liability arising in a year subsequent to the year for which development rebate was admissible to the assessee as per the provisions of Section 33. We have already discussed above that, as per provisions of Section 33, development rebate is admissible for the year in which machinery is installed and put to use or in the subsequent year, if it is first put to use in that year, but in no case in a later year. Development rebate had already been allowed to the assessee in a.n earlier year. There is no provision for allowing further development rebate on the additional liability incurred in a subsequent year. We will draw attention to the following lines appearing at page 640 of the Kanga and Palkhiwala's Law and Practice of Income-tax, Volume-I, 7th Edition :
The result is that if an assessee has not borrowed moneys to pay for a capital asset but has an outstanding liability to pay the price in foreign exchange, which liability increases as a result of devaluation of the Indian rupee, and the increase is not later than the year in "which the development rebate is allowable under Sections 33, the assessee would be entitled to claim development rebate on the basis of such increased cost.
(Emphasis supplied) Hence, we turn down the claim of the assessee for the allowance of development rebate.
20. We will, however, accept the claim of the assessee for the allowance of depreciation on the additional expenditure incurred on account of the fluctuation in the rate of exchange in view of the provisions of Section 43A. This Sections provides for the re-computation of the cost for the purposes of depreciation where as a result of change in the rate of exchange there is an increase or reduction in the liability of the assessee in terms of Indian rupees to pay the price of any asset payable in foreign exchange or to repay moneys borrowed in foreign currency specifically for the purposes of acquiring the asset. But, in view of Sub-sections (2) of Section 43A, the claim of the assessee for development rebate cannot be entertained.
21. Another ground in these appeals is that the OIT(A) was not justified to vacate the disallowance of a portion of the interest, as had been made by the IAC (Asstt.). The assessee had borrowed funds from United Commercial Bank. For the assessment year 1976-77, the assessee had paid interest of Rs. 8,88,987 to United Commercial Bank on account of the borrowings made from that bank. For the assessment year 1977-78, the interest paid had amounted to Rs. 16,01,106. The assessee-company is 100 per cent subsidiary of M/s. Hindustan Aluminium Corporation Ltd. The business of the assessee-company is generation of electricity. The assessee had supplied electricity produced by it to M/s. Hindustan Aluminium Corporation Ltd. The IAC (Asstt.) found that there was some delay on * the part of the assessee-company to recover dues from M/s. Hindustan Aluminium Corporation Ltd. on account of the supply of electricity. In the previous year, relevant to assessment year 1976-77, sale of electricity by the assessee-company to M/s. Hindustan Aluminium Corporation Ltd. was for Rs. 9.29 crores. It has been pointed out by the IAC (Asstt.) that the dues from Hindustan Aluminium Corporation Ltd. which had not been collected up to six months, were for Rs. 3.7 crores. It has further been pointed out by the IAC (Asstt.) that electricity duty, which had not been recovered from Hindustan Aluminium Corporation Ltd. for over six months was for Rs. 4.10 crores. In the accounting period relevant to assessment year 1977-78, the assessee-company sold electricity to M/s. Hindustan Aluminium Corporation Ltd. for Rs. 9,37,65,200. It has been pointed out by the IAC (Asstt.) that dues of Rs. 3.21 crores had not been collected up to six months. It has been further pointed out by the IAC (Asstt.) that electricity duty for Rs. 4.97 crores was outstanding to be collected for more than six months. According to the IAC (Asstt.), by the assessee-company's not collecting the amounts outstanding from M/s. Hindustan Aluminium Corporation Ltd., it could be said that the borrowings raised by the assessee-company from United Commercial Bank were not wholly and exclusively used by the assessee-company in its own business but a portion of these borrowings was indirectly utilised by M/s. Hindustan Aluminium Corporation Ltd. The IAC (Asstt.) held that interest relating to such borrowings which were not utilised by the assessee-oompany in its own business, but which had been utilised indirectly by M/s. Hindustan Aluminium Corpn. Ltd., was to be disallowed. He hence disallowed a sum of Rs, 4,40,000 out of the total interest of Rs. 8,88,987 paid for the assessment year 1976-77 and a sum of Rs. 8 lakhs for the assessment year 1977-78 out of the total interest payment of Rs. 16,01,106 for that year. The IAC (Asstt.) had relied on the decision of the Mysore High Court in the case of CIT v. United Breweries [1973] 89 ITR 17. The assessee carried the matter in appeal beforethe CIT (A). The CIT(A) deletedthe additions. The CIT(A) gave the finding that the moneys had been borrowed by the assessee for the purposes of its own business and non-realisation of the dues an account of supply of electricity to the holding company for a period of less than six months could not be said to amount to the diversion of borrowings by the assessee-company to the holding company. In the appeals filed before us, the Department has assailed this finding of the CIT(A). It was contended by the learned Departmental Representative that the non-realisation of the dues from the holding company in time was tantamount to the diversion of the funds borrowed by the assessee-company to the holding company and to that extent the borrowed funds could not be considered to have been utilised by the assessee-company for the purposes of its own business and, as such, interest relating to those borrowings could not be allowed as a deduction in the computation of the taxable income of the assessee-company.
22. On the other hand, the learned counsel for the assessee contended that the borrowings raised by the assessee-company from M/s. United Commercial Bank were for the purposes of the business of the assessee-company and they had also been utilised by the assessee-company in its own business. It was pointed out by him that the delay up to six months in the recovery of the dues was not at all excessive and this much of delay was quite a normal feature of business. It was pointed out that the non-realisation of the trade debts would not lead to the inference that the borrowings raised by the company had been diverted by the company to the persons from whom debts were due on account of the supply of electricity. It was further pointed out by the counsel for the assessee that the amount shown as outstanding on account of electricity duty should not at all be taken into consideration, as the assessee had not paid any duty as yet to the State Government. It was pointed out that the assessee had contested the levy of electricity duty by the State Government and since the assessee had not as yet paid duty to the State Government, the assessee had also not recovered the same from the holding company.
23. We have considered the matter carefully. The question, which we have to decide, is whether in the facts of the case it can be said that the assessee-company had diverted some of the borrowings to the holding company, M/s. Hindustan Aluminium Corporation Ltd. We are of the view that it could not be said that the assessee-company had diverted a portion of its borrowings to the holding company. The non-realisation of the dues from the holding Company for a period of up to six months cannot be said to amount to diversion of borrowings. The IAC (Asstt.) had relied on the decision of Mysore High Court in the case of United Breweries (supra). In that case, the assessee-company had borrowed funds from outsiders on which it had paid interest. It had also advanced funds to its subsidiary companies on which it had not charged any interest. It was held by the High Court that that part of the capital borrowed by the assessee, which had been advanced by it to its subsidiaries, could not be considered to have been borrowed by the assessee for the purposes of its business and the interest on such borrowings was not an admissible deduction under Sections 36(l)(iii). Now, as would be apparent from the facts of that case, there was a diversion of the borrowed funds by the assessee-company to its subsidiaries. But in the case under our consideration, there is no such diversion of the borrowed funds. The case of the Department is that the non-realisation of the dues would amount to an indirect diversion of the borrowed funds. We are not inclined to accept this view of the Department. The non-realisation of the dues for a period up to six months is a normal happening in business. The department has not made out that there is any device. The holding company also pays tax. If the holding company were to incur expenditure on payment of interest, it would have got a deduction for it in the computation of its own taxable income. Moreover, as far as the non-collection of the electricity duty is concerned, there is absolutely on justification to take an adverse view of it, as the assessee itself had not yet paid any duty to the State Government.
24. The authorised representative of the assessee had drawn our attention to the decision of the Bombay High Court in the case of CIT v. Bombay Samachar Ltd. [1969] 74 ITR 723. It had been held by the Bombay High Court :
The view that if the assessee had collected the outstandings which were due to it from others, it would have been able to reduce its indebtedness and thus save a part of the interest which it had to pay on its own borrowings, that the assessee would not be justified in allowing its outstandings to remain without charging any interest thereon while it was paying interest on the amounts borrowed by it, and that to the extent to which it would have been in a position to collect interest on the outstanding due to it from other, it could not be permitted to claim as an allowance interest paid by it, is not correct.
25. Because of the foregoing discussion, we see no justification to interfere with the decision of the CIT(A) that it was not justified to disallow any portion of the interest payment by the assessee-company on its borrowings from United Commercial Bank. The Departmental Representative had drawn our attention to the Agreement entered into by the assessee-company with M/s. Hindustan Aluminium Corporation Ltd. It was pointed out by the Departmental Representative that it was laid down in Article XII that the assessee-company was to deliver to Hindustan Aluminium Corporation Ltd. a statement showing the amount payable for electricity supplied during the month, within 15 days after the last day of each month. It was pointed out that it was further provided that within 30 days of the receipt of the statement with five days of grace, M/s. Hindustan Aluminium Corporation Ltd. was to pay the amount. It was pointed out that it had been further provided in the agreement that interest @ 6 per cent per annum shall be paid on all over due amounts. It was pointed out by the Departmental Representative that no such interest had been charged. According to the learned Departmental Representative, the intention of the company in not charging interest as stipulated in the Agreement was to benefit the holding company. Be that as it may, what we have to decide is the simple question whether there has been any diversion by the assessee-company, of the funds borrowed by it to the holding company, so that it could be said that the assessee-company had not utilised the borrowings for the purposes of its own business. The Department has not made out any case for such diversion of borrowings. Non-realisation of the trade debts does not tantamount to diversion of borrowings. We hence reject this ground of appeal of the Department.
26. The next common ground raised in the appeals, filed by the Department, is that the CIT(A) had erred in directing the IAC(A) to give priority to the unabsorbed development rebate of earlier years over unabsorbed depreciation of earlier years in the matter of set off. The CIT(A) had relied on the decision of the Income-tax Appellate Tribunal, Madras Bench-B, in Seshasayee Paper & Boards Ltd. v. ITO [1979] 2 Taxman 84 wherein it had been held that unabsorbed development rebate of earlier years was to be given priority over unabsorbed depreciation of earlier years. The Tribunal took note of the fact that the unabsorbed development rebate was to be carried forward only for a period of 8 years, whereas unabsorbed depreciation could be carried forward indefinitely. The Tribunal stated :
It is also seen that there is no provision in the Act providing for any priority as between the abovementioned two allowances that are to be granted in computing the business income, namely, unabsorbed development rebate of the earlier years and unabsorbed depreciation of earlier years. But there is a provision according to which unabsorbed development rebate can be carried forward only for a period of 8 years. If it could not be absorbed against the income during the course of 8 years, it could not be allowed thereafter. There is no such description in the case of unabsorbed depreciation because Sub-sections (2) of Sections 32 provides that such unabsorbed depreciation of the earlier years is to be treated as the unabsorbed depreciation of the current year in which there is profit and the same has to be allowed to the extent of such profit. Having regard to the above situation and there being no express provision relating to the order of priority to be follpwed in granting the abovemen-tioned two allowances, we think that unabsorbed development rebate has to be given precedence over unabsorbed depreciation of the earlier years. If they are not so, the assessee may not be able to get the benefit of unabsorbed development rebate of the earlier years being allowed in the later year.
It was, relying on this decision of the Tribunal, that the CIT(A) had directed the IAC (Asstt.) in the impugned order to give precedence to unabsorbed development rebate of the earlier years over unabsorbed depreciation of earlier years in the matter of set off. The Departmental Representative pointed out that the various High Courts had held that, firstly, unabsorbed depreciation of earlier years was to be allowed and unabsorbed development rebate was to be set off only thereafter. It was contended by the Departmental Representative that in view of the decisions by the various High Courts on the subject, the order of the CIT(A) was required to be set aside.
27. We have considered the matter. The Karnataka High Court in the case of Mysore Paper Mills Ltd. v. C1T [1979] 117 ITR 132 held as under:
Sections 32(2) of the IT Act, 1961, by a legal fiction treats the unabsorbed depreciation allowance of the previous year as forming part of the current year's depreciation allowance and it requires the authorities functioning under the Act to deal with it as such subject only to Sections 72(2) and Sections 73(3) of the Act. But for Sections 32(2) being made subject to Sections 72(2), by reason of the legal fiction enacted in Sections 32(2), the entire unabsorbed depreciation allowance would have to be treated as current year's depreciation and deducted even before the carried forward loss is deducted. Therefore, the unabsorbed depreciation of an earlier year carried forward must be taken as part of the current year's depreciation allowance and should be set off to the extent possible against the income of the current year. Sections 33, providing for development rebate, does not deal with any trading loss as it is ordinarily understand. The Sections is intended to give an incentive to businessmen to invest on new machinery or in modernising plant and equipment. In order to earn develpment rebate the assessee has to satisfy certain other conditions which are provided under Sections 34 of the Act and the unabsorbed development rebate cannot be carried forward beyond eight years as provided by the Act. Hence, the unabsorbed development rebate cannot be treated as part of business loss which is allowed to be carried forward under Sections 72(1) of the Act and given priority over the unabsorbed depreciation allowance of the previous years.
28. The Madras High Court also held accordingly in the case o f CIT v. Coromandel Steels Ltd. [1981] 130 ITR 856 as under ;
In order to earn development rebate the assessee has to satisfy the conditions prescribed by Sections 34. Thus, it is not an absolute or unconditional allowance. The allowance of the development rebate is so limited as to reduce the total income to 'nil'. In other words, it is not treated as one of the kinds of deduction contemplated by Sections s 30 to 43. It stands in a class by itself. The competition in the matter of allowance between unabsorbed business loss and unabsorbed depreciation was resolved in favour of unabsorbed business loss by Parliament itself. There is, however, no provision made with reference to unabsorbed development rebate, as it stands in a class by itself. In these circumstances, the unabsorbed development rebate of earlier years would come up for consideration only after the allowance of (a) carried forward business loss, and (6) carried forward depreciation.
First, comes the deduction of depreciation of the current year. Then, as between unabsorbed business loss carried forward and unabsorbed depreciation, business loss has priority over unabsorbed depreciation and has to be allowed. Unabsorbed development rebate comes up for consideration only after these two allowances.
The High Court further stated :-
Where there is ambiguity in the provisions of the statute, it is not possible to apply any consideration based on the provisions being so applied as to be more advantageous to the assessee or to give the assessee a kind of choice in the matter of adjustment.
29. The Kerala High Court has also taken a similar view in the case of Calicut Modern Spg. & Wvg. Mills Ltd. v. CIT. It has been held:
It is only after setting off unabsorbed business loss and also unabsorbed depreciation that the question of unabsorbed development rebate can arise.
The Supreme Court has dismissed the assessee's Special Leave Petition against the judgment of the Kerala High Court [1988] 169 ITR Statutes p. 11.
30. Respectfully following the abovementioned decisions, it is held by us in the present appeal that, firstly, unabsorbed depreciation of earlier years was to be allpwed and it was only thereafter that unabsorbed development rebate of earlier years was to be set off. We hence set aside the order of the CIT(A) wherein priority had been given to the uuabsorbed development rebate over unabsorbed depreciation of earlier years in the matter of set off. This ground of appeal of the department is accepted.
31. to 33. [These paras are not reproduced here as they involved minor issues.]