Calcutta H.C : The appellant was not entitled to depreciation of Rs. 43,71,472 and the investment allowance of Rs. 27,01,145 on the increased cost of the plant and machinery resulting from increase in the liability to repay the foreign currency loans increased for purchase of such plant and machinery

High Court Of Calcutta

Century Enka Ltd. vs. Assistant Commissioner Of Income Tax

Section 32, 32A, 43A

Asst. Year 1988-89

Pinaki Chandra Ghose & Sankar Prasad Mitra, JJ.

IT Appeal No. 5 of 1999 & GA No. 1638 of 1999

16th January, 2009

JUDGMENT

PINAKI CHANDRA GHOSE, J. :

This appeal is admitted by the Court on the following substantial questions of law :

“Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the appellant was not entitled to depreciation of Rs. 43,71,472 and the investment allowance of Rs. 27,01,145 on the increased cost of the plant and machinery resulting from increase in the liability to repay the foreign currency loans increased for purchase of such plant and machinery ?”

2. In this matter the assessment year involved is 1988-89. The learned Tribunal held that under s. 43A of the said Act the claim of investment allowance is not allowable. Mr. Khaitan, appearing in support of this appeal drew our attention to s. 43A which is quoted hereunder :

“43A.(1) Notwithstanding anything contained in any other provisions of this Act, where an assessee has acquired any asset from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange at any time after the acquisition of such assets, there is an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment towards the whole or a part of the cost of the asset or for repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset (being in either case the liability existing immediately before the date on which the change in the rate of exchange takes effect), the amount by which the liability aforesaid is so increased or reduced during the previous year shall be added to, or, as the case may be, deducted from the actual cost of the asset as defined in cl. (1) of s. 43 or the amount of expenditure of a capital nature referred to [in cl. (iv) of sub-s. (1) of s. 35 or in s. 35A] or in cl. (ix) of sub-s. (1) of s. 36, or, in the case of a capital asset (not being a capital asset referred to in s. 50), the cost of acquisition thereof for the purposes of s. 48, and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset as aforesaid”.

The said section was in operation with regard to assessment year involved in this case. Mr. Khaitan, further submitted before us that there is a decision of this High Court which is CIT vs. Century Enka Ltd. (1992) 196 ITR 447 (Cal) where the Court held that where a machinery is purchased from a foreign country on a deferred payment basis or by obtaining a loan repayable in foreign currency, any additional amount payable due to periodical fluctuation in the currency rate in respect of foreign currency forms part of the actual cost for allowing investment allowance. Sec. 43A(2) of the IT Act, 1961, only excludes the provisions of s. 43A(1). Thus where the contract itself stipulates repayment in foreign currency, the actual cost of the assets must be computed on the value of the foreign currency. Therefore, the amount so paid for repayment, that is to say, any cost due to change in the value of foreign currency which actually goes in repaying the debt, must form part of ‘actual cost’ as contemplated by s. 43(1). In the said decision CIT vs. Century Enka Ltd. (supra) the Court held that : ….. In devaluation, there is a reduction in the value of a currency or of a standard monetary unit whereas in the case of fluctuation, there is no such reduction in the value of a currency or of a standard monetary unit; there is only fluctuation in the rate of exchange in day-to-day transactions. The day-to-day fluctuation in the rate of foreign exchange will not have any bearing on the liability as such. The crucial day is the date of repayment of the loan obtained for the purpose of acquisition of any capital asset. If a capital asset has been acquired by obtaining a loan or by deferred payment of the purchase price, and if, on the date of repayment of the loan of payment of any instalment of purchase price, any additional liability is imposed because of fluctuation in the rate of exchange, the assessee will be entitled to capitalise such liability.

It is common knowledge that the rate of exchange fluctuates every day depending on the conditions prevailing in the international monetary market but such fluctuation in conversion cannot be taken into account unless, at the time of actual payment of the liability in foreign currency, there has been, in fact, an additional liability. It is, therefore, necessary to ascertain in very case whether the assessee incurred any additional liability on the date of repayment or not. Only if any additional liability is incurred on the date of repayment due to change in the rate of conversion, such liability will be added to the cost of the capital asset and benefit of depreciation and investment allowance will be allowed on such added cost….” Consequently, the Court after taking into account the facts of the said case came to the conclusion that the assessee would be entitled to investment allowance on such sum as may be found to represent any additional liability on the date of actual payment of the loan arising due to fluctuation in the rate of conversion and the ITO shall allow the assessee an opportunity of creating reserve in respect of such additional sums eligible for investment allowance.

3. Subsequent to the order so passed by the Calcutta High Court it appears that the legislator found it is necessary to amend the said s. 43A and after amendment the said section came into force w.e.f. 1st April, 2003. The said section reads as follows : “43A. Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset in any previous year from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange during any previous year after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency (as compared to the liability existing at the time of acquisition of the asset) at the time of making payment— (a) towards the whole or a part of the cost of the asset; or (b) towards repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset along with interest, if any, the amount by which the liability as aforesaid is so increased or reduced during such previous year and which is taken into account at the time of making the payment, irrespective of the method of accounting adopted by the assessee, shall be added to, or, as the case may be, deducted from— (i) the actual cost of the asset as defined in cl. (1) of s. 43; or (ii) the amount of expenditure of a capital nature referred to in cl. (iv) of sub-s. (1) of s. 35; or (iii) the amount of expenditure of a capital nature referred to in s. 35A; or (iv) the amount of expenditure of a capital nature referred to in cl. (ix) of sub-s. (1) of s. 36; or (v) the cost of acquisition of a capital asset (nor being a capital asset referred to in s. 50) for the purposes of s. 48, and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset as aforesaid.”

In our considered opinion the same has been amended in the light of the situation as felt by the Division Bench of this High Court in Century Enka Ltd. (supra). Mr. Khaitan, further drew our attention to the decision of the Hon’ble Supreme Court in CIT vs. Arvind Mills Ltd. (1992) 101 CTR (SC) 91 : (1992) 193 ITR 255 (SC) where the Court held that s. 43A in fact introduced to provide for the treatment of the situation created by the devaluation of the rupee. It specifically enacts that the amount of increase or decrease in the liability due to exchange rate fluctuation should be adjusted against the actual cost or the capital expenditure or the cost of acquisition only in relating to five provisions of the Act referred to in the section. Where the terms of sub-s. (1) of s. 43A are fulfilled in any case, it is mandatory to take the actual cost, capital expenditure or cost of acquisition at the higher or lower figure for the purposes of the provisions mentioned therein irrespective of whatever might have been the position independent of the section. The non obstante clause with which the section begins, indeed, makes it clear that, if the position had been different otherwise it cannot prevail after the introduction of this section. Equally, even if the position would have been the same otherwise, that would be no justification to ignore or disregard the enacted provision on the ground that a specific statutory provision was not at all necessary. Once the provision is there, it should be applied in terms of the said provision. The Court further held that there is nothing in the language of sub-s. (1) of s. 43A which makes it inapplicable to a case where the change in the magnitude of the liability consequent on a change in the rate of exchange occurs during the very previous year in which the asset has been acquired. Thus the Court concluded the question that s. 43A provides also for a case in which the assessee has completely paid for the plant and machinery in foreign currency prior to the date of devaluation but the variation of exchange rate affects the liability of the assessee for repayment of the whole or part of the monies borrowed by him from any person, directly or indirectly, in any foreign currency for the purpose of acquiring the asset.

In the circumstances two questions were dealt with by the Court. It appears that the said Bench has come to the conclusion and held as follows :

“We are of the opinion that the language of the provision is perfectly clear. It cannot be interpreted in a restrictive manner as contended for by learned counsel for the assessee. In our opinion, it is a clear requirement of the statute that, for purposes of development rebate, any increase or decrease in the actual cost consequent on fluctuations in the exchange rate should not be taken into account. It may be that the legislature intended to give a different treatment to development rebate from depreciation and other allowances because the allowance of development rebate can result in an assessee claiming allowance exceeding the original cost. It may be that the legislature thought that, though development rebate was intended to promote development of industries, this could not be allowed at the cost of the foreign exchange resources of the country which are also depleted when there is an increase in liability due to devaluation of the currency. It is unnecessary to attribute any particular reason for the provision when the language of the section is otherwise plain and unambiguous. We do not think that in the face of the language of sub-s. (2), it would be right to permit the assessee to claim development rebate on the increased cost”. Accordingly, it is submitted that although the Calcutta High Court passed the said decision subsequent thereto but the Hon’ble Supreme Court held in favour of the assessee and allowed the appeal.

In the light of the said decision Mr. Khaitan, submitted that the appellant is entitled to get the benefit of the said difference and should be permitted to get the investment allowance on the increased cost. Mr. Khaitan, also cited the decisions in New India Industries Ltd. vs. CIT (1994) 119 CTR (Guj) 306 : (1993) 203 ITR 933 (Guj), Padamjee Pulp & Paper Mills Ltd. vs. CIT (1994) 117 CTR (Bom) 288 : (1994) 210 ITR 97 (Bom), CIT vs. Motor Industries Co. Ltd. (1998) 144 CTR (Kar) 101 : (1998) 229 ITR 137 (Kar), Associated Bearing Co. Ltd. vs. CIT (2006) 205 CTR (Bom) 150 : (2006) 286 ITR 341 (Bom) and CIT vs. Woodward Governor India (P) Ltd. & Ors. (2007) 210 CTR (Del) 354 : (2007) 294 ITR 451 (Del). In all these cases this point has already been dealt with in such situation and followed the decision of the Hon’ble Supreme Court. He further relied on a latest Supreme Court decision in CIT vs. Gujarat Siddhi Cement Ltd. (2008) 220 CTR (SC) 217 : (2008) 307 ITR 393 (SC) where the Court held that s. 43A(1) clearly related to the fluctuation of the exchange rate in the previous year in question in relation to investment allowance; and if any extra benefit was taken the same had to be taxed in the year when the liability was reduced as provided in s. 41(1)(a). Therefore, wherever there was exchange fluctuation in any previous year, s. 43A should be applied. Therefore, in this situation the Supreme Court also as it appears to us that in the facts of this case it would be appropriate to grant liberty to the assessee to establish the factual position relating to fluctuation in the foreign exchange rate only in connection with the said investment allowance and for that limited purpose we only remit the matter before the authority. However, the appeal is allowed in favour of the appellant.

In case of investment allowance, the same situation would arise in respect of the depreciation in view of the fact that the value of the goods taking into account of the said fluctuation would either be added to the cost of the plant and machinery so acquired by the appellant or will be reduced on the basis of such fluctuation exchange rate. Accordingly, in our considered opinion, such fact also to be considered by the authorities taking into account the fluctuation of the exchange rate of the currency and after applying the same the depreciation also to be included by them. So the question placed before us is answered in the negative only for the purpose of the verification of the amount in question and what was the actual rate at that time to be found out by the authority.

[Citation : 323 ITR 86]