Gujarat High Court
Commissioner Of Income-Tax vs Gujarat State Fertilizers Co. Ltd. on 19 October, 2002
Equivalent citations: (2003)179CTR(GUJ)266, [2003]259ITR526(GUJ)
Author: M.S. Shah
Bench: A.R. Dave, M.S. Shah
JUDGMENT M.S. Shah, J.
1. This reference has been placed before the Full Bench pursuant to the order dated March 13, 2001, passed by a Division Bench of this court taking the view that the decision of another Division Bench of this court in CIT v. Windsor Foods Ltd, [1999] 235 ITR 249, dealing with the question of interplay between the provisions of Section 32A (investment allowance) and those of Section 32A (relating to fluctuation in foreign exchange rate) of the Income-tax Act, 1961 ("the Act"), requires reconsideration.
2. The assessee is a public limited company manufacturing fertilizers and other products. The assessee entered into a contract for purchasing plant and machineries (the assets) from a Japanese company on deferred credit basis. Though the year of purchase is not clear from the paper book, the assessee was required to make payment in instalments over a period of 12 years (page 203).
3. The liability for the instalments towards the cost of the assets for the calendar years 1976,1977 and 1978 (relatable to the assessment years 1977-78, 1978-79 and 1979-80) increased by reason of fluctuation in the foreign exchange rate. The assessee claimed the following amounts for the years under consideration as allowable business expenditure :
Year Amount (Rs.) 1976 9,21,658 1977 26,49,336 1978 57,77,322
4. The claim of the assessee was negatived on the ground that it was capital expenditure. Anticipating such a ruling, the assessee had claimed in the alternative that the aforesaid expenditure went to increase the actual cost of the plant and machinery and, therefore, the assessee was entitled to get additional investment allowance under Section 32A of the Act. The Income-tax Officer as well as the Commissioner of Income-tax (Appeals) negatived this claim also on the ground that the years under consideration were not the years when the assets were either installed or first put to use. However, in the second appeal, the Income-tax Appellate Tribunal, Ahmedabad ("the Tribunal"), upheld the claims of the assessee on the basis of its orders in earlier years when the development rebate had been granted to the assessee and directed the Income-tax Officer to allow depreciation/development rebate/investment allowance on the items of expenditure arising from the difference in exchange rates, provided necessary conditions were fulfilled.
5. Hence, at the instance of the Revenue, the Tribunal has referred the following question for the opinion of this court :
"Whether, the Tribunal has been right in law and on facts in holding that the assessee is entitled to investment allowance on account of additional expenditure in the cost of the plant and machinery on account of realignment of currency ?"
6. When this reference came up for hearing before the Division Bench on March 13, 2001, learned counsel for the Revenue heavily relied on the decision of another Division Bench of this court in CIT v. Windsor Foods Ltd. [1999] 235 ITR 249, holding that the investment allowance under Section 32A is a one time allowance and it is not an allowance which is recurring--that is to say, an allowance which is required to be calculated year after year. If the machinery or plant is first put to use later than the previous year immediately succeeding the previous year of its installation, the right to claim the investment allowance would be completely lost. Therefore, the actual cost of machinery or plant in the previous year in which it is installed and first put to use, would be the basis of working out the investment allowance at an amount equal to 25 per cent. of that actual cost. The amount of investment allowance so worked out would get crystallised in that year and thereafter the only question that remains is whether the investment allowance which is so worked out, should be actually allowed by way of deduction. The deduction is to be allowed in accordance with and subject to the provisions of Section 32A. Since the investment allowance was already worked out on the basis of the actual cost, that quantified allowance cannot be varied by giving back effect to subsequent alteration in the exchange rate in the subsequent years and hence there can arise no question of working out any additional investment allowance in any subsequent year in which the fluctuation takes place.
7. The aforesaid decision was, therefore, clearly in favour of the Revenue, but learned counsel for the assessee successfully persuaded the Division Bench in taking the view that the decision of this court in Windsor Foods Ltd.'s case [1999] 235 ITR 249, required reconsideration because Sub-section (1) of Section 43A, of which the assessee claimed the benefit, commences with the words "notwithstanding anything contained in any other provision of this Act" and in view of the said non obstante clause, Section 43A containing special provision consequential to changes in rate of exchange of currency had an overriding effect over the provisions of Section 32A of the Act. Accordingly, the reference has been placed before this Full Bench.
8. We have heard Mr. Akil Kureshi, learned counsel for the Revenue, and Mr. J. P. Shah, learned counsel for the respondent-assessee, and for the intervenors on the merits of the controversy at length.
9. Submissions on behalf of the Revenue :
Mr. Akil Kureshi, learned counsel for the Revenue, has made the following submissions :
(i) Investment allowance is only a one time allowance, unlike depreciation allowance. Hence, the Division Bench in Windsor Foods Ltd.'s case [1999] 235 ITR 249 (Guj), rightly held that the amount eligible for deduction as investment allowance under Section 32A gets crystallised in the year in which the plant-and machinery is installed and first put to use.
If the right to get investment allowance is lost to the assessee on account of non-compliance with the conditions imposed by Section 32A or any other provisions of the Act, the non obstante clause in Section 43A was not intended to obliterate any such disqualification particularly the ones imposed by Subsections (3) and (4) of Section 32A.
(ii) Section 43A was inserted by the Finance (No. 2) Act of 1967, with effect from April 1, 1967, whereas Section 32A was inserted by the Finance Act, 1976, with effect from April 1, 1976. Hence, the non obstante clause in Section 43A could not have visualised or contemplated, dispensing with the mandatory conditions to be stipulated in a future provision yet to be enacted such as Section 32A for investment allowance.
(iii) Investment allowance is a one time allowance and the eight year period is only a period for spreading over the enjoyment of the benefit of investment allowance where the profits in the first year are not sufficient.
The assessee's interpretation would make the scheme unworkable beyond eight years from the date of installation. If the fluctuation takes place in the 12th year and even then if the assessee were to be given the benefit of additional investment allowance on the addition to the cost arising from the fluctuation, the assessee would still be required to comply with the conditions imposed by Section 32A to purchase new assets by completion of the 10th year from the date of installation of the original asset. Hence, the scheme would be unworkable.
The Legislature did not intend to make discrimination between the assets purchased from the local market and those purchased from abroad on credit. If the assessee's interpretation were to be accepted, the purchasers from abroad on credit would get the benefit of investment allowance even after completion of eight years whereas the purchasers from the local market would get it only for eight years from the year of installation and first use, because in their case Section 43A would not be applicable.
(iv) In Arvind Mills ltd, v. CIT [1978] 112 ITR 64, this court had held that the benefit of fluctuation in foreign currency in the year in which the plant and machinery is purchased and first put to use is available for claiming additional development rebate notwithstanding the provisions of Sub-section (2) of Section 43A. In appeal (CIT v. Arvind Mills ltd. [1992] 193 ITR 255) the Supreme Court negatived that view. Hence, the purpose of Sub-section (2) of Section 43A was intended to deny the benefit of development rebate on account of fluctuation in foreign exchange on a subsequent date after the date of purchase, even in the same year. But in case of investment allowance, the benefit of fluctuation in foreign exchange on a subsequent date in the same year would be available on account of Sub-section (1) of Section 43A. That does not mean that the absence of the words "investment allowance' or "allowance under Section 32A" in Sub-section (2) of Section 43A would make the assessee eligible for getting additional investment allowance on account of the escalation in the cost of the asset installed and put to use in the preceding year.
(v) The definition of "cost of asset" as contained in Section 43(1) is applicable only if it is not repugnant to the context. The decision in Dhandhania Kedia and Co. v. CIT [1959] 35 ITR 400 (SC); AIR 1959 SC 219, is relied upon. Submissions on behalf of the assessee :
On the other hand, Mr. J. P. Shah, learned counsel for the assessee, made the following submissions :
(i) If all one time allowances were to be excluded from the benefit of subsection (1) of Section 43A, Sub-section (2) thereof would have been redundant even in respect of development rebate. Section 43A(1) itself refers to Section 35(1)(iv) {capital expenditure on scientific research related to the business) and Section 35A (capital expenditure on acquisition of patent rights or copy- rights) which are also one time allowances. There are many other one time allowances, but none of them is specifically excluded by the Legislature except the development rebate. The legislative intention, therefore, was not to exclude one time allowances per se from the benefit of Section 43A.
(ii) The Legislature has consciously used the non obstante clause in Section 43A and the same Legislature while subsequently inserting Section 32A has taken care not to insert any such non obstante clause in Section 32A. If the Legislature had in mind the intention being suggested by the Revenue, the Legislature would have provided the commencement of Section 32A with the words "notwithstanding anything contained in Section 43A of the Act". Hence, Section 43A overrides the limitations, if any, imposed by Section 32A, which are inconsistent with the benefit granted by Section 43A.
(iii) Since any additional liability of the assessee on account of increase in the foreign exchange rate adds to the actual cost of the asset as defined by Section 43(1), the Legislature intended to confer the benefit under Section 43A(1) till the payment of the last instalment, even if such fluctuation in the foreign exchange rate and the payment of the last instalment is beyond eight or even beyond ten years from the date of installation of the asset and its first user. Full effect must be given to the non obstante clause in Sub-section (1) of Section 43A which confers this benefit, either by projecting the additional cost in the cost of acquisition in the year of installation and first user or by calculating the eight year period prescribed in Section 32A(3) to commence from the expiry of each year in which the fluctuation takes place till the date of last instalment.
(iv) The observations of the Supreme Court in CIT v. Arvind Mills Ltd. [1992] 193 ITR 255 support the case of the assessee rather than the case of the Revenue.
(v) Section 43A is a beneficial provision inserted with the specific pur pose of giving relief to the assessees who have to suffer higher cost of the plant and machinery on account of the fluctuation in the foreign exchange currency. Hence, such a benevolent provision should be liberally construed. In support of this contention, reliance has been placed on the decisions of the apex court in Chandulal Harjiwandas v. CIT [1967] 63 ITR 627 (interpretation should be in such a manner as not to nullify the object of the provision), Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188 (SC) (a provision in a taxing statute granting incentives for promoting growth and development should be construed liberally; and since a provision for promoting economic growth has to be interpreted liberally, the restriction on it too has to be construed so as to advance the object of the provision and not to thwart it) and in Broach District Co-operative Cotton Sales, Ginning and Pressing Society Ltd. v. CIT [1989] 177 ITR 418 (SC), on the similar lines. Facts in Windsor's case :
Before expressing any opinion on the correctness or otherwise of the principles laid down by this court in the case of Windsor Foods Ltd, [1999] 235 ITR 249, it is necessary to set out the facts of that case. For the assessment year 1980-81 (previous year 1979-80), the assessee-company in that case (hereinafter referred to as "Windsor") claimed a loss of Rs. 80,414 on account of exchange fluctuation of repayment of foreign currency loans obtained from the financial institutions for the purchase of machinery as business expenditure. Anticipating rejection of that claim, the assessee had alternatively contended that even if the said amount of Rs. 80,414 was to be treated as capital expenditure, then the investment allowance should be granted on it under Section 32A of the Act. The Income-tax Officer as well as the Commissioner of Income-tax (Appeals) negatived that claim, on the ground that the machineries were installed much earlier than the previous year of 1979-80. In second appeal, the Tribunal held that the additional liability of Rs. 80,414 was capital expenditure, but the final cost of the asset could be determined only after the last instalment of the loan was paid and, therefore, the additional liability should be treated as a part of the cost of machinery entitled to investment allowance in the year in which the additional liability was incurred because of the fluctuation in the exchange rate, irrespective of the fact that the assets were installed in an earlier year.
10. Before proceeding further, it is necessary to refer to the following impor tant fact which was noted by the court in Windsor Foods Ltd.'s case [1999] 235 ITR 249, 255 (Guj) :
"There is no dispute about the fact that the machinery and plant in question were installed and put to use by the assessee many years ago and that the investment allowance which is now sought to be claimed in view of the additional liability due to fluctuation in the foreign exchange rate is not on the basis of any carried forward investment allowance. In other words, whatever investment allowance was due to be made to the assessee in that past relevant previous year when the machinery or plant were installed and put to use, were all claimed and deductions were allowed at the relevant time. The claim is, therefore, confined to the additional liability of Rs. 80,414 which had arisen in the previous year of 1979-80 due to the change in the rate of exchange in repayment of the loans which were taken by the assessee for acquiring the asset in the past."
11. In the absence of indication of the exact year in which the assets were installed and put to use by the assessee in Windsor Foods ltd. 's case [1999] 235 ITR 249 (Guj), it is not clear whether the year for which the claim for the additional investment allowance was made in that case was within or beyond eight years from the end of the accounting year in which the concerned machinery and plant were installed and first put to use.
Section 32A analysed ;
12. For the purposes of appreciating the present controversy, Section 32A spanning over nine printed pages of the bare Income-tax Act, is required to be analysed in a language as simple as possible. Section 32A of the Act providing for investment allowance prescribes--
I. the eligibility for grant of this allowance ;
II. quantification of the allowance and the period during which the allowance can be claimed ;
III. the conditions for grant of the allowance.
I. Eligibility :
(i) The allowance is admissible in respect of a ship, an aircraft or machinery or plant specified in Sub-section (2) ("asset" for short), (Sub-section (1)), and
(ii) Such asset is owned by the assessee and wholly used for the purposes of the business carried on by him (Sub-section (1)).
II. Quantification of and the period for claiming investment allowance :
(i) The allowance is to be quantified to the extent of 25 per cent, of the actual cost of such asset to the assessee. (Sub-section (1))
(ii) The deduction is to be allowed for the assessment year relevant to the previous year (accounting year) in which the asset was installed or first put to use (the immediate succeeding year, in case the asset was not first put to use in the year of installation, but it was put to use in the immediate succeeding year), (Sub-section (1)) (For the sake of convenience, this previous year or accounting year will be referred to throughout in this judgment as the year of installation without specifying every time that alternatively it would be the year of first user, if the first user was not in the year of installation itself, but in the immediate next year).
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(iii) If on account of inadequate income in the year of installation, the amount of investment allowance cannot be claimed or fully claimed, it can be carried forward to the subsequent assessment years, subject to the condition that "No portion of the investment allowance shall be carried forward for more than eight assessment years immediately succeeding the assessment year relevant to" the year of installation, (Sub-section (3))
13. In other words, the investment allowance can be carried forward to maximum eight assessment years immediately after the expiry of the assessment year relevant to the year of installation. III. Conditions :
The investment allowance shall be allowed only if the following conditions are fulfilled, namely :
(i) the prescribed particulars are furnished by the assessee in respect of the asset in question, (Sub-section 4(i)) (ia) the asset is not sold or otherwise transferred by the assessee for a period of eight years from the end of the year of installation, (Sub-section 5(a)) (ii) the assessee must create a reserve (investment allowance reserve account) to the extent of 75 per cent. of investment allowance availed. From out of such reserves, the assessee must acquire another asset within ten years from the date of installation of the original asset on which the investment allowance was claimed, (Sub-section 4(ii)) (The debiting of this reserve to profit and loss account may be done not only for the accounting year in respect of which the deduction is to be allowed but even for any earlier accounting year which is not earlier than the year of installation, (Sub-section 4(ii))
14. Breach of any of these conditions will entail withdrawal of investment allowance, (Sub-sections (4) and (5)) Section 43(1) and Section 43A(1) :
"43. In sections 28 to 41 and in this section, unless the context otherwise requires--
(1) 'actual cost' means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority : . . .
Explanation 8.--For the removal of doubts, it is hereby declared that where any amount is paid or is payable as interest in connection with the acquisition of an asset, so much of such amount as is relatable to any period after such asset is first put to use shall not be included, and shall be deemed never to have been included, in the actual cost of such asset;
43A. Special provisions consequential to changes in rate of exchange of currency.--(1) Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset from a foreign country for the purposes of his business or profession, and in consequence of a change in the rate of foreign exchange, at any time after the acquisition of such asset, there is an increase (or reduction) in the liability of the assessee as expressed in Indian currency (being the liability existing immediately before the date of effect of the change in foreign exchange rate), for making payment/repayment towards the whole or part of the cost of the asset or the loan taken in any foreign currency specifically for the purpose of acquiring the asset, the amount by which the liability is so increased (or reduced) during the previous year shall be added to (deducted from) the actual cost of the asset as defined in Section 43(1) ....
(2) The provisions of Sub-section (1) shall not be taken into account in computing the actual cost of an asset for the purpose of the deduction on account of development rebate under Section 33."
15. The expression "actual cost" is defined under Section 43(1) to mean the actual cost of the asset to the assessee as worked out in the manner indicated therein in the context of different contingencies mentioned. It is provided under Section 43A(1) that where there is fluctuation in the exchange rate which increases (or reduces) the liability to pay the cost of the asset after it is acquired from a foreign country on credit, liability so increased (or reduced) during the previous year is to be added to (or deducted from) the actual cost of the asset as defined in Section 43(1) of the Act,
16. Do variations in foreign exchange rate in subsequent year project back into actual cost in the year of installation ?
17. After considering the provisions of Sections 43 and 43A(1), the Division Bench in Windsor Foods Ltd.'s case [1999] 235 ITR 249 (Guj) observed that the extent of addition to (or reduction in) the actual cost of the asset is directly connected with the liability outstanding immediately prior to the date of fluctuation in the exchange rate. Thus, if on such date only a part of the cost of the acquired asset is outstanding for payment, the exchange rate fluctuation will be worked out in the context of only that part of the outstanding payment and the addition to the actual cost will be made accordingly in that previous year in which the change has taken place. There is, therefore, no scope for revising the cost actually met prior to the date of the fluctuation in the exchange rate. It is only after the date of such fluctuation that the question can arise of revising the actual cost in the manner provided in Section 43A(1) during the previous year in which the fluctuation takes place. The actual cost so revised in the previous year will have relevance to the deductions which may be allowable in respect of that previous year and cannot relate back to the earlier previous year so as to retrospectively change the actual cost that prevailed in that year and could not have been altered by foreseeing any change in the exchange rate. In other words, the change in exchange rate cannot project back to the period prior to the date on which such change took effect.
18. We are in respectful agreement with this part of the reasoning of the Division Bench in Windsor Foods Ud.'s case [1999] 235 ITR 249 (Guj). In view of the clear provisions of Sub-section (1) of Section 43A of the Act, it is only during the previous year in which the fluctuation takes place that there will be addition to (reduction in) the actual cost of the asset as defined in Section 43(1) of the Act. It is thus obvious that the increase or reduction in the liability will be only with effect from the date on or after the date of fluctuation in the foreign exchange rate and such subsequent fluctuation cannot relate back to the period prior to the date of variation in the foreign exchange rate.
Windsor case--the premise and the conclusion
19. The reasons given by the Division Bench in Windsor Foods Ltd. '$ case [1999] 235 ITR 249 (Guj) for not applying the impact of the fluctuation in the foreign exchange rates beyond the year of installation of the asset are already indicated in para. 4 of this judgment. The Division Bench consolidated that reasoning with the following premise :
"Whether allowance is permissible and to what extent it is permissible in the previous year of such fluctuation would depend on the provisions under which it is to be worked out. The basic requirements laid down in the relevant provisions of the Act for the eligibility for such allowances and for working out the allowances as also in respect of the previous year for which they can be allowed, do not stand altered by Sub-section (1) of Section 43A. The provision is relevant only in the context of the previous year in which the change occurs and the actual cost is therefore adjusted, which will have impact only in respect of the allowances and deductions which are permissible in that previous year.
Since the investment allowance was already worked out on the basis of the actual cost and it got capitalised in the year of installation and first user and that quantified allowance cannot be varied by giving a back effect to such subsequent alteration in the exchange rate, there can arise no question of working out any additional investment allowance in such subsequent year in which the fluctuation takes place."
20. On the basis of the above conclusion, the Division Bench held that the Tribunal was in error in holding that the assessee was entitled to the deduction of investment allowance on the amount of Rs. 80,414 being the additional liability that arose due to fluctuation in foreign exchange rate in respect of the payments of outstanding instalments of machinery in a subsequent year.
21. Our perspective :
What we fail to appreciate is as to why the fluctuation in the foreign exchange rate cannot have any impact by way of addition to (or reduction in) the liability of the assessee to the cost of the asset (where purchase is on credit) or towards the repayment of the loan in foreign currency after the date of change in the foreign exchange rate. More particularly when Section 32A(3) itself allows the investment allowance not availed in the year of installation on account of insufficient profits, to be carried forward to the next eight assessment years.
22. In our opinion, in taking the aforesaid view, the Division Bench, with respect, did not give full effect to the non obstante clause with which subsection (1) of Section 43A(1) commences nor to the object of introducing Section 43A in the Act, nor even to the object underlying the conditions imposed for grant of investment allowance under Section 32A of the Act. It is necessary to consider all these aspects in view of the following settled principles of interpretation of statute which are recently summarised by the apex court in British Airways Plc, v. Union of India, AIR 2002 SC 391 (page 393) :
"7. While interpreting a statute the court should try to sustain its validity and give such meaning to the provisions which advance the object sought to be achieved by the enactment. The court cannot approach the enactment with a view to pick holes or to search for defects of drafting which make its working impossible. It is a cardinal principle of construction of a statute that effort should be made in construing the different provisions so that each provision will have its play and in the event of any conflict a harmonious construction should be given. The well known principle of harmonious construction is that effect shall be given to all the provisions and for that any provision of the statute should be construed with reference to the other provisions so as to make it workable. A particular provision cannot be picked up and interpreted to defeat another provision made in that behalf under the statute. It is the duty of the court to make such construction of a statute which shall suppress the mischief and advance the remedy. While interpreting a statute the courts are required to keep in mind the consequences which are likely to flow upon the intended interpretation."
23. Object of Section 43A(1) :
First we will point out the object of introducing Section 43A(1). The Legislature was aware that when an assessee acquires assets from countries outside India for the purpose of his business or profession, in a large number of such cases the cost of such acquisition is not paid by the assessee himself in full in the same previous year in which the asset is acquired/installed and first put to use. Ordinarily, the payment of the cost of the asset is made either by taking credit from the supplier abroad or by taking a loan from banks/financial institutions which is repayable in foreign currency in instalments over a number of years. Hence, in such cases, the fluctuations in the rate of foreign exchange would (more often than not) increase the liability of the assessee periodically. If such fluctuations in foreign exchange are not taken into account, the assessee would not get the benefits of depreciation and such other allowances on the basis of the actual cost of acquisition of the plant and machinery, but he would get such benefits only on the basis of the cost of the asset in terms of the Indian currency as per the foreign exchange rate at the time of acquiring the asset or at the most as per the foreign exchange rate at the end of the previous year in which the asset is purchased and first put to use. In view of the almost constantly increasing liability of the assessees to pay higher amounts in terms of the rupee on account of decline in the value of the rupee vis-a-vis foreign currencies like dollars, sterling pounds, etc., the assessees were not getting the benefits under the Income-tax Act in respect of the increased cost of acquisition on account of such changes in the rate of exchange of currencies.
24. It was in order to relieve the assessees from this hardship that Parliament introduced Section 43A containing special provisions consequential to changes in rate of exchange of currency. The section was introduced by the Finance (No. 2) Act, 1967, with effect from April I, 1967. Scheme of Section 32A :
The scheme of Section 32A is that the assessee who purchases a new plant and machinery is to be given the incentive of investment allowance to the extent of 25 per cent. of the actual cost of the machinery/plant to the assessee subject to fulfilment of certain conditions :
(i) No investment allowance on mere purchase :
The assessee must have put the asset to use in the year of installation or in the immediate next accounting year.
The Legislature did not intend giving the benefit to an assessee who does not put the asset to use in the year of purchase/installation, or at least in the immediate next year. Thus the incentive is to be given to one who is prompt in utilising the asset, that is, one who is promopt in putting the asset to productive use and not to one who keeps the asset idle for more than a year.
(ii) Carry forward of unabsorbed investment allowance :
The Legislature was aware that it was very likely that the assessee may not be able to generate profits in the very first year of installation of the asset to avail fully of the investment allowance. Hence, the Legislature provided that investment allowance could be carried forward in the subsequent assessment years when the income is sufficient to take the benefit of the investment allowance.
(iii) Carry forward for how many years :
The next question that the Legislature addressed itself to was--should this carry forward be allowed till the payment of the last instalment by the assessee may be 10 ; 15 or 20 years ? The Legislature's answer was--the outer time limit for carry forward of the investment allowance is eight assessment years immediately succeeding the year of installation and first user of the asset. The clear intent of the Legislature was, therefore, to give this incentive to an assessee who is not only prompt in putting the asset to productive use but also to efficient use. In other words, the Legislature expected the assesseeto be on its feet and start generating adequate profits within the period of eight years from expiry of the year of installation and first user. May be asses-sees who acquire assets by purchasing them on a long term loan of 12 or 20 years may find the eight year limit a little too short, but the Legislature in its wisdom introduced that limit in 1976 and made no change thereafter, (iv) Creation of reserves for acquiring another asset: The most important condition imposed by the Legislature on the asses-see for availing of investment allowance is that the assessee must create a reserve (investment allowance reserve account) to the extent of 75 per cent of the investment allowance availed of, out of which the assessee must acquire another asset within ten years from the expiry of the year of installation and first user of the original asset. Here also the legislative intent is clear-the incentive is for one who continues the industrial/professional activity by purchasing another asset within the ten year period. Entrepreneurs are expected to come out with a new burst of energy at least once in ten years, if they want to retain the benefit of investment allowance.
25. Interplay between Section 32A and Section 43A(1) :
The question which really arises for our consideration is what is the impact of the non obstante clause with which Sub-section (1) of Section 43A begins, on Section 32A and to what extent.
26. Mr. Kureshi, learned counsel for the Revenue, submitted that the only limited impact which the said non obstante clause has on the working out of investment allowance under Section 32A is that without the said non obstante clause, the assessee would not be able to modify or change the cost of acquisition of the asset even if there was a fluctuation in the rate of foreign exchange after the date of acquisition in the same year in which the asset is acquired. For instance, a specified asset was acquired on May 10, 1994, at a cost of US $ 1,44,000 by taking loan from a financial institution repayable in 12 years in monthly instalments of US $ 1,000 each commencing from June 1,1994. At that point of time (i.e., May 10,1994) the rate of exchange was Rs. 32 for one dollar and the assessee had purchased the asset by taking loan from a financial institution repayable over a period of 12 years. Say, there was a fluctuation in the exchange rate with effect from December 20, 1994, making it Rs. 34 per one dollar, i.e., in the same accounting year, and the assessee had paid the instalments of $ 1,000 each on January 1, February 1 and March 1, 1995.
27. In the absence of Section 43A, the assessee would not have got the benefits of the fluctuation in the foreign exchange rate. He would have got the benefits of investment allowance and even depreciation on the basis of the cost of asset as fixed on May 10, 1994, at the rate of only Rs. 32 per one dollar (i.e., US $ 1,44,000 x Rs. 32). This amount would have remained constant for all purposes, i.e., for all allowances for all subsequent years, even if the foreign currency had become dearer and dearer every now and then. Learned counsel for the Revenue submitted that the Legislature in fact introduced Section 43A so that the assessee would get the benefit of the fluctuation in the foreign exchange rate in the subsequent years for depreciation, because it is a recurring allowance. But so far as the investment allowance is concerned, the assessee would get the benefit of additional investment allowance only in respect of the increase in the cost in terms of Indian currency for the instalments paid from January 1, 1995, to March 31, 1995, when the exchange rate applicable would be Rs. 34 per dollar, but any subsequent fluctuation in the rate of foreign exchange after March 31, 1995, cannot be taken into account for the purpose of investment allowance, because the cost of acquisition of the asset had to be crystallised by March 31, 1995, which was the last date of the previous year in which the assessee had acquired and installed the asset and first put it to use. Learned counsel for the Revenue, therefore, submitted that the Division Bench has correctly interpreted the provisions of Section 32A read with Section 43A and that the view taken therein is not required to be changed.
28. Mr. Kureshi for the Revenue further submitted that if the interpretation canvassed by the assessee were to be accepted, the whole scheme of investment allowance under Section 32A would be unworkable. Section 32A provides for grant of investment allowance at the rate of 25 per cent. of the cost of the asset subject to various conditions. One of these conditions is that an amount equal to 75 per cent. of the investment allowance to be actually allowed is debited to the profit and loss account and credited to the reserve account to be utilised for the purpose of acquiring a new machinery or plant, before the expiry of a period of ten years from the previous year in which the machinery or plant in question was installed and first put to use. If the asses-see's arguments were to be accepted and the fluctuation in the foreign exchange rate even in the 11th or 12th year after the year of installation and first user were to be taken into account, the whole scheme would be unworkable and the condition aforesaid would be incapable of being complied with in so far as the additional liability on account of the foreign exchange fluctuation taking place in the llth or 12th year was concerned.
29. On the other hand, Mr. J. P. Shah, learned counsel for the assessee, submitted that the non obstante clause in Section 43A(1) has to be given full play and effect. All fluctuations in the rate of foreign exchange till the payment of last instalment have to be taken into account. Where the cost of the asset was met by the assessee by taking credit from the supplier or by taking a loan from the financial institution repayable in foreign currency, any fluctuation in the exchange rate of the foreign currency till the last instalment is paid has to be taken into account in view of Section 43A(1) and for working out any allowance like investment allowance, depreciation, etc. For instance, in the illustration given by the Revenue, if the asset was purchased for 1,44,000dollars in the year 1994 and the cost was paid by taking loan from a financial , institution spread over a period of 12 years and if any fluctuations in the foreign currency takes place increasing the liability of the assessee and consequent addition to the cost of the asset such increase/s must be added to the cost of the asset in each year of fluctuation. In view of the all pervasive language of Sub-section (1) of Section 43A, the benefit of adjusted cost on account of increase in liability of the assessee arising from fluctuation in the foreign exchange rate would be available to the assessee irrespective of the fact whether such fluctuation in foreign exchange rate takes place after eight years or ten years from the date of expiry of the year in which the asset was installed and first put to use. It could be even in the 20th year in which the last instalment is paid. It is also submitted that if the eight year period specified in Sub-section (3) of Section 32A is so sacrosanct, it could be computed from the expiry of each year in which the fluctuation in the foreign exchange rate takes place, for the purpose of computing additional cost on which investment allowance would be available.
30. Having heard learned counsel for the parties and also learned counsel for the assessee who also appears in his capacity as counsel for the intervenors, we are of the view that the correct position in law is somewhere in between the extreme stands adopted by learned counsel for the rival parties.
31. For the reasons already indicated in paragraph 13 above (page 537) we are in respectful agreement with the Division Bench in Windsor Foods Ltd.'s case [1999] 235 ITR 249 (Guj), that the fluctuation in foreign exchange rates subsequent to the date of acquisition cannot relate back to the date of acquisition. However, once the fluctuation takes place, in respect of the liability outstanding on that date, Section 43A(1) does come into play. If the contention of the Revenue were to be accepted, the relevant portion of Section 43A would have to be read in the following terms :
"in consequence of a change in the rate of exchange at any time after the acquisition of such asset but before the expiry of the previous year in which such asset was acquired, there is an increase or reduction in the liability of the assessee . . ."
32. The interpretation canvassed by learned counsel for the Revenue thus not only does grave violence to the language employed by the Legislature but also nullifies the object and language of Section 43A in the matter of grant of investment allowance under Section 32A of the Act, notwithstanding the non obstante clause with which Sub-section (1) of Section 43A begins.
33. In the illustration given in para. 19 (page 540) above, the actual cost of the asset to the assessee is US $ 1,44,000 and not the rupee equivalent thereof. Because, for the accounting year of installation of the asset (i.e., 1994-95), the accounts are not to be maintained in two separate currencies, the actual cost will be shown on the basis of the rate of foreign currency on the last day of that accounting year--1,44,000 multiplied by Rs. 34. Investment allowance at 25 per cent. of cost of acquisition will also be worked out on that basis in that year. The reserves required to be credited in that year will also be worked out on that basis. But in the subsequent years also the cost of acquisition of the asset would remain US $ 1,44,000 and for every variation in the foreign exchange rate with reference to the bench mark rate prevailing on March 31, 1995, on the differential amount the assessee will be entitled to claim 25 per cent. as investment allowance and the condition for debiting 75 per cent. thereof to the investment allowance reserve account would continue to apply. Hence, if in the accounting year 1996-97, the assessee pays 12 instalments of US $ 1,000 each at the following rates, the assessee would be entitled to claim additional investment allowance on the differential amount by which the actual cost of the asset has gone up in terms of the Indian currency :
Instalment in foreign currency Foreign exchange rate for US $ 1 Payment of instalment in Rs.
As per rate as on 31-3-1995 (Rs. 34 per dollar) Addition to the cost of asset (d)-(e) in Rs.
(a)
(b)
(c)
(d)
(e) (0) 1-4-1996 US $ 1000 36 36,000 34,000 2,000 1-5-1996 US $ 1000 36 36,000 34,000 2,000 1-6-1996 US $ 1000 37 37,000 34,000 3,000 1-7-1996 US $ 1000 37 37,000 34,000 3,000 1-8-1996 US $ 1000 37 37,000 34,000 3,000 1-9-1996 US $ 1000 38 38,000 34,000 4,000 1-10-1996 US $ 1000 38 38,000 34,000 4,000 1-11-1996 US $ 1000 38 38,000 34,000 4,000 1-12-1996 US $ 1000 39 39,000 34,000 5,000 1-1-1997 US $ 1000 40 40,000 34,000 6,000 1-2-1997 US $ 1000 40 40,000 34,000 6,000 1-3-1997 US $ 1000 40 40,000 34,000 6,000 4,56,000 4,08,000 48,000
34. For claiming additional investment allowance on Rs. 48,000 (i.e., 25 per cent. thereof would be Rs. 12,000) the assessee would have debit Rs. 9,000 (75 per cent. of Rs. 12,000) to the investment allowance reserve account.
35. There is another reason for taking the above view and that is also the reason why in the illustration above, the discussion is confined to payment of instalments of the principal amount. Clause (1) of Section 43 specifically provides that for Sections 28 to 41 (which would also include Section 32A) unless the context otherwise requires, "actual cost" means the actual cost of the asset to the assessee, . . . Explanation 8 to Clause (1) which was inserted by the Finance Act, 1976, with effect from April 1, 1975, reads as under :
"Explanation 8.-- For the removal of doubts, it is hereby declared that where any amount is paid or is payable as interest in connection with the acquisition of an asset, so much of such amount as is relatable to any period after such asset is first put to use shall not be included, and shall be deemed never to have been included, in the actual cost of such asset."
36. Hence, the interest paid by the assessee on the loan taken for purchasing the asset or the interest paid by the assessee to the supplier for purchasing the asset on deferred payment basis cannot be included in the actual cost of the asset. The court can, therefore, safely infer that the Legislature intended that the principal amount of instalments which the assessee pays for repayment of the loan would form a part of the actual cost of the asset to the assessee. Hence, whatever higher amount the assessee pays in Indian currency at the time of payment of the instalment with reference to the bench mark rate would go to add to the actual cost of the asset.
37. At this stage reference may be made to the fact that the Income-tax Officer had rejected the assessee's claim for interest payment on deferred credit facility to the foreign supplier (Hithachi Zosen of Japan) of the following sums as business expenditure ;
Assessment year Rs.
Pages (Paper book) 1977-78 39,66,824 157 1978-79 29,44,182 202 1979-80 19,69,963 234
38. The Income-tax Officer had treated it as capital expenditure. This was agitated in appeal against the orders of assessments for 1972-73 and 1975-76. But the Commissioner of Income-tax (Appeals), following the decision of the Tribunal allowed the claim for all the relevant assessment years as business expenditure. Vide order in I. T. R. Nos. 968,1235 and 2168/Ahd of 1979, dated April 7, 1982, the Tribunal had taken the view that payment of interest on deferred credit facility was allowable as business expenditure.
39. Apex court decision in Arvind Mills :
Learned counsel for the Revenue has heavily relied upon the decision of the Supreme Court in CIT v. Arvind Mills Ltd. [1992] 193 ITR 255 in support of his contention that whenever there is any one time allowance like development rebate or investment allowance, the benefit of Section 43A is not available for such one time allowance. It is submitted that in the aforesaid decision, the Supreme Court has specifically observed that so far as the development rebate is concerned, it is a one time allowance which has to be allowed in the year in which the machinery/plant has been acquired, installed or brought to use. It is vehemently contended by learned counsel for the Revenue that since the investment allowance is similar in nature to development rebate, by virtue of Sub-section (2) of Section 43A investment allowance also stands excluded from the benefit of Sub-section (1) of Section 43A.
40. We are unable to accept the aforesaid contention of the Revenue. The benefit of Sub-section (1) of Section 43A is not available in case of developmentrebate because of specific exclusion thereof by virtue of Sub-section (2) of Section 43A inserted by the Finance (No. 2) Act of 1967, with effect from April 1,1967. While inserting Section 32A by the Finance Act of 1976, the Legislature was conscious of the two different allowances being development rebate and investment allowance which is clear from Clause (c) of Sub-section (1) of Section 32A making specific mention of development rebate. However, in 1976 or thereafter the provisions of Sub-section (2). of Section 43A were not amended so as to exclude investment allowance also from the benefit of Subsection (1) of Section 43A. For the aforesaid reasons, we are in respectful agreement with the view taken by the Patna High Court in Usha Beltron Ltd. v. CIT [1999] 238 ITR 133, that the omission on the part of the Legislature in not mentioning "investment allowance" in the body of existing Sub-section (2) of Section 43A, while enacting Section 32A in 1976, was conscious and deliberate and that once the provisions of the statute are clear, there is no justification for reading the words "and investment allowance" in Sub-section (2) of Section 43A.
41. The scope and ambit of Sub-section (1) of Section 43A has been made very clear by the Supreme Court in the case of CIT v. Aroind Mills Ltd. [1992] 193 ITR 255, wherein the Supreme Court referred to the Notes on Clauses of the Finance Bill by which Section 43A was introduced and also the clarificatory letter dated January 4, 1967, issued by the Ministry of Finance. After considering all the relevant aspects, the apex court has held that the increase or decrease in liability arising on account of the fluctuation in the foreign exchange rate should be taken into account to modify the figure of actual cost and that such adjustment should be made in the year in which the increase or decrease in the liability arises on account of fluctuation in the rate of exchange. The apex court specifically observed that the adjusted actual cost is to be taken as the actual cost for all purposes other than for grant of development rebate. In our view, therefore, the decision of the apex court in CIT v. Arvind Mills Ltd. [1992] 193 ITR 255, far from helping the case of the Revenue, supports the case of the assessee on the limited issue that additional investment allowance is allowable if the cost of the asset increases on account of fluctuation in foreign exchange rate in subsequent years.
42. We also find considerable force in the submission of learned counsel for the assessee that Sub-section (1) of Section 43A also grants the benefit of adjusted cost on account of fluctuation in the foreign exchange rate even in case of some other one time allowances like those for scientific research under Section 35(1)(iv) or for acquisition of patent rights under Section 35A.
43. For the aforesaid reasons, we are of the view that, with respect, the Division Bench in the Windsor Foods Ltd.'s case [1999] 235 ITR 249 (Guj), did not lay down the correct law in observing that any increase in liability of the assessee on account of foreign exchange fluctuation in any year subsequent to the year of acquisition/installation and first use will not entitle the assessee to invesfment allowance on such addition to the cost of the asset.
44. Can the variation in foreign exchange rate have any impact on investment allowance beyond the eight year period ?
45. The question, however, still remains whether the effect of fluctuation would continue for the purposes of Section 32A till the last instalment of the loan is paid by the assessee which may be for a period of 12 or even 20 years from the year in which the asset was installed and first put to use.
46. We are unable to accept the contention of learned counsel for the assessee that such an interpretation should be accepted.
47. In our view, Section 43A of the Act had the limited object of providing relief to the assessee on account of change in the rate of foreign exchange. The provisions of Section 43A incorporated by the Finance (No. 2) Act of 1967, with effect from April I, 1967, could not have intended to modify the entire scheme of Section 32A for grant of investment allowance which was inserted by Parliament by the Finance Act, 1976, with effect from April 1, 1976, and which we have explained in detail in paragraph 18 (page 539) hereinabove.
48. As already explained above, Section 43A was intended to relieve the asses-sees of one and only one hardship--i.e., increase in liability on account of increase in the rate of foreign exchange. Sub-section (1) of Section 43A commencing with the non obstante clause could not have intended, and did not intend, to do away with the conditions imposed by Section 32A that the asset must have been put to use in the same previous year in which it was acquired/ installed or at least in the immediately succeeding year. Similarly, Section 43A could not have intended, and did not intend, to extend the period of eight years beyond which the assessee cannot get the benefit of the investment allowance nor to extend the period of ten years within which a new asset has to be acquired out of the reserves as discussed above. As already indicated above, Parliament merely wanted to relieve the hardship of the assessee who was complying with all the conditions imposed by various provisions granting the benefits like depreciation, investment allowance, etc., but who was subjected to fluctuations in foreign exchange rate and, therefore, his hardship was to be relieved only to the extent of providing that the actual cost shall be calculated in terms of foreign currency and not in terms of Indian currency, but this relief is to operate within the parameters of Section 32A and other sections granting the deductions and allowances and not beyond them. To this limit extent, we agree with the premise adopted by the Division Bench in Windsor Foods Ltd.'s case [1999] 235 ITR 249 (Guj), that the basic requirements laid down in the relevant provisions of the Act for the eligibility for such allowances and for working out the allowances as also in respect of the previous year/s for which they can be allowed, do not stand altered by Sub-section (1) of Section 43A. In the case of CIT v. Arvind Mills Ltd. [1992] 193 ITR 255, the Supreme Court was not at all concerned with this controversy, as the fluctuation in the foreign exchange rate had taken place in the year of acquisition/installation itself.
49. For the aforesaid reasons, we also find the considerable substance in the submission of Mr. Kureshi for the Revenue that in the case of an assessee, who has acquired a specified asset from a foreign supplier on deferred payment basis or by taking loan repayable in foreign currency, was not intended by Parliament to be given a longer period for availing of the investment allowance than the assessee acquiring the asset from the local market. The eight assessment years following the assessment year relevant to the year of installation/first user is the maximum period allowed by the Legislature to all for availing the investment allowance and there is nothing in Section 43A(1) which changes the scheme for investment allowance or any other allowance or deductions under other provisions of the Act except for the limited purpose as already explained earlier in this judgment. Otherwise, the entire scheme of Section 32A imposing a mandatory condition on the assessee to acquire another asset from out of the investment allowance reserve account within ten years from the expiry of the year of installation of the asset would become unworkable, if the assessee were to be allowed to claim investment allowance even after ten years from the year of installation. May be the assessee who has acquired the asset from a foreign supplier by taking deferred payment facility or on loan repayable in foreign currency for a period of 12 or 20 years may find the period of eight years too short for claiming investment reserves, but then that period was stipulated by Parliament in 1976, after insertion of Section 43A in 1967 and, therefore, the appeal for providing a longer period for claiming investment allowance beyond eight years from the year of installation must be made to the Legislature. After all there is no fundamental right to get investment allowance. It is subject to such conditions as are imposed by the Legislature.
50. As regards the various authorities cited by learned counsel for the parties on the question of interpretation of statutes, we do not think that it is necessary to deal with each of those authorities. Suffice it to state that we have noted that a non obstante clause is like a legal fiction and that a legal fiction is to be carried to its logical conclusion, but we would like to refer to the decisions of the apex court in Bengal Immunity Co. Ltd. v. State ofBihar [1995] 6 STC 446 ; AIR 1955 SC 661 (followed in CIT v. Vadilal Lallubhai [1972] 86 ITR 2 (SC); AIR 1973 SC 1016-1019 and in CIT v. Mother India Refrigeration Industries P. Ltd. [1985] 155 ITR 711 (SC); [1985] 4 SCC 1). It has been laid down in the above decisions that a legal fiction is to be limited to the purpose for which it was created and should not be extended beyond that legitimate field. In other words, a fiction is not to be extended beyond the purpose for which it is created. The view that we are taking also accords with the cardinal principle of construction of a statute that effort should be made in constructing the different provisions so that each provision will have its play and in the event of any conflict a harmonious construction should be given.
51. As indicated in paragraph 17 (page 538) hereinabove, we have considered that the object underlying Section 43A was to relieve the hardship of the asses-see consequent upon the increase in liability of the assessee upon fluctuation in the foreign exchange rates and in paragraph 18 (page 539) we have also considered the underlying object for granting the incentive of investment allowance to the assessee under Section 32A of the Act and the rationale of each of the various terms and conditions for grant of this allowance. We have also considered in paragraph 32 (page 546) above that Section 43A did not and could not have intended to affect, much less dilute, any of the conditions for applicability and operation of Section 32A as Section 43A was intended only to modify the definition of the term "actual cost" in Section 43(1) so as to take care of the addition to (or reduction in) the liability for payment on account of fluctuation in foreign exchange rate without extending the period covered by Sub-section (3) of Section 32A.
52. It is difficult to appreciate how reliance placed by Mr. J. P. Shah for the assessee on the Explanation to Section 32A(4)(ii) helps the assessee in stretching his case beyond the maximum period of eight years.
53. In case the Assessing Officer computes the total income of a given year higher than the one returned by the assessee and consequently a higher amount of investment allowance is admissible for that year, the Assessing Officer shall give a notice granting opportunity to the assessee to make good the short fall in the investment allowance reserve account in the year of service of such notice or in the immediately preceding accounting year if the accounts thereof are not closed. (Explanation to Sub-section (4)). As the analysis of Section 32A in paragraph 10 (page 534) of this judgment indicates, the conditions including the condition imposed by Sub-section (4)(ii) of Section 32A do not and cannot enlarge the maximum period stipulated by Sub-section (3) of Section 32A in mandatory terms for availing of the investment allowance. "No portion of the investment allowance shall be carried forward for more than eight assessment years immediately succeeding the assessment year relevant to" the year of installation of the asset. On the contrary, if anything, the provisions of Sub-section 4(ii) and the Explanation thereto only give some leeway to the assessee in the matter of debiting the reserves (75 per cent. of the investment allowance actually availed of) to the profit and loss account of a different year, but no indulgence is granted for claiming the investment allowance beyond eight years from the year of installation of the asset.
54. Similarly, the Explanation to Sub-section (1) of Section 32A relied upon by Mr. Shah does not carry the assessee's case any further. It merely states thatfor the purposes of Sub-section (1) of Section 32A, "actual cost" means the actual cost of the asset to the assessee as reduced by that part of such cost which has been met out of the amount released to the assessee out of the investment deposit account under Section 32AB(6). The latter part of the Explanation is not applicable here and the underlined words merely reiterate the words used in Sub-section (1) and do not enlarge the maximum eight year period stipulated by Sub-section (3) of Section 32A.
55. We have also perused the decisions cited by Mr. J. P. Shah in support of his contention that three other High Courts have already taken the view that investment allowance is allowable on the higher actual cost resulting from . fluctuation in foreign exchange rates.
56. In CIT v. Century Enka ltd. [1992] 196 ITR 447, the Calcutta High Court has held as under (page 449) :
"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 or 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 every 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."
57. It is pertinent to note that the Calcutta High Court was dealing with a case where the fluctuation in the foreign exchange rate took place in the year 1978-79. It is not clear, however, as to exactly in which year the plant or machinery was first put to use. The Calcutta High Court was not called upon to decide the controversy whether such investment allowance can be allowed on account of the increased liability resulting from fluctuation in foreign exchange which takes place beyond eight years from the year of installation of the asset. Hence, the said decision, though in line with the principles being laid down by us, does not support the contention of the assessee that the benefit of Section 43A would be available for getting higher investment allow ance even if the fluctuation takes place beyond eight years from the year of installation.
58. In Usha Beltron Ltd. v. CIT [1999] 238 ITR 133 (Patna), the plant and machinery were installed and put to use from October 1,1988, when the company commenced its commercial production. For the assessment year 1989-90, the assessee claimed that the cost of plant and machinery increased by Rs. 25 lakhs and odd on account of fluctuation in exchange rate and claimed depreciation as well as investment allowance on the increased cost in view of the provisions of Section 43A of the Act.
59. While the Assessing Officer and the Commissioner of Income-tax (Appeals) negatived the claim of the assessee for both the items, the Income-tax Appellate Tribunal accepted the assessee's claim for additional depreciation, but negatived the claim for additional investment allowance on the basis of the provisions of Sub-section (2) of Section 43A. The assessee, therefore, carried the matter in reference before the Patna High Court.
60. The High Court held in favour of the assessee on the ground that the Legislature was aware of the provisions regarding development rebate while enacting Section 32A as Section 32A(1)(c) makes specific mention of development rebate, but still the Legislature did not think if fit to mention "investment allowance" in the body of Sub-section (2) of Section 43A.
61. It is clear from the narration of the facts that this was a case where the claim for additional investment allowance was made within the eight year period, in fact the fluctuation took place in the year of installation or in the very next year.
62. Coming to the decision of the Madras High Court in CIT v. Chengalvarayan Co-operative Sugar Mills Ltd. [2000] 242 ITR 440, there also the assessee had installed the machinery during the previous year relevant to the assessment year 1982-83 and the liability for payment of additional amounts arose on account of fluctuation in foreign exchange rates during the previous year relevant to the assessment year 1983-84. Thus, the claim for additional investment allowance was made in the very next year after the year of installation, i.e., within the eight year period.
63. The decisions of the Calcutta, Patna and Madras High Courts thus do not support the contention of the assessee, in so far as it is contended that the assessee's claim for additional investment allowance on account of fluctuation in foreign exchange rate has to be accepted even beyond the period of eight assessment years from the year of installation of the asset.
64. In our considered view, therefore, any increase/reduction in the liability of the assessee towards the cost of acquisition of the asset on account of fluctuation in the rate of foreign exchange would be admissible for the purpose of investment allowance if such fluctuation has taken place in the previous year in which the asset is installed and first put to use, and in the subsequent eight assessment years from the date of expiry of the year of installation and first use. Any fluctuation in the rate of foreign exchange beyond the aforesaid period of eight years would not have any impact on the question of investment allowance.
65. One more question which is required to be considered is what would be the position if the assessee had already taken the benefit of the investment allowance before the expiry of the eight year period as stated above say, in the 4th year. The liability to repay the loan for purchasing the asset is to be totally discharged in the 12th year and the fluctuation in the foreign exchange rate takes place, say, in the 5th, 6th, 7th and/or 8th year from the expiry of the year in which the asset was installed and first put to use.
66. Learned counsel for the Revenue submitted that since the assessee had already availed of the full investment allowance by the end of the 4th assessment year from the expiry of the year of installation/first user, the assessee cannot get any further investment allowance on account of increase in liability of the assessee on account of adverse fluctuation in the foreign exchange rate in the subsequent years even within the eight year period.
67. Learned counsel again relied upon the principles laid down by the Division Bench in Windsor Foods Ltd.'s case [1999] 235 ITR 249 (Guj).
68. We are unable to accept the above submission. Apart from the fact that in the matter of the interpretation of the provisions of Section 32A read with Section 43A of the Act, we are overruling the view taken in Windsor Foods Ltd.'s case [1999] 235 ITR 249 (Guj), we are of the opinion that such a question was not posed before the Division Bench in Windsor Foods Ltd.'s case [1999] 235 ITR 249 (Guj) in such clear terms as will be clear from the facts in Windsor Foods Ltd.'s case [1999] 235 ITR 249 (Guj) as extracted from page 255 of the reported judgment (in para. 9 (page 533) of this judgment). The machinery and the plant in question were installed and put to use by the assessee many years ago before the respective previous year of 1979-80 in which the fluctuation in foreign exchange rate took place. The Division Bench observed that whatever investment allowance was due to be made to the assessee in that past relevant previous year when the machinery or plant were installed and put to use, were all claimed and deductions were allowed at the relevant time. It is not clear whether the claim in that case was made within a period of eight years or beyond a period of eight years.
69. We have examined this aspect of the matter independently. The definition of "actual cost" contained in Section 43(1) of the Act is applicable to all the sections from 28 to 41 which also include Section 32A. As per Section 43(1), the actual cost means the actual cost of the asset to the assessee. The actual cost of the asset would include (as could be inferred from Explanation 8 to Section 43) the amount which is paid in instalments towards the cost of acquisition of the asset (as distinguished from payment towards interest) and in view of the provisions of Section 43A(1) of the Act read with Section 32A(3), any increase in the liability of the assessee on account of change in the rate of foreign exchange within the period of eight years would be relevant for the grant of investment allowance in the year in which the fluctuation takes place, provided there was existing liability immediately before the date of effect of the change in foreign exchange rate. There is nothing in Section 32A which can deny the assessee this benefit of investment allowance on the additional cost of the asset on account of fluctuation of foreign exchange rate within the eight year period. The view that we have taken is that the working out of the cost of acquisition for the benefit of investment allowance under Section 32A is subject to modification under Sub-section (1) of Section 43A of the Act and that such modification is to be given for the particular instalments in foreign currency which become due and payable on and after the date of fluctuation in the foreign exchange rate. Of course, the claim for such additional investment allowance would also be subject to the conditions stipulated in Sub-sections (3) and (4) of Section 32A of the Act, that is, without extending the outer period of eight years (from the date of expiry of the year of first user of the asset) for availing of the benefit and without extending the period of ten years for acquiring the new plant/machinery. Hence, this benefit would be available to the assessee within the aforesaid period of eight years even where the assessee had already fully claimed the investment allowance at the rate specified in Section 32A before the date of fluctuation, provided the liability to pay the principal amount of cost of the asset in foreign currency was still outstanding on the date of fluctuation.
70. Conclusions :
In the result, our conclusions are as under :
I. While agreeing with the principle laid down by the Division Bench in C1T v. Windsor Foods Ltd. [1999] 235 ITR 249 (Guj), that the fluctuation in foreign exchange rate in a subsequent year cannot relate back to the year in which the asset was acquired, we overrule the decision of the Division Bench in Windsor Foods Ltd.'s case [1999] 235 ITR 249 (Guj), in so far as the Division Bench held that the amount of investment allowance under Section 32A of the Act gets crystallised once and for all in the year of installation and first user and that any fluctuation in the rate of exchange in a subsequent year will not have any impact on the amount of investment allowance allowable to the assessee under Section 32A of the Act.
II. The correct principles for grant of investment allowance in the context of variations in the rate of foreign exchange are as stated below :
(i) In view of the non obstante clause with which Sub-section (1) of Section 43A commences, the investment allowance which the assessee acquiring a specified asset from a country outside India on deferred payment basis or by taking a loan repayable in foreign currency is entitled to claim under section 32A of the Act would vary depending on the increase/decrease in the existing liability of the assessee for the cost of acquisition of the asset in question arising from fluctuation in the foreign exchange rate, provided such fluctuation takes place within a period of maximum eight years from the expiry of the previous year in which the asset in question was installed and first put to use, as stated in Sub-section (3) of Section 32A of the Act.
(ii) There will, however, be no change in the amount of investment allowance which the assessee would be entitled to get under Section 32A of the Act on account of any fluctuation in the rate of foreign exchange which takes place after the expiry of the aforesaid period of eight years.
(iii) Additional investment allowance on account of fluctuation in foreign exchange rate will be computed only in respect of the additional liability on the principal amount of cost or loan repayment towards the cost price, and not in respect of interest component of the payment (vide Explanation 8 to Section 43(1)), for which deduction would be available as business expenditure under Section 36(1)(iii).
(iv) Even if the assessee had claimed full investment allowance before the date of fluctuation on the basis of the cost of the asset as earlier worked out for the period prior to the date of fluctuation, the assessee, who had taken loan or credit in foreign currency for purchasing the plant/machinery, would be entitled to claim additional investment allowance on the basis of any such fluctuation in foreign exchange which takes place within the aforesaid period of eight years, provided there was an outstanding liability in foreign currency towards payment of the cost of the asset on the date immediately prior to the date of fluctuation. In other words, if the cost of the asset goes up on account of any fluctuation in the foreign exchange rate within the aforesaid period of eight years, the assessee would be entitled to claim investment allowance on such additional cost paid by it in foreign currency, notwithstanding the fact that the assessee had already availed of the full investment allowance before the date of fluctuation on the basis of the cost earlier worked out.
(v) Even when the fluctuation takes place within the aforesaid period of eight years, 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 payment of the instalment under the deferred payment scheme or the date of repayment of the loan or a part thereof obtained for the purpose of acquisition of the 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 or 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 (vide CIT v. Century Enka Ltd. [1992] 196 ITR 447 (Cal)).
The reference shall now go before the Division Bench for being answered in the light of the opinion given by us.
D.A. Mehta, J.
71. Having gone through the judgment of my learned Brother Justice M. S. Shah, in view of the reasons which follow hereinafter we record our opinion.
72. The assessee is a public limited company. The company manufactures fertilizers and caprolactum. The assessment years are 1977-78, 1978-79 and 1979-80, the respective accounting periods being the calendar years 1976, 1977 and 1978.
73. The assessee entered into a contract for supply of plant and machinery equipments with Hitachi Zosen of Japan on deferred credit basis. Accordingly, the assessee was required to make payment in instalments over a period of time. The liability for the years under consideration has increased by reason of fluctuation in exchange rate. The assessee claimed the following amounts for each of the years under consideration as allowable business expenditure : (1) Rs. 9,21,658, (2) Rs. 26,49,336, (3) Rs. 57,77,322. The claim of the assessee was negatived and it was held that the expenditure in question was capital in nature.
74. The assessee preferred an alternative claim that the aforesaid expenditure went to increase the actual cost of the plant and machinery and hence the assessee should be granted investment allowance under Section 32A of the Income-tax Act, 1961 ("the Act"). The Income-tax Officer rejected the claim of the assessee stating that conditions for applicability of Section 32A were not satisfied. The Commissioner of Income-tax (Appeals), before whom the assessee went in appeal held that the order of the Income-tax Officer was correct because the years under consideration are not the years when the assets were either installed or first put to use, and this was the basic requirement for applicability of Section 32A of the Act. The Income-tax Appellate Tribunal, in the second appeal preferred before it upheld the claim of the assessee on the basis of the reasons stated in earlier orders wherein development rebate had been granted to the assessee in the same set of facts and circumstances.
75. The Tribunal has raised the following question of law at the instance of the Commissioner of Income-tax for the opinion of this court :
"Whether, the Tribunal has been right in law and on facts in holding that the assessee is entitled to investment allowance on account of additional expenditure in the cost of plant and machinery on account of realignment of currency ?"
When the matter came up before the Division Bench, the Revenue placed reliance upon the decision of this court in the case of CIT v. Windsor Foods Ltd. [1999] 235 ITR 249. On behalf of the assessee reliance was placed on various provisions of the Act as well as the decisions of other High Courts which have taken a contrary view. The Division Bench was of the prima facie opinion that the view expressed by this court in the case of Windsor Foods Ltd. [1999] 235 ITR 249 did not appear to be correct as the aspect of Section 43A of the Act commencing with non obstante clause and hence overriding other provisions of the Act, was not taken into consideration. Accordingly, the matter is placed before the larger Bench for deciding the reference.
76. The Division Bench of this court in the case of CIT v. Windsor Foods Ltd. [1999] 235 ITR 249 was called upon to decide the following question (page 251) :
"1. Whether, on the facts and in the circumstances of the case and in law the Tribunal was right in coming to the conclusion that the assessee was entitled to investment allowance on the amount of Rs. 80,414 being the additional liability arising due to fluctuation in foreign exchange rate in respect of the payment of outstanding instalments of machinery ?"
Thus, as the question itself indicates the additional liability arose due to exchange fluctuation in respect of payment of outstanding instalments. This is what was held in the said case (page 261) :
"The extent of addition (or reduction as the case may be), to the actual cost of the asset is directly connected with the liability outstanding immediately prior to the date of fluctuation in the exchange rate. Thus, if on such date only a part of the cost of the acquired asset is outstanding for payment, the exchange rate fluctuation will be worked out in the context of only that part of the outstanding payment and the addition to the actual cost will be made accordingly in that previous year in which the change has taken place. There is, therefore, no scope for revising the cost actually met prior to the date of the fluctuation in the exchange rate. It is only after the date of such fluctuation that the question can arise of revising the actual cost in the manner provided in Section 43A(1) during the previous year in which the fluctuation takes place. The actual cost so revised in the previous year will have relevance to the deductions which may be allowable in respect of that previous year and cannot relate back to the earlier previous year so as to retrospectively change the actual cost that prevailed in that year and could not have been altered by foreseeing any change in the exchange rate. In other words, the change in exchange rate cannot project back to the period prior to the date on which such change took effect. The deduction of investment allowance can be allowed in respect of the previous year in which the machinery was installed or first put to use. If the deduction becomes allowable in that relevant previous year, the full investment allowance is to be worked out on the basis of the actual cost of the machinery or plant to the assessee at that relevant time. That quantification of the amount at 25 per cent. of the actual cost to be allowed by way of deduction as investment allowance got crystallised on the basis of the actual cost and no change can be made therein for that previous year on the basis of any fluctuation that takes place in the exchange rate in the subsequent years which will have impact only on the liability to pay as it stands immediately prior to the date of fluctuation in such subsequent year. The fact that the investment allowance is carried forward under Sub-section (3) or that the reserve can be created in any subsequent assessment year due to insufficiency of profits in the earlier years will not alter this situation. In our view, therefore, no question of revising the full amount of the investment allowance which was already worked out in the relevant previous year can ever arise by virtue of any subsequent fluctuation in the exchange rate which brings about a change in the liability that existed immediately before the date on which the change in the rate of exchange takes effect. The additional liability is to be added to the actual cost only in that previous year in which it arises and the actual cost so revised will be operative in respect of the benefits which are required to be calculated in that previous year. Since the investment allowance was already worked out on the basis of the actual cost and that quantified allowance cannot be varied by giving a back effect to such subsequent alteration in the exchange rate, there can arise no question of working out any additional investment allowance in such subsequent year in which the fluctuation takes place. . . ."
Mr. Akil Qureshi, learned standing counsel appearing on behalf of the applicant-Revenue, after referring to various provisions of the Act, submitted that investment allowance under Section 32A of the Act is to be allowed either in the year of acquisition/installation of the plant and machinery or when the plant and machinery is first put to use in the immediately succeeding year. That the said deduction is not to be allowed beyond one year and Sub-section (3) of Section 32A of the Act merely permits carry forward of unabsorbed investment allowance which stands quantified. That investment allowance is permitted to be deducted on fulfilment of various conditions prescribed in the section. Section 43(1) of the Act only defines as to what is actual cost but it does not state as to what would be the effect when the said actual cost would undergo change by virtue of operation of Section 43A of the Act. That Section 43(1) does not deal with allowability in relation to deduction which has already been granted on the basis of actual cost worked out and thereafter there is no further scope for granting any further deduction. Referring to the provision of Section 43A of the Act, it was submitted that it does not permit reopening of accounts nor does it provide for any relating back, which would be necessary if the contentions of the assessee were to be accepted. It was further submitted that the phrase "during the previous year" used in Section 43A of the Act should be read to mean only that previous year in which deduction under Section 32A would otherwise be available and it cannot be read to mean that investment allowance which has already been granted has to be changed. He further contended that Section 43 opens with the phrase "unless the context otherwise requires" and on harmonious reading of Section 43(1), Section 32A and Section 43A of the Act, the legislative intention should be inferred as held in the case of C1T v. Windsor Foods Ltd. [1999] 235 ITR 249 (Guj). That by the operation of the non obstante clause in Section 43A of the Act as suggested by the assessee the restrictive conditions in Section 32A would stand negatived. Apart from heavy reliance on the decision of the Division Bench of this court in the case of CIT v. Windsor Foods ltd. [1999] 235 ITR 249. Mr. Qureshi also referred to various decisions dealing with various principles of interpretation to contend that interpretation should be purposive, contextual and the ratio decidendi of a decision had to be applied.
77. Mr. J. P. Shah, learned counsel, appearing on behalf of the respondent-assessee, stated that the decision of the apex court in the case of CIT v. Arvind Mills Ltd. [1992] 193 ITR 255 was a complete reply to the submissions of the Revenue and a benevolent provision brought on the statute book for establishment and growth of industry should be construed with a benevolence oriented approach. It was submitted that Section 43A of the Act opened with the phrase "Notwithstanding anything contained in any other provision of this Act" and Section 32A did not open with the phrase notwithstanding anything contained in Section 43A of the Act, hence the latter, i.e., Section 32A of the Act, had to yield to Section 43A of the Act. It was further contended that Section 43A(1) of the Act referred to various other provisions which deal with one time allowances in the capital field like Section 35(1)(iv) of the Act or Section 35(2)(ia) or Section 32(1)(iia) or Section 32(1)(vi) of the Act. Therefore, according to him Section 43A(1) of the Act was not meant to be operative only in relation to the provisions which deal with recurring deductions. Mr. Shah referred to various decisions of the apex court in support of the proposition that where an incentive is granted the provision should be construed liberally so as to advance that object and an interpretation which would nullify the object of the provision should be avoided.
78. The controversy--whether the provisions of Section 32A of the Act prevail over those of Section 43A of the Act as canvassed by the Revenue or, Section 43A of the Act overrides other provisions including Section 32A of the Act as contended by the assessee--shall have to be resolved in the light of well established principles of interpretation. The approach has to be therefore as stated by the, Supreme Court (see page 393 of AIR 2002 SC) :
"8. While interpreting a statute the court should try to sustain its validity and give such meaning to the provisions which advance the object sought to be achieved by the enactment. The court cannot approach the enactment with a view to pick holes or to search for defects of drafting which make its working impossible. It is a cardinal principle of construction of a statute that effort should be made in construing the different provisions so that each provision will have its play and in the event of any conflict a harmonious construction should be given. The well known principle of harmonious construetion is that effect shall be given to all the provisions and for that any provision of the statute should be construed with reference to the other provisions so as to make it workable. A particular provision cannot be picked up and interpreted to defeat another provision made in that behalf under the statute. It is the duty of the court to make such construction of a statute which shall suppress the mischief and advance the remedy. While interpreting a statute the courts are required to keep in mind the consequences which are likely to flow upon the intended interpretation,"
(British Airways Plc. v. Union of India [2002] 2 SCC 95, 100; AIR 2002 SC 391) :
Section 32A of the Act which deals with investment allowance was inserted by the Finance Act, 1976, with effect from April 1, 1976. Sub-section (1) of the said section provides that in respect of a ship or an aircraft or machinery or plant specified in Sub-section (2), which is owned by the assessee and is wholly used for the purpose of the business carried on by the assessee deduction would be allowable in the previous year of acquisition or installation, as the case may be, or in the immediately succeeding previous year, if the said asset is first put to use then in that previous year. The amount of allowance would be equal to twenty-five per cent. of the actual cost of asset. Sub-section (2) of Section 32A of the Act specifies the asset which would be eligible for investment allowance. Sub-section (3) of Section 32A provides that the deduction of investment allowance shall be to the extent so as to reduce the income to "nil" and in case any sum remains unabsorbed the same shall be carried forward and the outer limit for carrying forward is eight assessment years immediately succeeding the assessment year relevant to the previous year in which the asset was acquired/installed or the immediately succeeding previous year in which the asset was first put to use. Sub-section (4) of Section 32A stipulates certain conditions on fulfilment of which the deduction under Sub-section (1) shall be allowed and one of the important conditions pertains to creation of investment allowance reserve to the extent of 75 per cent. of the investment allowance to be actually allowed being debited to the profit and loss account of any previous year in respect of which deduction is to be allowed under Sub-section (3) or any other previous year (but not being earlier than the year of acquisition/installation or when the asset was first put to use). Explanation under Sub-section (4) provides that in the eventuality of the Assessing Officer computing a figure higher than the one on the basis of which the assessee had claimed deduction, an opportunity shall be granted to the assessee to make good the shortfall in the investment allowance reserve account and specifies that such additional reserve can be created in the previous year in which the Assessing Officer serves a notice on the assessee or immediately preceding previous year if the accounts for that year have not been made up.
Section 43 deals with definition of certain terms relevant to income from profits and gains of business or profession and opens by stating "In Sections 28 to 41 and in this section, unless the context otherwise requires". Clause (1) defines "actual cost" to mean the actual cost of the assets to the assessee. For the present it is not necessary to deal with the proviso or Explanation under the said clause.
79. Section 43A of the Act was inserted by the Finance (No. 2) Act, 1967, with effect from April 1, 1967. The said section pertains to special provisions consequential to change in the rate of exchange of currency. Sub-section (1) of Section 43A lays down that notwithstanding anything contained in any other provision of the Act, where an assessee has acquired any asset from a country outside India for the purpose of his business and, in consequence of a change in the rate of exchange at any time after the acquisition of such asset, there is an increase or reduction in the liability of the assessee in Indian currency for making payment towards the whole or a part of the cost of the asset, the amount by which the liability aforesaid is so increased or reduced shall be added to or reduced from the actual cost of the asset as defined in Section 43(1) and the amount arrived at after such addition/reduction shall be taken to be the actual cost of the asset. Therefore, it is apparent that :
(a) the provision overrides any other provision of the Act;
(b) the provision operates on an event which happens after the date of acquisition of an asset;
(c) the provision envisages increase/reduction in the liability for making payment towards the whole or part of the cost of the asset;
(d) the amount by which the liability is increased/reduced should go to add to or reduce from the actual cost of the asset under Section 43(1) of the Act;
(e) such changed figure shall be taken to be the actual cost of the asset;
(f) such increase/reduction in the liability shall be added to or reduced from the cost of the asset during the previous year in which the exchange fluctuation took place.
On a plain reading of Section 43A of the Act, one thing is certain and that is, the increase or reduction in the liability has to take place only in the year of fluctuation and it does not relate back to the year of acquisition/installation/ first user. One will therefore have to proceed on the footing that the actual cost figure which was quantified earlier than the previous year in which the fluctuation took place, shall have to be modified in the year of fluctuation. It is well-settled that when the asset was purchased at a price, liability to pay the said price arose simultaneously. Merely because, the said liability was to be discharged in instalments, it cannot be stated that the liability did not exist or accrue till the instalments became due and payable. It is this liability which changes on account of fluctuation in the rate of exchange. There is one more aspect. The price of the asset had already been arrived at on the day when the contract of purchase had been entered into ; now due to fluctuation in the rate of exchange, in terms of Indian currency the cost in the hands of an assessee shall stand modified. The contention of the Revenue therefore that the figure of actual cost stood quantified once and for all for the purpose of investment allowance in the year of acquisition/installation/first user will therefore have to be tested in this context.
80. The question is as regards allowability or otherwise of investment allowance on the additional amount which goes to enhance the actual cost of the asset in question. There is no dispute that the actual cost gets enhanced for all other purposes like depreciation, etc. Therefore, the contention raised on behalf of the Revenue by giving various illustrations would not throw any further light as regards the controversy at hand. The apprehension to the effect that provisions relating to carry forward of unabsorbed investment allowance and creation of investment allowance reserve and utilisation of the said reserve within the specified time limits would become unworkable if the assessee's claim is upheld is unfounded.
81. The approach advocated by the Revenue goes against the well-settled cannons of construction. It cannot be permitted to pick up Sub-sections (3) and (4) of Section 32A of the Act to defeat the operation of Section 43A of the Act. Moreover, the question before the court is whether investment allowance is available on enhanced actual cost. The submission on behalf of the Revenue that even if such enhanced actual cost is considered for grant of investment allowance, the actual allowance should adhere to the statutory limitation laid down in Sub-sections (3) and (4) of Section 32A requires to be stated to be rejected. There is no such restriction prescribed in Section 43A of the Act : it merely states "Notwithstanding anything contained in any other provision of this Act. ..."
82. Taking into consideration the object of the provision, viz., Section 32A of the Act, the claim would become workable once the provisions of Section 43A(1) of the Act are allowed to have full play. In other words when a provision stipulates that it shall override any other provision of the Act it is something akin to a provision which enacts a fiction. It is well-established that a fiction has to be permitted to operate to its logical end and one cannot permit the mind to be boggled at any intermediate stage. That in case of conflict between two provisions, overriding effect has to be given to the provision which opens with a non obstante clause. To put it differently, the non obstante clause is a legislative device adopted to modify or override the ambit of the provisions mentioned in the non obstante clause. In this case all the provisions of the Act, the scope of a non obstante clause has been explained by the Supreme Court in the case of Vishin N. Khanchandani v. Vidya Lachmandas Khanchandani [2000] 246 ITR 306, 314 thus :
"There is no doubt that by non obstante clauses the Legislature devises means which are usually applied to give overriding effect to certain provisions over some contrary provisions that may be found either in the same enactment or some other statute. In other words, such a clause is used to avoid the operation and effect of all contrary provisions. The phrase is equivalent to showing that the Act shall be no impediment to the measure intended. To attract the applicability of the phrase, the whole of the section, the scheme of the Act and the objects and reasons for which such an enactment is made have to be kept in mind."
As stated by the apex court in the case of CIT v. Arvind Mills Ltd. [1992] 193 ITR 255 once the non obstante clause operates, even if the position had been different otherwise, it cannot prevail after the introduction of this section, i.e., Section 43A(1) of the Act.
83. In the light of this position of law, once Section 43A of the Act provides that the figure of actual cost of an asset to the assessee stands modified in the previous year in which the exchange rate fluctuation took place, all other consequences would flow by adopting the said year and the said figure of the actual cost as the starting point. In other words, an assessee claiming investment allowance on such modified figure of the actual cost will be required to fulfil the requisite condition like creation of reserve to the specified extent in the year of such change in the figure of actual cost. The period of carry forward for the purpose of eight years shall have to be computed from the said year and similarly the period of utilisation of the investment allowance reserve shall have to be computed from the said year. This would of course be only in relation to the enhanced cost of the asset i.e., the deduction would be available to the extent of 25 per cent. of the enhanced cost, reserve will have to be created to the extent of 75 per cent. of the enhanced cost,
84. The provision of Section 32A of the Act nowhere provides that investment allowance cannot be allowed beyond the year of acquisition/installation/first put to use where the actual cost stands modified due to application of Section 43A of the Act. On the contrary there are inherent indications in the scheme of Section 32A of the Act which go to show that an assessee can claim deduction of a higher amount of investment allowance on fulfilment of the statutory condition prescribed. The creation of reserve and allowance have been linked with availability of sufficient profits. Sub-section (4) provides for creation of investment allowance reserve account and specifically stipulates that the same could be created not only in the previous year in respect of which a deduction is to be allowed under Sub-section (3) but it could be any earlier previous year but the cut-off point would be the previous year in which an asset was acquired or installed or first put to use. In other words, in any of the years subsequent to such year an assessee would be permitted to pass necessary entries by debiting profit and loss account and crediting the reserve account and what is more material is such entries are relatable to the profits and gains of the previous year which would be a subsequent year. Similarly, the Explanation to Sub-section (4) also gives an indication that an Assessing Officer may permit an assessee to credit further amounts to the investment allowance reserve account out of the profits and gains of the previous year in which the Assessing Officer serves the assessee with the notice to do so.
85. Thus, on an overall consideration of the scheme of Section 32A of the Act, it is abundantly clear that the Legislature did not envisage any relating back to the year of acquisition/installation/first user but has provided for creation of reserve and allowance in a subsequent year being aware of the settled legal position that reopening of accounts is unknown to income-tax. This position is clear from the decision in the case of Arvind Mills Ltd. [1992] 193 ITR 255 (SC) wherein at page 262 of the reports the apex court has referred to two of its earlier decisions in the cases of CIT v. A. Gajapathy Naidu [1964] 53 ITR 114 and CIT v. Swadeshi Cotton and Flour Mills P. Ltd. [1964] 53 ITR 134. In fact, the court has also taken note of the fact that the said principle has subsequently been recognised by the amendment to the Companies Act, 1956.
86. In relation to Section 43A of the Act, the apex court has stated thus (page 270 of 193 ITR) :
"It lays down, firstly, that the increase or decrease in liability should be taken into account to modify the figure of actual cost and secondly that such adjustment should be made in the year in which the increase or decrease in liability arises on account of the fluctuation in the rate of exchange . . . As we have discussed above, the provisions of Sub-section (1) apply to the present case and the increased liability should be taken as 'actual cost' within the meaning of Section 43A(1). All allowances including development rebate or depreciation allowance or the other types of deductions referred to in the subsection would therefore have to be based on such adjusted actual cost. But then Sub-section (2) intercedes to put in a caveat. It says that the provisions of Sub-section (1) should not be applied for purposes of development rebate. The effect is that the adjusted actual cost is to be taken as the actual cost for all purposes other than for grant of development rebate."
Hence, once Sub-section (1) of Section 43A of the Act comes into play and the increase in liability is taken as the actual cost within the meaning of Section 43(1) of the Act, the effect is that such adjusted actual cost has to be taken as the actual cost for all purposes other than development rebate and all allowances would have to be based on such adjusted actual cost. Therefore, the assessee would be entitled to investment allowance on the figure of enhanced actual cost.
87. The decision of the Division Bench in the case of Windsor Foods Ltd. [1999] 235 ITR 249 (Guj) is therefore overruled and held to be not laying down the correct law as regards allowability of investment allowance on an enhanced cost.
88. In so far as the aspect of interest payable, on the borrowing or deferred credit which is payable in instalments, forming part of the instalment is concerned, it is not necessary for us to deal with the said aspect as such interest component will be governed by the provisions of Section 36(1)(iii) or Explanation 8 under Section 43(1) of the Act. We are making this observation only with a view to ensure that if this aspect is arising in the case of any of the interveners who are represented by Mr. J. P. Shah, the said aspect can be urged and agitated before the appropriate forum as the facts warrant.
89. The reference shall now go before the Division Bench for being answered in the light of the opinion given by us.