Calcutta High Court
Century Enka Ltd vs Assistant Commissioner Of Income Tax on 16 January, 2009
Author: Pinaki Chandra Ghose
Bench: Pinaki Chandra Ghose
ITA No. 5 of 1999
G.A. No.1638 of 1999
IN THE HIGH COURT AT CALCUTTA
Constitutional Writ/Civil Appellate/Ordinary Original Civil Jurisdiction
ORIGINAL SIDE
CENTURY ENKA LTD. Plaintiff/Petitioner/Applicant
Versus
ASSISTANT COMMISSIONER OF INCOME TAX Defendant/Respondent
BEFORE:
The Hon'ble JUSTICE PINAKI CHANDRA GHOSE The Hon'ble JUSTICE SANKAR PRASAD MITRA Date : 16th January, 2009.
PINAKI CHANDRA GHOSE,J: -This appeal is admitted by the Court on the following substantial questions of law:
"Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in law in holding that the appellant was not entitled to depreciation of Rs.43,71,472/- and the investment allowance of Rs.27,01,145/- on the increased cost of the plant and machinery resulting from increase in the liability to re-pay the foreign currency loans increased for purchase of such plant and machinery?"
In this matter the assessment year involved is 1988-89. The learned Tribunal held that under section 43A of the said Act the claim of investment allowance is not allowable. Mr. Khaitan appearing in support of this appeal drew our attention to Section 43A which is quoted hereunder:
43A.(1) Notwithstanding anything contained in any other provisions of this Act, where an assessee has acquired any asset from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange at any time after the acquisition of such assets, there is an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment towards the whole or a part of the cost of the asset or for repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset (being in either case the liability existing immediately before the date on which the change in the rate of exchange takes effect), the amount by which the liability aforesaid is so increased or reduced during the previous year shall be added to, or, as the case may be, deducted from the actual cost of the asset as defined in clause
(l) of Section 43 or the amount of expenditure of a capital nature referred to [in clause (iv) of sub-
section (1) of Section 35 or in section 35A] or in clause (ix) of sub-section (1) of section 36, or,in the case of a capital asset (not being a capital asset referred to in section 50), the cost of acquisition thereof for the purposes of section 48, and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the amount 2 of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset as aforesaid."
The said section was in operation with regard to assessment year involved in this case. Mr. Khaitan further submitted before us that there is a decision of this High Court which is reported in 196 ITR 447 (CIT vs. Century Enka Ltd) where the Court held that where a machinery is purchased from a foreign country on a deferred payment basis or by obtaining a loan repayable in foreign currency, any additional amount payable due to periodical fluctuation in the currency rate in respect of foreign currency forms part of the actual cost for allowing investment allowance. Section 43A(2) of the Income Tax Act, 1961, only excludes the provisions of section 43A(1). Thus where the contract itself stipulates repayment in foreign currency, the actual cost of the assets must be computed on the value of the foreign currency. Therefore, the amount so paid for repayment, that is to say, any cost due to change in the value of foreign currency which actually goes in repaying the debt, must form part of 'actual cost' as contemplated by section 43(1). In the said decision CIT vs. Century Enka Ltd (Supra) the Court held that ..
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" ..... In devaluation, there is a reduction in the value of a currency or of a standard monetary unit whereas in the case of fluctuation, there is no such reduction in the value of a currency or of a standard monetary unit; there is only fluctuation in the rate of exchange in day-to-day transactions. The day-to-day fluctuation in the rate of foreign exchange will not have any bearing on the liability as such. The crucial day is the date of repayment of the loan obtained for the purpose of acquisition of any capital asset. If a capital asset has been acquired by obtaining a loan or by deferred payment of the purchase price, and if, on the date of repayment of the loan of payment of any instalment of purchase price, any additional liability is imposed because of fluctuation in the rate of exchange, the assessee will be entitled to capitalise such liability.
It is common knowledge that the rate of exchange fluctuates every day depending on the conditions prevailing in the International Monetary Market but such fluctuation in conversion cannot be taken into account unless, at the time of actual payment of the liability in foreign currency, there has been, in fact, an additional liability. It is, therefore, necessary to 4 ascertain in very case whether the assessee incurred any additional liability on the date of repayment or not. Only if any additional liability is incurred on the date of repayment due to change in the rate of conversion, such liability will be added to the cost of the capital asset and benefit of depreciation and investment allowance will be allowed on such added cost.... .."
Consequently, the Court after taking into account the facts of the said case came to the conclusion that the assessee would be entitled to investment allowance on such sum as may be found to represent any additional liability on the date of actual payment of the loan arising due to fluctuation in the rate of conversion and the Income Tax Officer shall allow the assessee an opportunity of creating reserve in respect of such additional sums eligible for investment allowance. ] Subsequent to the order so passed by the Calcutta High Court it appears that the Legislator found it is necessary to amend the said Section 43A and after amendment the said Section came into force with effect from 1st April, 2003. The said section reads as follows:
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"43A. Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset in any previous year from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange during any previous year after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency (as compared to the liability existing at the time of acquisition of the asset) at the time of making payment-
(a) towards the whole or a part of the cost of the asset; or
(b) towards repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset along with interest, if any, the amount by which the liability as aforesaid is so increased or reduced during such previous year and which is taken into account at the time of making the payment, irrespective of the method of accounting 6 adopted by the assessee, shall be added to, or, as the case may be, deducted from-
(i) the actual cost of the asset as defined in clause (1) of Section 43; or
(ii) the amount of expenditure of a capital nature referred to in clause (iv) of sub-section (1) of section 35; or
(iii) the amount of expenditure of a capital nature referred to in section 35A; or
(iv) the amount of expenditure of a capital nature referred to in clause (ix) of sub-section (1) of section 36; or
(v) the cost of acquisition of a capital asset(nor being a capital asset referred to in section
50) for the purposes of section 48, and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital assset as aforesaid:
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In our considered opinion the same has been amended in the light of the situation as felt by the Division Bench of this High Court in Century Enka Limited (supra).
Mr. Khaitan further drew our attention to the decision of the Hon'ble Supreme Court reported in 193 ITR 255 (CIT vs. Arvind Mills Ltd) where the Court held that section 43A in fact introduced to provide for the treatment of the situation created by the devaluation of the rupee. It specifically enacts that the amount of increase or decrease in the liability due to exchange rate fluctuation should be adjusted against the actual cost or the capital expenditure or the cost of acquisition only in relating to five provisions of the Act referred to in the section. Where the terms of sub-section (1) of Section 43A are fulfilled in any case, it is mandatory to take the actual cost, capital expenditure or cost of acquisition at the higher or lower figure for the purposes of the provisions mentioned therein irrespective of whatever might have been the position independent of the section. The non obstante clause with which the section begins, indeed, makes it clear that, if the position had been different otherwise it cannot prevail after the introduction of this section. Equally, even if the 8 position would have been the same otherwise, that would be no justification to ignore or disregard the enacted provision on the ground that a specific statutory provision was not at all necessary. Once the provision is there, it should be applied in terms of the said provision.
The Court further held that there is nothing in the language of sub-section (1) of Section 43A which makes it inapplicable to a case where the change in the magnitude of the liability consequent on a change in the rate of exchange occurs during the very previous year in which the asset has been acquired. Thus the Court concluded the question that Section 43A provides also for a case in which the assessee has completely paid for the plant and machinery in foreign currency prior to the date of devaluation but the variation of exchange rate affects the liability of the assessee for repayment of the whole or part of the monies borrowed by him from any person, directly or indirectly, in any foreign currency for the purpose of acquiring the asset.
In the circumstances two questions were dealt with by the Court. It appears that the said Bench has come to the conclusion and held as follows:
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"We are of the opinion that the language of the provision is perfectly clear. It cannot be interpreted in a restrictive manner as contended for by learned counsel for the assessee. In our opinion, it is a clear requirement of the statute that, for purposes of development rebate, any increase or decrease in the actual cost consequent on fluctuations in the exchange rate should not be taken into account. It may be that the Legislature intended to give a different treatment to development rebate from depreciation and other allowances because the allowance of development rebate can result in an assessee claiming allowance exceeding the original cost. It may be that the Legislature thought that, though development rebate was intended to promote development of industries, this could not be allowed at the cost of the foreign exchange resources of the country which are also depleted when there is an increase in liability due to devaluation of the currency. It is unnecessary to attribute any particular reason for the provision when the language of the section is otherwise plain and unambiguous. We do not think that in the face of the language of sub-section (2), it would be right to permit the asessee to claim development rebate on the increased cost."
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Accordingly, it is submitted that although the Calcutta High Court passed the said decision subsequent thereto but the Hon'ble Supreme Court held in favour of the assesse and allowed the appeal.
In the light of the said decision Mr. Khaitan submitted that the appellant is entitled to get the benefit of the said difference and should be permitted to get the investment allowance on the increased cost.
Mr. Khaitan also cited the decisions reported in (1993) 203 ITR 933 (Cal) [New India Industries Ltd. vs. CIT], (1994)210 ITR 97 (Bom) [Padamjee Pulp and Paper Mills Ltd vs. CIT], (1998) 229 ITR 137 (Kar) [CIT v. Motor Industries Co Ltd],(2006) 286 ITR 341 (Bom) [Associated Bearing Co Ltd vs. CIT] and (2007) 294 ITR 451 (Del) [CIT v. Woodward Governor India P Ltd] In all these cases this point has already been dealt with in such situation and followed the decision of the Hon'ble Supreme Court.
He further relied on a latest Supreme Court decision reported in 307 ITR 393 (CIT v. Gujarat Siddhi Cement Ltd] where the Court held that section 43A(1) clearly related to the fluctuation of the exchange rate in the previous year in 11 question in relation to investment allowance; and if any extra benefit was taken the same had to be taxed in the year when the liability was reduced as provided in section 41(1)(a). Therefore, wherever there was exchange fluctuation in any previous year, section 43A should be applied. Therefore, in this situation the Supreme Court also as it appears to us that in the facts of this case it would be appropriate to grant liberty to the assesse to establish the factual position relating to fluctuation in the foreign exchange rate only in connection with the said investment allowance and for that limited purpose we only remit the matter before the authority. However, the appeal is allowed in favour of the appellant.
In case of Investment Allowance, The same situation would arise in respect of the depreciation in view of the fact that the value of the goods taking into account of the said fluctuation would either added to the cost of the plant and machinery so acquired by the appellant or will be reduced on the basis of such fluctuation exchange rate. Accordingly, in our considered opinion, such fact also to be considered by the authorities taking into account the fluctuation of the exchange rate of the currency and after applying the same the depreciation also to be included by 12 them. So the question placed before us is answered in the negative only for the purpose of the verification of the amount in question and what was the actual rate at that time to be found out by the authority.
All parties concerned are to act on a xerox signed copy of this order on the usual undertakings.
Urgent xerox certified copy of this order, if applied for, be supplied to the parties subject to compliance with all requisite formalities.
(PINAKI CHANDRA GHOSE, J.) SANKAR PROSAD MITRA:I agree.
(SANKAR PRASAD MITRA, J.) dg/ 13