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2002 (10) TMI 79 - HC - Income TaxPurchase Of Plant And Machinary From Abroad - 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. dealing with the question of interplay between the provisions of section 32A (investment allowance) and those of section 43A (relating to fluctuation in foreign exchange rate) of the Income-tax Act, 1961 ( the Act ), requires reconsideration. - 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? - The decision of the Division Bench in the case of Windsor Foods Ltd. is therefore overruled and held to be not laying down the correct law as regards allowability of investment allowance on an enhanced cost. - 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.
Issues Involved:
1. Interplay between Section 32A (investment allowance) and Section 43A (fluctuation in foreign exchange rate) of the Income-tax Act, 1961. 2. Whether the assessee is entitled to additional investment allowance due to increased cost from foreign exchange fluctuation. 3. The impact of the non obstante clause in Section 43A on Section 32A. 4. The period within which investment allowance can be claimed under Section 32A. 5. The treatment of interest on deferred credit facilities as business expenditure. Detailed Analysis: 1. Interplay between Section 32A and Section 43A: The assessee, a public limited company, purchased plant and machinery from a Japanese company on a deferred credit basis. Due to foreign exchange rate fluctuations, the liability increased for the years 1976, 1977, and 1978. The assessee claimed this increased liability as business expenditure, which was denied. Alternatively, the assessee claimed that the increased liability should add to the actual cost of the assets, thus entitling them to additional investment allowance under Section 32A. The Tribunal upheld the assessee's claim, but the Revenue contested this, leading to the reference. 2. Entitlement to Additional Investment Allowance: The Revenue argued that investment allowance under Section 32A is a one-time allowance crystallized in the year of installation and first use. They contended that any fluctuation in foreign exchange rates in subsequent years should not affect the investment allowance already determined. The assessee, however, argued that Section 43A, with its non obstante clause, overrides Section 32A, allowing for adjustments to the actual cost due to foreign exchange fluctuations even in subsequent years. 3. Impact of Non Obstante Clause in Section 43A: The court noted that Section 43A begins with "notwithstanding anything contained in any other provision of this Act," indicating its overriding effect. This clause means that any increase or decrease in liability due to foreign exchange fluctuations should be added to or deducted from the actual cost of the asset, irrespective of other provisions, including Section 32A. The court agreed that the non obstante clause in Section 43A should be given full effect, allowing for adjustments to the actual cost of the asset in subsequent years due to foreign exchange fluctuations. 4. Period for Claiming Investment Allowance: The court analyzed Section 32A, which allows investment allowance to be carried forward for a maximum of eight assessment years following the year of installation or first use. The court held that while Section 43A allows for adjustments to the actual cost due to foreign exchange fluctuations, these adjustments must occur within the eight-year period specified in Section 32A. Any fluctuation beyond this period would not affect the investment allowance. 5. Treatment of Interest on Deferred Credit Facilities: The court noted that interest on deferred credit facilities is treated as business expenditure and not added to the actual cost of the asset. This treatment aligns with Explanation 8 to Section 43(1), which excludes interest payable after the asset is first put to use from the actual cost. Judgment Summary: The court concluded that the Division Bench in Windsor Foods Ltd.'s case did not correctly interpret the law regarding the interplay between Sections 32A and 43A. The court held that: - The non obstante clause in Section 43A allows for adjustments to the actual cost of the asset due to foreign exchange fluctuations within the eight-year period specified in Section 32A. - Investment allowance can be claimed on the increased cost due to foreign exchange fluctuations within this period. - Any fluctuation beyond the eight-year period does not affect the investment allowance. - Interest on deferred credit facilities is treated as business expenditure and not added to the actual cost of the asset. The reference was sent back to the Division Bench for a decision in light of this opinion.
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