2002 (8) TMI 56 - HC - Income Tax

Whether, on the facts and in the circumstances of the case, and on a proper construction of section 43B of the Income-tax Act, 1961, the assessee is entitled to a revenue deduction in respect of customs and excise duty component of the value of the closing stock? - We, therefore, answer the question referred to us at the instance of the assessee against the assessee, and in favour of the Revenue. - Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that investment allowance in respect of the incremental cost of the machinery, necessitated by the fluctuation in foreign exchange rates is allowable to the assessee in the respective years in which such cost arose? - The second question referred to us is, therefore, answered in favour of the assessee and, against the Revenue.

Summary

Issues:
1. Interpretation of section 43B of the Income-tax Act, 1961 regarding revenue deduction for customs and excise duty component in closing stock.
2. Allowability of investment allowance for incremental cost of machinery due to fluctuation in foreign exchange rates under section 32A of the Act.

Issue 1: Interpretation of Section 43B - Revenue Deduction for Customs and Excise Duty Component in Closing Stock:
The case involved the question of whether the assessee is entitled to a revenue deduction for the customs and excise duty component of the value of the closing stock under section 43B of the Income-tax Act, 1961. The assessee, a manufacturer of cement and asbestos sheets, imported asbestos fiber on which it paid customs duty. The assessee contended that until the imported asbestos fiber is used up in the manufacturing process, the customs duty paid did not form part of the cost of the fiber. However, the assessing authority, Commissioner, and Tribunal rejected this contention. The court held that the customs duty paid on imported raw materials necessarily forms part of the cost to the assessee, whether used in manufacturing or stored as closing stock. The court emphasized that the closing stock must be valued at cost, which includes the customs duty paid, as per established accounting practices. Therefore, the court ruled against the assessee's claim for revenue deduction for customs and excise duty in the closing stock.

Issue 2: Allowability of Investment Allowance for Incremental Cost of Machinery due to Fluctuation in Foreign Exchange Rates under Section 32A:
The second issue pertained to the allowance of investment allowance for the incremental cost of machinery due to fluctuation in foreign exchange rates under section 32A of the Act. Section 43A of the Act deals with changes in the rate of exchange of currency concerning assets acquired from abroad. The court emphasized that for computing the investment allowance under section 32A, the additional liability incurred by the assessee due to variations in the rate of exchange for assets imported from abroad must be considered. The court referred to the circular issued by the Central Board of Direct Taxes and previous judgments to support its interpretation. The court held that the investment allowance should be allowed on the actual cost of machinery, including the additional cost due to exchange rate fluctuations. The court rejected the Revenue's argument that previous judgments should be applied by analogy, emphasizing that section 43A(1) must be given full effect when computing investment allowance. Therefore, the court ruled in favor of the assessee regarding the allowance of investment allowance for incremental machinery cost due to foreign exchange rate fluctuations.

In conclusion, the court's judgment addressed the interpretation of sections 43B and 32A of the Income-tax Act, 1961, regarding revenue deduction for customs and excise duty in closing stock and the allowance of investment allowance for incremental machinery cost due to fluctuation in foreign exchange rates, respectively.