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Issues Involved:
1. Entitlement to depreciation on additional liability due to exchange rate fluctuation. 2. Basis for calculating depreciation-actual payment vs. accrual basis. 3. Applicability of judicial precedents-Kanoria Chemicals and Industries Ltd. vs. Century Enka Ltd. Issue-wise Detailed Analysis: 1. Entitlement to Depreciation on Additional Liability Due to Exchange Rate Fluctuation: The primary issue in this case was whether the assessee is entitled to claim depreciation on the additional liability arising from exchange rate fluctuations on foreign exchange loans used to purchase plant and machinery. The assessee claimed a deduction of Rs. 56,15,081 for depreciation on such exchange fluctuations capitalized during the year. The Assessing Officer (AO) disallowed this claim, referencing the reasoning applied in the assessment year 1991-92. The Commissioner of Income-tax (Appeals) (CIT(A)) allowed the claim, relying on the Calcutta High Court's decision in CIT v. Kanoria Chemicals and Industries Ltd. [1994] 207 ITR 718. The Department appealed this decision to the Tribunal. 2. Basis for Calculating Depreciation-Actual Payment vs. Accrual Basis: The Tribunal's two-member bench had differing opinions on whether depreciation should be calculated on an accrual basis or based on actual payment. The Judicial Member, siding with the AO, argued that the additional liability should be recognized only on the date of actual repayment of the loan, citing the Calcutta High Court's decision in CIT v. Century Enka Ltd. [1992] 196 ITR 447. This decision emphasized that day-to-day exchange rate fluctuations should not impact the liability until the actual payment date. Conversely, the Accountant Member supported the assessee's claim, arguing that depreciation and investment allowance should be granted on the increased liability caused by exchange rate fluctuations, even if not actually paid during the year. This view was based on the Supreme Court's interpretation in Arvind Mills Ltd. [1992] 193 ITR 255, which allowed for the notional increase in cost due to exchange rate fluctuations under the mercantile system of accounting. 3. Applicability of Judicial Precedents-Kanoria Chemicals and Industries Ltd. vs. Century Enka Ltd.: The Judicial Member leaned on the decision in Century Enka Ltd., which was decided later and thus considered more authoritative. This decision held that only actual payment dates should determine additional liability due to exchange rate fluctuations. The Accountant Member, however, favored the decision in Kanoria Chemicals and Industries Ltd., which directly addressed the issue at hand and supported the assessee's position. The Accountant Member emphasized that when two different views exist, the one favoring the assessee should be adopted, as per the principle established in CIT v. Vegetable Products Ltd. [1973] 88 ITR 192. Order of the Third Member: Given the conflicting views, the matter was referred to a Third Member. The Third Member, aligning with the Accountant Member, concluded that the assessee should be entitled to depreciation on the enhanced liability due to exchange rate fluctuations, even if not actually paid during the year. This conclusion was based on the interpretation of section 43A of the Income-tax Act as it existed during the relevant year, which did not mandate actual payment but recognized liability based on the method of accounting employed by the assessee. Conclusion: The Third Member's decision upheld the order of the CIT(A), allowing the assessee's claim for depreciation on the additional liability arising from exchange rate fluctuations. The Tribunal's final decision, based on the majority opinion, favored the assessee, thereby dismissing the Department's appeal.
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