2008 (10) TMI 11 - SC - Income Tax

Effect of fluctuation of foreign exchange rate resulting in increase of cost of plant & machinery - assessee claimed increased amount as deduction as investment allowance - AO disallowed the claim on the ground that plant & machinery were installed in the earlier years - no arguments advanced and no factual details were furnished regarding the fluctuation by assessee - Section 43A substituted w.e.f. 1.4.03 - matter remitted to the Tribunal to consider the issue in the background of Sec. 43A(1)

Issues Involved:
1. Effect of Section 43A of the Income Tax Act, 1961 on the fluctuation of foreign exchange rate.
2. Claim for increased investment allowance due to increased cost of plant and machinery.
3. Applicability of Section 43A(1) in the assessment year 1993-94.
4. Relevance of previous judgments in similar contexts.

Issue-wise Detailed Analysis:

1. Effect of Section 43A of the Income Tax Act, 1961 on the fluctuation of foreign exchange rate:
The primary issue revolves around the interpretation of Section 43A of the Income Tax Act, 1961, which deals with the special provisions consequential to changes in the rate of exchange of currency. The dispute is whether the fluctuation in the foreign exchange rate, resulting in an increase in the cost of plant and machinery, should be considered for investment allowance deductions. The Supreme Court highlights that Section 43A(1) applies to the fluctuation in the previous year in question, and any benefit derived from such fluctuation must be taxed in the year when the liability is reduced, as per Section 41(1)(a) Explanation 2.

2. Claim for increased investment allowance due to increased cost of plant and machinery:
The assessee claimed an increased amount as a deduction for investment allowance due to the increased cost of plant and machinery on account of exchange rate fluctuation. The assessing officer disallowed this claim, arguing that the plant and machinery were installed in previous years, and thus, no investment allowance provision could be made in the current assessment year. The CIT(A) upheld the disallowance, citing a lack of arguments and factual details from the assessee regarding the foreign exchange rate fluctuation.

3. Applicability of Section 43A(1) in the assessment year 1993-94:
The assessment year in question is 1993-94, relating to the previous year 1992-93. The court notes that Section 43A(1) was applicable as it stood at that time, and any increase or reduction in liability due to foreign exchange rate changes during the previous year must be adjusted in the actual cost of the asset. The court distinguishes this from the post-2003 amendment scenario, where the provisions were altered by the Finance Act, 2002.

4. Relevance of previous judgments in similar contexts:
The court examined previous judgments, including *Commissioner of Income Tax v. Lucas TVS Ltd* and *Commissioner of Income Tax v. Arvind Mills*, to determine their applicability to the present case. The court found that the Lucas TVS case dealt with a different question and was not directly relevant. The Arvind Mills case, which dealt with development rebate under Section 33, provided insights into how increased liability due to exchange rate fluctuation should be treated, but it did not directly address the issue of investment allowance under Section 32A. The court emphasized that the language of Section 43A(1) clearly mandates the adjustment of the actual cost in the year of liability fluctuation.

Conclusion:
The Supreme Court concluded that the CIT(A) had recorded a categorical finding that no argument was advanced and no details were provided by the assessee regarding the foreign exchange rate fluctuation. Therefore, the court deemed it appropriate to grant the assessee an opportunity to establish the factual position related to the fluctuation. The matter was remitted to the Tribunal for reconsideration, focusing on whether the assessee's claim for deduction is justified under Section 43A(1) as it stood during the relevant period. The appeal was disposed of accordingly.

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