2008 (6) TMI 77 - HC - Income Tax

Import of machinery agreement entered into by the assessee with foreign manufacturer made provision for escalation of the cost addition amount was paid in accordance with that clause such additional amount was part of actual cost of the assessee in the relevant A.Y. - For the purposes of section 32A, the actual cost of the assessee has to be computed in each A.Y. hence assessee was entitled to investment allowance on such cost sections 32A & 43(1) should be interpreted liberally

Summary

Issues Involved:
1. Whether the Tribunal was right in law in allowing the grant of investment allowance for the year 1986-87 when the plant and machinery had been installed in the year 1981-82.
2. Whether investment allowance can be allowed in any year subsequent to the date of purchase or installation and having put to use.

Detailed Analysis:

Issue 1: Grant of Investment Allowance for the Year 1986-87
The primary issue revolves around whether the investment allowance could be granted for the year 1986-87 despite the plant and machinery being installed in the year 1981-82. The assessee-company initially filed its return of income on July 30, 1986, and subsequently revised it to enhance the investment allowance claim. The Assessing Officer initially allowed the investment allowance but later withdrew it based on the Commissioner of Income-tax's directive, who deemed the initial assessment erroneous and prejudicial to the interests of the Revenue. The Tribunal, however, set aside the Commissioner's order, leading to the Revenue's appeal.

The Revenue argued that the investment allowance should be based on the actual cost determined during the year of installation (1981-82) and not on any subsequent cost escalations. They contended that the allowance should be confined to the value of the plant and machinery at the time of installation, and any later enhancements in cost should not be considered.

Issue 2: Allowance of Investment Allowance in Subsequent Years
The Tribunal's decision was based on the interpretation of Section 32A and Section 43(1) of the Income-tax Act. Section 32A(1) allows a deduction in respect of machinery or plant in the year it is installed or first put to use. Section 43(1) defines "actual cost" as the cost to the assessee, which can include subsequent payments related to the asset.

The assessee argued that the escalation in cost due to an agreement with the suppliers, approved by the Reserve Bank of India, should be included in the actual cost. Thus, the investment allowance should be allowed on the increased cost in the relevant assessment year (1986-87). The Tribunal supported this view, citing the Supreme Court's judgment in Saharanpur Electric Supply Co. Ltd. v. CIT [1992] 194 ITR 294, which recognized that actual cost could be altered prospectively due to subsequent events like currency fluctuations or additional capital expenditure.

The Tribunal also referred to the judgment in CIT v. Funskool (India) Ltd. [2007] 294 ITR 642, which allowed investment and depreciation allowances on additional customs duty paid in a subsequent year for machinery imported and installed in an earlier year.

Conclusion:
The Tribunal concluded that the assessee is entitled to investment allowance on the additional amount paid in the accounting year relevant to the assessment year 1986-87. The actual cost includes any subsequent payments made in connection with the plant and machinery. The Tribunal's decision was based on valid materials and evidence, and no contrary evidence or case law was presented by the Revenue. Therefore, the Tribunal's order was confirmed, and the appeal by the Revenue was dismissed. The question of law was answered in favor of the assessee, affirming that investment allowance could be granted in subsequent years based on the altered actual cost of the asset.