1978 (8) TMI 77 - HC - Income Tax

Summary

Issues:
- Interpretation of the actual cost of plant and machinery for depreciation and development rebate purposes in the context of currency devaluation.

Analysis:
The case involved M/s. Kirloskar Electric Company Ltd. disputing the treatment of the difference in rupee value of machinery due to currency devaluation as part of the actual cost of plant and machinery for depreciation and development rebate purposes. The company had acquired machinery in England using funds deposited in sterling currency prior to the devaluation of the Indian rupee. The Income Tax Officer (ITO) allowed depreciation based on the pre-devaluation value of the pound sterling, arguing that the devaluation did not impact the actual cost of the machinery. However, the Appellate Authority Commission (AAC) ruled in favor of the assessee, emphasizing that depreciation and development rebate should be based on the rupee value of the machinery and not the pre-devaluation foreign currency value. The department appealed to the Tribunal, which overturned the AAC's decision, considering the difference in value as notional and not part of the actual cost. The Tribunal's reasoning was based on the assumption that the assessee did not incur additional expenditure post-devaluation. The Tribunal also dismissed the relevance of customs duties levied on the machinery based on post-devaluation rates.

The High Court criticized the Tribunal's approach, highlighting that the effect of devaluation on the rupee value of the funds used for machinery purchase was not merely notional. The Court emphasized commercial principles in determining depreciation and development rebate under the Income Tax Act. It noted that if the company had transferred the funds post-devaluation, it would have received more rupees, indicating a tangible impact on the actual cost. The Court rejected the Tribunal's reasoning that the difference in value was notional, stating that it would lead to incongruous results and create disparities among purchasers based on currency timing. The Court emphasized that the advantage derived from devaluation was separate from the machinery purchase and should not affect the actual cost calculation. Therefore, the Court ruled in favor of the assessee, affirming that the rupee value post-devaluation should be considered in determining the actual cost of the machinery for depreciation and development rebate purposes.

In conclusion, the High Court answered the questions in favor of the assessee, emphasizing the importance of considering post-devaluation rupee value in determining the actual cost of plant and machinery for depreciation and development rebate calculations. The Court's decision clarified the impact of currency devaluation on asset valuation for tax purposes, ensuring a fair and consistent approach in assessing depreciation allowances and development rebates.