2023 (2) TMI 766 - HC - Income Tax

Increase in loan liability due to fluctuation in foreign exchange rates - Investment allowance additionally claimed with regard to the additional cost which arose on account of fluctuation in the foreign currency exchange rate - investment allowance on the additional cost in the year of acquisition - actual cost of the ship from the foreign country and the assessee was entitled to invest allowance on the additional cost in the year of acquisition - HELD THAT - As per section 43A of the Act as it stood during the relevant assessment year up to the assessment year 2003-03 the adjustment on account of foreign currency rate fluctuation was to be made in the year in which the foreign exchange fluctuation took place. By virtue of Finance Act 2002 with effect from assessment year 2003-04 such adjustment is to be made in the year in which the liability in foreign exchange is discharged. In view of GUJARAT STATE FERTILIZERS CO. LTD. 2002 (10) TMI 79 - GUJARAT HIGH COURT it is well-settled that when the asset was purchased at a price liability was to be discharged in instalments it cannot be stated that the liability did not exist or accrue till the instalments became due and payable. It is this liability which changes on account of fluctuation in the rate of exchange. In the Backdrop of the provisions of section 32A read with section 43A and in view of the judgments referred hereinabove we answer the questions of law in favour of the appellant and against the revenue. We hold that in terms of section 43A the increase or reduction in the liability has to take place only in the year of fluctuation and it does not relate back to the year of acquisition of the asset.

Summary

Issues:
Appeals under section 260A of the Income Tax Act against a common order, substantial question of law regarding increase in loan liability due to fluctuation in foreign exchange rates, entitlement to investment allowance on additional cost, interpretation of section 32A, reliance on previous judgments, validity of claim for additional investment allowance, relevance of section 43A, applicability of judgments by different High Courts and Supreme Court.

Analysis:

1. Common Order Appeal:
The appeals were filed against a common order by the Income Tax Appellate Tribunal for multiple assessment years. The issue revolved around whether the increase in loan liability due to fluctuation in foreign exchange rates should be considered as part of the actual cost of the ship for the purpose of investment allowance.

2. Interpretation of Section 32A:
The appellant acquired a ship on a deferred payment basis, and the actual cost increased due to fluctuation in foreign exchange rates. The appellant claimed investment allowance on the additional cost arising from the currency fluctuation. The key dispute was whether such additional investment allowance was permissible under section 32A of the Income Tax Act.

3. Previous Judgments and Interpretation:
The department contended that there was no provision allowing for additional investment allowance due to foreign exchange rate fluctuations. The Tribunal relied on a previous judgment to deny the appellant's claim. However, the appellant argued that the previous judgment was per incuriam and cited subsequent decisions by different courts to support their claim.

4. Applicability of Section 43A:
The judgment discussed the relevance of section 43A, which governs adjustments for foreign currency rate fluctuations. It highlighted that adjustments should be made in the year of fluctuation and not related back to the year of acquisition. The Supreme Court's approval of a similar view expressed by the Gujarat High Court further supported the appellant's position.

5. Conclusion and Decision:
After considering the arguments, provisions of section 32A and 43A, and relevant judgments, the Court ruled in favor of the appellant. It held that the increase or reduction in liability due to foreign exchange fluctuation should be accounted for in the year of fluctuation. The Court disposed of the appeals in favor of the appellant based on the interpretation of the relevant sections and precedents cited.