1991 (12) TMI 1 - SC - Income Tax

Additional amount payable for the import of machinery on account of devaluation of rupees - development Rebate - includibility of additional amount paid in actual cost for purpose of rebate - though development rebate was intended to promote development of industries, this could not be allowed at the cost of the foreign exchange resources of the country which are also depleted when there is an increase in liability due to devaluation of the currency

Issues Involved:
1. Accounting for additional liability due to currency devaluation.
2. Calculation of depreciation and development rebate under the Income-tax Act, 1961.

Detailed Analysis:

1. Accounting for Additional Liability Due to Currency Devaluation
The core issue here is whether an Indian businessman should account for the additional liability arising from the devaluation of the Indian rupee in the year the liability arose or by reopening the accounts of the earlier year when the asset was acquired. The Supreme Court examined the principles laid down by the Institute of Chartered Accountants of India and statutory provisions, including section 43A of the Income-tax Act, 1961, and amendments to the Companies Act, 1956.

The Institute of Chartered Accountants of India recommended that the additional cost due to devaluation should be considered as enhancing the cost of the corresponding asset purchased. Depreciation should be provided on the additional cost according to the method normally employed by the company. The Supreme Court acknowledged that on strict accountancy principles, the increase in liability should ideally be adjusted in the accounts of the earlier year in which the asset was acquired. However, practical difficulties led to the recommendation that necessary adjustments be made in the subsequent years instead of reopening closed accounts.

The Supreme Court concluded that the actual cost of the asset for the assessment year 1966-67 would be Rs. 1,00,000, and for the assessment year 1967-68, it would be Rs. 1,20,000.

2. Calculation of Depreciation and Development Rebate
The second issue was how to calculate allowances like depreciation and development rebate under the Income-tax Act, 1961, when the actual cost of the asset increases due to devaluation.

Depreciation:
The Supreme Court noted that depreciation is a recurrent claim. Under sections 32 and 43(1) and (6) of the Income-tax Act, depreciation is allowed on the actual cost of the asset less all depreciation allowed in earlier years. If the cost of the asset increases due to devaluation, the written down value for the year in which the increased liability arises should be recalculated on the basis of the increased cost minus earlier allowed depreciation. For example, if the asset earns depreciation at 10%, the depreciation allowance for the assessment year 1966-67 would be Rs. 10,000, and for 1967-68, it would be on Rs. 1,10,000 (Rs. 1,20,000 minus Rs. 10,000).

Development Rebate:
Development rebate, being a one-time allowance, presents a challenge. If the actual cost has already been determined and development rebate granted, an increase in liability due to devaluation raises questions about whether the assessment should be reopened. The Supreme Court noted that section 43A was enacted to address such issues. Sub-section (1) of section 43A provides for modification of the actual cost of the asset due to exchange rate fluctuation, while sub-section (2) mandates that this adjustment should not be considered for development rebate purposes.

The Revenue argued that section 43A(2) clearly excludes any increase or decrease in liability due to exchange rate fluctuations from being considered for development rebate. The Supreme Court agreed, stating that the language of section 43A(2) is clear and unambiguous, and should be applied as such. The Court emphasized that the statutory provision must be followed, regardless of what the position might have been otherwise.

The Supreme Court rejected the argument that section 43A applies only to cases where the fluctuation in exchange rate occurs in a subsequent year. The Court held that section 43A applies irrespective of when the fluctuation occurs, and once the conditions of sub-section (1) are satisfied, sub-section (2) excludes the application of the adjusted actual cost for development rebate purposes.

Conclusion:
The Supreme Court allowed the appeal, upholding the Assessing Officer's action of granting development rebate only on the original cost of Rs. 52.48 lakhs and not on the increased cost of Rs. 61 lakhs due to devaluation. The Court made no order regarding costs, acknowledging that the assessees had succeeded before all the High Courts.

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