2002 (1) TMI 260 - AT - Income Tax

Summary

Issues Involved:
1. Whether depreciation on additional liability arising from exchange rate fluctuations should be allowed.
2. Interpretation of relevant case laws and their applicability.
3. Method of accounting and its impact on the claim.

Issue-wise Detailed Analysis:

1. Depreciation on Additional Liability Due to Exchange Rate Fluctuations:
The primary issue is whether the assessee is entitled to claim depreciation on the additional liability arising from the fluctuation in the exchange rate of the rupee. The assessee claimed a deduction of Rs. 56,15,081, which was capitalized during the year for foreign exchange loans taken for the purchase of plant and machinery. The Assessing Officer (AO) disallowed this claim, referencing the reasoning used in the assessment year 1991-92, despite the CIT(A) having deleted a similar addition for that year.

2. Interpretation of Relevant Case Laws:
The assessee relied on the Calcutta High Court's decision in the case of CIT v. Kanoria Chemicals & Industries Ltd. [1994] 207 ITR 718, which supported their claim. However, the Tribunal noted a subsequent decision by the jurisdictional High Court in CIT v. Century Enka Ltd [1992] 196 ITR 447 (Cal.), which held that day-to-day fluctuations in the exchange rate do not impact the liability, and only the date of repayment of the loan is crucial. The Tribunal observed that the decision in Century Enka Ltd. was not considered in the earlier Tribunal order dated 28th November, 2000. The Tribunal decided to follow the later decision in Century Enka Ltd., which emphasized actual payment rather than accrual for capitalizing additional liability due to exchange rate fluctuations.

3. Method of Accounting and Its Impact:
The learned Accountant Member disagreed with the Judicial Member, emphasizing that the discussions in Century Enka Ltd. were obiter dicta and not directly adjudicated upon the issue at hand. Instead, the case of Kanoria Chemicals & Industries Ltd. was considered a direct authority. The Accountant Member also referenced the Supreme Court's decision in CIT v. Arvind Mills Ltd. [1992] 193 ITR 255, which supported the notion of allowing depreciation on the increased cost due to exchange rate fluctuations, even if not actually paid during the year, based on the mercantile system of accounting.

Third Member Decision:
The Third Member, V. Dongzathang, President, was called upon to resolve the difference of opinion. The President sided with the Accountant Member, noting that the decision in Century Enka Ltd. did not overrule the earlier decision in Kanoria Chemicals & Industries Ltd. and that the provisions of section 43A during the relevant year did not require actual payment for claiming additional liability. The President concluded that the assessee should be entitled to depreciation and investment allowance on the enhanced liability due to exchange rate fluctuations, aligning with the mercantile system of accounting.

Final Judgment:
In accordance with the majority view, the Tribunal held that the CIT(A) was justified in directing the AO to allow depreciation on the additional liability arising from the difference in the exchange rate of the rupee. The appeal filed by the department was dismissed.