2009 (1) TMI 427 - HC - Income Tax

Depreciation-Investment allowance- Whether on the facts and in the circumstances of the case the Income-tax Appellate Tribunal was justified in law in holding that the appellant was not entitled to depreciation of Rs. 43, 71, 472 and the investment allowance of Rs. 27, 01, 145 on the increased cost of the plant and machinery resulting from increase in the liability to repay the foreign currency loans increased for purchase of such plant and machinery? Held that- the assessee was entitled to depreciation and investment allowance on the increased cost of the plant and machinery resulting from increase in the liberty to repay the foreign currency loans incurred for purchase of such plant and machinery. It would be appropriate to grant liberty to the assessee to establish the factual position relating to fluctuation in the foreign exchange rate only in connection with the investment allowance. The same situation would arise in respect of depreciation. The appeal is allowed in favour of appellant.

Issues:
Interpretation of section 43A of the Income-tax Act for allowing depreciation and investment allowance on increased cost due to foreign currency loan liability fluctuation.

Analysis:
1. The primary issue in this case involved the interpretation of section 43A of the Income-tax Act concerning the allowance of depreciation and investment allowance on the increased cost of plant and machinery due to fluctuations in foreign currency loan liability. The appellant contested the decision of the Income-tax Appellate Tribunal, arguing for the inclusion of additional liabilities arising from currency rate fluctuations in the actual cost for investment allowance.

2. The appellant's counsel referred to the case of CIT v. Century Enka Ltd. [1992] 196 ITR 447, where the High Court held that additional amounts payable due to currency rate fluctuations should be considered part of the actual cost for investment allowance if the machinery was purchased on deferred payment or through foreign currency loans. The court emphasized that the actual cost should reflect any additional liabilities incurred at the time of repayment due to exchange rate fluctuations.

3. The subsequent amendment to section 43A in 2003 aimed to address situations like those discussed in Century Enka Ltd. The Supreme Court in CIT v. Arvind Mills Ltd. [1992] 193 ITR 255 clarified that section 43A mandated adjusting the actual cost or capital expenditure based on exchange rate fluctuations, irrespective of the accounting method used by the assessee.

4. The Calcutta High Court further elaborated on the applicability of section 43A, emphasizing that even if the change in liability due to exchange rate fluctuations occurred in the same year as asset acquisition, it should be considered for investment allowance. The court highlighted the importance of following statutory provisions, as indicated by the non obstante clause in section 43A.

5. The appellant's counsel cited various cases supporting the interpretation of section 43A for investment allowance, including New India Industries Ltd. v. CIT [1993] 203 ITR 933 and CIT v. Gujarat Siddhi Cement Ltd. [2008] 307 ITR 393. These cases reinforced the need to consider exchange rate fluctuations in determining the actual cost for depreciation and investment allowance.

6. The High Court ultimately ruled in favor of the appellant, allowing the appeal and granting liberty to establish the factual position regarding exchange rate fluctuations for investment allowance. The court directed the authorities to verify the actual rate at the time and consider the fluctuation of the currency exchange rate for calculating depreciation.

7. In conclusion, the judgment emphasized the significance of considering exchange rate fluctuations in determining the actual cost for investment allowance and depreciation, in line with the provisions of section 43A of the Income-tax Act.

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