2005 (10) TMI 75 - HC - Income Tax

Benefit of investment allowance on the increased loan liability consequent upon the depreciation of the Indian currency in the foreign exchange market. - held that Tribunal erred in holding that the investment allowance was not allowable on the increase in the original cost of imported assets due to increase in the assessee s loan liability consequent to the depreciation in the value of Indian currency in foreign exchange - Whether Tribunal erred in not accepting the claim of the assessee that canteen equipment and water coolers are a part of plant and machinery and that, therefore, the assessee was entitled to investment allowance on the same? this question is answered in the affirmative in favour of the assessee

Issues Involved:
1. Investment allowance on calculators and factory cleaning machines.
2. Investment allowance on the actual cost of assets without considering exchange rate fluctuations.
3. Investment allowance on increased cost due to currency depreciation.
4. Investment allowance on canteen equipment and water coolers.

Issue-wise Detailed Analysis:

1. Investment Allowance on Calculators and Factory Cleaning Machines:
The Tribunal was right in law in directing the Income-tax Officer to allow investment allowance on calculators for the assessment year 1979-80 and factory cleaning machines for the assessment year 1980-81. The Assessing Officer initially denied the allowance, arguing that calculators were not plant and machinery. However, the Commissioner of Income-tax (Appeals) and the Tribunal upheld that calculators, used in the assessee's trade of manufacturing ball bearings, qualify as plant and machinery. The Tribunal noted that "plant" must be given a very wide meaning, as supported by various judgments, including CIT v. Taj Mahal Hotel and CIT v. Elecon Engineering Co. Ltd. The Tribunal also upheld the investment allowance on factory cleaning machines, noting consistency with previous years. Thus, the Tribunal's directive to allow the investment allowance was affirmed.

2. Investment Allowance on Actual Cost of Assets Without Considering Exchange Rate Fluctuations:
The Tribunal erred in holding that the investment allowance should be based on the cost as on the date of purchase without considering fluctuations in exchange rates. The Tribunal relied on the decision in Calcutta Electricity Supply Corporation Ltd. v. Addl. CIT, which emphasized that costs should be determined based on the exchange rate at the time of purchase. However, the assessee argued that section 43A of the Income-tax Act should apply, which adjusts the actual cost based on changes in exchange rates after the acquisition of assets. This view is supported by judgments in CIT v. Gujarat State Fertilizers Co. Ltd. and others, indicating that the actual cost should reflect the real cost incurred by the assessee, including exchange rate variations. Therefore, the Tribunal's decision was incorrect, and the issue was answered in favor of the assessee.

3. Investment Allowance on Increased Cost Due to Currency Depreciation:
The Tribunal erred in not allowing investment allowance on the increase in the original cost of imported assets due to currency depreciation. The Tribunal's opinion that the cost should be based on the exchange rate at the time of purchase was challenged. The assessee contended that section 43A mandates adjusting the actual cost for exchange rate changes occurring after asset acquisition. This interpretation is supported by various judgments, including CIT v. Gujarat State Fertilizers Co. Ltd., which emphasize that section 43A should be applied to all allowances based on actual cost, including investment allowance. The Tribunal's decision was thus erroneous, and the issue was resolved in favor of the assessee.

4. Investment Allowance on Canteen Equipment and Water Coolers:
The Tribunal erred in not accepting the claim that canteen equipment and water coolers are part of plant and machinery, thus denying investment allowance. The Assessing Officer categorized water coolers as furniture and fixtures, not plant. However, the Commissioner of Income-tax (Appeals) and various High Court judgments, including CIT v. Electronics Research Industries P. Ltd. and others, have recognized similar items as plant entitled to investment allowance. The Tribunal's view that water coolers, not directly involved in manufacturing, do not qualify for investment allowance, was incorrect. The issue was therefore answered in the affirmative, favoring the assessee.

Conclusion:
The reference was disposed of, with all issues resolved in favor of the assessee and against the Revenue, with no order as to costs.

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