2024 (7) TMI 515 - HC - Income Tax

Increase in loan liability due to fluctuation in foreign exchange rates - foreign currency loan had been taken - investment allowance additionally claimed by the Assessee with regard to the additional cost arising out of fluctuation in the foreign currency exchange rate - ITAT held that the Assessee was not entitled to claim investment allowance to the extent of exchange rate fluctuations - HELD THAT - As decided in GUJARAT STATE FERTILIZERS CO. LTD. 2002 (10) TMI 79 - GUJARAT HIGH COURT on a plain reading of section 43A of the Act, one thing is certain, and that is, 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/installation/first user. One will therefore have to proceed on the footing that the actual cost figure which was quantified earlier than the previous year in which the fluctuation took place, shall have to be modified in the year of fluctuation. It is well-settled that when the asset was purchased at a price, liability was to be discharged in installments, it cannot be stated that the liability did not exist or accrue till the installments became due and payable. It is this liability which changes on account of fluctuation in the rate of exchange. Thus investment allowance, consequent to exchange rate fluctuation, would be allowable. For these reasons, and in the backdrop of the provisions of Section 32A, and in view of the judgments referred to above, the question of law deserves to be answered in favour of the Appellant and against the Revenue.

Summary

Issues:
Whether the increase in loan liability due to foreign exchange rate fluctuation is part of the actual cost of the ship for investment allowance eligibility.

Analysis:
The judgment involved three Appeals concerning the entitlement to investment allowance based on the additional cost due to fluctuation in foreign exchange rates for a ship acquired in a foreign country. The Assessee, engaged in shipping business, claimed an investment allowance under Section 32A for the vessel M/s. M.V. Prabhu Das. The dispute centered around the additional cost arising from exchange rate fluctuations. The Revenue contended that no provision allowed claiming investment allowance for such fluctuation-induced costs. The Income Tax Appellate Tribunal (ITAT) relied on a previous judgment to deny the Assessee's claim. However, the Division Bench referred to the Gujarat State Fertilizers Co. Ltd. case to establish that the liability modification due to exchange rate fluctuation should be considered in the year of fluctuation, not the acquisition year.

The Division Bench's analysis highlighted that the liability change arising from exchange rate fluctuation should be factored in the year of fluctuation, as per Section 43A. The judgment referenced the Ambika Mills Ltd. case, where the Supreme Court approved the Gujarat High Court's view, supporting the allowance of investment allowance due to exchange rate fluctuation. Consequently, the Division Bench ruled in favor of the Appellant, emphasizing that investment allowance must consider exchange rate fluctuations for the relevant assessment years covered by the Appeals.

The judgment resolved the common question of law in favor of the Appellant and against the Revenue, directing that the investment allowance should include the impact of exchange rate fluctuations for the assessed years. The Appeals were disposed of accordingly, with no costs awarded.