Judgment:
1. The Department has filed this appeal for the asst. yr. 1993-94 against the order of learned CIT(A) dt. 31st Oct., 1996, on the following ground : "On the facts and in the circumstances of the case, the learned CIT(A)-IV, Calcutta, erred in directing to allow depreciation on the additional liability arising to the assessee out of the difference in the rate of exchange of rupee." 2. The relevant facts giving rise to this appeal are that the assessee claimed deduction of Rs. 56,15,081 being depreciation on exchange fluctuations capitalised during the year in respect of foreign exchange loans taken for purchase of plant and machinery. The assessee stated that the deduction was based on the additional liability arising out of difference in rate of exchange of rupee and in support of his claim relied on the decision of the Calcutta High Court in the case of CIT v.Kanoria Chemicals & Industries Ltd. (1994) 207 ITR 718 (Cal). The AO rejected the claim of the assessee and added back the said amount of Rs. 56,15,081 by following the reasonings for the asst. yr. 1991-92.
However, the AO stated that the learned CIT(A) in the appeal filed by the assessee had deleted the addition made by the AO for the asst, yr.
1991-92 but the Department had filed the appeal against the said order of learned CIT(A) before the Tribunal.
3. The learned CIT(A) by following the decision of the Calcutta High Court in the case of Kanoria Chemicals & Industries Ltd. (supra) allowed the claim of the assessee. Hence, the Department is in appeal before the Tribunal.
4. During the course of hearing of the appeal, the learned Departmental Representative justified the action of the AO. However, the learned authorised representative of the assessee submitted that the same very issue was considered by the Tribunal 'D' Bench, Calcutta, in ITA No.619/Cal/1996 for the asst. yr. 1991-92 and the Tribunal by its order dt. 28th Nov., 2000, dismissed the Revenue's appeal and confirmed the order of the learned CIT(A) by following the decision of the Calcutta High Court in the case of Kanoria Chemicals & Industries Ltd. (supra).
However, the Bench brought to the notice of the learned representatives of the parties the subsequent decision of the jurisdictional High Court in the case of CIT v. Century Enka Ltd. (1992) 196 ITR 447 (Cal) wherein Their Lordships have held that the day-to-day fluctuations in the rate of foreign exchange would not have any bearing on the liability as such and the crucial day is the date of repayment of the loan obtained for the purpose of acquisition of any capital asset. It has further been held that if a capital asset has been acquired by obtaining a loan or by deferred payment of the purchase price, and if, on the date of repayment of the loan or repayment of any instalment of purchase price, any additional liability is imposed because of fluctuations in the rate of exchange, the assessee will be entitled to capitalise such liability. It was further observed by the Hon'ble High Court that the rate of exchange fluctuates everyday depending on the condition prevailing in the international monetary market but such fluctuation in conversion could not be taken into account unless, at the time of actual payment of the liability in foreign currency, there has been, in fact, an additional liability. It was further held that it is, therefore, necessary to ascertain in every case whether the assessee incurred any additional liability on the date of repayment or not. Only if any additional liability is incurred on the date of repayment due to change in the rate of conversion, such liability would be added to the cost of the capital asset and benefit of depreciation and investment allowance will be allowed on such added cost. The learned authorised representative of the assessee merely relied on the decision of the Calcutta High Court in the case of Kanoria Chemicals & Industries Ltd. (supra) without any further submission.
5. We have carefully considered the orders of the authorities below and the earlier order of the Tribunal dt. 28th Nov., 2000. We have also considered the submissions of the learned representatives of the parties and have also gone through another order of the jurisdictional High Court in the case of Century Enka Ltd. (supra).
5.1 On perusal of the earlier order of the Tribunal dt. 28th Nov., 2000, we observe that the said decision of the jurisdictional High Court in the case of Century Enka Ltd. (supra) was not considered.
Further, the jurisdictional High Court has considered the aforesaid issue in Century Enka Ltd.'s case (supra) which was decided on 30th May, 1991, i.e., subsequent to the decision in the case relied on by the learned authorised representative of the assessee, namely Kanoria Chemicals & Industries Ltd.'s case (supra) which was decided on 28th May, 1991. The Bombay High Court has held in CIT v. Thana Electricity Supply Ltd. (1994) 206 ITR 727 (Bom) that when there are two different decisions of the same Court, it is advisable to follow the later decision of the Court. Accordingly, we respectfully following the later decision of the jurisdictional High Court in the case of Century Enka Ltd. (supra), hold that the assessee is entitled for the incremental depreciation on the basis of the additional liability on actual payment and not on accrual basis. Accordingly, we restore the order of the AO in disallowing the claim of the assessee by reversing the order of the learned CIT(A). Therefore, the ground of appeal is decided in favour of the Department.
1. I regret that on perusal of the order prepared by my learned Brother, the JM, I am unable to agree with the views expressed by him therein. Very recently, a similar issue in the case of Indian Aluminum Co. Ltd. [ITA Nos. 86 to 88 (Cal) of 1993] came for my consideration in appeals filed in another Bench. The issue and also the factual circumstances in the said case were exactly the same as in the present case. In the appellate order prepared by me, I allowed the assessee's contention regarding granting of depreciation and investment allowance on the increased liability in respect of the cost of plant and machineries acquired by that concern due to fluctuation in the exchange rate. Detailed reasonings have been given by me as to why depreciation and investment allowance will have to be granted in the circumstances under consideration.
2. In the present order, my learned Brother, the JM, has passed his order by mainly relying on the discussions made by the Hon'ble High Court at Calcutta in the case of Century Enka Ltd. (supra), it is, however, required to be mentioned in this connection that the said discussions were of the nature of obiter, inasmuch as, the Hon'ble Calcutta High Court was not required to adjudicate upon the issue which forms the subject-matter of the present appeal. On the other hand, the other case of Kanoria Chemicals & Industries Ltd. (supra) is a direct, authority, so far as the issue before us is concerned, inasmuch as, the factual circumstances as well as the point to be decided by the Hon'ble High Court were exactly the same in that case, as in the present case before us. The Hon'ble Calcutta High Court held in favour of the assessee in the case of Kanoria Chemicals & Industries Ltd. (supra) and decided that depreciation and investment allowance are required to be granted on the increased liability caused by fluctuation in the exchange rate. The Hon'ble Calcutta High Court also held in the said decision that there is no difference so far as the fact is concerned between actual devaluation and day-to-day fluctuation in the exchange rate.
3. Therefore, in the case of Indian Aluminium Co. Ltd. (supra), I decided the issue in favour of the assessee by following the direct judgment of the Hon'ble Calcutta High Court; in the case of Kanona Chemicals & Industries Ltd. (supra). It is also a cardinal principle of taxation law that whenever two different views are possible, one which is in favour of the assessee is required to be taken. So far as the issue involved in the present case is concerned, the Hon'ble Calcutta High Court took diametrically opposite views in the cases of Century Enka Ltd. (supra) and Kanona Chemicals & Industries Ltd.(supra), almost around the same point of time.
4. Again, in the case of Indian Aluminium Co. Ltd.(supra), I considered the detailed discussions made by the Hon'ble Supreme Court in the case of CIT v. Arvind Mills Ltd: (1992) 193 ITR 255 (SC) at p. 262, of the said reported judgment, the Hon'ble Supreme Court discussed as below : "Under the definitions contained in Section 32 r/w Section 43(1) and (6) of the IT Act, the depreciation is to be allowed on the actual cost of the asset less all depreciation actually allowed in respect thereof in earlier years. Thus, where the cost of the asset subsequently goes up because of devaluation, whatever might have been the position in the earlier year, it is always upon to the assessee to insist, and for the ITO to agree, that the written down value in the year in which the increased liability has arisen should be taken on the basis of the increased cost minus depreciation earlier allowed on the basis of the old cost." The Supreme Court did not say in this case that the increased cost means the cost ultimately required to be incurred at the time of making actual payment thereof. On the other hand, the Hon'ble Supreme Court considered the notional increase in the cost on year-to-year basis, on account of fluctuation in the exchange rate, where the assessee follows mercantile system of accounting.
5. Taking into consideration the above principles as well as the opinion given by the Hon'ble Supreme Court in the case of Arvind Mills Ltd. (supra), I hold that even when the liability was not required to be actually met by way of actual payment during the year, the assessee should be entitled to depreciation as well as investment allowance on the enhanced liability in respect of the cost of the assets concerned due to fluctuation in the exchange rate, since when the assessee follows mercantile system of accounting. Therefore, I uphold the order of the learned CIT(A) on this issue. .
The question to be referred to the Hon'ble President, Tribunal for being decided by a Third Member, arising out of a difference of opinion between the Judicial and the Accountant Members : "Whether, on the facts and in the circumstances of the case, the order of the CIT(A) directing to allow depreciation on the additional liability arising to the assessee due to fluctuation in the exchange rate is to be upheld or not ?" 1. There being a difference of opinion between the Members, the following question was referred to me under Section 255(4) of the Act : "Whether, on the facts and in the circumstances of the case, the order of the CIT(A) directing to allow depreciation on the additional liability arising to the assessee due to fluctuation in the exchange rate is to be upheld or not ?" 2. The facts are that the assessee claimed Rs. 56,15,081 as deprecation on exchange fluctuation capitalized during the year under Section 43 A of the IT Act. The AO disallowed the claim in the light of the order for the earlier years.
3. On appeal, the learned CIT(A) allowed the claim in the light of the order for asst. yr. 1991-92 following the decision of the Calcutta High Court in the case of Kanoria Chemicals & Industries Ltd. (supra). The AO was directed to allow depreciation on the additional liability arising out of the difference in the rate of exchange. He accordingly directed the AO to follow the order of the Hon'ble High Court in the present case and allow the depreciation and the other liability.
4. Aggrieved by the said order, the Revenue came up in appeal before the Tribunal and it was submitted that the learned CIT(A) was not justified in allowing the claim. Relying on the decision of the Hon'ble Calcutta High Court in the case of Century Enka Ltd. (supra), it was submitted that such liability is to be taken only on the date of repayment of the loan obtained for the purpose of acquisition of any capital asset. The learned JM agreed with the Revenue and reversed the order of the CIT(A) and restored that of the AO observing as follows : "5. We have carefully considered the orders of the authorities below and the earlier order of the Tribunal dt. 28th Nov., 2000. We have also considered the submissions of the learned representatives of the parties and have also gone through another order of the jurisdictional High Court in the case of Century Enka Ltd. 5.1 On perusal of the earlier order of the Tribunal dt. 28th Nov., 2000, we observe that the said decision of the jurisdictional High Court in the case of Century Enka Ltd. (supra) was not considered.
Further, the jurisdictional High Court has considered the aforesaid issue in Century Enka Ltd.'s case (supra) which was decided on 30th May, 1991, i.e., subsequent to the decision in the case relied on by the learned authorised representative of the assessee namely, CIT v. Kanoria Chemicals & Industries Ltd, which was decided on 28th May, 1991. The Bombay High Court has held in CIT v. Thana Electricity Supply Co. Ltd. (1994) 206 ITR 727 (Bom) that when there are two different decisions of the same Court, it is advisable to follow the later decision of the Court. Accordingly, we respectfully following the later decision of the jurisdictional High Court in the case of Century Enka Ltd. (supra) hold that the assessee is entitled for the incremental depreciation on the basis of the additional liability on actual payment and not on accrual basis. Accordingly, we restore the order of the AO in disallowing the claim of the assessee by reversing the order of the learned CIT(A). Therefore, the ground of appeal is, decided in favour of the Department." 5. On the other hand, the learned AM held that the assessee would be entitled to the claim as follows : "2. In the present order, my learned Brother, the JM, has passed his order by mainly relying on the discussions made by the Hon'ble High Court at Calcutta in the case of Century Enka Ltd. (supra). It is however required to be mentioned in this connection that the said discussions were of the nature of obiter, inasmuch as, the Hon'ble Calcutta High Court was not required to adjudicate upon the issue which forms the subject-matter of the present appeal. On the other hand, the other case of Kanoria Chemicals & Industries Ltd. (supra) is a direct authority, so far as the issue before us is concerned, inasmuch as, the factual circumstances as well as the point to be decided by the Hon'ble High Court were exactly the same in that case, as in the present case before us. The Hon'ble Calcutta High Court held in favour of the assessee in the case of Kanoria Chemicals & Industries Ltd. (supra) and decided that depreciation and investment allowance are required to be granted on the increased liability caused by fluctuation in the exchange rate. The Hon'ble Calcutta High Court also held in the said decision that there is no difference so far as the fact is concerned between actual devaluation and day-to-day fluctuation in the exchange rate.
3. Therefore, in the case of Indian Aluminium Co. Ltd. (supra), I decided the issue in favour of the assessee by following the direct judgment of the Hon'ble Calcutta High Court, in the case of Kanoria Chemicals & Industries Ltd. It is also a cardinal principle of taxation law that whenever two different views are possible, one which is in favour of the assessee is required to be taken. So far as the issue involved in the present case is concerned, the Hon'ble Calcutta High Court took diametrically opposite views in the cases of Century Enka Ltd. and Kanoria Chemicals & Industries Ltd., almost around the same point of time.
4. Again, in the case of Indian Aluminium Co. Ltd., I considered the detailed discussions made by the Hon'ble Supreme Court in the case of Arvind Mills Ltd. (1992) 193 ITR 255 (SC). At p. 262 of the said reported judgment, the Hon'ble Supreme Court discussed as below : 'Under the definitions contained in Section 32 r/w Section 43(1) and (6) of the IT Act, the depreciation is to be allowed on the actual cost of the asset less all depreciation actually allowed in respect thereof in earlier years. Thus, where the cost of the asset subsequently goes up because of devaluation, whatever might have been the position in the earlier year, it is always open to the assessee to insist, and for the ITO to agree, that the written down value in the year in which the increased liability has arisen should be taken on the basis of the increased cost minus depreciation earlier allowed on the basis of the old cost.' The Supreme Court did not say in this case that the increased cost means the cost ultimately required to be incurred at the time of making actual payment thereof. On the other hand, the Hon'ble Supreme Court considered the notional increase in the cost on the year-to-year basis, on account, of fluctuation in the exchange rate, where the assessee follows mercantile system of accounting.
5. Taking into consideration the above principles as well as the opinion given by the Hon'ble Supreme Court in the case of Arvind Mills Ltd. (supra), I hold that even when the liability was not required to be actually met by way of actual payment during the year, the assessee should be entitled to depreciation as well as investment allowance on the enhanced liability in respect of the cost of the assets concerned due to fluctuation in the exchange rate, since the assessee follows mercantile system of accounting.
Therefore, I uphold the order of the learned CIT(A) on this issue." 6. On this difference of opinion, the above question was referred to me for decision. At the time of hearing before me, Shri Kaisang the learned Sr. Departmental Representative appeared for the Revenue and Shri R. Venkatkrishnan, learned counsel appeared for the assessee. They were heard at length.
7. On careful consideration of the rival submissions in the light of the material on record, I am of the view that the order of the learned JM is factually incorrect. While reversing the order of the learned CIT(A), on the basis of the jurisdictional High Court in the case of Century Enka Ltd. (supra), he relied on the decision of the Hon'ble Bombay High Court in the case of Thana Electricity Supply Ltd. (supra) wherein it was held that when there are two different decisions of the same Court, it is advisable to follow the later decision of the Court.
Admittedly, the date of the order in the case of Century Enka.Ltd. (supra) was 30th May, 1991, and in the case of Kanoria Chemicals & Industries Ltd. (supra) the date of the order is 28th March, 1991. The later decision in the case of Century Enka Ltd. (supra) did not consider the earlier decision in the case of Kanoria Chemicals & Industries Ltd. (supra) and, therefore, it cannot be said that the earlier decision has been overruled by the Hon'ble High Court. In fact, the Bench consists of the same Hon'ble Judges. Since the facts in the case of Kanoria Chemicals & Industries Ltd. (supra) are exactly the same as in the case of the present assessee, the earlier decision is more appropriate and preferable.
8. The provisions of Section 43A as it exist during the year, do not insist on actual payment but the liability due to increase or reduction as expressed in Indian currency for making payment towards the whole or part of the cost of the asset, etc. is to be considered. In so far as actual payment is concerned, Section 43(2) define the word "paid" in the context of Sections 28 to 41 and it means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head "profits and gains of business or profession". In such a case when the liability is incurred at the end of the year and the account is to be closed the liability has to be taken into account as the assessee is maintaining its accounts on mercantile basis. There is no scope for bringing in the requirement of actual payment for claiming additional liability under the provisions of Section 43A as it exist during the year. This is fully evidenced by the substitution of the existing Section 43A by the Finance Act, 2002, w.e.f. 1st April, 2003.
9. Even in the case of revenue expenditure the question of allowability of such increase or reduction in the fluctuation of foreign exchange came up before Special Bench of the Tribunal in the case of Oil & Natural Gas Corpn. Ltd. v. Dy. CIT (ITA No. 2472/Delhi/1996) [reported at (2002) 77 TTJ (Del)(SB) 387--Ed.]. By the order dt. 1st Aug., 2002, the Tribunal enunciated the principles on the basis of which the claim of the assessee has to be considered as follows : "23. On the basis of principles enunciated in various judicial decisions, we propose to formulate certain test questions with a view to deciding the issue before us in the light of answers to those questions. These are as under : (i) Whether the system of accounting followed by the assessee is mercantile system, which brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed and brings into credit what is due, immediately it becomes due and before it is actually received; (ii) Whether the same system is followed by the assessee from the very beginning and, if there was a change in the system, whether the change was bona fide; (iii) Whether the assessee has given same treatment to the losses claimed to have accrued and to the gains that may accrue to it; (iv) Whether there has been consistently and definiteness in making entries in the account books in respect of losses and gains; (v) Whether the method adopted by the assessee for making entries in the books both in respect of losses and gains is as per nationally accepted accounting standards; (vi) Whether the system adopted by the assessee is fair and reasonable or is adopted only with a view to reducing the incidence of taxation." 10. On that basis it allowed the claim of the assessee at para 25.1 as follows : "25.1 From the facts of the present case it is seen that the method of accounting adopted by the assessee right from asst. yr. 1982-83 is mercantile system and it has been consistently claiming the losses suffered by it on account of fluctuation in foreign currency rates only on accrual basis. In fact, in asst. yrs. 1982-83 to 1986-87 the claim of the assessee was allowed by the AO. Of course, upto asst. yr. 1981-82 the loss was claimed in the year in which the loans or part thereof were repaid. Thus, the assessee had changed its method of accounting from asst. yr. 1982-83 but the bona fides of the change were not doubted or disputed by the Department.
Further, the assessee has been consistent and definite in making entries in its account books in respect of the losses suffered on account of fluctuation in foreign currency rates. In the circumstances, the answer to question Nos. (i), (ii) and (iv) is in affirmative." 11. Having regard to the above, I am of the view that in the light of the law as it exists during the year under consideration, the learned AM was fully justified in holding that the assessee should be entitled to depreciation as well as investment allowance on the enhanced liability in respect of the cost of the assets concerned due to fluctuation in the exchange rate. This view is further fortified by the decision of the Hon'ble Supreme Court in the case of CIT v. Vegetable Products Ltd. (1973) 88 ITR 192 (SC) wherein it was held that if the Court finds that the language of the taxing provision is ambiguous or capable of more meanings than one, then the Court has to adopt that interpretation which favours the assessee, more particularly so when the provision relates to the imposition of penalty. I, therefore, concur with the learned AM.12. The matter will go before the regular Bench for decision, according to majority opinion.
1. In accordance with the majority view, we hold that the CIT(A) was justified in directing the AO to allow the depreciation on additional liability arising out of the difference in the rate of exchange of rupee. Accordingly, we support the conclusions arrived at by the CIT(A) and decline to interfere in the matter.