Judgment:
1. This is an appeal filed by the assessee arising out of the order of CIT(A), dt. 7th March, 1996.
"that the learned Dy. CIT's observation that the 'appellant has not yet suffered any loss, since no repayment of the foreign loan has yet been made, is wrong. She ought to have considered the fact that the appellant's loss on account of devaluation was determined during the year under appeal only and hence, following the Accounting Standards (AS-11), she ought to have allowed depreciation and Investment Allowance on the enhanced capitalised value of the plant and machinery".
3. From the grounds raised and the arguments advanced, the only issue arising in this appeal is in relation to allowance of depreciation and investment allowance on the enhanced cost due to additional liability incurred for purchase of plant and machinery due to fluctuation in the foreign exchange rate.
4. The appellant-company had imported certain machinery by obtaining a loan in foreign exchange from foreign institutions. While the plant and machinery had been installed and put into use in an earlier year, the payments in foreign exchange towards the cost of machinery were still outstanding and were being paid in instalments. The appellant had capitalised a sum of Rs. 1,17,22,640 on account of exchange rate fluctuation on foreign currency loans in respect of the debt outstanding and claimed depreciation and investment allowance thereon, 5. The CIT(A) had confirmed the above view, and held that the actual cost of the plant and machinery would increase as and when the actual payments are made towards the external debt. Till the time, the payments are made in respect of additional liability, it is only a contingent one and not present liability and the depreciation will be allowed only in the year when the actual payment is made. The assessee reiterating the same ground is now in appeal before us, 6. The learned counsel for the assessee has argued that the issue is more or less covered by the decision of the jurisdictional High Court in the case of CIT v. Widia (India) Ltd. (1992) 193 ITR 475 (Kar). She had also relied upon the following cases : 1. CIT v. Tata Hydro Electric Supply Co. Ltd. (1996) 219 ITR 178 (Bom); She, thereafter, argued that since the issue on hand is fully covered by the decision of the Hon'ble Karnataka High Court, the appeal of the assessee needs to be allowed.
7. The learned Departmental Representative argued that the repayment of the loan is rescheduled and hence no part of the loan is repayable during the year. The liability which is required to be discharged at a future date, increase in the liability due to fluctuation in the foreign exchange rate depends upon the exchange rate prevailing at the time of repayment and hence contingent in nature. The CIT(A), was, therefore, justified in dismissing the appeal of the assessee. We have given our considered thought to the issue on hand, the facts of the case and the decisions relied upon by the counsels. The facts are undisputed. The sum arrived at Rs. 1,17,22,640 for the increase in the liability due to the difference in the foreign exchange rate in respect of loan taken in foreign currency to acquire the plant and machinery is also not in dispute. The issue involved is divided into three parts for proper disposal thereof. We shall first discuss whether the liability of the nature is a contingent one or the actual liability.
8. When the assessee purchased assets at a price, its liability to pay the sum arose simultaneously. Merely because the said liability was to be discharged in instalments it could not be said that the liability did not exist or accrue till the instalments became due and payable. It was that liability which had increased on account of fluctuation in the rate of exchange.
9. Thus, the liability being the present one and in view of Section 43(A), it is required to be added to the cost of plant and machinery acquired out of such foreign exchange loan. Our above view, is supported by the decision of the Hon'ble Gujarat High Court in the case of New India Industries Ltd. v. CIT (1993) 203 ITR 933 (Guj).
10. Having held that the increase in liability of Rs. 1,17,22,640 on account of exchange rate fluctuation on foreign currency loan is to be added to the cost of plant and machinery. Let us now deal with the issue relating to the claim of depreciation and investment allowance thereon. We shall first discuss the impact of such addition to the cost of assets on the depreciation allowances thereon. Section 43(A), as introduced in the statute book w.e.f 1st April, 1967, provides that the liability of such a nature shall be added to the actual cost of asset as defined in Section 43(1) of the IT Act, 1961. The depreciation under Section 32 is to be allowed with reference to the actual cost. The actual cost for this purpose is defined under Section 43(1) of the Act.
11. It therefore, follows that when the actual cost defined in Section 43(1) is to be increased by the additional liability due to fluctuation in the foreign exchange rate in respect of loans taken in foreign currency, the depreciation is also required to be allowed thereon. This view has been held by the Hon'ble Karnataka High Court in CIT v. Motor Industries Co. Ltd. (1988) 173 ITR 374 (Kar). This view has been further followed in the following cases : 12. The decision relied upon by the learned authorised representative in Sivananda Steels Ltd.'s case (supra) and the decision relied upon in the ground No. 4 of the grounds of appeal, in case of CIT v. Elgi Rubber Products Ltd. (1996) 133 "CTR (Mad) 417 : (1996) 219 ITR 109 (Mad) simply states that the liability of such a nature is of capital account and not a revenue expenses. The decision in Sivananda Steels Ltd.'s case (supra) and Elgi Rubber Products Ltd.'s case (supra) does nbt support the case of the assessee. However, since we have held that the issue is covered in view of the decision in MICO Ltd.'s case (supra), the claim of the assessee so far as depreciation is concerned is admissible. Thus, the assessee is therefore, entitled to claim depreciation on the capitalised sum of Rs. 1,17,22,640 on account of additional liability incurred due to fluctuation in foreign exchange rate.
13. We shall now discuss whether on this nature of additional liability the assessee is entitled to investment allowance or not. The assessee acquired/installed plant and machinery during the previous year relevant to the asst. yr. 1989-90. The investment allowance was granted to the assessee on the cost of plant and machinery at the relevant time. The learned counsel for the assessee has heavily relied upon the decision of the Hon'ble Karnataka High Court in (1992) 193 ITR 475 (Kar) (supra). The question posed before the Hon'ble Karnataka High Court read as under: "Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in allowing investment allowance on the enhanced cost of assets due to fluctuations in foreign currency rates and accordingly directing the ITO to recompute the investments allowance and grant the deductions ?" "The first question is covered by the decision of this Court in CIT v. Motor Industries Co. Ltd. (1988) 173 ITR 374 (Kar). Following the said decision, the first question is answered in the affirmative and against the Revenue." On reading of the aforesaid decision in the case of Motor Industries Co. Ltd. (supra), we find that the issue involved therein was in respect of depreciation and not investment allowance. We are therefore, required to go into the relevant provision as regards the grant of investment allowance under Section 32A of the IT Act.
14. Section 32A(1) and the Explanation defined the word "actual cost", which reads as under : "In respect of a ship or an aircraft or machinery or plant specified in Sub-section (2), which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this section, be allowed a deduction, in respect of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed or if the ship, aircraft, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year, a sum by way of investment allowance equal to twenty-five per cent of the actual cost of the ship, aircraft, machinery or plant to the assessee.
Explanation : For the purposes of this sub-section 'actual cost' means the actual cost of the ship, aircraft, machinery or plant to the assessee as reduced by that part of such cost which has been met out of the amount released to the assessee under Sub-section (6) of Section 32AB." 15. From the reading of the section and the Explanation it follows that the investment allowance is granted as a one time allowance at the specified percentage on the cost of plant and machinery acquired or first put to use. The same is not repetitive in nature like depreciation.
16. Section 43 starts with the words "in Sections 28 to 41 and in the section unless the context otherwise requires actual cost means......".
The Explanation to Section 32A(B)(1) defines what is the actual cost for the purpose of granting of investment allowance under Section 32A.Section 43A requires the additional liability incurred due to fluctuation in the foreign exchange rate in respect of the loan taken for acquiring any assets to be incurred in the actual cost for the purpose of Section 43(1). Giving logical meaning the cost is required to be arrived at in the year when the assets are acquired or first put to use when the claim under Section 32A is to be allowed. The cost is thereafter, immaterial, once the investment allowance is allowable under this Act. The subsequent addition to the cost by operation of Section 43A does not alter the cost when the plant and machinery were acquired or first put to use.
17. There is no reference in Section 43(1) to increase or reduce the cost of the asset in Explanation to Section 32A(1).
18. The deduction of investment allowance can be allowed in respect of the previous year in which the machinery was installed or first put to use. If the deduction becomes allowable in that relevant previous year, the full investment allowance is to be worked out on the basis of the actual cost of the machinery or plant to the assessee at that relevant time. The quantification of the amount at 25 per cent of the actual cost to be allowed by way of deduction as investment allowance got crystallised on the basis of the actual cost and no change can be made therein for that previous year on the basis of any fluctuation that takes place in the exchange rate in the subsequent years. The fact that the investment allowance is carried forward under Sub-section (3) or that the reserve can be created in any subsequent assessment year due to insufficiency of profits in the earlier years will not alter this situation. Therefore, no question of revising the full amount of the investment allowance which was already worked out in the relevant previous year can ever arise by virtue of any subsequent fluctuation in the exchange rate.
19. We are, therefore, unable to concur with the arguments of the learned authorised representative that the additional claim for investment allowance is allowable as per the decision of the Hon'ble Karnataka High Court in Widia (India) Ltd.'s case (supra).
20. On the other hand, we are fortified in our view by the decision of the Hon'ble Gujarat High Court in the case of CIT v. Windsor Foods Ltd. (1999) 235 ITR 249 (Guj).
21. In the result, the assessee's claim for investment allowance under Section 32A in respect of additional cost due to fluctuation in the foreign exchange rate, in respect of foreign exchange liability incurred for acquiring certain plant and machinery is not allowable.