1991-VIL-132-ITAT-
Equivalent Citation: ITD 038, 449,
Income Tax Appellate Tribunal MADRAS
Date: 28.06.1991
SOUTHERN ASBESTOS CEMENT LIMITED.
Vs
DEPUTY COMMISSIONER OF INCOME-TAX.
BENCH
Member(s) : D. S. MEENAKSHISUNDARAM., S. KANNAN.
JUDGMENT
Per Shri S. Kannan (Accountant Member)---These three appeals by the assessee raise certain common issues for resolution. Hence, they were heard together and are disposed of by a common order.
2. Claim for Revenue Deduction under Sec. 43B in respect of Customs Duty and Central Excive Duty --- This issue is common to all the three assessment years.
3. The assessee, a public limited company, manufactures and markets asbestos cement sheets, asbestos cement pressure pipes and pipe accessories, bitumen washers and certain other related items. Raw asbestos fibre is one of the basic raw materials necessary for making asbestos cement products and the assessee used to import the said raw material. On the raw asbestos fibre imported the assessee paid customs duty. It also paid excise duty on the asbestos cement products manufactured by it. It is common ground that the customs duty paid each year was debited to the raw material purchases account along with the cost of raw material. It is also common ground that the excise duty paid on finished goods was fully accounted for in the books of account of the assessee.
4. There is yet another undisputed fact, that is that while valuing the closing stock of (a) imported raw asbestos fibre and (b) finished products the assessee had taken into account the customs duty on the former and the excise duty relating to the latter. The customs duty and excise duty components of the closing stock, it is common ground, are as follows :--
Customs duty Central Excise Duty
1985-86 Rs. 60,10,873 Rs. 3,58,545
1986-87 Rs. 76,81,519 Rs. 1,10,658
1987-88 Rs. 77,28,023 Rs. 2,60,609
5. In the assessment proceedings relating to all the three assessment years under consideration the assessee, inter alia, set up a claim to the effect that the customs duty and excise duty components of the closing stock must be deducted from the book profits of the assessee. This claim was set up by the assessee through what it has labelled "Profit & Loss Adjustment Account", which was produced before the Assessing Officer. The assessee also sought to support its claim by relying on the Gujarat case of Lakhanpal National Ltd. v. ITO [1986] 162 ITR 240.
6. The rationale behind the said claim was explained by the assessee in a note submitted by it to the Assessing Officer. Reproduced below is the note relating to the assessment year 1985-86 :--
" 1. Customs duty Rs. 60,10,873: Raw asbestos fibre an imported raw material for the manufacture of asbestos cement products attracts customs duty. The liability of customs duty arises when the fibre is directly cleared from ship to factory godown. Sometimes, fibre cleared from ship is stored in customs bonded warehouses. The fibre under customs bonded warehouses will attract customs duty when they are taken out of the warehouse to factory godown. During the previous year relevant to assessment year 1985-86, 1098.847 M.T. of fibre as per statement enclosed were cleared after paying a duty of Rs.95,91,001. Against this, 626.334 MT of fibre were consumed for production and the balance 1072.513 MT was lying in the stock as on 30-6-1984. The customs duty paid by us on the closing stock 1072.513 MT of fibre was Rs.60,10,873. This amount which is not debited to P&L Account during the year is included in the closing stock of fibre as on 30-6-1984. This sum actually paid by us arising out of the statutory liability has been claimed by us as deduction u/s. 43B of the Income-tax Act.
2. Excise duty prepaid on finished goods : Rs.3,58,545. All the clearance of finished goods from factory for home consumption are liable for central excise levy before they pass our factory gate. We have sales depots at various places for which we periodically stock transfer our finished goods after paying central excise duty. On 30-6-1984, there were stocks of finished goods lying at our various depots. The central excise duty of Rs. 3,58,545 assessed on these stocks were paid already at the time of clearance from factories. The duty paid which is not debited to P & L account has been kept in prepaid account. Since the duty paid on these finished goods during the previous year relevant to assessment year 1985-86 are statutory liability, we have claimed this as deduction u/s.43-B of the Income-tax Act."
It is a matter of record that the same position was taken by the assessee in the assessments for the assessment years 1986-87 and 1987-88 also. The Assessing Officer negatived the assessee's claim. In this regard the following considerations weighed with him :--
(1) The decision of the Gujarat High Court in the case of Lakhanpal National Ltd. has not been accepted by the Department.
(2) Section 43-B does not permit any tinkering with the value of closing stock, which has been valued by the assessee itself according to its own past practice and also according to the established commercial principles.
(3) Customs duty and excise duty already stand debited to the Profit & Loss Account and, hence, what in essence the assessee wants is to revalue indirectly the closing stock by excluding from the value of the closing stock "an important element of cost, namely customs and excise duty".
(4) The decision of the I.T.A.T., Delhi Bench-C in the case of Hindustan Computers Ltd. v. ITO [1987] 21 ITD 524 goes against the claim of the assessee.
7. The C.I.T. (A) declined to interfere in the matter. According to him sec. 43-B was introduced into the Income-tax Act, 1961 for the specific purpose of curbing the practice of claiming a deduction without payment. The assesee, however, seeks "total claim of deduction for the same amount", once as a deduction in consumption of raw materials while arriving at manufacturing profit and again in the Profit & Loss Account by a separate claim under sec. 43B. This cannot be allowed. Further, in the Gujarat case there was no claim for total deduction.
8. It is in these circumstances that the assessee is now before us.
9. Early in the hearing, we wondered, aloud, how, given the true rationale behind it, sec. 43B could possibly avail the assessee and whether the issue did not need to be resolved de hors section 43B, and on principles which are directly applicable to the matter on hand. In response, the learned counsel for the assessee stated that he would be building his arguments on the provisions of that section. His arguments may be summarised as follows :--
(i) For purposes of computing business income under sec. 28, customs and central excise duties are admissible deductions. In cases where the taxpayer follows mercantile system of accounting, such deductions are normally available on accrual basis.
(ii) Sec. 43B, however, prohibits deduction on accrual basis, and stipulates that deduction will be allowed only in the previous year in which tax or duty is actually paid.
(iii) The non obstante clause with which the section begins makes it clear that the section will have an over-riding effect
(iv) Explanation to the section is designed to ensure that the taxpayer does not get a double deduction in respect of the same amount of tax/duty - once on accrual basis and for the second time on actual payment basis.
(v) In the case before us, in the previous year relevant to the assessment years now before us, the assessee actually paid (a) customs duty on the stock of raw asbestos fibre imported by it and (b) excise duty on finished products manufactured by it.
(vi) It should, therefore, follow that under sec.43B, which authorises deduction towards tax/duty on actual payment basis, the assessee is entitled to revenue deduction in respect of the entirety of the duties actually paid.
(vii) Now, customs duty and excise duty have respectively entered into the cost of raw asbestos fibre imported by the assessee and finished products manufactured by the assessee. Consequently the cost-based value of closing stock of (a) imported raw asbestos fibre, and (b) finished products manufactured by the assessee includes respectively customs duty and excise duty prepaid by the assessee.
(viii) The value of the closing stock of raw materials and finished products are credited to the manufacturing account. This means that deduction in respect of customs duty and excise duty actually paid is not allowed in its entirety, but is limited to the duty paid on the raw material consumed and the finished products sold by the assessee during the relevant year of account. In other words, contrary to the clear provisions of sec. 43B, the assessee has been denied the benefit of deduction in respect of the customs duty/excise duty component of the value of the closing stock. In support of the aforesaid contentions the learned counsel for the assessee referred to and relied upon the Gujarat case of Lakhanpal National Ltd.
10. To a specific query from the Bench as to whether the ratio laid down by the Supreme Court in the case of Chainrup Sampatram v. CIT [1953] 24 ITR 481 in the matter of valuation of closing stock does not militate against the assessee's claim, Shri K.R. Ramamani, the learned counsel for the assessee, contended that the provisions of sec. 43B will certainly avail the assessee.
11. Shri D. Ravindran, the learned Departmental Representative, strongly supported the orders of the lower authorities. He first contended that the method of accounting regularly followed by the assessee was to add customs duty paid to the cost of import raw materials and the excise duty paid to the cost of finished products. There is no justification, whatsoever, to change this method of accounting, which is in accord with well established accounting principles.
12. Secondly, in respect of imported raw materials, the customs duty paid, and in respect of the finished goods the excise duty paid were fully allowed. Therefore, the assessee's claim under sec. 43-B was rightly rejected. Shri Ravindran, then contended that, strictly speaking, the value of the components of closing stock do not enter into the P&L A/c. Therefore, no deduction is admissible from the profits as disclosed in the P&L A/c as claimed by the assessee.
13. We have looked into the facts of the case. We have considered the rival submissions.
14. At the outset we may notice some of the salient principles governing assessment of income to tax under the Income-tax Act, 1961. It is well settled that the assessment is made with reference to each assessment year with a view to bringing to tax, inter alia, profits and gains of business computed in accordance with the provisions of the Act. The profits and gains that are liable to be taxed under sec. 28 of the Act are profits and gains as understood in commercial circles. In other words, " 'profit' is to be understood in its natural and proper sense - in a sense which no commercial man would misunderstand". In its operation this principle has this effect, namely that even though the Act does not contain a specific provision for allowing a claim for a particular deduction, the admissibility of the deduction will depend upon whether, having regard to the accepted commercial practice and trading principles, it can be said to arise out of the carrying on the business and is incidental to it. If that is established, then the deduction must be allowed. This is, of course, subject to the significant rider that there is no prohibition against it, express or implied, in the Act.
15. Under the provisions of sec. 145 of the Act, the profits and gains of the taxpayer shall be computed in accordance with the method of accounting regularly employed by him. Here it is well settled that the choice of the method of accounting lies with the assessee. But the method of accounting must not only be a recognised method of accounting, but also must be regularly followed by the assessee. There is a further rider that the method of accounting must also be such that the assessee's income can properly be deduced therefrom.
16. It is well settled that the method of valuing stock on hand is but an aspect of the method of accounting followed by the assessee. As has been pointed out by the Supreme Court in the case of CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122, "whichever method of book-keeping is adopted, in the case of a trading venture, for computing the true profits of the year the stock-in-trade must be taken into account. If the value of the stock-in-trade must be taken into account, in the ultimate result the profit or loss resulting from trading is bound to get absorbed or reflected in the stock-in-trade unless the value of the stock-in-trade remains unchanged at the commencement of the year and the end of the year". Further, if the method of valuation of stock in hand adopted by the assessee is such that it does not enable the assessing authority to properly deduce the taxable income, the assessing authority is entitled to interfere in a suitable manner. Thus, in the following cases the method of valuation of stock adopted by the assessee was held to be inappropriate inasmuch as it did not result in the assessee's true taxable income being deduced :--
(i) Patrick (Inspector of Taxes) v. Broadstone [1954] 25 ITR 377 (CA)-- (base stock method).
(ii) Minister of National Revenue v. Anaconda American Brass Ltd. [1956] 30 ITR 84 (PS) (LIFO method).
(iii) CIT v. McMillan & Co. [1958] 33 ITR 182 (fixed percentage method).
17. The assessee is prohibited from adopting regularly one method accounting for his own purposes, and yet another method of accounting for income-tax purposes. In the case of CIT v. Shrimati Singari Bai [1945] 13 ITR 224 (All.), the assessee, a money-lender, was regularly following mercantile system of accounting. She, however, chose cash system of accounting for the purposes of filing her return of income for the assessment year 1934-35. Invoking the provisions of section 13 of the Indian Income-tax Act, 1922, the ITO completed the assessment on the basis of the profits disclosed by her books of account. The Assistant Commissioner declined to interfere in the matter. Answering the reference against the assessee, the Allahabad High Court observed :
" The section 13 appears to me to mean nothing, where an assessee has adopted a mercantileof earnings method of accounting, if it does not mean that he is to be bound by that method of computing his profits and gains for the purpose of his liability to income-tax as well as merely for his domestic accounting purposes. It seems to me, therefore, to constitute a formidable difficulty in the way of the assessee in this case to explain what section 13 does mean, if it does not mean that an assessee can be taxed upon that which he has not actually received or is not deemed statutorily to have received."
18. To turn now to the issue before us. As pointed out earlier, not only before the lower authorities but also before us the assessee has based its claim on the provisions of section 43B of the Act. This section, which was inserted by the Finance Act, 1983 with effect from April 1, 1984, as it stood at that time, reads as follows :--
" 43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of--
(a) any sum payable by the assessee by way of tax or duty under any law for the time being in force, or
(b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which sum is actually paid by him.
Explanation : For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (a) or clause (b) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1983 or any other assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him."
A plain reading of the section makes it clear that in respect of the items set out in the two clauses, it supersedes section 145 and provides that deduction shall be allowed not on accrual basis but on the basis of actual payment. But for the said section, an assessee following mercantile system of accounting would have been entitled to revenue deduction on accrual basis. The effect of the said section is to make a departure from accrual basis and to stipulate that it is only on the actual payment of tax/duty that a revenue deduction will be available in the year in which the tax or duty is actually paid. The said section, as we see it, does not contain anything to support the assessee's claim that the excise/customs duty component of closing stock where such stock had been valued at cost should be reduced from the closing stock valuation merely because customs/excise duty had actualy been paid by the assessee during the relevant year of account.
19. The assessee, on the contrary, lays emphasis on that part of section which stipulates that tax or duty shall be allowed only in computing the income of that previous year in which the tax or duty is actually paid.
20. Let us ignore for a moment the fact that the assessee is seeking to lop off a particular portion of the section and to interpret it in its favour. Let us assume that apparently the section is ambiguous. It is well settled that where the provisions of a statute are ambiguous, the most appropriate rule of construction to apply is what is called the mischief rule. The circumstance in which such rule of construction is to be applied was thus enunciated in the judgment of Das, Ag. C.J. (as he then was) in Bengal Immunity Co. Ltd. v. State of Bihar [1955] 2 SCR 603 :
" It is a sound rule of construction of a statute firmly established in England as far back as 1984 when Heydon's case [1584] 3 Co. Rep. 7a ; was decided that.... for the sure and true interpretation of all statutes in general (be they penal or beneficial, restrictive or enlarging of the common law) four things are to be discerned and considered :--
1st. what was the common law before the making of the Act,
2nd. what was the mischief and defect for which the common law did not provide.
3rd. what remedy the Parliament hath resolved and appointed to cure the disease of the Commonwealth, and
4th. the true reason of the remedy ; and then the office of all judges is always to make such construction as shall suppress the mischief, and advance the remedy, and to suppress subtle inventions and evasions for continuance of the mischief, and pro privato commodo, and to add force and life to the cure and remedy, according to the true intent of the makers of the Act, pro bono publico."
In In re Mayfair Property Co. [1898] 2 Ch. 28, Lindley, M.R., in 1898 found the rule "as necessary now as it was when Lord Coke reported Hleydon's case. In Eastman Photographic Materials Co. v. Comptroller General of Patents, Designs and Trade Marks [1898] A.C. 571 the Earl of Halsbury re-affirmed the rule is follows :
'My Lords, it appears to me that to construe the statute now in question, it is not only legitimate but highly convenient to refer both to the former Act and to the ascertained evils to which the former Act had given rise, and to the later Act which provided the remedy. These three things being compared, I cannot doubt the conclusion.' "
In Thomson v. Lord Clanmorris [1900] 1 Ch. 718, Lord Lindley paraphrases the position thus :
" In construing any.... statutory enactment, regard must be had not only to the words used, but to the history of the Act, and the reasons which led to its being passed. You must look at the mischief which had to be cured as well as at the cure provided."
21. The said principles were applied by the Supreme Court in CIT v. Sodra Devi [1957] 32 ITR 615 and K.P. Varghese v. ITO [1981] 131 ITR 597.
22. What was mischief that section 43B was designed to curb, and what was the cure that it sought to provide ? The answer is readily available in paragraph 60 of the Memorandum explaining the provisions in the Finance Bill, 1983. The paragraph reads as under :--
" 60. Several cases have come to notice where taxpayers do not discharge their statutory liability such as in respect of excise duty, employer's contribution to provident fund, Employee's State Insurance Scheme, etc. for long periods of time, extending sometimes to several years. For the purpose of their income-tax assessments, they claim the liability as deduction on the ground that they maintain accounts on mercantile or accrual basis. On the other hand they dispute the liability and do not discharge the same. For some reason or the other undisputed liabilities also are not paid. To curb this practice, it is proposed to provide that deduction for any sum payable by the assessee by way of tax or duty under any law for the time being in force (irrespective of whether such tax or duty is disputed or not) or any sum payable by the assessee as an employer by way of contribution to any provident fund, or superannuation fund or gratuity fund or any other fund for the welfare of employees shall be allowed only in computing the income of that previous year in which such sum is actually paid by him."
It will be clear from the said paragraph that sec. 43B has a specific but limited purpose, namely to allow deduction in respect of tax or duty on actual payment basis.
23. As we see it, there is no warrant to construe the said stipulation so as to widen its scope and effect as is sought to be done by the assessee.
24. One of the specific queries that was raised by the Bench was whether the ruling of the Supreme Court in the case of Chainr up Sampatram would support the assessee's claim. And the response was that sec. 43B would certainly avail the assessee. We are unable to agree for the following reasons.
25. It is common ground that, all along, the assessee was valuing the stock in hand at cost, which, according to well established accounting principles and trading practice, rightly, included the customs/excise duty component. The assessee's case is that it had been denied full revenue deduction in respect of customs and excise duties actually paid by it during the relevant previous years. Let us examine this claim, in the light of well-settled accounting principles. It is not disputed that the customs and excise duties actually paid were debited, in their entirety, to manufacturing account. This would mean that customs duty entered into the cost of imported raw asbestos fibre, becoming in the process and integral part of the cost of production of the goods manufactured by the assessee. Similarly, excise duty also become one of the components of the cost of production.
26. Now, had the entire stock of raw asbestos fibre imported by the assessee been utilised for manufacturing asbestos cement products, and had the entire stock of manufactured goods been sold during the relevant year of account itself, then the profit earned by the assessee would be represented by the excess of sale price over cost price. In other words, in the very process of determining the profits cleared by the assessee, full deduction is allowed for the customs and excise duties paid by the assessee.
27. But often the assessee is left with stock-in-hand, at the end of the year of account. It then becomes necessary to value the closing stock of raw materials and/or finished products in accordance with accepted principles, and credit the value to the manufacturing account or trading account as the case may be.
28. The significant point to be noted is that, from accounting angle, the fact that the value of the closing stock is credited to the accounts does not mean that full deduction is not allomed for the duty paid by the assessee. Such a deduction stands allowed, in full, in the first instance when the duties paid are debited to the accounts ; otherwise the cost of production will get distorted. At the end of the year, the value of the closing stock is credited to the accounts ; otherwise profits will get distorted. This adjustment has thus a rationale of its own. To view it as a denial of full deduction in respect of the duties paid by the assessee is to miss its accounting significance.
29. To turn now to authority, in the case of Chainrup Sanmptram the Supreme Court on a detailed consideration of the principles of valuing closing stock held that valuation of unsold stocks at the close of an accounting period is a necessary part of the process of determining the trading results of that period. The Supreme Court, if we may ray so with respect, lucidly explained the rationale behind the principle of valuing closing stock at cost or market price, whichever is lower.
30. Reference may also be made to the Calcutta case of British Paints India Ltd. v. CIT [1978] 111 ITR 53 in which the Calcutta High Court, on an exhaustive analysis of the case law on the subject, deduced the basic principles applicable to the question of valuation of closing stock (see pages 62 and 63 of the Report). The significance of proper valuation of closing stock is also highlighted by the Supreme Court in the latest cases of (i) CIT v. British Paints (India) Ltd. [1991] 188 ITR 44 (SC) and (ii) A.L.A. Firm v. CIT [1991] 189 ITR 285.
31. The aforesaid principles make it clear that in a case where the closing stock is valued at cost (because it is lower than the market price) customs/excise duty paid must necessarily enter into the computation of the value of closing stock. Any attempt to exclude from the value of closing stock the duty component will distort the true profits of the assessee. Therefore, such exclusion cannot be permitted.
32. As for the Gujarat case of Lakhanpal National Ltd. the report does not indicate that the attention of the learned Judges were drawn either to the mischief rule of construction or to the principles of valuation of closing stock as enunciated by the Supreme Court in the case of Chainrup Sampatram. Therefore, with respect, we hold that the said judgment of the Gujarat High Court cannot avail the assessee.
33. One of the points urged by Shri D. Ravindran, the learned Departmental Representative, was that the case before us is one of change in the method of accounting. As we see it, the case before us is not one of change in the method of accounting. The undisputed fact is that in its books of account the assessee, while valuing the closing stock at cost, had rightly taken into account customs/excise duty paid by it during the relevant year of account. It was only for income-tax purposes that, through what it had labelled as "Profit and loss adjustment account", the assessee claimed a revenue deduction in respect of the duty component of the closing stock value. The Allahabad case of Shrimati Singari Bai is the authority for the proposition that the assessee cannot be permitted to do so. This is yet another reason why the assessee's claim must fail.
34. To sum--
(i) Having regard to the mischief it seeks to curb and the cure it seeks to provide, sec. 43B cannot avail the assessee.
(ii) The well settled principles of valuing closing stock also militates against the assessee's claim.
(iii) The ratio of the Allahabad case of Shrimati Singari Bai is a further hurdle in the path of the assessee's succeeding in its claim.
35. In view of the foregoing, therefore, we decline to interfere in this respect of the matter.
36. Claim for Investment Allowance---This issue is common to all the assessment years under consideration. In the previous year relating to the assessment year 1983-84 the assessee, it would appear, installed certain plant and machinery which it had imported for the purposes of its business. It would appear that the assessee had purchased the said machinery on deferred payment basis. Investment allowance admissible on the particular plant and machinery was also allowed in the assessment for the assessment year 1983-84.
37. In the course of the assessment proceedings for the three assessment years under consideration the assessee claimed investment allowance on the increase in the cost of the machinery occasioned by fluctuation in the foreign exchange rate. The details of the increase in the cost of machinery due to fluctuation in foreign exchange rate and the incremental investment allowance claimed by the assessee are abstracted below :
Increase in Cost. Investment Allowance
(25%)
1985-86 Rs. 1,73,560 Rs. 43,390
1986-87 Rs. 4,15,555 Rs. 1,03,889
1987-88 Rs. 6,08,901 Rs. 1,52,225
38. The Assessing Officer disallowed the assessee's claim on the ground that the machinery having been installed in the previous year relevant to the assessment year 1983-84, investment allowance for that assessment year was allowed and that there is no provision in the Income-tax Act to give investment allowance in respect of the same plant and machinery over a period of more than one assessment year. The CIT (A) declined to interfere in the matter. In this regard he was also impelled by the consideration that sec. 32-A contemplates the grant of investment allowance either in the year of installation or in the year in which the plant and machinery was first put to use. The CIT(A) was not impressed by the argument that there is nothing in sec. 43A which puts an embargo on the grant of such allowance to the assessee because,' according to the first appellate authority, sec. 32-A is a complete code by itself. It is in these circumstances that the assessee is now before us.
40. Shri K. R. Ramamani, the learned counsel for the assessee reiterated the arguments that had been advanced unsuccessfully before the lower authorities on his part, the learned Departmental Representative strongly supported the impugned orders of the lower authorities.
41. Sec. 43A was introduced by the Finance (No. 2) Act, 1967 with effect from April 1, 1967. The said section was introduced in the wake of the 1966 devaluation of the Indian rupees and with a view to mitigating the hardship suffered by the assessees who had imported capital assets from abroad before the date of devaluation of the rupee on deferred payment terms or against loan in foreign currency, and who, as a result of the devaluation of Indian rupee, had to pay more in terms of Indian currency. This additional liability devolving on the Indian importers of capital assets from abroad could not be ignored; otherwise they would have suffered hardship in matters relating to depreciation allowance, amortisation of capital expenses, computation of capital gains and loss and the like. It was, therefore, that sec. 43A was introduced into the Act.
42. The ingredients of sec. 43A (1) are :--
(i) The assessee must have acquired any asset from a country outside India for purposes of its business or profession.
(ii) Either the liability in respect of the cost of the asset or the liability for repayment of the moneys borrowed by the assessee in any foreign currency specifically for the purpose of acquiring the asset should be outstanding, either wholly or in part
(iii) As a result of the fluctuation in foreign exchange rate, there should be an increase or reduction in the said liability as expressed in Indian currency.
(iv) If there is an increase in such liability as expressed in Indian currency, the incremental amount would be added to the cost of the asset as defined in sec. 43(1). If, on the contrary, there is a reduction in liability, the decremental amount will go to reduce the actual cost of the asset as defined in sec. 43(1).
43. We then have sec. 43A(2), which puts a specific embargo on the applicability of the provisions of sec. 43A(1) to development rebate under sec. 33 of the Act.
44. The most significant point to be noted is that sec. 43A does not contain any such embargo in so far as investment allowance is concemed. As pointed outearlier, sec. 43A was inserted by Finance (No. 2) Act, 1967 with effect from 1-4-1967. Sec. 32A dealing with investment allowance was inserted by the Finance Act, 1976 with effect from 1-4-1976. Even though the latter section was inserted nine years after the insertion of the former section, yet neither of the sections contains anything even remotely suggesting that the provisions of sec. 43A(1) are not applicable to investment allowance.
45. Secondly, sec. 43A(1) provides that the incremental cost occasioned by fluctuation in foreign exchange rate would go to augment the actual cost of the asset as defined in sec. 43(1). And when regard is had to the further significant fact that the definition contained in sec. 43 is applicable to sections 28 to 41 (both inclusive), the conclusion is inescapable that the augmenting of actual cost by the incremental cost occasioned by fluctuation in the rate of foreign exchange contemplated by sec. 43A(1) is also applicable to sec. 32A, which also talks of actual cost. It should, therefore, follow that the incremental cost would go to augment the actual cost even for purposes of computing investment allowance under sec. 32-A.
46. So far there is no difficulty. Difficulties, however, arise when we come to the modalities of giving effect to the provisions of sec. 43A(1), particularly in the context of investment allowance.
47. "Actual cost" has both a time dimension and a price dimension. Sec. 43A(1), which governs the price dimension, has this effect, namely that the incremental cost gets added to the actual cost.
When we say that actual cost has a time dimension, we mean that, conceptually speaking, actual cost is necessarily related to the point of time at which an asset is purchased.
48. When we are dealing with the Income-tax Act, the time dimension assumes special significance. For example, to be entitled to depreciation in respect of a depreciable asset, the assessee must satisfy the twin criterion of ownership and user. In a particular case, the assessee might have acquired a depreciable asset in one particular previous year, but would have put it to business use in a subsequent previous year. In such a case, depreciation on the asset will be allowed only in the year of user. Investment allowance, on the contrary, is available either in the year in which the plant and machinery is installed or in the year in which it is first put to use.
49. Now, the incremental cost occasioned by fluctuation in rate of exchange comes into being after depreciation/investment allowance is allowed to the assessee. Consequently, the augmenting of the actual cost by the incremental cost contemplated by sec. 43A(1) must necessarily relate back to the assessment year in which the allowance was granted to the assessee.
50. This relating back of the increment cost does not present any difficulty in matters relating to depreciation allowance. Normally, every time incremental cost comes into existence as a result of exchange rate fluctuation, the incremental cost should be added to the actual cost of the asset and depreciation allowed on the augmented actual cost. However, the definition of the term "Written Down Value" contained in sec. 43(6)(b) renders the task easy. To illustrate--
Actual cost to the assessee of a
depreciable asset : Rs. 10 lakhs
Less : Depreciation allowed in the very first
year of assessment, say, assessment
year 1981-82 : Rs. 2 lakhs
Written Down Value : Rs. 8 lakhs
If, in the previous year relevant to the assessment year 1982-83,the incremental cost occasioned by fluctuation in foreign exchange rate is, say Rs. 1 lakh, the normal calculation would be as under :--
Actual cost to the assessee : Rs.10 lakhs
Add: Incremental cost under sec. 43A(1) : Rs. 1 lakhs
Augmented actual cost : Rs.11 lakhs
Less : Depreciation actually allowed : Rs. 2 lakhs
Revised Written Down Value : Rs. 9 lakhs
The same calculation can be short-circuited as under :--
Written Down Value : Rs. 8 lakhs
Add : Incremental cost u/s. 43A(1) : Rs. 1 lakhs
Revised Written Down Value : : Rs. 9 lakhs
The above example will make it clear that, while giving effect to the provisions of sec. 43(1) for purposes of depreciation allowance, all that one has to do is to add to the written down value the incremental cost that came into existence during the relevant previous year.
51. Investment allowance, on the contrary, defies such a simple solution. It is allowed either in the year of installation or in the first year of user of the plant and machinery. Thus, investment allowance is a one-time allowance. Now, having regard to this special feature, how does one go about giving effect to sec. 43(1) ? Here, sec. 154 readily suggests itself. But considering the fact that a bar of limitation by time is incorporated into it, that section provides, only to a limited extent, the procedural modalities for adding the incremental cost to the actual cost. Stated differently, that section cannot be invoked to add to the actual cost the incremental cost that arises after the expiry of the limitation period incorporated into that section.
52. Section 155 is silent on the issue.
53. Again, the granting of investment allowance is, inter alia, subject to the creation by the assessee of investment allowance reserve. This would mean that even in cases where recourse is take n to sec. 154, the assessee will have to create incremental investment allowance reserve. But the difficulty here is that, as pointed out by the Supreme Court in the case of CIT v. A. Gajapathi Naidu [1964] 53 ITR 114 the concept of reopening closed accounts has no place under the Indian Income-tax Act.
54. Since there is nothing either in sec. 43A or in sec. 32A to deny the assessee the benefit of the former section in respect of investment allowance, a practical way must be found to ensure that the benefit conferred by the enactment reaches the assessee. As we see it, the most practical solution would be to allow the assessee the benefit of investment allowance in respect of the incremental cost in the year in which the incremental cost arises, provided, of course, that the assessee creates a suitable reserve for this purpose.
55. In view of the foregoing, therefore, we hold that the assessee is entitled to succeed on this issue. We direct the Assessing Officer to allow the assessee's claim for investment allowance in respect of the incremental cost in the respective years in which such cost arose. The Assessing Officer is, of course, free to verify the arithmetical accuracy of the actual sum which are claimed as deduction as and by way of incremental investment allowance. The Assessing Officer will, no doubt, see whether the assessee has created adequate investment allow ance reserve to cover the investment allowance admissible on the incremental cost.
56. In the result, the related grounds of appeal are allowed.
57. Capitalisation of amount spent on repairs--At the time of the hearing, the learned counsel for the assessee did not press the grounds relating to this issue. They are, therefore, dismissed as such.
58. In the result, all the three appeals of the assessee are allowed in part
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