Non obstante Clause Overrides Section 32A: Foreign Exchange Adjustments Allowed

The court held that the non obstante clause in Section 43A overrides Section 32A, allowing adjustments to the actual cost of assets due to foreign exchange fluctuations within the eight-year period specified in Section 32A. Investment allowance can be claimed on the increased cost resulting from foreign exchange fluctuations within this period, with interest on deferred credit facilities treated as business expenditure. The case was referred back to the Division Bench for reconsideration based on this interpretation.

---

---

Issues Involved:
1. Interplay between Section 32A (investment allowance) and Section 43A (fluctuation in foreign exchange rate) of the Income-tax Act, 1961.
2. Whether the assessee is entitled to additional investment allowance due to increased cost from foreign exchange fluctuation.
3. The impact of the non obstante clause in Section 43A on Section 32A.
4. The period within which investment allowance can be claimed under Section 32A.
5. The treatment of interest on deferred credit facilities as business expenditure.

Detailed Analysis:

1. Interplay between Section 32A and Section 43A:
The assessee, a public limited company, purchased plant and machinery from a Japanese company on a deferred credit basis. Due to foreign exchange rate fluctuations, the liability increased for the years 1976, 1977, and 1978. The assessee claimed this increased liability as business expenditure, which was denied. Alternatively, the assessee claimed that the increased liability should add to the actual cost of the assets, thus entitling them to additional investment allowance under Section 32A. The Tribunal upheld the assessee's claim, but the Revenue contested this, leading to the reference.

2. Entitlement to Additional Investment Allowance:
The Revenue argued that investment allowance under Section 32A is a one-time allowance crystallized in the year of installation and first use. They contended that any fluctuation in foreign exchange rates in subsequent years should not affect the investment allowance already determined. The assessee, however, argued that Section 43A, with its non obstante clause, overrides Section 32A, allowing for adjustments to the actual cost due to foreign exchange fluctuations even in subsequent years.

3. Impact of Non Obstante Clause in Section 43A:
The court noted that Section 43A begins with "notwithstanding anything contained in any other provision of this Act," indicating its overriding effect. This clause means that any increase or decrease in liability due to foreign exchange fluctuations should be added to or deducted from the actual cost of the asset, irrespective of other provisions, including Section 32A. The court agreed that the non obstante clause in Section 43A should be given full effect, allowing for adjustments to the actual cost of the asset in subsequent years due to foreign exchange fluctuations.

4. Period for Claiming Investment Allowance:
The court analyzed Section 32A, which allows investment allowance to be carried forward for a maximum of eight assessment years following the year of installation or first use. The court held that while Section 43A allows for adjustments to the actual cost due to foreign exchange fluctuations, these adjustments must occur within the eight-year period specified in Section 32A. Any fluctuation beyond this period would not affect the investment allowance.

5. Treatment of Interest on Deferred Credit Facilities:
The court noted that interest on deferred credit facilities is treated as business expenditure and not added to the actual cost of the asset. This treatment aligns with Explanation 8 to Section 43(1), which excludes interest payable after the asset is first put to use from the actual cost.

Judgment Summary:
The court concluded that the Division Bench in Windsor Foods Ltd.'s case did not correctly interpret the law regarding the interplay between Sections 32A and 43A. The court held that:
- The non obstante clause in Section 43A allows for adjustments to the actual cost of the asset due to foreign exchange fluctuations within the eight-year period specified in Section 32A.
- Investment allowance can be claimed on the increased cost due to foreign exchange fluctuations within this period.
- Any fluctuation beyond the eight-year period does not affect the investment allowance.
- Interest on deferred credit facilities is treated as business expenditure and not added to the actual cost of the asset.

The reference was sent back to the Division Bench for a decision in light of this opinion.

---