1977 (7) TMI 31 - HC - Income Tax

Court considers devaluation impact on imported machinery cost for tax rebate

The court held that the increased liability incurred by the assessee due to the devaluation of the Indian rupee should be considered in determining the ... Accounting Year, Actual Cost, Cash System, Foreign Currency, Mercantile System Issues Involved:1. Entitlement to development rebate on additional liability incurred due to devaluation.2. Deductibility of additional liability as a result of devaluation from business profits under section 28 or 37 of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Entitlement to Development Rebate on Additional Liability Incurred Due to DevaluationBackground:The assessee, a public limited company running a textile mill, imported machinery from foreign countries. The purchase price was in foreign currencies, and the assessee borrowed foreign currency from ICICI to make the payments. Due to the devaluation of the Indian rupee on June 6, 1966, the liability for repayment increased by Rs. 13,41,158. The assessee claimed that this increased liability should be considered for depreciation allowance and development rebate.Contentions:- Assessee's Argument: The increased liability due to devaluation should be added to the actual cost of the machinery for the purpose of development rebate under section 33.- Revenue's Argument: The additional liability arose after the machinery was installed and was related to the repayment of the loan, not the purchase price. Hence, it should not be considered in computing the actual cost of the asset. Further, section 43A, which deals with increased liability due to devaluation, excludes such consideration for development rebate.Court's Analysis:- Interpretation of 'Actual Cost': The court referred to the Supreme Court's decision in Challapalli Sugars Ltd. v. Commissioner of Income-tax, which held that 'actual cost' includes all expenditures necessary to bring an asset into existence and put it in working condition.- Section 43A: The court noted that section 43A(1) allows increased liability due to devaluation to be added to the actual cost for depreciation but excludes it for development rebate under section 43A(2). However, the court found that section 43A(1) applies only to liabilities arising after the acquisition of the asset, not before.- Commercial Accounting Principles: The court emphasized that the increased liability due to devaluation, which was an integral part of the original transaction, should be considered as enhancing the cost of the machinery.Conclusion:The court concluded that the increased liability due to devaluation should be taken into account in determining the actual cost of the machinery for the purpose of allowing development rebate under section 33. The Tribunal's contrary view was incorrect.2. Deductibility of Additional Liability as a Result of Devaluation from Business ProfitsBackground:The assessee alternatively contended that the additional liability incurred due to devaluation should be deductible from business profits under section 28 or 37 of the Income-tax Act, 1961.Court's Analysis:- Statement at the Bar: The assessee's counsel stated that this question was not pressed.Conclusion:The court did not express any opinion on this issue as it was not pressed by the assessee.Summary of Judgment:The court held that the increased liability incurred by the assessee due to the devaluation of the Indian rupee should be considered in determining the actual cost of the imported machinery for the purpose of allowing development rebate under section 33 of the Income-tax Act, 1961. The Tribunal's decision to the contrary was incorrect. The second question regarding the deductibility of the additional liability from business profits was not pressed by the assessee, and the court did not express any opinion on it. The court ruled in favor of the assessee and against the revenue, awarding costs to the assessee.