1991 (12) TMI 1 - SC - Income Tax

Ruling clarifies section 43A(1) boosts actual cost for depreciation, but section 43A(2) bars higher development rebate

SC held that the assessee's case squarely fell within section 43A(1), as the additional liability arose from foreign currency fluctuation on machinery ... Additional liability due to currency devaluation - import of machinery on account of devaluation of rupees - development Rebate - includibility of additional amount paid in actual cost for purpose of rebate - Whether, in such a case, on general principles, the actual cost of the assessee's plant or machinery would be the revised liability or the original liability - HELD THAT:- The facts of the case undoubtedly fall within the terms of section 43A(1). The assessee has acquired, for the purposes of its business, a capital asset from a country outside India by making payment in foreign currency. For this purpose, it has borrowed monies in foreign currency from outside agencies and the liability in respect of such assets is outstanding. At a point of time after the acquisition of the asset, this liability has increased on account of the devaluation of our currency. These conditions being satisfied, the language of the sub-section is attracted. There is no need to speculate on all the problems that might have arisen if section 43A has not been there because the statute has resolved these problems. It lays down, firstly, that the increase or decrease in liability should be taken into account to modify the figure of actual cost and secondly that such adjustment should be made in the year in which the increase or decrease in liability arises on account of the fluctuation in the rate of exchange. The result of the above discussion is that once the language of subsection (1) is attracted to a particular case, sub-section (1) applies. Once sub-section (1) is attracted, its application is excluded qua development rebate, by the operation of sub-section (2). Nor is there any inappropriateness of statutory language as urged. As we have discussed above, the provisions of sub-section (1) apply to the present case and the increased liability should be taken as 'actual cost' within the meaning of section 43A(1). All allowances including development rebate or depreciation allowance or the other types of deductions referred to in the sub-section would therefore have to be based on such adjusted actual cost. But then sub-section (2) intercedes to put in a caveat. It says that the provisions of sub-section (1) should not be applied for purposes of development rebate. The effect is that the adjusted actual cost is to be taken as the actual cost for all purposes other than for grant of development rebate. Read thus, there is no difficulty in the application of the language of the section to the present case. There is no inappropriateness of language either in sub-section (1) or in sub-section (2). The language used is quite appropriate and meets the situation fully. In our opinion, it is a clear requirement of the statute that, for purposes of development rebate, any increase or decrease in the actual cost consequent on fluctuations in the exchange rate should not be taken into account. It may be that the Legislature intended to give a different treatment to development rebate from depreciation and other allowances because the allowance of development rebate can result in an assessee claiming allowances exceeding the original cost. It may be that the Legislature thought that, though development rebate was intended to promote development of industries, this could not be allowed at the cost of the foreign exchange resources of the country which are also depleted when there is an increase in liability due to devaluation of the currency. It is unnecessary to attribute any particular reason for the provision when the language of the section is otherwise plain and unambiguous. We do not think that, in the face of the language of sub-section (2), it would be right to permit the assessee to claim development rebate on the increased cost. We, therefore, allow the appeal and uphold the action of the Assessing Officer granting development rebate to the assessee only in respect of a sum of Rs. 52.48 lakhs and not on Rs. 61 lakhs on the basis of which it was claimed. Having regard, however, to the fact that the assessees had succeeded before all the High Courts, we make no order regarding costs. Appeal allowed. Issues Involved:1. Accounting for additional liability due to currency devaluation.2. Calculation of depreciation and development rebate under the Income-tax Act, 1961.Detailed Analysis:1. Accounting for Additional Liability Due to Currency DevaluationThe core issue here is whether an Indian businessman should account for the additional liability arising from the devaluation of the Indian rupee in the year the liability arose or by reopening the accounts of the earlier year when the asset was acquired. The Supreme Court examined the principles laid down by the Institute of Chartered Accountants of India and statutory provisions, including section 43A of the Income-tax Act, 1961, and amendments to the Companies Act, 1956.The Institute of Chartered Accountants of India recommended that the additional cost due to devaluation should be considered as enhancing the cost of the corresponding asset purchased. Depreciation should be provided on the additional cost according to the method normally employed by the company. The Supreme Court acknowledged that on strict accountancy principles, the increase in liability should ideally be adjusted in the accounts of the earlier year in which the asset was acquired. However, practical difficulties led to the recommendation that necessary adjustments be made in the subsequent years instead of reopening closed accounts.The Supreme Court concluded that the actual cost of the asset for the assessment year 1966-67 would be Rs. 1,00,000, and for the assessment year 1967-68, it would be Rs. 1,20,000.2. Calculation of Depreciation and Development RebateThe second issue was how to calculate allowances like depreciation and development rebate under the Income-tax Act, 1961, when the actual cost of the asset increases due to devaluation.Depreciation:The Supreme Court noted that depreciation is a recurrent claim. Under sections 32 and 43(1) and (6) of the Income-tax Act, depreciation is allowed on the actual cost of the asset less all depreciation allowed in earlier years. If the cost of the asset increases due to devaluation, the written down value for the year in which the increased liability arises should be recalculated on the basis of the increased cost minus earlier allowed depreciation. For example, if the asset earns depreciation at 10%, the depreciation allowance for the assessment year 1966-67 would be Rs. 10,000, and for 1967-68, it would be on Rs. 1,10,000 (Rs. 1,20,000 minus Rs. 10,000).Development Rebate:Development rebate, being a one-time allowance, presents a challenge. If the actual cost has already been determined and development rebate granted, an increase in liability due to devaluation raises questions about whether the assessment should be reopened. The Supreme Court noted that section 43A was enacted to address such issues. Sub-section (1) of section 43A provides for modification of the actual cost of the asset due to exchange rate fluctuation, while sub-section (2) mandates that this adjustment should not be considered for development rebate purposes.The Revenue argued that section 43A(2) clearly excludes any increase or decrease in liability due to exchange rate fluctuations from being considered for development rebate. The Supreme Court agreed, stating that the language of section 43A(2) is clear and unambiguous, and should be applied as such. The Court emphasized that the statutory provision must be followed, regardless of what the position might have been otherwise.The Supreme Court rejected the argument that section 43A applies only to cases where the fluctuation in exchange rate occurs in a subsequent year. The Court held that section 43A applies irrespective of when the fluctuation occurs, and once the conditions of sub-section (1) are satisfied, sub-section (2) excludes the application of the adjusted actual cost for development rebate purposes.Conclusion:The Supreme Court allowed the appeal, upholding the Assessing Officer's action of granting development rebate only on the original cost of Rs. 52.48 lakhs and not on the increased cost of Rs. 61 lakhs due to devaluation. The Court made no order regarding costs, acknowledging that the assessees had succeeded before all the High Courts.