2002 (2) TMI 305 - AT - Income Tax

Exchange rate fluctuations impact asset depreciation but not investment allowance. Tribunal decision aligns with precedents.

The Tribunal allowed depreciation on the capitalised sum due to exchange rate fluctuation but denied the claim for investment allowance on the same ... Present liability versus contingent liability - addition to actual cost under section 43(A) - depreciation allowable with reference to enhanced actual cost - investment allowance under section 32A computed on cost at time of installation/first usePresent liability versus contingent liability - addition to actual cost under section 43(A) - Whether increase in liability due to foreign exchange fluctuation in respect of foreign currency loan is a present liability to be added to the cost of plant and machinery or a contingent liability. - HELD THAT: - The Tribunal held that the liability to pay for imported plant and machinery arose when the assets were purchased and did not cease to exist merely because payment was to be made by instalments; the increase in that liability caused by exchange rate fluctuation therefore represented an existing liability. Applying section 43(A), such additional liability must be added to the actual cost of the asset for the purposes of computing cost under the Act. The Tribunal observed that this view is supported by the decision of the Hon'ble Gujarat High Court in New India Industries Ltd. v. CIT and proceeded on the basis that the capitalised exchange difference constituted part of the cost of the plant and machinery. [Paras 8, 9]Increase in liability on account of exchange rate fluctuation is a present liability and is to be added to the actual cost of plant and machinery under section 43(A).Depreciation allowable with reference to enhanced actual cost - addition to actual cost under section 43(A) - Whether depreciation is allowable on the enhanced capitalised value of plant and machinery resulting from the addition of exchange fluctuation liability. - HELD THAT: - Having held that section 43(A) requires the additional liability to be included in the actual cost of the asset, the Tribunal concluded that depreciation under section 32 must be computed with reference to that increased actual cost. The Tribunal relied on the Karnataka High Court decision in Motor Industries Co. Ltd. and subsequent consistent authorities, and rejected contrary authorities as not supporting the assessee's claim only to the extent of treating the liability as capital rather than revenue. Consequently, the capitalised exchange difference of Rs. 1,17,22,640 (undisputed) is eligible for depreciation. [Paras 10, 11, 12]Depreciation is allowable on the capitalised sum representing the exchange rate fluctuation because it forms part of the actual cost of the plant and machinery.Investment allowance under section 32A computed on cost at time of installation/first use - Whether investment allowance under section 32A is admissible on the enhanced cost arising from subsequent exchange rate fluctuations. - HELD THAT: - The Tribunal analysed section 32A and its Explanation, observing that investment allowance is a onetime deduction calculated on the 'actual cost' of the machinery at the relevant previous year when the machinery was installed or first put to use. The Tribunal held that subsequent additions to cost by operation of section 43A do not alter the quantum of investment allowance once crystallised in the year of installation or first use; there is no provision in the Explanation to section 32A(1) for revising that cost later. The Tribunal declined to follow the Karnataka High Court's terse statement in Widia (India) Ltd. as extending investment allowance to subsequent enhancements of cost, and relied on the Gujarat High Court decision in CIT v. Windsor Foods Ltd. to deny the claim. [Paras 17, 18, 19, 20, 21]Investment allowance under section 32A is not allowable on the additional cost arising from subsequent exchange rate fluctuations; the allowance is to be computed on the actual cost at the time of installation or first use.Final Conclusion: The appeal is partly allowed: the assessee is entitled to have the exchangerate increase added to the cost of plant and machinery and to claim depreciation thereon, but the assessee is not entitled to investment allowance under section 32A on that subsequently enhanced cost. Issues:Allowance of depreciation and investment allowance on enhanced cost due to foreign exchange rate fluctuation.Analysis:The appeal concerns the allowance of depreciation and investment allowance on the enhanced cost due to additional liability incurred for the purchase of plant and machinery because of fluctuations in the foreign exchange rate. The appellant had imported machinery using a loan in foreign exchange, and while the machinery was installed in a previous year, payments in foreign exchange were still outstanding. The appellant capitalized an amount due to exchange rate fluctuation on the outstanding debt and claimed depreciation and investment allowance on it. The CIT(A) held that depreciation would only be allowed when actual payments were made towards the additional liability, considering it contingent until then.The Tribunal examined whether the liability due to fluctuation in the foreign exchange rate was contingent or actual. It determined that the liability arose when the assets were purchased, and the increase due to exchange rate fluctuation was to be added to the cost of the plant and machinery as per section 43(A). This view was supported by the decision of the Hon'ble Gujarat High Court in New India Industries Ltd. v. CIT [1993] 203 ITR 933.Regarding depreciation, the Tribunal held that the additional liability due to fluctuation in the foreign exchange rate should be added to the actual cost of the assets, allowing depreciation on the total amount. This view was consistent with the decision of the Hon'ble Karnataka High Court in CIT v. Motor Industries Co. Ltd. [1988] 173 ITR 374 and subsequent cases.However, concerning investment allowance, the Tribunal found that the allowance was a one-time deduction based on the actual cost of the assets at the time of acquisition or first use. The Tribunal noted that the investment allowance amount was fixed at the time of acquisition and could not be revised due to subsequent fluctuations in exchange rates. The decision of the Hon'ble Karnataka High Court in Widia (India) Ltd.'s case did not support an additional claim for investment allowance due to exchange rate fluctuations. The Tribunal cited the decision of the Hon'ble Gujarat High Court in CIT v. Windsor Foods Ltd. [1999] 235 ITR 249 to support its conclusion.In conclusion, the Tribunal partially allowed the appeal, permitting depreciation on the capitalised sum due to exchange rate fluctuation but denying the claim for investment allowance on the same amount.