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 ... Actual Cost, Investment Allowance 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.