1991 (8) TMI 128 - AT - Income Tax

Tribunal rules on depreciation & investment allowance for assets

The Tribunal allowed the appeal by the assessee regarding the disallowance of 50% depreciation on holiday homes, stating that depreciation cannot be ... Accounting Year, Exchange Fluctuation, Investment Allowance Issues Involved:1. Disallowance of 50% depreciation on holiday homes.2. Non-allowance of investment allowance on increased cost of ships due to foreign exchange fluctuation.Detailed Analysis:1. Disallowance of 50% depreciation on holiday homes:The issue concerns the CIT (Appeals) disallowing 50% of the depreciation claimed by the assessee on its holiday homes, amounting to Rs. 10,000. The Tribunal noted that the provisions of section 37(4) of the Act, which deal with disallowance of certain expenses, do not apply to holiday homes. Depreciation is an allowance admissible under section 32 of the Act and cannot be disallowed under section 37(4). The Tribunal upheld the claim of the assessee, stating that the disallowance was not in order since section 37(4) only contemplates disallowance of expenses admissible under section 37, not those under other provisions like section 32.2. Non-allowance of investment allowance on increased cost of ships due to foreign exchange fluctuation:This issue revolves around the non-allowance of an investment allowance of Rs. 4,28,73,922, representing the increased cost of ships due to foreign exchange fluctuation. The assessee acquired two ships partly financed by a foreign exchange loan, and the loss due to exchange fluctuation occurred after the accounting year. The AO and CIT(A) held that this loss should not be included in the actual cost of acquisition of the ships for the relevant assessment year.The assessee argued that the actual cost, as per section 43(1), is dynamic and should include losses incurred after the accounting year if they relate to the acquisition of a capital asset. Citing various judgments, the assessee contended that the liability due to currency fluctuation should be considered part of the actual cost. The Tribunal, however, found the claim untenable. It emphasized that actual cost should be determined at the time of installation or when the asset is put to use, as per commercial and accounting principles. Losses due to currency fluctuation after the acquisition are capital losses and should be adjusted in the year they occur, as per section 43A.The Tribunal noted that section 43A was introduced to mitigate hardships caused by currency devaluation and requires adjustments in the year of fluctuation. The Tribunal rejected the assessee's claim, stating that allowing investment allowance on subsequent currency fluctuation losses would lead to an unsettled and inconsistent determination of the actual cost. The Tribunal upheld the CIT(A)'s order, denying the investment allowance on the increased cost due to currency fluctuation.Conclusion:The Tribunal allowed the appeal by the assessee regarding the disallowance of 50% depreciation on holiday homes but upheld the CIT(A)'s order denying the investment allowance on the increased cost of ships due to foreign exchange fluctuation. Both the assessee's and the department's appeals were allowed in part.