Commissioner of Income Tax vs Punjab Anand Industries

Ajay Kumar Mittal, J.—This appeal has been preferred by the Revenue u/s 260A of the income tax Act, 1961 (in short, "the Act"), against the order dated January 29, 2008, passed by the income tax Appellate Tribunal, Chandigarh Bench "A", Chandigarh (for brevity, "the ITAT") in I.T.A. No. 293/Chandi/2007, for the assessment year 1993-94, claiming following the substantial question of law:

Whether, on the facts and in the circumstances of the case, the hon''ble Tribunal was right in law in allowing the deduction u/s 32A with regard to the additional liability incurred towards the cost of the plant and machinery on account of fluctuation in foreign exchange rate subsequent to the year in which plant and machinery has been installed?

Briefly, the facts as narrated in the appeal necessary for adjudication of the controversy involved, may be noticed. The assessee-company purchased certain machinery in the assessment year 1987-88. Due to fluctuation in the foreign exchange rates in the assessment years 1991-92 to 1993-94, liability of the assessee got enhanced. The assessee claimed investment allowance in respect of the enhanced cost on account of currency fluctuations in the assessment year 1993-94. The Assessing Officer, vide order dated March 1, 2002, annexure A1 disallowed the claim on the ground that in terms of section 32A of the Act, investment allowance was to be allowed on actual cost of plant and machinery in the year in which it was acquired or immediately succeeding previous year, if plant and machinery is first put to be used in the succeeding year. Aggrieved thereby, the assessee filed an appeal before the Commissioner of income tax (Appeals) (CIT(A)) who, vide order dated January 5, 2007, annexure A2 deleted the disallowances made by the Assessing Officer. Not satisfied with the order passed by the Commissioner of income tax (Appeals), the Revenue filed an appeal before the income tax Appellate Tribunal. The income tax Appellate Tribunal, vide order dated January 29, 2008, annexure A3 rejected the Revenue''s appeal on the basis of the order passed in the assessee''s own case for the assessment year 1994-95 in I.T.A. No. 707/CHD/2000, dated May 31, 2006. Hence, the present appeal.

Learned counsel for the Revenue submitted that unless the amount was actually paid on account of exchange rate fluctuation by the assessee, the benefit of the same should not have been allowed to the assessee as has been done by the income tax Appellate Tribunal. Relying upon the decision of the apex court in Commissioner of Income Tax, Madras Vs. Lucas T.V.S. Ltd. Padi Chennai, , Assst. Commissioner of Income Tax, Vadodara Vs. Elecon Engineering Co. Ltd., and the Karnataka High Court in Commissioner of Income Tax Vs. Wipro Finance Ltd., it was urged that section 43A of the Act was amended by the Finance Act, 2002, with effect from April 1, 2003, which was clarificatory in nature and, therefore, the same was applicable to assessment years prior thereto as well.

On the other hand, learned counsel for the assessee besides supporting the order passed by the income tax Appellate Tribunal, on the strength of the decision of the apex court in Commissioner of Income Tax, Delhi Vs. Woodward Governor India P. Ltd., this court in Commissioner of Income Tax Vs. Arihant Cotsyn Ltd., the Calcutta High Court in Century Enka Ltd. Vs. Assistant Commissioner of Income Tax, and this court in CIT v. Oswal Spinning and Weaving Mills Ltd. (I.T.A. No. 12 of 2005, dated May 8, 2012) contended that in view of section 43A of the Act, as it existed at the relevant time, the assessee was entitled to the benefit thereunder.

After hearing the learned counsel for the parties, we do not find any merit in the appeal.

Section 43A of the Act was inserted by the Finance (No. 2) Act, 1967, with effect from April 1, 1967. At the relevant time, it reads thus:

43A. Special provisions consequential to changes in rate of exchange of currency.--(1) Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange at any time after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment towards the whole or a part of the cost of the asset or for repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset (being in either case the liability existing immediately before the date on which the change in the rate of exchange takes effect), the amount by which the liability aforesaid is so increased or reduced during the previous year shall be added to, or, as the case may be, deducted from, the actual cost of the asset as defined in clause (1) of section 43 or the amount of expenditure of a capital nature referred to in clause (iv) of sub section (1) of section 35 or in section 35A or in clause (ix) of sub-section (1) of section 36, or, in the case of a capital asset (not being a capital asset referred to in section 50), the cost of acquisition thereof for the purposes of section 48, and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset as aforesaid...

The scope of the aforesaid provision was succinctly analysed by the apex court in Woodward Governor India (P.) Ltd.''s case (supra) as under (page 272):

As stated above, what triggers the adjustment in the actual cost of the assets, in terms of unamended section 43A of the 1961 Act is the change in the rate of exchange subsequent to the acquisition of asset in foreign currency. The section mandates that at any time there is change in the rate of exchange, the same may be given effect to by way of adjustment of the carrying cost of the fixed assets acquired in foreign currency. But for section 43A which corresponds to paragraph 10 of AS-11 such adjustment in the carrying amount of the fixed assets was not possible, particularly in the light of section 43(1). The unamended section 43A nowhere required as condition precedent for making necessary adjustment in the carrying amount of the fixed asset that there should be actual payment of the increased/decreased liability as a consequence of the exchange variation. The words used in the unamended section 43A were ''for making payment'' and not ''on payment'' which is now brought in by amendment to section 43A vide the Finance Act, 2002.

In order to appropriately adjudicate the controversy, the amendment brought about to section 43A of the Act by the Finance Act, 2002, effective from April 1, 2003, may also be noticed, which reads thus:

43A. Notwithstanding anything contained in any other provision of the Act, where an assessee has acquired any asset in any previous year from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange during any previous year after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency (as compared to the liability existing at the time of acquisition of the asset) at the time of making payment,--

(a) towards the whole or a part of the cost of the asset; or

(b) towards repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset along with interest, if any,

the amount by which the liability as aforesaid is so increased or reduced during such previous year and which is taken into account at the time of making the payment, irrespective of the method of accounting adopted by the assessee, shall be added to, or, as the case may be, deducted from--. . .

According to the amended section 43A of the Act, any addition to and deduction from the actual cost of a capital asset resulting from exchange fluctuation shall be only at the time of actual discharge of the liability and not to be adjusted with reference to amount payable and outstanding at the end of each year on the basis of the mercantile system of accounting. It has further been provided that the method of accountancy being followed by the assessee would not be relevant. Any adjustment which has already been allowed as a deduction prior to April 1, 2003, shall not be allowed again on account of exchange fluctuation at the time of actual payment.

The apex court in Woodward Governor India (P.) Ltd.''s case (supra) dealt with a similar issue for years prior to the assessment year 2003-04 and held that the amendment of section 43A by the Finance Act, 2002, with effect from April 1, 2003, would be applicable prospectively with the following observations (page 272):

Lastly, we are of the view that the amendment of section 43A by the Finance Act, 2002, with effect from April 1, 2003, is amendatory and not clarificatory. The amendment is in complete substitution of the section as it existed prior thereto. Under the unamended section 43A adjustment to the actual cost took place on the happening of change in the rate of exchange whereas under the amended section 43A the adjustment in the actual cost is made on cash basis. This is indicated by the words ''at the time of making payment''. In other words, under the unamended section 43A, ''actual payment'' was not a condition precedent for making necessary adjustment in the carrying cost of the fixed asset acquired in foreign currency, however, under the amended section 43A with effect from April 1, 2003; such actual payment of the decreased/enhanced liability is made a condition precedent for making adjustment in the carrying amount of the fixed asset. This indicates a complete structural change brought about in section 43A, vide the Finance Act, 2002. Therefore, the amended section is amendatory and not clarificatory in nature.

As noticed above, the hon''ble apex court in Woodward Governor India (P.) Ltd.''s case (supra) held that the amendment to section 43A by the Finance Act, 2002, with effect from April 1, 2003, was amendatory and not clarificatory. In other words, it would mean that it shall be prospectively effective from April 1, 2003, and the cases relating to earlier assessment years would be governed by the unamended section 43A of the Act. Once that is so, the present appeal which relates to the assessment year 1993-94, the same would be governed by the unamended provisions of section 43A of the Act. It is held that the assessee was entitled to exchange rate fluctuation in respect of foreign currency in the assessment year in question as it was following the mercantile system of accountancy.

Adverting to the judgments relied upon by the learned counsel for the Revenue, suffice it to notice that the judgments relied upon in Lucas T.V.S. Ltd.''s case (supra), Elecon Engineering Co. Ltd.''s case (supra) and Wipro Finance Ltd.''s case (supra) do not advance the case of the Revenue being on individual fact situation involved therein.

Accordingly, the substantial question of law raised in this appeal is answered against the Revenue. Consequently, the appeal is dismissed.