Commissioner of Income Tax vs S.G. Chemicals and Pharmaceuticals Ltd.

R.K. Abichandani, J.

The Tribunal, Ahmedabad Bench "C", has referred the following questions for the opinion of this court :

R.A. No. 781/Ahd/1987

At the instance of the Commissioner :

(i) Whether, the cost of plant and machinery under erection as also the cost of building under construction was to be included in the capital base for purposes of deduction u/s 80J of the Income Tax Act, 1961?

R.A. No. 782/Ahd/1987

At the instance of the Commissioner :

(ii) Whether the assessee is entitled to investment allowance in respect of the amount paid as a result of the fluctuation in exchange rate?

R.A. No. 804/Ahd/1987

At the instance of the assessee :

(iii) Whether the amount of Rs, 28,79,813 claimed by way of exchange loss consequent to the fluctuation in exchange rate was allowable as a deduction?

So far as question No. (i) is concerned, the Income Tax Officer has rejected the assessee''s claim to the effect that the plant and machinery under erection and building under construction should be included in the computation of capital employed for the purpose of deduction u/s 80J of the Income Tax Act, 1961. However, the claim was accepted by the Commissioner (Appeals) relying on the decision of this court in Commissioner of Income Tax, Gujarat-II Vs. Cibatul Ltd., . The Tribunal, following the decision of this court, confirmed the order of the Commissioner (Appeals). The decision of this court in Cibatul (supra) was followed in CIT v. Gujarat State Fertiliser Co. Ltd. (1996) 219 GLR 550 . In Commissioner of Income Tax Vs. Alcock Ashdown and Co. Ltd. and Filtrone India Ltd., the decision of this court in Cibatul Ltd was approved. The decision in Alcock (supra) was followed by the Supreme Court in Commissioner of Income Tax, Karnataka Vs. M/s. Karnataka Power Corporation, . In the above view of the matter, we hold that the Tribunal was right in holding that the cost of plant and machinery under erection as also the cost of building under construction was to be included in the capital raised for the purpose of deduction u/s 80J of the Act. The said question is, therefore, answered in the affirmative against the revenue and in favour of the assessee.

As regards the question No. (ii) as to whether the assessee was entitled to investment allowance in support of the amount paid as a result of the fluctuation in exchange rate, the Tribunal relying upon its earlier decision in Windsor Foods Ltd. v. ITO held that the amount pertaining to the principal would qualify for investment allowance. The Division Bench of this court, considering the earlier decision of the Tribunal, in Commissioner of Income Tax Vs. Windsor Foods Ltd., has held that the Tribunal was wrong in holding that the assessee was entitled to the deduction on investment allowance on the amount of additional liability, It was held that no question of reducing full amount of investment allowance which was already worked out in the relevant previous year can ever arise by virtue of any subsequent fluctuation in the exchange rate. Relying on the decision of this court in CIT v. Windsor Foods Ltd. (supra), we hold that the Tribunal was wrong in holding that the assessee was entitled to investment allowance in respect of the amount paid as a result of fluctuation in exchange rate. The question No. (ii) is, therefore, answered in the negative in favour of the revenue and against the assessee.

The third question is at the instance of the assessee who claimed that the exchange loss consequent upon the fluctuation in exchange rate was allowable as a deduction. In this regard, considering the similar claim and relying upon the Supreme Court decision in Sutlej Cotton Mills Limited Vs. Commissioner of Income Tax, Calcutta, this court has held in CIT v. Windsor Foods Ltd. (supra) that the additional liability due to fluctuation in exchange rate was clearly referable to liability of a capital nature and not to liability on revenue account. It was held that the Tribunal was right in holding that the said additional liability was not revenue expenditure. For the same reasons, we hold that the amount of Rs. 28,79,813 claimed by way of exchange loss consequent to the fluctuation in exchange rate was not allowable as deduction. The question No. (iii) is accordingly answered against the assessee and in favour of the revenue. The reference stands disposed of accordingly with no, order as to costs.

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