COMMISSIONER OF INCOME-TAX, GUJARAT vs. ARVIND MILLS LTD.

CIVIL APPEAL No. 1207/1978Supreme Court1991 INSC 33210 December 1991Bench: 3 JudgesAuthor: S. RANGANATHAN, N.D. OJHA, V. RAMASWAMI OF INCOME22 pages
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What did the Supreme Court hold?

The Supreme Court held that the language of Section 43A is clear and unambiguous. Sub-section (2) explicitly excludes the application of sub-section (1) for the purpose of development rebate. Therefore, any increase or decrease in the actual cost of an asset due to exchange rate fluctuations cannot be taken into account for calculating development rebate. The Court reasoned that the legislature intended to treat development rebate differently from depreciation and other allowances, possibly to protect the country's foreign exchange resources. The Court found no rationale for distinguishing between fluctuations occurring in the same year of acquisition versus subsequent years. The appeal was allowed, upholding the Revenue's action of restricting the development rebate to the original cost (Rs. 52.48 lakhs) and not the claimed revised cost (Rs. 61 lakhs).

What were the facts?

The assessee, Arvind Mills Ltd., acquired a capital asset from outside India, incurring liability in foreign currency. Due to the devaluation of the Indian rupee in 1966, this liability increased. The assessee claimed development rebate on the revised cost, which included the increased liability. The Revenue, however, allowed the rebate only on the original cost, taking the view that exchange rate fluctuations should not affect the calculation of development rebate. The High Court had ruled in favour of the assessee, leading the Revenue to appeal to the Supreme Court. The dispute concerns assessment years not explicitly stated but implied to be around the time of the 1966 devaluation.

What were the issues?

1. Whether, for the purpose of development rebate, an increase in the actual cost of a capital asset consequent upon fluctuations in the exchange rate should be taken into account, as per Section 43A of the Income Tax Act, 1961? (Question of law) Assessee's contentions: Section 43A was not applicable as the increase in liability occurred in the same accounting year as the acquisition, and it was intended for subsequent accounting years. There was no specific provision to exclude development rebate on increased cost. Revenue's contentions: Section 43A, particularly sub-section (2), clearly mandates that fluctuations in exchange rates should not be considered for development rebate. The special provision (Section 43A(2)) should override general provisions concerning depreciation and development rebate on actual cost.

Which sections of the Income-tax Act were involved?

Section 43A

AI-generated summary — verify with the full judgment below

COMMISSIONER OF INCOME-TAX, GUJARAT v. ARVIND MILLS LID. DECEMBER 10, 1991 A [S. RANGANATHAN, V. RAMASWAMI AND N~D. OJHA, JJ.] B Income TaxAct, 1961: Section 43A-Capital asset-Purchase of from foreign country-En- hancement of liability consequent upon devaluation of Indian currency-- Development rebate-Whether could be allowed on the increased cost. C The Respondent-assessee had acquired, for the purpose of its busi- ness, a capital asset from a country outside India by making payment in foreign currency. For acquiring the said assets, it borrowed money in foreign currency from outside agencies and the liablility in respect of such assets was outstanding. Due to devaluation of the Indian currency in 1966, D the said liability had increased. The assessee claimed development rebate on the revised cost of the plant and machinery which included the increased liability on account of devaluation. The Revenue allowed devel- opment rebate only on the actual cost, taking the view that the increase or decrease in the actual cost consequent on fluctuations in exchange rate E would not be taken into account for the purposes of development rebate.

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