COMMISSIONER OF INCOME-TAX vs. SYNBIOTICS LTD.

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ITR/56/1987HC GujaratGJHC24011789198705 March 1998Author: HONOURABLE MR. JUSTICE R.K.ABICHANDANI,HONOURABLE MR. JUSTICE KUNDAN SINGH3 pages
AI SummaryAnswered in the negative in favour of the Revenue and against the assessee.

What did the High Court hold?

The High Court held that the ITAT committed an error in allowing investment allowance on both guarantee commission and the loss due to foreign exchange fluctuation. Regarding guarantee commission, the Court referred to the Supreme Court's decision in Addl. Commissioner of Income Tax Vs. Akkamamba Textiles Ltd. (227 ITR 464), which affirmed the Andhra Pradesh High Court's view that guarantee commission paid for deferred payment of machinery purchase consideration is a revenue expenditure deductible under Section 37. However, the High Court clarified that while it is a revenue expenditure, it does not qualify for investment allowance. For the foreign exchange fluctuation loss, the Court noted that the machinery was installed prior to 1966, and the fluctuation occurred in the previous year 1979-80. The Court relied on its own prior decision in ITR 227/85, holding that investment allowance is quantified on the actual cost of the asset at the time of installation and cannot be revised in a subsequent year due to exchange rate fluctuations that increase the liability under Section 43A(1). Therefore, the ITAT erred in allowing investment allowance on this subsequent fluctuation.

What were the facts?

The Gujarat High Court was considering a reference from the Income Tax Appellate Tribunal (ITAT) concerning the assessment year(s) not explicitly stated but implied to be related to the previous year 1979-80. The Commissioner of Income-tax (Revenue) challenged the ITAT's decision allowing investment allowance on two items for the assessee, Synbiotics Ltd. The disputed items were guarantee commission and loss arising from foreign exchange rate fluctuations. The ITAT had allowed investment allowance on both. The High Court was asked to decide whether the ITAT was correct in law. The procedural history involves the ITAT's order being challenged via a reference application under Section 256(1) of the Income Tax Act, 1961.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in allowing investment allowance on guarantee commission? (Question of law, turning on the admissibility of guarantee commission as expenditure for investment allowance purposes). 2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in allowing investment allowance on loss caused as a result of fluctuation in the rate of foreign exchange? (Question of law, turning on the computation of actual cost for investment allowance purposes in light of subsequent exchange rate fluctuations). Assessee's Contentions: The judgment does not explicitly record the assessee's contentions. However, it is implied that the assessee argued for the allowance of investment allowance on both guarantee commission and foreign exchange loss, as the ITAT had ruled in their favour. Revenue's Contentions: The Revenue, through the Commissioner of Income-tax, challenged the ITAT's decision, implying they argued against the allowance of investment allowance on both guarantee commission and foreign exchange loss. The Revenue relied on the Supreme Court's decision in Addl. Commissioner of Income Tax Vs. Akkamamba Textiles Ltd. (227 ITR 464) and a previous decision of the same High Court in ITR 227/85.

Which sections of the Income-tax Act were involved?

Section 256(1),Section 37,Section 32A,Section 43A(1)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

INCOME TAX REFERENCE No 56 of 1987

For Approval and Signature:

Hon'ble MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE KUNDAN SINGH ============================================================ 1. Whether Reporters of Local Papers may be allowed to see the judgements?

2.

To be referred to the Reporter or not?

3.

Whether Their Lordships wish to see the fair copy of the judgement?

4.

Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder?

5.

Whether it is to be circulated to the Civil Judge?

-------------------------------------------------------------- COMMISSIONER OF INCOME-TAX Versus SYNBIOTICS LTD. -------------------------------------------------------------- Appearance: MR MIHIR JOSHI, Advocate for the Petitioner MR B.D. KARIA, Advocate for the respondent. --------------------------------------------------------------

CORAM : MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE KUNDAN SINGH Date of decision: 05/03/98

ORAL JUDGEMENT (Per R.K.Abichandani,J.)

The Income Tax Appellate Tribunal has referred the following question for the opinion of this Court under Section 256(1) of the Income Tax Act, 1961. "Whether, on the facts and in the circumstances of the case the Appellate Tribunal is right in law in allowing investment allowance on guarantee commission and loss caused as a result of fluctuation in the rate of foreign exchange."

Though the question referred to us is one, it involves two distinct aspects. The investment allowance on the guarantee commission and the investment allowance on the loss caused as a result of fluctuation in the rate of foreign exchange.

As regards the aspect of allowance of investment allowance on guarantee commission, both the sides have drawn our attention to the decision of the Hon'ble the previous year 1979-80. The investment allowance is required to be quantified on the actual cost of the asset and the deduction is to be allowed as per the provisions of Section 32A of the Act. The question whether any fluctuation in the exchange rate in subsequent years which raises the liability of the assessee, can relate

back for recomputing the actual cost in the earlier previous year in which the investment allowance was worked out, came to be considered by this Bench in ITR 227/85 and it was held that there cannot be any such subsequent revision of investment allowance in the later previous year in which the fluctuation in the exchange rate took place, which had the effect of making addition to the actual cost of such additional liability by virtue of Section 43A(1) in that subsequent previous year. For the same reasons as we have given for our decision rendered on 4.3.98 in ITR No. 227/85, we hold that the Tribunal committed an error in allowing investment allowance on the loss caused as a result of fluctuation in the rate of foreign exchange in the previous year, 1979-80 in respect of the investment allowance, which was worked out several years ago when the machinery was installed and used.

In view of what we have said above, the question referred to us is answered in the negative in favour of the Revenue and against the assessee. The reference stands disposed of accordingly with no order as to costs. ------

*/Mohandas

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