M/S TOLANI LTD. vs. THE DCIT SPL.RGE.31

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ITXA/237/2004HC Bombay05 July 2024Author: HON'BLE SHRI JUSTICE G. S. KULKARNI, HON'BLE SHRI JUSTICE SOMASEKHAR SUNDARESAN5 pages
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What did the High Court hold?

The High Court held that the investment allowance consequent to exchange rate fluctuation would be allowable. The Court noted that the question of law had already been answered by a Division Bench of the same Court on January 20, 2023, in appeals concerning an affiliate of the assessee. This earlier decision had considered the ratio in Commissioner of Income-Tax vs. Gujarat State Fertilizers Co. Ltd., which stated that the increase or reduction in liability due to fluctuation in the rate of exchange should be modified in the year of fluctuation. The Supreme Court's approval of the Gujarat High Court's view in Commissioner of Income-Tax vs. Ambika Mills Ltd. was also highlighted. Therefore, for the relevant assessment years, the investment allowance needed to factor in the exchange rate fluctuations as claimed by the assessee. The question of law was answered in favour of the appellant and against the revenue. The appeals were disposed of accordingly.

What were the facts?

The assessee, M/s. Tolani Ltd., is in the business of shipping and acquired a vessel, M.V. Prabhu Das, in September 1988, financed by a foreign currency loan. The assessee claimed investment allowance under Section 32A of the Income Tax Act, 1961, on the actual cost of the ship. The dispute concerns the additional investment allowance claimed on the increased loan liability due to foreign exchange rate fluctuations in subsequent assessment years (1990-91, 1991-92, and 1992-93). The Assessing Officer and the Income Tax Appellate Tribunal (ITAT) denied this additional allowance, relying on the Bombay High Court's decision in Khatau Makanji Spinning and Weaving Co. Ltd. vs. CIT. The assessee appealed these decisions.

What were the issues?

1. Whether the increase in loan liability due to foreign exchange rate fluctuation in subsequent years is part of the actual cost of the ship acquired in September 1988, entitling the assessee to investment allowance on such additional cost in the year of fluctuation? (Question of law, concerning Section 32A of the Income Tax Act, 1961). Assessee's Contentions: - The assessee argued that the additional cost arising from exchange rate fluctuations should be considered part of the actual cost of the ship for investment allowance purposes. - Relied on the Bombay High Court's decision in Associated Bearing Co. Ltd. vs. CIT and subsequent cases like CIT-2 vs. Tata Chemicals Ltd., which held the earlier decision in Khatau Makanji's case to be per incuriam. - Submitted that the Division Bench's order dated January 20, 2023, in similar appeals of an affiliate company, had already answered this question in their favour. Revenue's Contentions: - The revenue contended that there was no provision under which additional investment allowance could be claimed on costs incurred due to exchange rate fluctuations. - The ITAT had relied on the judgment in Khatau Makanji Spinning and Weaving Co. Ltd. vs. CIT, which held that investment allowance was not available on additional costs due to exchange rate fluctuations.

Which sections of the Income-tax Act were involved?

Section 32A,Section 43A

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 242 OF 2004 WITH INCOME TAX APPEAL NO. 829 OF 2004 WITH INCOME TAX APPEAL NO. 237 OF 2004 M/s. Tolani Ltd. Bakhtawar Building, Nariman Point, Mumbai 400 021 …Appellant Versus The DCIT Spl. Reg. 31, Mumbai Aayakar Bhavan, M.K. Road, Mumbai 400 020 …Respondent Mr. Atul K. Jasani, Advocate for the Appellant. Mr. Suresh Kumar, Advocate for Respondent. CORAM : G. S. KULKARNI & SOMASEKHAR SUNDARESAN, JJ. DATE : JULY 05, 2024 ORAL JUDGEMENT: (Per, Somasekhar Sundaresan J.)

1.

These three Appeals raise a common question of law, namely:- ASHWINI JANARDAN VALLAKATI ASHWINI JANARDAN VALLAKATI Date: 2024.07.08 10:52:45 +0530 CNR No : HCBM020243872003 Uploaded on - 08/07/2024 Downloaded on - 31/10/2026 00:30:43

2024:BHC-OS:9923-DB “Whether the increase in loan liability of the Assessee due to fluctuation in foreign exchange rates in the subsequent years was part of actual cost of the ship by name M/s. M.V. Prabhu Das acquired in September 1988 from the foreign country and the Assessee was entitled to investment allowance on the additional cost in the year of fluctuation ?”

2.

The Assessee has filed three Appeals, namely, Income Tax Appeal No.237 of 2004 for assessment year 1990-91; Income Tax Appeal No.242 of 2004 for assessment year 1991-92 and Income Tax Appeal No.829 of 2004 for assessment year 1992-93. Learned Counsel for the Assessee as well as for the Revenue submit that the aforesaid question of law has already been answered by an order of a Division Bench of this Court dated 20th January, 2023, while disposing of five Appeals, namely, Income Tax Appeal Nos.597 of 2003, 595 of 2003, 594 of 2003, 596 of 2003 and 598 of 2003 in the case of M/s. Tolani Shipping Co. Ltd., an affiliate of this Assessee.

3.

At all times relevant to these Appeals, the Assessee was engaged in the business of shipping and had acquired a vessel by the name M/s. M.V. Prabhu Das. The acquisition was paid for in foreign currency, for which a foreign currency loan had been taken. In the return of income filed by the Assessee, in terms of Section 32A as that Section then stood, a deduction at the rate of 20% of the actual cost of Downloaded on - 31/10/2026 00:30:43 the ship owned by the Assessee and wholly used for the purpose of the business of the Assessee was claimed. Section 32A(3) contemplated that the Assessee may carry forward such claim for a period of not more than eight years immediately succeeding the assessment year relevant to the previous year in which the vessel was acquired.

4.

What is in dispute is the investment allowance additionally claimed by the Assessee with regard to the additional cost arising out of fluctuation in the foreign currency exchange rate. According to the Revenue, there was no provision under which additional investment allowance could be claimed on the basis of costs incurred due to the exchange rate fluctuation. The Learned Income Tax Appellate Tribunal (“ITAT”), placing reliance on a judgment of this Court Khatau Makanji Spining and Weaving Co. Ltd. Vs. Commissioner of Income-Tax

1 , held that the Assessee was not entitled to claim investment allowance to the extent of exchange rate fluctuations. Since ITAT placed reliance upon Khatau Makanji’s case, it would be relevant to note the question of law in that case, and the view expressed on the same:- “.....So far as the third question is concerned, learned counsel for the Assessee submits that this question is not covered and the Assessee is entitled to investment allowance under section 32A in respect of additional costs of the imported assets 1 [1996] (Bo.m 222 ITR 472 Downloaded on - 31/10/2026 00:30:43 which has taken place because of the fluctuation in the rate of exchange in the year subsequent to the year of acquisition.

We have heard learned counsel for the Assessee. We have perused section 32A. We do not find anything there which may support the above contention of learned counsel for the Assessee. We, therefore, answer the third question in the affirmative, i.e, in favour of the Revenue and against the Assessee.”

5.

Learned Counsel for both parties submit that the view expressed in the Khatau Makanji was held to be per incuriam in the case of Associated Bearing Co. Ltd Vs. Commissioner of Income-tax

2 , and such view was later followed in Commissioner of Income-tax-2 Vs. Tata Chemicals Ltd.

3 .

6.

Dealing with these issues, the Division Bench of this Court in its order dated 20th January, 2023 (referred to above) had extracted from and analyzed the decision in Commissioner of Income-Tax Vs. Gujarat State Fertilizers Co. Ltd. as follows:- “…………...On a plain reading of section 43A of the Act, one thing is certain, and that is, the increase or reduction in the liability has to take place only in the year of fluctuation and it does

not relate

back

to the year

of acquisition/installation/first user. One will therefore have to proceed on the footing that the actual cost figure which was quantified earlier than the previous year in which the fluctuation took place, shall have to be modified in the year of fluctuation. It is well-settled that when the asset was 2 [2006] 286 itr 341 (Bom.) 3 [2016] 75 taxmann.com 228 (Bombay) Downloaded on - 31/10/2026 00:30:43 purchased at a price, liability was to be discharged in installments, it cannot be stated that the liability did not exist or accrue till the installments became due and payable. It is this liability which changes on account of fluctuation in the rate of exchange........"

7.

Ruling that since the Hon’ble Supreme Court in Commissioner of Income-Tax vs Ambika Mills Ltd.

4 had already approved the view expressed by the Gujarat High Court in the aforesaid decision, the Division Bench ruled in its order dated 20th January, 2023, that investment allowance, consequent to exchange rate fluctuation, would be allowable.

8.

For these reasons, and in the backdrop of the provisions of Section 32A, and in view of the judgments referred to above, the question of law deserves to be answered in favour of the Appellant and against the Revenue. Consequently, for the relevant assessment years covered by these three Appeals, the investment allowance would necessarily need to factor in the exchange rate fluctuations as claimed in those years.

9.

These Appeals are disposed of in the aforesaid terms. No costs. [ SOMASEKHAR SUNDARESAN, J.] [G. S. KULKARNI, J.] 4 [1993] 201 ITR (ST.) 63 Downloaded on - 31/10/2026 00:30:43 Powered by TCPDF (www.tcpdf.org)

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