ISPAT ALLOYS LTD. vs. DY.COMMNR.OF I.T.

1. The present appeal is directed against an order dated 30th September 2002 passed by the Income Tax Appellate Tribunal, Cuttack Bench, Cuttack (ITAT) in ITA.2/CTK/98 and CO.9/CTK/9 allowing the Department’s appeal for the assessment year (AY) 1994-95 holding that the Appellant-Company would not be allowed to claim additional depreciation allowance adjustment towards the actual cost of plant and machinery which might get increased due to the exchange rate fluctuation.

While admitting the present appeal on 21st February 2005, the following substantial question of law was framed by this Court for consideration:

The brief facts are that the Appellant-Assessee filed its return of income for the AY 1994-95. Pursuant to a notice issued under Sections 142 (1) and 143 (2) of the Income Tax Act, 1961 (Act), the Assessee appeared before the Assessing Officer (AO) and claimed depreciation allowance on the increased cost of the plant and machinery due to exchange fluctuations. The AO in the assessment order dated 31st March 1997 rejected the above claim.

In appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] by an order dated 31st October 1997 allowed the claim of the Assessee in respect of the additional claim for depreciation allowance on increased cost of plant and machinery due to exchange rate fluctuation. The CIT (A) referred to the decision of the Calcutta High Court in Commissioner of Income Tax v. Kanoria Chemicals and Industries Ltd [1994] 207 ITR 718 (Cal); the decision of Bombay High Court in Commissioner of Income Tax v. Hindustan Aluminum Corporation Ltd. [1994] 207 ITR (Bom.) and the decision of Supreme Court of India in Commissioner of Income Tax, Gujarat v. Arvind Mills Ltd. AIR 1992 SC 718. The CIT (A) also noted that his predecessor had allowed a similar claim for the AY 1991-92.

The Department’s appeal was allowed by the ITAT by the impugned order. The reasoning in the impugned order of the ITAT reads as under: “27. We have heard both the parties and perused the record and find that this Bench in the case cited above by the DR has held that the actual cost in such cases can be quantified at the time of actual payment and not on the accrual basis. Respectfully following the order of this Bench, CIT (A)’s order is therefore set aside and this ground of the department is allowed.

This Court has heard the submissions of Mr. Sunil Mishra, learned counsel appearing for the Appellant-Assessee and Mr. R. Chimanka, learned Senior Standing Counsel appearing for the Department.

The impugned order of the ITAT fails to discuss any of the decisions referred to by the CIT (A) in its order. Its conclusion that the actual cost in such cases can be quantified “at the time of actual payment and not on the accrual basis” entirely misses the central issue which is the effect of increase in the cost on account of exchange rate fluctuation.

In fact this issue was implicitly acknowledged by the Supreme Court in Arvind Mills Ltd. (supra) where after analyzing Section 43 A of the Act, in the context of development rebate, it was

The Gujarat High Court in New India Industries Ltd. v. Commissioner of Income Tax [1993] 203 ITR 933 (Guj) has, after discussing the decision of the Supreme Court in Arvind Mills Ltd. (supra) concluded as under: “In our opinion, when the assessee purchased assets at a price, its liability to pay the same arose simultaneously. Merely because the said that the liability was to be discharged in instalments become due and payable. It was that liability which has increased on account of fluctuation in the rate of exchange. In our opinion, the contention raised on behalf of the revenue that the liability to pay the price of the asset arose only when the instalments became due and payable cannot be accepted for the reason that we are considering a provision which is made inter alia, for the purpose of determining the allowability of depreciation allowance. If the assessee become the owner of the machinery and starts using the same, it would become entitled to depreciation allowance. It is for the purpose of working out the amount of depreciation that one has to look at the cost of the asset in respect of which depreciation is claimed. It is in this context that we have to consider as to when the liability can be said to have arisen. If the contention raised on behalf of the Revenue is accepted, then it would defeat the very purpose of the provision. As view to mitigate hardships which were likely to be caused to the assessee as a result of fluctuation in the

The above conclusion is consistent with the decision of the Calcutta High Court in Kanoria Chemicals and Industries Ltd. (supra) and the decision of the Bombay High Court in Hindustan Aluminum Corporation Ltd. (supra). There is no decision to the contrary cited before this Court by the Department.

For the aforementioned reasons, the Court answers the question in the affirmative i.e. in favour of the Assessee and against the Department. The impugned order of the ITAT as well as the AO on this aspect stands set aside and the order of the CIT

Urgent certified copy of this order be granted as per rules.