ORDER
N.R. Prabhu, Accountant Member
1 to 16 [These paras are not reproduced here, as they involve minor issues.]
17. The next ground of appeal is that the CIT (Appeals) erred in holding that 50 per cent of depreciation of Rs. 10,000 claimed by the assessee on its holiday homes was to be disallowed in computing the taxable income of the assessee. As observed earlier, while dealing with the disallowance in connection with the maintenance of holiday homes, provisions of Section 37(4) will have no role to play in the case of holiday homes. The disallowance, therefore, is not in order. In any case, depreciation being an allowance which is admissible under the provisions of Section 32 of the Act, the same cannot be disallowed under Section 37(4) of the Act. This is because Section 37(4) contemplates disallowance of only those expenses which are otherwise admissible under Section 37 of the Act. Expenses or allowances allowable under the other provisions of the statute would remain untouched by the provisions of Section 37(4) of the Act. We, therefore, uphold the claim of the assessee.
18. That takes us to the last and more substantial important ground which is against non-allowance of investment allowance of Rs. 4,28,73,922 being the increased cost of ships.
The assessee during the previous year relevant to the assessment year under appeal had acquired two ships. The ships were acquired partly out of foreign exchange loan made available to the assessee. The sum of Rs. 4,28,73,922 represented loss as a result of exchange fluctuation. Since this took place after the close of the accounting year, the AO was of the view that this loss would not enter into the determination of the actual cost of acquisition of ships. The CIT(A) laying heavy reliance on the provisions of Section 43A of the Act held that variation in the actual cost of acquisition consequent to changes in the rate of exchange was to be taken into account only during the previous year in which the change in rate of exchange of currency took place. Since the loss accrued not in the previous year but in the two subsequent years, the CIT(A) took the view that the claim of the assessee was not tenable. Assessee is aggrieved.
19. It is contended by the learned counsel for the assessee that actual cost as per the provisions of Section 43 (1) is a dynamic concept. Losses suffered after the expiry of the previous year and during the pendency of the assessment proceedings or the capital expenditure incurred which is relatable to the acquisition of a capital asset, would have to be taken into consideration in determining the actual cost with reference to which depreciation and investment allowance have to be allowed. There is no bar in law to exclude such losses or expenditure. Our attention in this connection is invited to the decision in Habib Hussein v. CIT [1963] 48 ITR 859 (Bom.) where the court has taken the view that it was open to the ITO to determine afresh the original cost of the depreciable assets in the assessment of each year. The court observed that the powers of the ITO to determine afresh the original cost of the depreciable assets was limited to the correction of the mistakes in the matter of determination of the original cost at the commencement of the business would not be correct and if the provisions were so construed it might lead to unforeseen results. Thus, it is observed that losses incurred subsequent to the close of the accounting year would have no relevance in the determination of the actual cost is an argument that has to be discarded. Our attention is further invited to the decision in Karnani Industrial Bank Ltd. v. CIT [1954] 25 ITR 558 (Cal.) where the court had held neither the principle of resjudicata or estoppel could prevent the ITO from determining for himself what the actual cost of machinery had been. Our attention is then invited to the decision of the Allahabad High Court in CIT v. Burhwal Sugar Mills Ltd. [ 1971 ] 82 ITR 784 wherein the court has held that where an assessee maintains its account books on the mercantile system of account, the date on which the liability accrued is the date to be considered for the purposes of entering that liability in the account. That was so even though the liability was capable of estimate only and its actual quantification had to be postponed. There in the course of the assessment proceedings a quantification of liability had infact taken place, the same has to be substituted in place of the estimated amount and, according to the assessee, the authority for this proposition can again be formed in the decision of the Allahabad High Court in Motilal Padamapal Sugar Mills v. CIT [ 1977] 106 ITR 988.
Our attention is then invited to the Supreme Court decision in the case of CIT v. Shoorji Vallabhdas & Co. [ 1962] 46 ITR 144. That was a case where the assessee had credited some amounts to the commission account. There was an agreement which altered the rate of commission in such a way that the assessee received by way of commission an amount different from what had been entered in the books of accounts. The agreement was entered into after the close of the accounting year and the department took the view that the income had already accrued and the agreement after the close of the accounting year to give up a portion of that income could not save that portion from liability to income-tax. The Supreme Court decided the issue in favour of the assessee. This would clearly negate the contention that the events in the previous year alone can be held to be sacrosanct as far as liability to claim a deduction is concerned. Assessee then took us through the decision in CIT v. Sarabhai Sons Ltd. [1983] 143 ITR 473 (Guj.). That was a case where the managing director was appointed by an assessee and he was rendering services during the accounting year. A special resolution was passed fixing the remuneration after the close of the accounting year. The court held that the liability to pay remuneration arose in the accounting year. All the above decisions, according to the assessee, would go to indicate that it was not always necessary that the event quantifying the liability should have to take place in the previous year relevant to the assessment year under consideration. What was necessary was the accrual of liability. In this case, the cost of acquisition of the ships had a foreign loan component. Since the loan is to be liquidated in instalments and since the currency loss or profit is something which cannot be avoided where the currency is a floating currency, the capital cost of the ships purchased cannot be quantified with exactitude. In such circumstances the loss arising or ascertained in course of the assessment proceedings, would have to be regarded as part of the capital cost. Our attention is also invited to the other decisions where a view favourable to the assessee has been taken by the courts and in particular to the decision of the Allahabad High Court in the case in CIT v. U.B.S. Publishers & Distributors [1984] 147 ITR 114 where the court had taken the view that where the assessee was importing books from foreign country and devaluation of Indian currency had taken place resulting in a higher liability to the assessee, the additional liability of the assessee to pay accrued when books were imported. Our attention thereafter is invited to the provisions of Section 43A where the statute has made a provision to meet a contingency of this nature. The statute clearly requires the tax authorities to treat the loss arising on account of devaluation as part of the cost of the plant and machinery imported. The statute has, however, carved out an exception and that is such cost resulting from devaluation would be a component in the cost not eligible for development rebate. The exclusion, if any, is for the purpose of determining assessee’s claim of development rebate and not investment allowance and that is the view taken by the Bombay Bench ‘C of the Tribunal in ITA No. 1637/ Bom./84, dated 21-3-1986. Assessee also took us through the decisions of the Bombay High Court in Addl. CIT v. Chowgule & Co. (P.) Ltd. [1986] 159 ITR 12, 159 ITR 12 and 116 ITR 879 (Sic). In the later case the court has held that in view of the specific provisions contained in sub-clause (2) of Section 43A which provide that variation in the cost of assets arising out of devaluation of rupee should not be taken into consideration for the purpose of grant of development rebate under Section 33 of the old IT Act, the general principle that additional liability arising out of devaluation of Indian rupee would be a capital expenditure could not be applied for the purpose of granting development rebate under Section 33 of the Act. By implication there is no such bar against allowance of claim for investment allowance. In the light of these decided cases the inescapable conclusion, according to the assessee, would be that the extra liability that the assessee was saddled with in regard to loan taken by assessee in foreign exchange as a result of currency fluctuation would definitely go to increase cost and investment allowance would be admissible with reference to such increased cost.
20. The learned Departmental Representative, on the other hand, relies on the orders of the AO and the CIT(A). He contends that the expression ‘actual cost’ has been defined in Section 43(1) of the Act and though it is wide in its sweep, would not taken into consideration the loss arising out of currency fluctuation, such loss, at best, would be added to the cost or written down value of the ships, in the year in which the loss arose. The order of the CIT(A) deserves to be confirmed.
21. We have heard the parties to the dispute. Under the provisions of Section 32A of the Act, an assessee is entitled to claim investment allowance in respect of ships, air-crafts or machinery or plant owned by the assessee and which is wholly used for the purpose of business carried on by the assessee. The plant and machinery should be new and must have been installed in an industrial undertaking for the purpose of construction, manufacture or production of any article of thing. But such claim can be entertained, of course, subject to the other provisions of Section 32A in respect of the previous year in which the plant or and machinery was installed or if the plant and machinery was first put to use in the immediately succeeding year then in respect of that previous year. It is common ground here that the investment allowance in regard to these two ships acquired by the assessee has to be allowed in respect of the assessment year 1983-84. The short question that arises for consideration is the determination of the amount with reference to which such claim has to be quantified. As observed earlier, the ships were acquired partly with foreign exchange loans. The cost of acquisition of such ships in terms of Indian rupees was debited in the asset account on the basis of the prevailing rate of exchange as at the end of the accounting year. A claim has been made that as a result of foreign exchange fluctuation in currency rate of exchange, assessee had to incur a further liability of Rs. 4,28,73,922 and that the assessee would be entitled to investment allowance on what assessee considered such extra cost of acquisition. It is an admitted fact that such loss has arisen after the close of the accounting year. We are of the view that the claim of the assessee is not tenable. Actual cost with reference to which investment allowance has to be quantified has been defined in Section 43(1) of the Act. It would mean, actual cost of assets to the assessee. This definition is not comprehensive and has left a lot to imagination. The courts have time and again interpreted this expression and have held having regard to the accountancy principles that it would include all expenditure necessary to bring such assets into existence and put them into working condition. In that context the Supreme Court in the case in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 has held, in case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of fixed assets (underline supplied). This rules out the capitalisation of any interest even though paid on moneys borrowed for acquisition of capital assets after the production has already started. Taking a clue from this decision it would be evident that the loss incurred by assessee due to currency fluctuation after the acquisition would infact be no part of the actual cost for the purposes of allowing the claim of investment allowance. We shall in this connection advert to the provisions of Section 43 A of the Act. These provisions were inserted in the statute with a view to mitigating rigours caused by devaluation of Indian currency in the year 1966. The provisions lay down that the actual cost of an asset as defined in Section 43(1) shall be increased or decreased by the amount by which the liability due to fluctuation in currency exchange is increased or reduced. These provisions require the tax authorities to make the adjustment only in the year in which such increase or decrease had taken place. When such is the statutory provision, it is difficult to conceive that the loss incurred after the end of the accounting year would be eligible for investment allowance also.
We have to remember in this connection that investment allowance is something which is admissible in the year in which the plant or machinery or the ship is installed or if its installation is in one year and the initial user in the immediately succeeding year, the year in which the plant or machinery or the ship, as the case may be, is put to use. It is common ground that the year in which investment allowance is admissible is the year 1983-84. We, in the circumstances, feel that the claim of the assessee that it would be entitled to the investment allowance on the additional liability which arose in the subsequent years is exaggerated and has to be rejected. If we are to accept this claim, it could lead to a result which will have an unsettling effect. For example, if the investment allowance is quantified in one year but due to non-availability of profits the same is allowed to be carried forward and the same could be absorbed say only in the eighth year and in the meantime there were losses due to currency fluctuation, the assessee could claim that the investment allowance to which it would be eligible is the investment allowance based on the actual cost as increased by the additional liability arisiag as a result of currency fluctuation during the interregnum. Thus, the investment allowance would remain a claim whose quantum would be determined not based on the cost to the assessee in the year in which the eligibility for the claim arises. The quantum would vary from year to year depending on the loss or profit arising out of currency fluctuation. Then again, if the assessment is complete soon after the close of the accounting year, the claim would be of a sum which would be different from the sum that would be admissible if for any reason the assessment gets delayed. This is what we described as unsettling effect in the earlier part of this order. We are of the view that the decisions relied upon by the assessee in the course of the appeal hearing would be of little help. Thus, in the decision in Habib Hussein’s case (supra) the assessee had agreed to pay in consideration of service assistance rendered by the owner of the land which was taken on lease by the assessee a sum based on the gross annual income. This agreement was subsequently revised and a fixed amount was determined to be payable in lieu of annual instalments amount. The additional amount paid by the assessee was no doubt held by the court as part of the actual cost. It has to be remembered that the court in that case was expLalning the meaning of the expression ‘actual cost to the assessee’ and in that context the court had held that amount expended or Lald out for the purpose of acquiring a depreciable asset would require to be included in the cost of the depreciable asset. Further, adverting to Rule 19 of the IT Rules, as they stood in the Statute book at the relevant time, the court held that it was open to the ITO to determine afresh for himself the actual cost of the depreciable asset in the assessment of each year and further held that such portion of the amount paid by the assessee as might be determined to be attributable to the acquisition of depreciable asset should be included in the actual cost of this asset to the assessee in respect of year or years of account at the commencement of which the liability to pay it or part thereof had accrued or would accrue. The court, however, left the question as to what year and what sum or any part or part thereof should be allowed to be determined by the Tribunal. This decision of the Court does not in any way support the case of the assessee. It has to be recalled in this connection that this was a case where the assessee by a subsequent arrangement agreed to pay a lump sum to third party in lieu of the annual instalments which it had undertaken to pay by an earlier agreement. This decision does not support the proposition that is being canvassed before us. The decision reported in 106 ITR 988 would also be of no help to the assessee. That is also a decision where the court has held that where a liability infact has been incurred during the accounting year, the same could be claimed as a deduction in an estimated manner if the exact quantification had not taken place. The court further held that if in the course of the assessment proceedings, the same is required to be discharged the liability so ascertained, could be substituted for the earlier estimate. We fail to understand how this decision could be of any help to the assessee. In the cases reported in Burhawal Sugar Mills Ltd. ‘s case (supra) and Molilal Padmapal Sugar Mill’s case (supra) the court has only Lald down the manner in which a revenue liability, which infact had accrued, has to by dealt with in the assessment proceedings. The decision reported in Skoorji Vallabhdas & Co’s case (supra) cannot also be pressed into service. There the Supreme Court has held that the mere fact that an agreement, by which a lesser sum was to be received by an assessee by way of commission, was entered into after the close of the accounting year, the department could not be heard to argue that the amounts so given up by the agreement, which was signed after the close of the accounting year, would be exigible to tax. In none of the above cases the courts were called upon to decide the issue of the above nature. Even by implication it cannot be said that the decisions of the courts which are relied upon by the assessee in the course of the appeal hearing are of any assistance in deciding the issue before us or are in any way supporting the view canvassed by the assessee before us. The only way this issue could be resolved is by giving the expression ‘actual cost’ the meaning assigned to it in the commercial and accounting world. If this is done, the actual cost of the assets would only mean the cost to the assessee at the lime of its installation or at the time it is brought to use. Subsequent losses arising as a result of currency fluctuations would be in the nature of capital losses. It has to be remembered that the assessee had to incur these losses only because part of the finance necessary for the acquisition of the ships came out of borrowings from foreign source and in foreign currency. Such losses would go to increase the cost of the assets by virtue of the provisions of Section 43 A( 1) of the IT Act which are provisions granting certain concessions to the assessee and as observed earlier introduced in the Statute book with a view to lessening the hardship caused as a result of losses incurred due to currency fluctuations. Inherent therein is the need to capitalise the amount representing the losses due to currency fluctuation in the year in which such losses were suffered. We, therefore, are of the view that the claim of the assessee is not all tenable. We may in this connection refer to the decision of the Bombay High Court in Chowgule & Co. (P.) Ltd.’ s case (supra), where the court has clearly held that while calculating the deduction on account of development rebate, the method has suggested in Section 43A(1) has to be ignored and the same has to be made only upon the basis of Section 33 of the Act. This decision of the Bombay High Court can also be pressed into service for rebutting the claim of the assessee that since provisions of Section 43A(2) deal with only development rebate, they cannot be made use of in resisting the claim of the assessee for deduction of investment allowance. This argument of the assessee is based on the decision of the Tribunal in ITA No. 1637/Bom./84, dated March 21, 1987, wherein the Tribunal had held that the bar as contained in Section 43A(2) would not be applicable for computing the actual cost of an asset for the purpose of investment allowance as such provisions deal exclusively with the claim of development rebate. The Bombay High Court in the case referred to above has clearly held that for the purpose of computing deduction on account of development rebate, the provisions of Section 43A( 1) of the Act had to be ignored. If they have to be ignored for the purpose of computing the deduction on account of development rebate, there is no reason why they should be taken into consideration for determining the claim of investment allowance. In the light of the above discussion, we shall uphold the order of the CIT(A) denying the assessee investment allowance on the losses incurred due to currency fluctuation.
22. In the result, the appeal by the assessee and the cross appeal by the department are allowed in part.