JUDGMENT
R. Jayasimha Babu, J.
1. Two questions have been referred to us, one at the instance of the assessee, and the other at the instance of the Revenue, The assessment years are 1985-86, 1986-87 and 1987-88.
2. The question referred at the instance of the assessee is,
“Whether, on the facts and in the circumstances of the case, and on a proper construction of Section 43B of the Income-tax Act, 1961, the assessee is entitled to a revenue deduction in respect of customs and excise duty component of the value of the closing stock?”
3. The assessee is a manufacturer of cement, as also asbestos sheets. For the purpose of manufacturing asbestos sheets, the assessee imported asbestos fibre on which it paid customs duty. While a major portion of the quantity so imported was utilised in the manufacture of sheets in the relevant assessment years, at the end of each assessment year, there remained with the assessee some portion of the imported stock of asbestos fibre on which it had paid duty. While the assessee showed in its accounts the value of the consumption of raw materials including the duty element on the imported asbestos fibre, and also showed the value of the closing stock as including the customs duty paid, for the purpose of income-tax, it chose to claim a revenue deduction for the amount of the customs duty paid on the asbestos fibre in stock by contending that until that imported asbestos fibre is used up in the course of manufacture, the customs duty paid at the time of importation did not form part of the cost of the asbestos fibre.
4. The assessee also claimed revenue deduction for the excise duty paid on the cost of finished products after paying duty and removing the same from its godown and moving it to other places of storage, on the ground that until sales are effected, excise duty paid should be regarded as a separate item, and the amount of duty paid thereon is to be deducted from the value of the closing stock of those finished products.
5. That contention was rejected by the assessing authority, as also by the Commissioner and the Tribunal.
6. Learned counsel for the assessee sought to derive support for his case by placing reliance on the decision of this court in the case of CIT v. English Electric Co. of India Ltd. [2000] 243 ITR 512. The court therein held that the excise duty payable on the closing stock did not form part of the value of the closing stock. In this case, the excise duty had actually been paid and was not a mere liability. The finished products on which the duty had been so paid had also been moved from the assessee’s godowns to other places of storage and the value of the closing stock included not merely the cost of production, but also the excise duty paid thereon. There was, therefore, no question of converting any liability into an asset. If the assessee had not paid the duty, but had kept the amount that would have been payable as duty in a separate account, that amount certainly would have formed part of the assets of the assessee.
7. So far as the valuation of the raw material is concerned, even the assessee had very rightly shown the value of the closing stock of the raw material as inclusive of the customs duty that had been paid thereon at the time of importation. The Tribunal has observed that it was common ground that all along the assessee was valuing the stock in hand at cost which according to the well established accounting principles and trading practice rightly included the customs/excise duty component. It was only for the purpose of income-tax that the assessee chose to present what it labelled as profit and loss adjustment account and sought to claim as revenue deduction the duty component of the value of the closing stock.
8. The Tribunal, in our view, was right in holding that the assessee was not entitled to any such deduction. The cost of the imported raw materials to the assessee would necessarily include the customs duty paid thereon, as without the payment of such duty, the assessee would not be entitled to remove the imported raw material from the ports. On payment of such duty, it necessarily constituted a part of the cost of the raw material to the assessee. The value of that imported raw material would not undergo any change depending on whether it is used up in the course of manufacture, or is stored in the godown to be used at future point of time in the course of manufacture. The value of the imported raw material was, therefore, required to be shown uniformly when it was used up in the process of manufacture, as, also when it was required to be valued as part of the closing stock by including the customs duty component. The assessee itself had rightly followed that method, and that method is in accord with the established accounting practices.
9. Learned counsel for the assessee submitted that the assessee had not made any claim under Section 43B of the Act for the deduction of the amount of duty paid and, therefore, it was entitled to value the closing stock of raw material in a manner which would exclude the amount of the customs duty. Though the submission appears to be superficially attractive, on closer examination, it is required to be rejected. The closing stock, it is now well settled, is required to be valued at cost, or at market value, whichever is lower. It was at no point of time the case of the assessee that the market value of the stock of imported asbestos fibre was lower than the value of the fibre inclusive of the customs duty paid thereon. The cost to the assessee was at all times, the value of the imported material in terms of the price paid to the foreign seller, the cost of freight, insurance, the cost of clearance and movement of the goods to its factories, as also the customs duty which it had paid before clearing the goods from the port. The closing stock had, therefore, necessarily to be valued in a manner which reflected the actual cost incurred.
10. We, therefore, answer the question referred to us at the instance of the assessee against the assessee, and in favour of the Revenue.
11. The question referred to us at the instance of the Revenue is,
“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that investment allowance in respect of the incremental cost of the machinery, necessitated by the fluctuation in foreign exchange rates is allowable to the assessee in the respective years in which such cost arose?”
12. “Investment allowance” is provided for in Section 32A of the Act. That allowance is a portion of the “actual cost” to the assessee of the ship, aircraft, machinery or plant.
13. Section 43A of the Act makes a special provision consequential to the changes in the rate of exchange of currency. That provision was introduced by the Finance (No. 2) Act, 1967, with effect from April 1, 1967. Section 43A(1) of the Act opens with a non obstante clause and provides that if the assessee had acquired any asset from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange at any time after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment towards the whole or a part of the cost of the asset or for repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency, for the purpose of acquiring the asset, the amount by which the liability is so increased or reduced during the previous year shall be added to, or, as the case may be, deducted from, the actual cost of the asset.
14. The application of Section 43A, in respect of the development rebate provided for under Section 33 is excluded by reason of Section 43A(2) which prohibits the taking into account of Section 43A(1) for computing the actual cost of an asset for the purpose of deduction on the ground of development rebate under Section 33 of the Act.
15. It is thus evident from a bare perusal of Section 43A of the Act that for the purpose of determining the actual cost for computing the investment allowance under Section 32A of the Act, the additional liability incurred by the assessee who has made the investment on ship, aircraft, plant or machinery imported from abroad and for which the payment is to be made in foreign currency, by reason of variation in the rate of exchange is required to be taken into account.
16. The Supreme Court in the case of CIT v. Arvind Mills Ltd. , has set out the circular issued by the Central Board of Direct Taxes explaining the scope of Section 43A of the Act, the relevant part of which reads thus (page 265) :
“62. The provisions of the new Section 43A apply in a case where an assessee has acquired any capital asset from abroad for the purpose of his business or profession, on credit or on deferred payment terms, or against a loan in foreign currency, and the whole or a part of the cost of such asset or of the loan in foreign currency, is outstanding as on the date on which there is a change in the rate of exchange of currency. In such a case where, in consequence of the change in the rate of exchange of currency, there is an increase or reduction in the assessee’s liability as expressed in Indian currency for payment of the whole or part of the cost of the assets or of the loan in foreign currency, the original actual cost, to the assessee, of the machinery or plant or other capital asset, is required to be increased or, as the case may be, reduced, correspondingly . . .”
17. After considering that circular and the argument advanced before it, the apex court concluded thus (page 270) :
“The result of the above discussion is that once the language of Sub-section (1) is attracted to a particular case, Sub-section (1) applies. Once Sub-section (1) is attracted, its application is excluded qua development rebate, by the operation of Sub-section (2).”
18. The necessary consequence is that in a case where Section 43A(1) of the Act is attracted and the matter under consideration is not one concerning the claim of development rebate, Section 43A(1) must be given full effect.
19. This court in the case of CIT v. Chengalvarayan Co-operative Sugar Mills Ltd. [2000] 242 ITR 440 dealt with a case of an assessee who claimed the benefit of Section 43A(1) of the Act while computing the investment allowance. This court held (page 442) :
“There can, therefore, be no manner of doubt that the investment allowance which is required to be allowed on the actual cost of machinery or plant, is required to be allowed on the amount by which that actual cost has increased by reason of variation in the rate of exchange as between Indian currency and foreign currency, where the said acquisition is from a foreign country. The fact that the additional liability for the assessee arose in the year subsequent to the date of installation does not come in the way of the investment allowance being allowed to the assessee. Section 43A(1) of the Act refers to the amount by which the liability of the assessee is so increased or reduced ‘during the previous year’. The increase in the liability of the assessee during the previous year on account of the change in the rate of exchange is part of the actual cost of the machinery acquired from a foreign country and the assessee is entitled to investment allowance on the additional cost.”
20. The submission made by counsel for the Revenue that that judgment is per incuriam, as the case of Arvind Mills Ltd. , had not been referred to therein, that the law stated in that judgment in relation to development rebate, by analogy should be made applicable to Section 32A as well, and that Section 43A(2) should be read as if it included therein a reference to Section 32A, is wholly without any merit, and has only to be stated to be rejected.
21. The second question referred to us is, therefore, answered in favour of, the assessee and, against the Revenue.