1991 (5) TMI 26 - HC - Income Tax

Summary

Issues Involved:
1. Entitlement to investment allowance on additional liability due to exchange rate fluctuation.
2. Requirement of creating an investment allowance reserve.

Summary:

Issue 1: Entitlement to Investment Allowance on Additional Liability Due to Exchange Rate Fluctuation
The primary issue was whether the assessee was entitled to investment allowance on a sum of Rs. 4,04,741, which represented additional liability due to variation in the exchange rate related to foreign loan liability. The Tribunal held that the assessee was entitled to investment allowance and directed the Income-tax Officer to provide the assessee an opportunity to create a reserve before allowing the investment allowance. The court referenced previous judgments, including Union Carbide India Ltd. v. CIT [1981] 130 ITR 351 and CIT v. Bharat General and Textile Industries Ltd. [1986] 157 ITR 158, which established that additional liability due to exchange rate fluctuation should be added to the cost of acquisition of the asset, thus qualifying for investment allowance. The court reiterated that the provisions of section 43A of the Income-tax Act, 1961, apply in such cases, and any additional liability on the date of repayment due to exchange rate fluctuation should be capitalized.

Issue 2: Requirement of Creating an Investment Allowance Reserve
The second issue was whether the Tribunal was correct in directing the Income-tax Officer to allow the assessee an opportunity to create a reserve before granting the investment allowance. The court discussed the conditions u/s 32A(4)(ii) of the Income-tax Act, 1961, which require the creation of an "investment allowance reserve" equal to 75% of the investment allowance to be allowed. The court referenced the Supreme Court decision in Shri Shubhlaxmi Mills Ltd. v. Addl. CIT [1989] 177 ITR 193, which emphasized the necessity of creating such a reserve in the relevant previous year. However, the Finance Act, 1990, amended section 32A(4)(ii) retrospectively from April 1, 1976, allowing the reserve to be created in any previous year in respect of which the deduction is to be allowed or any earlier previous year not earlier than the year in which the asset was first put to use. The court found no infirmity in the Tribunal's direction to allow the assessee an opportunity to create the reserve, in line with the amended provisions.

Conclusion:
The court concluded that the assessee is entitled to investment allowance on the additional liability due to exchange rate fluctuation, provided the liability is capitalized on the date of actual payment. The Income-tax Officer is directed to allow the assessee an opportunity to create the necessary reserve for such additional sums eligible for investment allowance. There will be no order as to costs.