TMI Blog2006 (11) TMI 255X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of allowing the expenditure pertaining to employees under section 37(1). 3. Under the facts and circumstances of the case, Learned Commissioner of Income-tax (Appeals), Rajasthan-2, Jaipur has erred in not giving any direction in relation to ground No.8 of the appeal before her relating to disallowance of liabilities for superannuation fund and gratuity Rs. 4,97,312 and Rs. 1,62,548 respectively. 3. Apropos the first ground, the ld. Assessing Officer noted that the assessee had claimed investment allowance amounting to Rs. 38,04,143 on the investments made in plant and machinery. It was found that the allowance was claimed on the additions resulting from foreign exchange fluctuations. The ld. Assessing Officer negatived the claim of the assessee under section 32A for this amount. In the first appeal, the ld. CIT(A) allowed the partial relief to the tune of Rs. 2,08,128 on account of fresh purchase of machinery worth Rs. 10,30,639 during the year under consideration. As regards the balance amount of Rs. 35,96,015 representing the investment allowance on account of foreign exchange fluctuations was not allowed. 4. Before us the ld. Counsel for the assessee contended th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowance has not been specifically excluded from the purview of section 43A and accordingly the decision rendered in South India Shipping Corpn. Ltd. v. Addl. CIT [1979] 116 ITR 819 (Mad.) is confined only to the development rebate and hence cannot be applied to the investment allowance as is the case under consideration. There is no quarrel that the assessee had created investment allowance reserve in its books of account which has not been disputed by the authorities below. The assessee in its written submissions before the ld. CIT(A), copy placed before us on Page 1 of the Paper Book has clearly mentioned the fact of creation of necessary reserve in its account books. In view of this discussion, we overturn the finding in the impugned order to this extent. This ground is allowed. 6. The second ground relates to the claim for deduction from entertainment expenses. Briefly stated the facts of the case are that the assessee claimed a sum Rs. 40,219 out of total entertainment expenses of Rs. 1,34,064, being 30 per cent as attributable to the participation of the employees of the company in accompanying the guests for entertainment. No deduction was allowed by the ld. Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the year of its installation. 3. The CIT(A) has observed in his order that, the provisions of section 32A provided that the deduction shall be allowed in respect of the previous year in which the machinery or plant was installed or was first put to use or if put to use in the immediately succeeding previous year, then in respect of that previous year, a sum by way of investment allowance equal to 20 per cent of the actual cost of plant and machinery to the assessee will be allowed. These conditions have not been satisfied in the case of assessee and as such the claim of the assessee has been rightly denied by the Assessing Officer. However, as regards the claim for investment allowance in respect of fresh purchase of machinery worth Rs. 10,30,639, investment allowance was allowed by the CIT(A) to the tune of Rs. 2,08,128. Finally, the CIT(A) has restricted the disallowance to Rs. 38,04,143 - 2,08,128 = Rs. 35,96,015. 4. My ld. Brother has deleted the said disallowance by heavily relying on the ratio laid down by Hon'ble Gujarat High Court in the case of Gujarat State Fertilizer Co. Ltd. It was observed by ld. Accountant Member that the impugned claim for deduction under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove regarding the schedule of payment etc. etc. These facts are not clear from the record in the instant case. Nowhere, the Assessing Officer or the CIT(A) have discussed these aspects which are essential to consider the claim of the assessee, neither the schedule nor the enhanced value or the repayment schedule have been mentioned in the record. When it is so, then I am of the view that matter needs a fresh adjudication by the Assessing Officer to examine the additional liability on the date of actual payment of loan as per schedule etc. specially when CIT(A) has observed that "the conditions have not been satisfied in the case of appellant for the year under consideration". I am also of the view that after having the clear facts, occasion will arise regarding the applicability of the ratio laid down by higher courts. 7. Thus, I modify both the orders of the lower authorities and restore the order back to the Assessing Officer to decide the claim of the assessee de novo after providing a reasonable opportunity to the assessee in the light of above discussion. REFERENCE UNDER SECTION 255(4) OF THE INCOME- TAX ACT, 1961 On difference of opinion between the Members who original ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the difference between original cost and enhanced cost due to fluctuation in the period under consideration (1-7-1987 to 31-3-1989) in terms of section 43A of the Income-tax Act. The assessee also created investment allowance reserve to the tune of Rs. 28,54,316 by crediting the reserve account and debiting the profit and loss account. This is clear from the assessment order where the above amount has been specifically disallowed and added back. 4. A perusal of the assessment order further reveals that claim of investment allowance was disallowed by the Assessing Officer by holding that the same was not permissible on enhanced cost due to enhancement of liability because of fluctuation of foreign currency rate. The investment allowance was to be allowed in the year in which machinery was installed and the same was not admittedly done in the year under consideration nor the present year was the immediately succeeding year in which machinery and plant was first put to use. Accordingly the claim was rejected. 5. The assessee impugned the action of the Assessing Officer in appeal and relied upon direct decision of Calcutta High Court in the case of Century Enka Ltd. and other de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spute on it. The learned Accountant Member accordingly allowed appeal of the assessee on this claim. 7. The learned Judicial Member did not agree with the learned Accountant Member although he also held that decision of Full Bench in the case of Gujarat State Fertilizer Co. Ltd. was applicable to the case. Certain portion of the decision was extracted in his order wherein it is stated "section 43A provides that the figure of actual cost of an asset of the assessee stands modified in the previous year in which the exchange rate fluctuation took place, all other consequences would flow by adopting that year and the figure of actual cost as the starting point." It is further extracted that an assessee claiming investment allowance on modified figure of actual cost will be required to fulfil requisite condition like creation of reserve to the specified extent in the year of such change of figure of actual cost. Learned Judicial Member further observed as under for remitting the matter back to the file of the Assessing Officer: "Further, it was mentioned that the period of carry forward for the purpose of eight years shall have to be computed from the year in which the additional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction in this case had started in March, 1986 and investment allowance was being claimed on liability enhanced on account of fluctuation in foreign exchange taken as loan for purchase of machinery and plant. In this connection, he drew my attention to page 7 of the paper book filed before the Bench. The written down value of plant and machinery as on 1st day of the year was shown at Rs. 5,43,78,599. The assessee had shown addition to machinery and plant at 1,80,96,636 representing liability enhanced due to fluctuation of foreign exchange rates. On the above value of the machinery depreciation was claimed by the assessee (including enhanced cost due to fluctuation in foreign exchange) and the same was duly allowed by the revenue as claimed. On page 8 of the paper book, schedule of depreciation and investment allowance claimed has been was furnished. The assessee has pointed out figures of addition "due to foreign exchange fluctuation difference on foreign currency loans". Figures of addition in machinery and plant were given on page 8 whereas that of Dies Moulds are given on page 9 of the paper book. On page 12, Schedule XVI the assessee has given complete detail of revaluation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted by the Assessing Officer or by CIT (Appeals). The revenue authorities disallowed the claim on the ground that the investment allowance was to be allowed only in the year in which machinery was installed or in the year machinery was purchased or in the immediately succeeding year. There was no dispute that assessee had discharged higher liability on account of foreign exchange fluctuation on loans utilized for purchase of machinery and plant. The objections raised by the revenue authorities were contrary to the provisions of section 43A of Income-tax Act and matter stood fully covered in favour of the assessee as per the direct decisions of four High Courts referred to in the order of learned Accountant Member. The learned Judicial Member was not justified in raising doubts on facts which were fully established and accepted by the revenue authorities. Some of the observations of learned Judicial Member are contrary to law. The learned counsel further drew my attention to decision of Hon'ble Bombay High Court in the case of Associated Bearing Co. Ltd. v. CIT [2006] 286 ITR 341 wherein again a view has been taken that investment allowance is to be allowed on increased liability d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wance at 20 per cent of additional liability when he should have claimed it at 25 per cent. Having regard to various doubts as above, the learned Judicial Member was justified in remitting the case to the file of the Assessing Officer for re-examination. The Assessing Officer, on re-examination, would allow the claim as per law and there is no loss to the assessee. The learned Departmental Representative accordingly supported the order of the Judicial Member. 11. I have given careful thought to the proposed orders of my learned brothers, facts and circumstances of the case and arguments advanced by both the parties. The learned Accountant Member, in the proposed order, has observed that assessee was entitled to claim investment allowance under section 32A read with section 43A on the enhanced liability towards cost of machinery due to fluctuation of foreign exchange rates in the year under consideration and the matter was fully covered in favour of assessee by the decisions of various Courts. Let us, therefore, have a look at the decisions considered by the learned Accountant Member. In the case of Century Enka Ltd., their Lordship of Calcutta High Court, after taking into acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bt 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." The majority decision of Full Bench of Gujarat High Court in the case of Gujarat State Fertilisers Co. Ltd., after elaborate discussion of the relevant statutory provision and case laws, including impact of "Notwithstanding anything contained in any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the previous year which would be a subsequent year. Similarly, the Explanation to sub-section (4) also gives an indication that an Assessing Officer may permit an assessee to credit further amounts to be investment allowance reserve account out of the profits and gains of the previous year in which the Assessing Officer serves the assessee with the notice to do so. Thus, on an overall consideration of the scheme of section 32A of the Act, it is abundantly clear that the Legislature did not envisage any relating back to the year of acquisition/installation/first user but has provided for creation of reserve and allowance in a subsequent year being aware of the settled legal position that reopening of accounts is unknown to income-tax. This position is clear from the decision of the case Arvind Mills Ltd. [1992] 193 ITR 255 (Hon'ble Supreme Court) wherein at page 262 of the reports the Apex Court has referred to two of its earlier decisions in the case of CIT v. A. Gajapathy Naidu [1964] 53 ITR 114 and CIT v. Swadeshi Cotton Flour Mills (P.) Ltd. [1964] 53 ITR 134. In fact, the court has also taken note of the fact that the said principle has subsequently been recognized by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m financial institutions to finance the same. The foreign currency loans were re-paid during the year and foreign exchange fluctuations on the same was debited to actual cost of asset as provided under section 43A of the Income-tax Act, 1961. In view of the above, the additions to Plant Machinery were eligible for investment allowance." The aforesaid claim was accepted by the learned CIT (Appeals) with following observations in para 2.3 as under: "...As regards the foreign exchange liability of Rs. 1,79,80,075, it is seen that on facts there is no dispute that the amount has been paid in a year subsequent to the year in which the asset was purchased, installed and used." As rightly observed by the learned CIT (Appeals), the claim was not disputed even by the Assessing Officer. However, Assessing Officer, as also CIT (Appeals) did not allow investment allowance as according to them the same could be allowed only in the year in which machinery or plant was installed or put to use or if it was put to use in the immediately succeeding year, than in that year. About this, learned Judicial Member in the concluding part of para 6 of his proposed order, has directed that the Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m and how this objection has been raised, is not clear at all. The learned Judicial member should have seen the audited accounts of the assessee which were part of the record of the Assessing Officer. Without looking at the relevant record and following observations of the learned CIT (Appeals) which are unsustainable under the law, a remand to the Assessing Officer for fresh adjudication and for further enquiry has been directed. All the conditions as already observed including creation of investment allowance reserve, discharge of enhanced liability etc. were fully satisfied in this case. Having regard to clear statutory provisions and facts and circumstances of the case, where the cost of machinery and plant got enhanced due to fluctuation in foreign exchange rates, the assessee was entitled to investment allowance on the modified or enhanced cost of machinery in the year under consideration. The assessee has fulfilled all the conditions to claim the allowance as per material available on record. The learned Judicial Member, in my humble opinion was not justified in holding that the matter should be sent back to the Assessing Officer for fresh adjudication. A remand cannot be or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercial production of assessee started in March, 1986. The investment allowance on modified figure is to be allowed on the basis of provisions of section 43A of Income-tax Act which is clearly applicable in the year under consideration as admitted and agreed to by both the learned Members of the Tribunal. 15. It was further contended that assessee has not proved that investment allowance is being claimed on machinery and plant which is owned by the assessee and used for purposes of business. This plea is also without any substance. As stated above, depreciation on enhanced liability due to fluctuation on foreign exchange rate has been duly allowed to the assessee as is evidence from the chart produced by the assessee and referred to above. Therefore, there can be no dispute that machinery was owned by the assessee and used for purposes of business. The contention raised is without any substance. 16. It was further claimed that provision of section 43A is not applicable to the allowance of development rebate which is similar to investment allowance. If development rebate cannot be allowed, then on same reasoning investment allowance on additional modified cost cannot be allowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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