TMI Blog1992 (1) TMI 139X X X X Extracts X X X X X X X X Extracts X X X X ..... depreciation under s. 32(1)(ii) is allowable at half of depreciation at normal rate (i.e. 15 per cent) and not at half of the enhanced rate, i.e., 18.75 per cent). He also observed that depreciation on new machinery installed during the year which worked for less than 12 months, is allowable at normal rate of depreciation instead of enhanced rate allowed by te ITO. He also observed that depreciation on the cost of building shall also be recalculated and the correct amount of depreciation should be allowed. The assessee preferred the present appeal in which these findings given by the CIT have been challenged. 3. The learned counsel for the assessee submitted that once the change in accounting year was granted by the ITO and the previous year was extended covering a period of 15 months, normal depreciation on plant and machinery was rightly allowed by the ITO at the enhanced rate of 18.75 per cent, in accordance with r. 5 read with proviso thereto in respect of the assets used for the purposes of business including those acquired during the year. The additional depreciation under s. 32(1)(ii) is allowable at 50 per cent of the normal depreciation allowable under the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation on the additional cost of assets arisen due to fluctuation of foreign exchange rate has wrongly been raised in the aforesaid ground, as such depreciation has been allowed by the ITO himself and that is not a point of dispute in view of the clear provisions of s. 43A. 6.1 The assessee had obtained loans from ICICI in foreign currency for purchasing machinery from outside India. The liability increased by an amount of Rs. 3,91,813 on account of exchange rate difference. The claim of the assessee for grant of deduction in respect of the aforesaid amount as a revenue expenditure was disallowed by the ITO on the ground that such additional amount payable by the assessee on account of fluctuations in foreign exchange rate formed part of actual cost of the machinery imported. He allowed depreciation thereon, but disallowed the assessee's claim for grant of investment allowance on the aforesaid amount on the plea that the amount does not represent any asset installed during this year. The CIT(A) observed that investment allowance and depreciation is admissible as the amount in question forms part of the actual cost. He, therefore, directed the ITO to verify and allow investment al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C) 91 : (1992) 193 ITR 255 (SC), the Hon'ble Supreme Court considered the meaning and scope of the provisions of s. 43A of IT Act, 1961. In order to appreciate the true scope and meaning of the said provisions, the Hon'ble Supreme Court gave a hypothetical illustration in para 2 and raised the questions which would arise in relation to proper and correct interpretation of the said provision. The said illustration and the question arising there from as appearing at page 94 are reproduced hereunder. "The cost of the plant or machinery would have been debited by him, in his books for the year ended 31st March, 1966, at Rupees one lakh. If the price wholly or in part remained undercharged on 6th June, 1966, the assessee would have become liable to pay more money in terms of the Indian rupee to pay in full the price of $ 10,000. Let us suppose that he had eventually to pay Rs. 1,20,000 in the accounting year 1966-67 to discharge his liability towards the purchase price. The two questions that would arise are— (i) Should he enter the additional liability of Rs. 20,000 in his books for the year ended 31st March, 1967 during which the additional liability arise consequent on the deva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mendment to the Companies Act, 1956. Thus, in the illustration given earlier the actual cost of the asset for the asst. yr. 1966-67 will be Rs. 1,00,000. The actual cost to the entered in the books, for the asst. yr. 1967-68, will, however, be Rs. 1,20,000. 6. We may now turn to the second question posed earlier and consider the position on general principles. So far as depreciation allowance is concerned, the position is perhaps a little simpler because it is a recurrent claim. Under the definitions contained in s. 32 r/w ss. 43(1) and (6) of the IT Act, the depreciation is to be allowed on the actual cost of the asset less all depreciation actually allowed in respect thereof in earlier years. Thus where the cost of the asset subsequently goes up because of devaluation, whatever might have been the position in the earlier year, it is always open to the assessee to insist, and for the ITO to agree, that the written down value in the year in which the increased liability has arisen should be taken on the basis of the increased cost minus depreciation earlier allowed on the basis of the old cost. Thus in the illustration given earlier, if the asset is one that earns depreciation a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into account in computing the actual cost of an asset for the purpose of deduction on account of the development rebate under s. 33. This means, according to the Department, the statue is categorical that any increase or decrease in the liability towards the actual cost of machinery or plant consequent on fluctuations in exchange rates is totally irrelevant and has to be disregarded for purposes of computation of the development rebate allowable thereon." The Supreme Court has thus clearly held that effect of such payment made on account of fluctuations in foreign exchange rates should be given in the year in which the increase or reduction in liability arises. It has also categorically held that the difficulty arising in the matter relating to one time allowance like development rebate in the absence of a provision like s. 43A could be an arguable matter which could be argued by the Revenue or the assessee in the way indicated in para 6 of the said judgment. To obviate all these doubts and difficulties, s. 43A was enacted. While sub-s. (1) of s. 43A provides generally for modification of the actual cost of the assets consequent on the variation in exchange rate in the year in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever is lower is a well recognised method. It was a bona fide change and such changed method has consistently been followed in all subsequent years. The judgment of Hon'ble Supreme Court relied upon by the learned Departmental Representative instead of supporting the Revenue's case supports the case of the assessee as in that judgment this particular method of valuation of closing stock has been held to be a well recognised method. She relied upon the various judgments referred to in para 9.2 of the order passed by the CIT(A) and relied upon the other reasons mentioned in the said appellate order. 7.3 In our view the order of the CIT(A) in relation to this ground requires no interference. The Supreme Court in the case of CIT vs. British Paints India Ltd. held that the method of valuing the closing stock in that case on the basis of cost of raw materials totally excluding the overhead expenditure was patently wrong and would result in a distorted picture of the true state of business for the purposes of computing the income chargeable to tax. However, in the said judgment the Hon'ble Supreme Court has also held that it is a well recognised principle of commercial accounting to va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the occasion of silver jubilee was a gesture of goodwill and such expenditure was incurred for business purposes of the company. The allowability of such an expenditure is clearly supported by judgment of Hon'ble Gujarat High Court in the case of SLM Maneklal Industries Ltd. and judgment of Madras High Court in the case of Amar Jothi Pictures vs. CIT (1968) 69 IT 755 (Mad). The view taken by the CIT(A) is, therefore, confirmed. 10. The next ground relates to grant of Extra Shift Allowance (ESA) at the enhanced rate in view of the change of the previous year. In view of our findings given in the assessee's appeal against order s. 263 passed by the CIT for the year under consideration, we hold that the CIT(A) has rightly directed the ITO to grant ESA with reference to the enhanced amount of normal deprecation granted to the assessee in view of longer previous year of 15 months in the presents case. 11. The next ground relates to grant of investment allowance on electrical installations which, according to the Revenue, is not the integral part of the plant and machinery. The learned Departmental Representative relied upon the reasons mentioned in the assessment order. The learne ..... X X X X Extracts X X X X X X X X Extracts X X X X
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