Holding

Section 43A(1) applies to fluctuations in the previous year and any extra benefit arising therefrom must be taxed in the year the liability is reduced under Section 41(1)(a) Explanation 2, therefore the claim for deduction under Section 32A is not permissible.

Summary

The Commissioner of Income Tax, Rajkot appealed against M/s Gujarat Siddhi Cement Ltd.'s claim of an investment allowance for additional costs incurred on plant and machinery due to foreign exchange rate fluctuations for the assessment year 1993-94. The assessing officer disallowed the claim, holding that the assets were installed in earlier years, and the CIT(A) upheld this view on the ground that the assessee had not furnished any arguments or factual details. The Tribunal and the Gujarat High Court allowed the claim, relying on a Gujarat Fertilizers decision. The Supreme Court examined the applicability of Section 43A(1) of the Income Tax Act, noting that it pertains only to fluctuations in the previous year and that any extra benefit must be taxed in the year the liability is reduced under Section 41(1)(a) Explanation 2. Consequently, the Court held that the deduction could not be claimed and remitted the matter to the Tribunal to consider the claim under the correct statutory framework. The appeal was allowed, upholding the assessing officer’s decision.

Issues considered

Whether Section 43A(1) of the Income Tax Act applies to the increase in cost of plant and machinery caused by foreign exchange rate fluctuations for the assessment year 1993-94.
Whether such an increase can be claimed as an investment allowance under Section 32A.
Interpretation of the relationship between Section 43A(1) and Section 43A(2) with respect to development rebate under Section 33.
Whether any extra benefit arising from the fluctuation must be taxed in the year the liability is reduced pursuant to Section 41(1)(a) Explanation 2.
Whether the assessee’s failure to advance arguments or furnish factual details affects the consideration of the claim.

Legislation cited

Direct Tax Laws (Amendment) Act, 1987s. 43A
Finance Act, 2002s. substitution of Section 43A
Income Tax Act, 1961s. 32, s. 32A, s. 33, s. 41(1)(a), s. 43A(1), s. 43A(2)

Subjects

investment allowanceforeign exchange fluctuationSection 43Adevelopment rebatetax deductioncost of plant and machineryassessment year 1993-94Income Tax Act

Judgment

[2008] 14 S.C.R. 688

A COMMISSIONER OF INCOME TAX, RAJKOT
v.
M/S GUJARAT SIDDHI CEMENT LTD.
(Civil Appeal No. 6144 of 2008)
OCTOBER 17, 2008
B
[DR. ARIJIT PASAYAT AND DR. MUKUNDAKAM
SHARMA, JJ.]
'-}....
Income Tax Act, 1961; Ss. 32, 33, 41(1)(a) and Explana-
c tion 2, S.32A as substituted by Finance Act, 2002 and S.43(A)
as substituted by Finance Act, 1967 and amended by Direct_ -
Tax Law Amendment Act, 1987:
Deduction - Increase in cost of plant and machinery due
to fluctuation- in foreign exchange rate - Claim of deduction
D for the assessment year 1993-94 -Held: In case, assessee
desire to claim extra benefit for the extra amount paid in lieu
of increase of cost of the plant and machinery, the same has
to be taxed in the year in which liability was reduced - How- ~
ever, in the instant case, appellate authority recorded a cat-
E egorica/ finding that no argument was advanced and no de-
tails were furnished by the -assessee - Under the circum-
stances, it would be appropriate to grant opportunity to asses-
see to establish factual position relating to fluctuation in for-
eign exchange rate - Hence, matter remitted to Tribunal for
F the limited purpose to consider the claim of the assessee in
terms of s.43(A) (1) of the Act as it stood then in the light of the
legal position, as stated. '"J-
Respondent-assessee claimed the deduction as in-
vestment allowance for the money spent due to increase
G in the cost of plant and machinery because of the fluctua-
tion in the foreign exchange rate. The claim was disallowed
by the assessing officer on the ground that plant and
machinery in question were installed in the earlier years.
+-,
.>

The appeal filed thereagainst by the assessee was dis-
H 688
COMMIN. OF INCOME TAX, RAJKOT v. M/S GUJARAT 689
SIDDHI CEMENT LTD.

-...-h-' missed by the appellate authority on the ground that no A
arguments were advanced and no factual details were
furnished regarding the alleged fluctuation on account
of foreign exchange rate. The Tribunal allowed the claim
of the assessee placing reliance on a decision of the
Gujarat High Court in Commissioner of Income Tax v. B
Gujarat Fertilizers (2003 (259) ITR 526). Hence the present
appeal.
k
Di.sposing of the appeal,. the Court
HELD: 1.1 In terms of Section 43A(1) of the Income c
Tax Act the liability decreases or increases due to flue-
tuation in foreign exchange rate in the previous year. If
that is not the position, there is no application of Section
43A(1 ). [Para - 6] [691-G-H]
Commissioner of Income Tax v. Arvind Mills (1992 Supp D
(2) sec 190 - distinguished.
l 1.2 Section 43A of the Act in the present form was
substituted by the Finance Act, 2002 w.e.f. 1.4.2003. Prior
to its substitution Section 43A as inserted by the Finance
Act, 1967 w.e.f. 1.4.67 and amended by Direct Tax Laws E
(Amendment) Act, 1987 w.e.f. 1.4.1989 contained sub-sec-
tion (2). The said sub-section as it stood at the relevant
point of time clearly stated that,the provisions of sub-sec-
tion (1) shall not be taken into account in computing the
actual cost of assets for the purpose of deduction on ac- F
~, count of development rebate under Section 33 of the Act.
[Para - 6] [692-B-C]
1.3 Section 43A(1) of the Act relates to the fluctua-
tion in the previous year. If any extra benefit is taken the G
same has to be taxed in the year when the liability is re-
,J"l duced as provided in terms of Section 41(1)(a) Explana-
tion 2. Therefore, whenever there is fluctuation in any pre-
vious year, Section 43A (1) comes into play. [Para - 9] [696-
B]
H
690 SUPREME COURT REPORTS [2008] 14 S.C.R.

A 2. In the instant case, as rightly submitted for the rev- '--r\-
I
enue, the appellate authority recorded a categorical find-
ing that no argument was advanced and no details were
given by the assessee. In the aforesaid background, it
would be appropriate to grant an opportunity to the as-
B sessee to establish the factual position relating to flue-
tuation in foreign exchange rate. For that limited purpose
the matter is remitted to the Tribunal to consider whether
assessee is justified in claiming deduction in the back- --:(_
ground of Section 43A(1) as it stood then, keeping in view
the legal position as stated. [Paras -11-12] [697-H; 698-A-
c B]
CIVILAPPELLATE JURISDICTION: Civil Appeal No. 6144
of 2008
From the Judgment and final Order dated 23.8.2006 of
D the High Court of Gujarat atAhmedabad in Tax Appeal No. 1833
of 2005
V. Shekhar, Shweta Garg, Ganesh, Ashish Gopal Garg
and B.V. Bairam Das for the Appellant.
s
E Bhargava V. Desai, Rahul Gupta and Ree~a Sharma for
the Respondent.
The Judgment of the Court was delivered by
DR. ARIJIT PASAYAT J. 1. Leave granted.
F 2. Challenge in this appeal is to the judgment of a Division
Bench of the Gujarat High Court dismissing the appeal filed by ''):.
the present appellant. The appeal was filed under Section 260A
of the Income Tax Act, 1961 (in short the 'Act'). The question
relates to the effect of Section 43A of the Act. The effect of flue-
G tuation of foreign exchange rate resulting in increase of cost of
plant and machinery was the dispute.
-)-. .
3. Respondent (hereinafter referred to as the 'assessee') '> '

claimed increased amount as deduction as investment allow-
a nee on account of increase in the cost of plant and machinery
H on account of exchange rate fluctuation. The assessing officer
COMMIN. OF INCOME TAX, RAJKOT v. M/S GUJARAT 691
SIDDHI CEMENT LTD.
r
~_..,

disallowed the claim on the ground that plant and machinery in A
respect of which there has been increase were installed in the
earlier years. Therefore, there is no scope for provision for in-
vestment allowance in the year under assessment. It referred to
the letter of the assessee dated IT/JAM/95-96/1226 dated
16.2.1996 making such claim. The assessee preferred an ap- B
peal before the Commissioner of Income Tax (Appeals) (in short
'CIT(A)'). The disallowance made by the assessing officer was
upheld by the CIT(A) on the ground that no arguments were
advanced and no factual details were furnished regarding the
alleged fluctuation on account of foreign exchange rate. The c
matter was carried in further appeal by the assessee before
the Income Tax Appellate Tribunal, Rajkot (In short 'Tribunal')
which allowed the claim placing reliance on a decision of the
Gujarat High Court in Commissioner of Income Tax v. Gujarat
Fertilizers (2003 (259) ITR 526). Revenue preferred an appeal
D
under Section 260A of the Act ·before the High Court. By the
~· impugned judgment the High Court upheld the view of the Tribu-
nal referring to the judgment of Gujarat Fertilizers's case (su-
pra).
4. In support of the appeal, learned counsel forthe appel- E
lant submitted that the subject matter of controversy is covered
by a decision of this Court in Commissioner of Income Tax,
Madras v. Lucas TVS Ltd, Padi Chennai (2008 (1) SCC 674).
He also relied on the decision in Commissioner of Income Tax
... ,_ . v. Arvind Mills (1992 Supp (2) SCC 190). F
.Ji
5. Learned counsel for the assessee-respondent on the
other hand submitted that Lucas TVS's case (supra) related to
an entirely different question and, therefore, the view expressed
by the High Court does not suffer from any infirmity.
G
6. The assessment year in the present case is 1993-94
/1 relating to the previous year 1992-93. In terms of Section 43A(1)
the liability decreases or increases due to foreign exchange
rate in the previous year. If that is not the position, there is no
application of Section 43A(1). Section 32A deals with invest-
H
692 SUPREME COURT REPORTS [2008] 14 S.C.R.

A ment allowance. Section 43A deals with special provisions con-
sequential to changes in rate of exchange of currency. It is to be
noted that Arvind Mil/s's case (supra) did not deal with invest-
ment allowance under Section 32A of the Act. It in fact related to
"development rebate" under Section 33. It is to be noted that
B Section 43A in the present form was substituted by the Finance
Act, 2002 w.e.f. 1.4.2003. Prior to its substitution Section 43A
as inserted by the Finance Act, 1967 w.e.f. 1.4.67 and amended
by Direct Tax Laws (Amendment) Act, 1987 w.e.f. 1.4.1989 con-
tained sub-section (2). The said sub-section as it stood at the
c relevant point of time clearly stated that the provisions of sub-
section (1) shall not be taken into account in computing the ac-
tual cost of assets for the purpose of deduction on account of
development rebate under Section 33.
7. In Arvind Mil/s's case (supra) it was observed inter-alia
as follows:
"13. It may also be mentioned that the Ministry of Finance,
by its letter of 4th January, 1967, sometime earlier to the
enactment of Section 43A had clarified its stand on certain
points raised by the Federation of Indian Chambers of
Commerce and Industry. The first two paragraphs of this
letter have a bearing on the issue before us and may be
extracted here :
"1. As regards the point that the additional rupee
liability in regard to assets imported before but
installed after the date of devaluation would, in- any
case, be treated as forming part of the actual cost of
the asset for the purpose of allowance of development
rebate under the existing law the interpretation of the
Government on legal position is different. It is that
the actual cost of the asset in such a case will be
reckoned at the cost on the date on which the legal
ownership in the assets passed to the assessee,
i.e., the cost as calculated in accordance with the
pre-devaluation rate of foreign exchange.
COMMIN. OF INCOME TAX, RAJKOT v. MIS GUJARAT 693
SIDDHI CEMENT LTD.

2. The Government agrees that for the purpose of A
the calculation of depreciation allowance, the cost
of capital assets imported before the date of
devaluation should be written off to the extent of the
full amount of the additional rupee liability incurred
on account of devaluation and not what is actually B
paid from year to year. The proposed legal provision
in the matter is intended to be framed on this basis."
(Emphasis Added)
xx xx xx c
18. We also find it difficult to find substance in the second
argument of Sri Salve that Sub-section (1) was inserted
only to define the year in which the increase or decrease
in liability has to be adjusted. It is no doubt true that, but
for the new section, various kinds of arguments could have D
been raised regarding the year in which such liability should
be adjusted. But, we think, arguments could also have
been raised as to whether the actual cost calls for any
adjustment at all in such a situation. It could have been
contended that the actual cost can only be the original E
purchase price in the year of acquisition of the asset and
that, even if there is any subsequent increase in the liability,
it cannot be added to the actual cost at any stage and that,
for the purposes of all the statutory allowances, the amount
of actual cost once determined would be final and F
conclusive. Also Section 43A provides for a case in which,
as in the present case, the assessee has completely paid
for the plant or machinery in foreign currency prior to the
date of devaluation but the variation of exchange rate
affects the liability of the assessee (as expressed in Indian G
currency) for repayment of the whole or part of the monies
borrowed by him from any person directly or indirectly in
any foreign currency specifically for the purposes of
acquiring the asset. It is a moot question as to whether in
such a case, on general principles, the actual cost of the H
694 SUPREME COURT REPORTS [2008] 14 S.C.R.

A assessee's plant or machinery will be the revised liability
or the original liability. This is also a situation which is
specifically provided for in the section. It may not, therefore,
be correct to base arguments on an assurnption that the
figure or actual cost has necessarily to be modified for
B purposes of development rebate or depreciation or other
allowances and that the only controversy that can arise will
be as to the year in which such adjustment has to be
made. In our opinion, we need not discuss or express any
concluded opinion on either of these issues. As we said
c earlier, there is no need to speculate on all the problems
that might have arisen if Section 43A had not been there
because the statute had resolved these problems. It lays
down, firstly, that the increase or decrease in liability should
be taken into account to modify the figure of actual cost
and secondly that such adjustment should be made in the
D
year in which the increase or de9rease in liability arises
on account of the fluctuation in th~ rate of exchange.
}"
19. The result of the above discussion is that once the
language of Sub-section (1) is attracted to a particular
E 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).
xx xx xx
F 22. Nor is there any in-appropriateness of statutory
language as urged. As we have discussed above, the
provisions of Sub-section (1) apply to the present case
and the increased liability should be taken as 'actual cost'
within the meaning of Section 43A(1 ). All allowances
including development rebate or depreciation allowance
G
or the other types of deductions referred to in the sub-
section will therefore have to be based on such adjusted
actual cost. But then Sub-section (2) intercedes to put in
a caveat. It says that the provisions of Sub-section (1)
should not be applied for purposes of development rebate.
H
COMMIN. OF INCOME TAX, RAJKOT v. MIS GUJARAT 695
SIDDHI CEMENT LTD.

~~ The effect is that the adjusted actual cost is to be taken as A
the actual cost for all purposes other than for grant of
development rebate. Read thus, there is no difficulty in the
application of the language of the section to the present
case. There is no inappropriateness of language either in
Sub-section (1) or in Sub-section (2). The language used B
is quite appropriate and meets the situation fully.
<
_;.- 23. For the reasons discussed above, we are of the opinion
that the language of the provision is perfectly clear. It cannot
be interpreted in a restrictive manner as contended for by
the learned Counsel for the assessee. In our opinion, it is c
a clear requirement of the statute that, for purposes of
development rebate, any increase or decrease in the
actual cost consequent on fluctuations in exchange rate
should not be taken into account. It may be that the
legislature intended to give a different treatment to D
development rebate from depreciation and other
allowances because the allowance of development rebate
••
,,,,-
can result in an assessee claiming allowances exceeding
the original cost. It may be that the legislature thought that,
though development rebate was intended to promote E
development of industries, this could not be allowed at the
cost of the foreign exchange resources of the country which
are also depleted when there is an increase in liability due
to devaluation of the currency. It is unnecessary to attribute
any particular reason for the provision when the language F
of the section is otherwise plain and unambiguous. We do
-·~ ,
not think that, in face of the language of Sub-section (2), it
would be right to permit the assessees to claim development
rebate on the increased cost. We, therefore, allow the appeal
and uphold the action of the assessing officer granting
G
, development rebate to the assessee only in respect of a

)
,_,· 1
.
sum of Rs. 52.48 lakhs and not on Rs. 61 lakhs on the basis
of which it was claimed. Having regard, however, to the fact
that the assessees had succeeded before all the High
Courts we make no order regarding costs."
H
696 SUPREME COURT REPORTS [2008] 14 S.C.R.

A 8. In the said case the issue related to the development -r-r·
rebate.
9. On a bare reading of the provision i.e. Section '43A(1)
the position is clear that it relates to the fluctuation in the previ-
ous year in question. If any extra benefit is taken the same has
B . to be taxed in the year when the liability is reduced as provided
in terms of Section 41 (1 )(a) Explanation 2. Therefore, when-
ever there is fluctuation in any previous year, Section 43A (1) ·~-
comes into play. Section 43A(1) as it stood at the relevant point
of time reads as follows:
c
"43A. Special provisions consequential to changes in rate
of exchange of currency- (1) Notwithstanding anything
contained in any other provision of this Act, where an
assessee has acquired any asset from a country outside
India for the purposes of hi~ business or profession and,
D
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
E whole or a part of the moneys borrowed by him from any
person, directly or indirectly, in any foreign currency
specifically for the purpose of acquiring the asset (being
in either case the liability existing immediately before the
date on which the change in the rate of exchange takes -
F effect), the amount by which the liability aforesaid is so
'
increased or reduced during previous year shall be added )~
to, or, as the case may be, deducted from, the actual cost '
of the asset as defined in clause (I) of section 43, or the
amount of expenditure of a capital nature referred to in
G clause (iv) of sub-section (1) of section 35 or in section
•
35A or in clause (ix) of sub-section (1) of section 36, or, .~t
in the case of a capital asset (not being a capital asset I,,. '

referred to in section 50), the cost of acquisition thereof
for the purposes of section 48, and the amount arrived at
H after such expenditure or a capital nature or, as the case
COMMIN. OF INCOME TAX, RAJKOT v. MIS GUJARAT 697
SIDDHI CEMENT LTD.

may be, the cost of acquisition of the capital asset as A
aforesaid.
Explanation 1- In this sub-section, unless the context
requires:-
(a) "rate of exchange" means the rate of exchange B
determined or recognised by the Central Government for
the conversion of Indian currency into foreign currency or
foreign currency into Indian currency;
(b) "foreign currency" and "Indian currency" have the
meanings respectively assigned to them in section 2 of C
the Foreign Exchange Regulation Act, 1947 (7 of 1947).
Explanation 2- Where the whole or any part of the liability
aforesaid is met, not by the assessee, but directly or
indirectly, by any other person or authority, the liability so 0
met shall not be taken into account for the purposes of this
sub-section.
Explanation 3- Where the assessee has entered into a
contract with an authorized dealer as defined in section 2
of the Foreign Exchange Regulation Act, 1947 (7of1947), E
for providing him with a specified sum in a foreign currency
on or after a stipulated future date at the rate of exchange
specified in the contract to enable him to meet the whole
or any part of the liability aforesaid, the amount, if any, to
be added to, or deducted from, the actual cost of the F
asset or the amount of expenditure of a capital nature or,
as the case may be, the cost of acquisition of the capital
asset under this sub-section shall, in respect of so much
of the sum specified in the contract as is available for
discharging the liability aforesaid, be computed with G
reference to the rate of exchange specified therein."
10. After the substitution by Finance Act, 2002 w.e.f.
1.4.2003 the position is quiet different.
11. In the instant case as rightly submitted by learned coun- H
l_

698 SUPREME COURT REPORTS [2008) 14 S.C.R.

A sel for the revenue, CIT(A) recorded to a categorical finding -,.:y.._
l
that no argument was advanced and no details were given.
12. In the aforesaid background we feel that it would be F
appropriate to grant opportunity to the assessee to establish
the factual position relating to fluctuation in foreign exchange
B rate. For that limited purpose the matter is remitted to the Tribu-
nal to consider whether assessee is justified in claiming de-
duction in the background of Section 43A(1) as it stood then, ~
keeping in view the legal position as highlighted above.

c 13. The appeal is disposed of accordingly.
S.K.S. Appeal disposed of. ;..

l (

. }- ...

JI