1. The real question that arises for determination in this reference under section 256(1) of the Income-tax Act, 1961, is in regard to the construction to be placed upon section 43A(2) of that Act.
2. The year concerned is the assessment year 1967-68, the previous year being the year ended March 31, 1967. The assessee followed the mercantile system of accounting. BY an agreement dated April 22, 1966, the assessee contracted with Lurgi Gesellschaff Fur Chemie and Hutternesen MBH, Frankfurt, Germany, to purchase an iron ore palletising plant. The agreement set out that the price of DM 15,991,000 would be the aggregate payable in respect of the various component parts of the plant. The price was F.O.B. a North Sea port. The payment was to be made thus 10% upon the signing of the agreement, 10% by an irrevocable letter of credit and the balance 80% in equal half-yearly installments, the first of which was to be payable six months after the final delivery. Interest was payable upon the balance 80% of the purchase price. Delivery was to commence ten months after the coming into effect of the agreement and was to be completed within sixteen months from the coming into effect of the agreement. The plant was to be erected under the supervision of the seller. The agreement came into effect on July 22, 1964. By an addenda to the agreement, the dates of payment thereunder were varied; they do not affect the position in so far as this reference is concerned.
3. The erection of the plant was started in April, 1965. The majority of shipments of the plant were received by June 6, 1966, on which date devaluation of the Indian rupee took place. Payment of DM 3,198,200 was made prior to June 6, 1966, and an amount of DM 12,792,800 remained to be paid. Consequently. the asessee's liability in terms of rupees rose from Rs. 1.92 crores to Rs. 2.62 crores. In February, 1967, the (erection of the) plant was completed and it began functioning.
4. It is an admitted position that, in so far as depreciation of the plant was concerned, the assessee claimed before the Income-tax Officer the benefit of section 43A(1) of the Income-tax Act, 1961, and it was allowed. The Income tax Officer also allowed to the assessee development rebate on the cost of the plant as enhanced due to the devaluation. The Additional commissioner was of the view that, for the reason that development rebate was allowed on the enhanced cost an d certain other reasons, the assessment order for, inter alia, the assessment year 1967-68 was erroneous and prejudicial to the interests of the Revenue. He, therefore, reopened the assessment under section 263 of the Income-tax Act, 1961. After hearing the assessee, he concluded that the acquisition of the plant was complete when the contractual obligations were crystallised on April 22, 1964, and that, therefore, the assessee had acquired the plant before the devaluation date and not thereafter. In exercise of the powers conferred under section 263, he set aside the assessment.
5. The assessee appealed to the Income-tax Appellate Tribunal. The Tribunal noted the facts and the arguments that were addressed to it. Having regard to the decision of the Supreme Court in CIT v. Mir Mohammad Ali : 53ITR165(SC) , the Tribunal held that the component parts of the plant for which prices were fixed under the agreement constituted separate assets. The Tribunal considered the argument on behalf of the assessee that the provisions of section 43A(1) of the Income-tax Act, 1961, were not to be taken into account, or, in other words, ignored, in computing the actual cost of an asset for the purpose of calculating development rebate. It did not accept the contention on behalf of the Revenue that the relationship between the seller and the assessee had become one of creditor and debtor on the date of the devaluation. It held that the assessee had an outstanding liability to pay part of the purchase price to the seller in foreign exchange; that liability had increased as a result of the devaluation of the Indian rupee; and that the assessee was entitled to claim development rebate on the basis of the increased cost.
6. At the instance of the Revenue, this question is posed to us :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was entitled to development rebate on the increased cost of the pelletisation plant due to devaluation of Indian rupee ?'
7. It is necessary to set out the provisions of section 43A of the Income-tax Act, 1961, for understanding the issues involved :
'43A. (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 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 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 effect), the amount by which the liability aforesaid 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 as defined in clause (1) of section 43 or the amount of expenditure of a capital nature referred to in clause (iv) of sub-section (1) of section 35 or in section 35A or in clause (ix) of sub-section (1) or section 36, or, in the case of a capital asset (not being a capital asset referred to in section 50), the cost of acquisition thereof for the purposes of section 48, and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset as aforesaid.
Explanation 1. - In this sub-section, unless the context otherwise requires, -
(a) 'rate of exchange' means the rate of exchange 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 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 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 authorised dealer as defined in section 2 of the Foreign Exchange Regulation Act, 1947 (7 of 1947), 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 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 reference to the rate of exchange specified therein.
(2) The provisions of sub-section (1) shall not be taken into account in computing the actual cost of an asset for the purpose of the deduction on account of development rebate under section 33.'
8. Mr. Dhanuka, learned counsel for the Revenue, submitted that, inasmuch as the assessee had itself claimed the benefit of the provisions contained in section 43A(1) of the Income-tax Act, 1961, for the purposes of claiming depreciation on the plant, it would not be open to the assessee to argue that section 43A(2) would not apply. There can be no doubt that when the conditions of sub-section (1) of section 43A are met and it applies, sub-section (2) must also apply. We proceed upon this basis.
9. The question, therefore, is of interpreting sub-section (2) of section 43A of the Income-tax Act, 1961.
10. According to Mr. Dhanuka, sub-section (2) of section 43A of the Income-tax Act, 1961, means that the additional cost resulting from the change in the exchange rate due to devaluation cannot be taken into account in computing the actual cost of the asset for the purpose of calculating development rebate. It was contended by Mr. Dhanuka that the non obstante clause with which sub-section (1) begins, operates also in regard to sub-section (2). Mr. Dhanuka urged that section 43A is a special provision which operates to the exclusion of general provisions of the Act, like section 33. Mr. Dhanuka relied upon the Notes on Clauses of the Finance (No. 2) Bill, 1967, by which section 43A was introduced. Clause 17 deals with section 43A. In regard to sub-section (2) thereof, it states 1967 64 ITR 170.
'The additional rupee liability incurred on imported capital assets or, as the case may be, any decrease in such liability, in the circumstances stated in the earlier paragraph will not, however, be taken into account in computing the actual cost of the asset for the purpose of deduction on account of development rebate.'
11. Our attention was drawn by Mr. Dhanuka to the decision of the Madras High Court in South Indian shipping Corporation Ltd. v. Addl. CIT : 116ITR819(Mad) . A Division Bench of the Madras High Court was dealing with the question whether, on the facts and in the circumstances of that case, the Tribunal was right in holding that, in computing the actual cost for the purpose of calculating development rebate under section 33 of the Income-tax Act, 1961, no upward adjustment of the amount which the assessee had to bear as a result of devaluation of the rupee should be made. After quoting section 43A, the court said that the Legislature had clearly intended not to take into account the variation in the cost of acquisition of an asset arising out of devaluation for the purpose of granting development rebate under section 33. In the circumstances, it was of the opinion that the general principles, according to which the increase in the cost of an asset arising out of devaluation had to be treated as part of the cost of the asset, could not be applied for the purpose of granting development rebate under section 33 in view of the definite provision against it in section 43A(2). The court considered its earlier judgment in Addl. CIT v. Kwality Spinning Mills (P.) LTD. : 109ITR646(Mad) , and observed that the decision would not apply to the facts of the case before them 'for, in that case, the actual cost of the machinery had increased due to the devaluation of the rupee even before the date of the acquisition.'
12. Reference to the judgment in the Kwality Spinning Mills (P.) Ltd. case : 109ITR646(Mad) , shows that the 'actual cost of the said machinery had increased consequent on the increase in the rate of exchange on the devaluation as they were acquired before the date of devaluation'. In other words, the facts there were such that section 43(1) of the Income-tax Act, 1961, was applicable. The question there raised was whether it had been rightly held that the assessee was entitled to development rebate on the increased - price payable on the asset as a result of fluctuation in the exchange rate on devaluation. It was held that the effect of sub-section (2) of section 43A was to exclude the applicability of sub-section (1) thereof for the computation of the actual cost for the purpose of deduction on account of development rebate under section 33. Therefore, for the purposes of computing the actual cost of an asset for the purpose of deduction on account of development rebate under section 33, the only statutory provision relevant was section 43(1) defining the expression 'actual cost'.
13. We may also note the decision of the Calcutta High Court in Union Carbide India Ltd. v. CIT : 130ITR351(Cal) . The view taken by the Madras High Court in the case of Kwality Spinning Mills (P.) Ltd. : 109ITR646(Mad) was preferred by the Calcutta High Court to the view subsequently taken by that court in the case of South India Shipping Corporation Ltd. : 116ITR819(Mad) .
14. In our view, sub-section (2) of section 43A provides that, in calculating the deduction on account of development rebate, the method provided under sub-section (1) of section 43A of the Income-tax Act, 1961, is not to be employed. That calculation is, in other words, to be made only upon the basis of section 33. In yet other words, in calculating the deduction on account of development rebate, one must proceed as if section 43A(1) does not appear on the statute book.
15. Even assuming that a non obstante clause is to be read as prefixed to sub-section (2) of section 43A of the Income-tax Act, 1961, no difference is made to the aforesaid interpretation. The special provision of section 43A(1) is in respect only of depreciation and does not affect the general provision in the statute in respect of development rebate. In So far as the Notes on Clauses are concerned, we can only say that the phraseology of Sub-section (2) Of section 43A does not express the intention of the Legislature conveyed thereby.
16. In the result, the question posed to us must be answered thus : The Tribunal was righting holding that, for the purposes Of computing the deduction on account Of development rebate, the provisions of section 43A(1) of the Income-tax Act, 1961, shall be ignored.
17. The Tribunal shall now consider what deduction on account of development rebate is allowable to the assessee having regard to the provisions Of section 33 read with section 43(1) Of the Income-tax Act, 1961, and the parties shall be at liberty to address the Tribunal on what should constitute the actual cost Of the asset and as Of which date.
18. The Revenue shall pay to the assessee the costs Of the reference.