1. These appeals filed by the Revenue involve common issues and therefore we proceed to dispose of these appeals by a combined order for the sake of convenience.
2. The issue centers round the interpretation of Section 43A(1) of the Income Tax Act with reference to the entitlement of depreciation under Section 32 of the of the Act.
3. The facts of the case revolve in a narrow compass. The assessee company is engaged in the business of manufacture and sale of Oxo Alcohol. It imported plant and machinery with an understanding that the purchase consideration is payable in foreign currency. During the years under consideration there was increase in the value of the assets on account of exchange rate fluctuation and accordingly the assessee claimed higher depreciation taking into consideration the enhanced liability on account of exchange rate fluctuation. The Assessing Officer was of the view that 'actual cost' for the purpose of claiming depreciation, has to be worked out with reference to the cost incurred at the time of purchase of the plant and machinery and additional amount paid through instalments. In other words, differential amount payable in future instalments should not be taken into consideration.
In this regard he observed, in the order for the assessment year 1995-96, as under: At the outset it can be stated that the Ministry of Law has clarified vide their clarification dated 11-10-84 at point No. 10 as under.
We are also of the opinion that the payment giving rise to increase or decrease at the time of repayment would be increase or decrease of capital nature. Intermediary fluctuations in the rate of exchange would not be relevant.
Secondly, as regards to the general principle quoted by the Authorised Representative of the assessee, it can be pointed out that to allow capitalization of loss accruing on account of exchange fluctuations on the outstanding liability is inadmissible as the entire consideration or payment is not due in the relevant assessment year. The computed additional liability is only a notional figure and unless payment effected it has no sanctity and the assessee's perception of liability recognition may change. Thus, the liability to the extent discharged and the proportionate increase thereto can only be capitalized for that year and the fluctuation in value is to be reckoned at each time the liability is paid off. This being the intention of the Act, the clarification by Ministry of Law is also commensurate with the provisions of determination of real income. Otherwise, assessee defaulting in payment of instalments or not making payment at all shall take the provisions of Act for a ride if the enhanced depreciation view is accepted.
Thirdly, the statute itself is very much clear and Section 43A being a special provision starting from non-obstante Clause overrides the general provision regarding allowance of depreciation and development rebate etc. Nowhere in Section 43A, Section 32 has been discussed although reference has also been made to Section 43(1) specifically with reference to Section 35(1), 35A, 36, 50 and 48.
Further, the language of the Section is for making payment towards whole or a part of the cost of the asset or for repayment of whole or a part of the money borrowed by him or any person. From this it is also clear when a part payment is made, to the extent of that part payment exchange fluctuation is to be reckoned. It shall be increased or decreased at each time the liability is paid off, but not for the entire amount when the entire amount is neither due nor paid during the previous year.
4. On an appeal filed by the assessee, the first appellate authority accepted the claim of the assessee in the light of the following decisions.
He further observed that identical issue was considered by him in the case of Dredging Corporation of India Limited. It is necessary to notice here that by the Finance Act 2002, the Legislature amended the provisions of Section 43A of the Act with effect from 1.4.2003 whereby actual payment was made the basis for claiming depreciation on the cost of the assets. The learned CIT(A) observed that the Legislature having consciously modified the provisions with prospective effect, i.e., with effect from 1.4.2003, the same cannot be applied to the assessment years under consideration. He further observed that the assessee having followed Mercantile system of accounting, the cost of the asset has to be determined on accrual basis irrespective of the actual dates of payment.
5. Aggrieved, the Revenue is in appeal before us. The learned Counsel appearing on behalf of the assessee strongly supported the order passed by the first appellate authority. He placed reliance upon the clarification issued by the Ministry of Law to submit that any intermediary fluctuations in the rate of exchange would be of no relevance for the purpose of determining the actual cost of an asset.
The notional liability may vary on a day-to-day basis and the exchange rate fluctuation as on the last day of the accounting year would lead to an anomalous situation inasmuch as the assessee the defaults in payment may enjoy enhanced depreciation even though he is otherwise not entitled to such claim, because so far as such assessee is concerned, the actual cost is a cost which was paid by it. He then adverted our attention to the decision of the Hon'ble (sic) High Court, in C.I.T. v.Jeypore Sugars Limited 175 ITR 627, referred to by the learned CIT(A), to submit that the Hon'ble Court had no occasion to deal with specific issue of determination of actual cost. Similarly, the Apex Court in the case of C.I.T. v. Aravind Mills (supra) was mainly concerned with the allowability of development rebate and in the process made certain passing remarks, which cannot be treated as obiter dicta. He then placed reliance upon the following decisions to submit that day-to-day fluctuations will have no relevance in determining the actual cost and the actual payment made by the assessee needs to be taken into consideration.
He thus strongly submitted that the amended provisions merely clarify the intention of the Legislature and thus it has retrospective operation. Even otherwise, the expression "for making payment" used in Section 43A prior to its substitution with effect from 1.4.2003 also indicate that actual payment has to be taken into consideration and not the mere liability arising on account of exchange rate fluctuation on the last day of the previous year.
6. On the other hand, learned Counsel appearing on behalf of the assessee strongly relied upon the order passed by the first appellate authority. In short, the case of the learned Counsel is that prior to the substitution by the Finance Act, 2002, Section 43A uses the expression, "there is an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment towards the whole or part of the cost of the asset", which implies that the Legislature was concerned with the liability arising out of the exchange rate fluctuation and not with reference to the actual payment of such liability, whereas the amended provisions specifically refer to the payment as the basis for determining the actual cost. Since the provisions were consciously brought into Statute with prospective effect, the interpretation of the learned CIT(A) with regard to the un-amended provisions deserve to be accepted.
7. In respect of assessment year 2002-2003, the learned C1T(A) was of the opinion that the amended provisions of Section 43A are merely clarificatory in nature and strongly relied upon the decision of the Hon'ble Gujarat High Court in the case of C.I.T. v. Gujarat State Fertilizer Co. Ltd. in coming to the conclusion that only the actual payment of instalment should be taken into consideration for determining the actual cost of the asset.
8. The arguments advanced by both the parties in respect of appeals of earlier assessment years are applicable to the year under consideration also.
9. An addition issue arises out of the order passed by the CIT(A) for the assessment year 2002-2003, i.e., whether unabsorbed depreciation of the assessment year 1994-95 can be carried forward to the year 2003-2004. Section 32(2) of the Act has undergone several changes; w.e.f. 1.4.1997 the Section was amended whereby the liberty granted to the assessee to treat the unabsorbed depreciation as current year's depreciation of next year and so on was curtailed and the status of unabsorbed depreciation was brought on par with unabsorbed losses of the earlier years, but with effect from assessment year 2002-2003 the Legislature kept in mind the growth of industry and the problems faced by them and accordingly revived the earlier provisions of permitting an assessee to carry-forward the depreciation for being set off in the subsequent years by treating it as current year's depreciation.
According to the Assessing Officer, the period of eight years expires for the assessment year 2003-2004 and therefore did not carry-forward the unabsorbed depreciation of the assessment year 1994-95 while passing the order for the assessment year 2002-2003.
10. Aggrieved, the assessee contended before the learned CIT(A) that the amended provisions of Section 32(2) of the Act are effective from the assessment year 2002-2003 whereby any unabsorbed depreciation to which full effect could not be given in the previous year, can be carried forward to the following previous year and it shall be deemed to be part of the allowance of that year. Since the assessment year 2002-2003 falls within the eight years period, the amended provisions come into play whereby depreciation which .could not be adjusted in this year has to be carried forward to the subsequent year. The case of the assessee was that the provisions as they existed prior to the amendment were withdrawn by the Finance Act, 2001 and thus the Assessing Officer was not justified in denying the benefit of carried forward of depreciation of the assessment year 1994-95. The learned CIT(A) rejected the contention of the assessee and thus the assessee is in appeal before us.
11. The learned Counsel appearing on behalf of the assessee strongly relied upon the Circular issued by the C.B.D.T. 230 ITR 26 (Statutes) to submit that the amendment made to Section 32(2) of the Act was clarified by the C.B.D.T. by stating that the limitation of eight years shall start from the assessment year 1997-98, in which event the depreciation of the assessment year 1994-95 can be carried forward for being set off for eight consecutive years from the assessment year 1997-98 in which event, the Assessing Officer was not justified in rejecting the claim of the assessee for the year 2002-2003. Even otherwise, the Legislature consciously dispensed with the restriction of eight years for carried forward and set off of unabsorbed depreciation which was explained by the C.B.D.T. in its Circular No. 14 of 2001 and thus unabsorbed depreciation carried forward to the assessment year 2002-2003 has to be considered as per the provisions as amended by the Finance Act, 2001 in which event the assessee would be entitled to carry forward depreciation of the assessment year 1994-95 to the assessment year 2003-2004.
12. On the other hand, learned DR strongly relied upon the orders passed by the tax authorities.
13. We have carefully considered the rival submissions and perused the record. As regards the first issue, it is noticed that the decisions cited by the learned DR are with reference to the claim of investment allowance and there is no direct decision in favour of the Revenue with regard to the allowability of depreciation on the enhanced cost. As against this, the assessee placed reliance upon the decision of the Hon'ble Gujrat High Court in the case of New India Industries Ltd. (supra) wherein the Court considered identical issue and by relying upon the decision of the Apex Court in the case of Arvind Mills Ltd. (supra) the Court observed as under: ...In our opinion, the contention raised on behalf of the Revenue that the liability to pay the price of the asset arose only when the instalments became due and payable cannot be accepted for the reason that we are considering a provision which is made, inter alia, for the purpose of determining the allowability of depreciation allowance. If the assessee becomes the owner of the machinery and starts using the same, it would become entitled to depreciation allowance. It is for the purpose of working out the amount of depreciation that one has to look at the cost of the asset in respect of which depreciation is claimed. It is in this context that we have to consider as to when the liability can be said to have arisen. If the contention raised on behalf of the Revenue is accepted, then it would defeat the very purpose of the provision. As pointed out by the Supreme Court, Section 43A was introduced with a view to mitigate hardships which were likely to be caused to the assessees as a result of fluctuation in the rate of exchange.
Similar view was express by the Hon'ble Madras High Court in the case of C.I.T. v. Madras Fertilizers Ltd. reported in (2002) 177 CTR (Mad.) 135, wherein the Court observed that enhancement of cost due to variation in exchange rate fluctuations has to be considered for determining the actual cost even with regard to the loan outstanding as at the end of each accounting year and not merely instalments of loan actually paid during the accounting year. The I.T.A.T., Delhi Bench also had an occasion to consider an identical issue in the case of Rajasthan Petro Synthetics Ltd. v. D.C.I.T.  60 ITD 682 wherein the Court observed that depreciation is allowable only on increased liability, i.e., the liability on dates of actual payment of instalments as well as the liability of the closing balance of loans as on the last day of the previous year. Even otherwise, a plain reading of the provisions as it existed prior to its substitution by the Finance Act, 2002, clearly postulate determination of actual cost with reference to the "increase in the liability" and not with reference to the actual payment made. Under these circumstances, we are of the opinion that the amended provisions, consciously brought into force with effect from 1.4.2003 by the Legislature, cannot be said to be clarificatory in nature and as per the provisions as applicable for the years under consideration, the decisions cited supra fully support the stand of the assessee. We, therefore, dismiss the appeals filed by the Revenue for the assessment year 1994-95 to 1999-2000.
14. Insofar as the appeal filed by the assessee for the assessment year 2002-2003 is concerned, the order passed by the Assessing Officer as well as the CIT(A) stand reversed and we direct the Assessing Officer to allow depreciation on the actual cost of the asset to be determined with reference to the provisions of Section 43A(1) of the Act, as explained by us in the preceding paragraphs.
15. The only other issue remains for the assessment year 2002-2003 is with regard to the entitlement to carry-forward depreciation pertaining to the assessment year 1995-95. The provisions as applicable for the assessment year 1994-95 do not restrict carry-forward of depreciation for any specified period and as per the provisions as they existed then, the depreciation carried forward from the earlier years has to be treated as current year's depreciation in which event, the depreciation of the assessment year 1994-95 has to be treated as the current year's depreciation for the assessment year 1995-96 and so on. However, by virtue of the amendment to the provisions with effect from 1.4.1997 carried forward depreciation is available for set off only for a period of eight years and the C.B.D.T. has clarified the amended provisions by stating that the limitation of eight years shall start from the assessment year 1997-98 by which the assessee would be entitled to carry forward the unabsorbed depreciation upto the assessment year 2004-2005. However, by the Finance Act, 2001 with effect from 1.4.2002, the old provisions were revived by dispensing with the restriction of eight years for carry forward and set off of unabsorbed depreciation.
As on 1.4.2002 the assessee's right to carry forward the depreciation of the assessment year 1994-95 being alive and available for set off, the amended provisions come into play, in which event the same has to be determined since it has to be carried forward to the next year.
16. In our considered opinion, the Assessing Officer as well as the CIT(A) have not considered the plain meaning of the provisions in correct perspective. We, therefore, set aside the orders passed by the tax authorities on this issue and direct the Assessing Officer to permit the assessee to carry-forward the depreciation referable to the assessment year 1994-95.
17. In the result, the appeals filed by the Revenue are dismissed and the appeal filed by the assessee is allowed.