Commissioner of Income Tax vs Tata Hydro Electric Power Supply Co. Ltd. Commissioner of Income Tax Vs Tata Power Co. Ltd. Commissioner of Income Tax Vs Andhra Valley Power Supply Co. Ltd.

Kania, Actg.C.J.

These are six references arising on a statement of the case submitted u/s 256(1) of the Income Tax Act, 1961. The assessment years with which we are concerned are the assessment years 1970-71 and 1971-72. References Nos. 287 and 287A of 1975 relate to Tata Hydro Electric Power Supply Co. Ltd., References Nos. 287B and 287C of 1975 relate to the Tata Power Co. Ltd. and References Nos. 287D and 287E of 1975 relate to Andhra Valley Power Supply Co. Ltd. As the references arise on a common statement of the case and the question referred to us for our determination is the same, we propose to dispose of these references by this common judgment.

The three assessees are companies doing the business of generation and supply of electric power to consumers. They belong to the Tata group of companies. The assessee companies undertook the erection of a thermal power-station at Trombay and the erection of that power station was completed during the previous years relevant to the assessment years l958-59 and 1959-60, respectively. For the purpose of purchase of the machinery required for the setting up of the said thermal power-station, the assessee raised loans from the World bank. According to the terms of the loan agreements under which the said loans were given, they were repayable in foreign currencies and in installment agreed to between the World Bank and the said assessee companies. The foreign currencies in which these loans were to be repaid were Deutsche Marks (referred to hereinafter as "Marks") and Netherland Guilders (referred to hereinafter as "Guilders"). There was a revaluation of Marks and Guilders on March 7/8, 1961, respectively. As a result of this revaluation, there was an increase in the liability to repay these loans in terms of rupees and this increase in liability to repay the loans came to Rs. 21,82,062 on March 7/8, 1961. In the assessment for the assessment years 1970-71 and 1971-72, the assessee companies claimed depreciation on account of increased liability for development as aforesaid on the sum of Rs. 18,46,023. The said amount of Rs. 18,46,023 was arrived at by deducting from the increased liability on March 7/8, 1961, a sum of Rs. 3,36,039 being loss written off during the period March 7, 1961, to June 6, 1966. The assessee further reduced the sum by deducting the notional amount of depreciation which would have been allowed for the assessment years 1967-68, 1968-69 and 1969-70, respectively, and claimed depreciation on the increased liability after deducting these amounts. The Income Tax Officer concerned allowed the claim of the assessees to depreciation on the increased liability reduced as aforesaid. The Additional Commissioner of Income Tax, however, called for and examined the records of the assessee companies. He took the view that the assessment orders passed by the Income Tax Officer allowing depreciation on the basis of the increased liability on account of revaluation of the German and Dutch currencies as aforesaid was erroneous and prejudicial to the interests of the Revenue inasmuch as, according to him, u/s 43A of the Income Tax Act, 1961, the adjustment for increased liability could be allowed only if the aforesaid liability was increased or decreased during the relevant previous year in consequence of a change in the rate of exchange. The assessees preferred appeals to the Income Tax Appellate Tribunal. The Tribunal agreed with the assessees submission that the provisions of section 43A were applicable to the cases of the assessees and that the increase in the assessees'' liability for repayment of loan on revaluation of the Dutch and German currencies went to add to the capital cost of the assessees. It is from this decision of the Tribunal that the following question has been posed for our consideration :

"Whether, on the facts and in the circumstances of the case, the assessees are entitled to depreciation for the years under reference on the basis of the claim that the increase in the assessees'' liability by Rs. 18,46,023 to repay the loan to the World Bank as a consequence of the revaluation of the German and Dutch currencies went to add to the cost to the assessees of the assets purchased outside India ?"

It is clear that the claim of the assessees is based on the provisions of section 43A of the Income Tax Act, 1961, which was inserted by section 17 of the Finance (No. 2) Act, 1967, with effect from April 1,1967. Mr. Jetly, learned counsel for the Revenue, put forward three submissions. The first submission was that the provisions of section 43A apply only to a case where the revaluation or devaluation of the foreign currency in question takes place after April 1, 1967. It was further submitted by him that in order to get the benefit of the provisions of section 43A, the capital asset in question must have been acquired after April 1, 1967. The third and the last submission of Mr. Jetly was that, in any event, in the present case, the assessees were not entitled to the benefit of the provisions of section 43A, because they had not capitalised their increased liability on account of revaluation of German Marks and Dutch Guilders.

In order to appreciate the submission of Mr. Jetly, it is necessary to bear in mind the provisions of section 43A of the Income Tax Act, 1961. The relevant provisions of that section read thus.

"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.."

The rest of the section is not material for our purposes. It may be mentioned here that depreciation is provided for u/s 32 of the Income Tax Act, 1961. That depreciation in a case like this would be with reference to the actual cost of machinery or plant installed. Section 43 defines the term "actual cost" for the purposes of sections 28 to 41. Section 43A contains certain special provisions which govern the meaning of the term "actual cost" as defined in section 43 where there is a change in the rate of exchange of the foreign currency involved in the acquisition of the assets whose actual cost is to be determined for the purpose of claiming depreciation. Mr. Jetly urged that the provisions of section 43A were not retrospective but were merely prospective, that is, they came into effect from April 1, 1967, and he stated that his first two submissions were based on the prospective nature of section 43A. We agree, and there is no controversy before us in that regard, that the provisions of section 43A are prospective. What is important, however, is to consider what is the sense in which the provisions of this section are prospective. In our view, on a plain reading of the relevant portion of section 43A, it makes it clear that all that is meant by saying section 43A is prospective is that the variation in the actual cost provided u/s 43A will be applicable only where depreciation has to be calculated in respect of a relevant previous year or accounting period ending after April 1, 1967. There is nothing in the language of this section to suggest that the asset in question must have been acquired after April 1, 1967, or that devaluation or revaluation of the foreign currency must take place after that day in order that the provisions of the section may come into play. In fact, the expression used in connection with the asset is "... where an assessee has acquired..." Regarding the change in the rate of exchange, all that is provided is that the change in the rate of exchange must take place after the acquisition of the asset in question. Since the language of the section makes it clear that the asset could have been acquired prior to April 1, 1967, it must necessarily follow that merely because the devaluation of foreign currency takes place before April 1, 1967, it cannot be said that the section would not apply. All that is required is that the revaluation or devaluation must take take place after the asset is acquired. In view of what we have discussed, the first two submissions of Mr. Jetly must be rejected.

Coming to the third submission of Mr. Jetly, regarding capitalisation of the increased liability, we are somewhat at a loss to understand this submission. Depreciation is, generally speaking, granted on capital assets. In the present case, there is no doubt that the machinery for the purchase of which the foreign loan was obtained did constitute a capital asset. If there is an increase in the liability in respect of the actual cost of that machinery, that increase must necessarily relate to the capital asset and we fail to see what difference it makes whether the assessee shows the value of the capital asset as having increased on account of increased liability in the balance-sheet or does not do so. As we have pointed out, section 43A of the Income Tax Act, 1961, only deals with the effect of a change in the rate of exchange with the foreign currency concerned in determining the "actual cost" referred to in section 43 and there is nothing in the language of section 43 to indicate that the actual cost has anything to do with the cost of the asset in question being capitalised or not. The last submission of Mr. Jetly must also be, therefore, rejected.

In the result, the question referred to us is answered in the affirmative and in favour of the assessee.

The Commissioner to pay to the assessees the costs of these references in one set.