Investment Allowance Available On Exchange Rate Fluctuation: Bombay High Court

The Bombay High Court has held that investment allowance is available on exchange rate fluctuations.

The bench of Justice G. S. Kulkarni and Justice Somasekhar Sundaresan has relied on the decision of the Supreme Court in the case of Commissioner of Income-Tax vs. Ambika Mills Ltd., in which it was held that investment allowance, consequent to exchange rate fluctuation, would be allowable.

The appellant/assessee is in the business of shipping and has acquired a vessel by the name of M/s. M.V. Prabhu Das. The acquisition was paid for in foreign currency, for which a foreign currency loan had been taken. In the return of income filed by the assessee, in terms of Section 32A as that section then stood, a deduction at the rate of 20% of the actual cost of the ship owned by the assessee and wholly used for the purpose of the business of the assessee was claimed.

Section 32A(3) contemplates that the assessee may carry forward a claim for a period of not more than eight years immediately succeeding the assessment year relevant to the previous year in which the vessel was acquired.

What is in dispute is the investment allowance additionally claimed by the assessee with regard to the additional cost arising out of fluctuations in the foreign currency exchange rate.

As per the department, there was no provision under which additional investment allowance could be claimed on the basis of costs incurred due to the exchange rate fluctuation.

The Income Tax Appellate Tribunal (ITAT) placed reliance on a judgment of Khatau Makanji Spining and Weaving Co. Ltd. vs. . Commissioner of Income-Tax in which it was held that the assessee was not entitled to claim investment allowance to the extent of exchange rate fluctuations.

The assessee contended that the judgment of Khatau Makanji Spining and Weaving Co. Ltd. vs. . Commissioner of Income-Tax was passed in ignorance of law and was held to be per incuriam in the case of Associated Bearing Co. Ltd. vs. . Commissioner of Income-Tax, and this view was later followed in Commissioner of Income-Tax-2 vs. . Tata Chemicals Ltd.

The court held that in the backdrop of the provisions of Section 32A and in view of the judgments, the question of law deserves to be answered in favor of the appellant and against the department.

The court, while allowing the appeal, held that the investment allowance would necessarily need to factor in the exchange rate fluctuations as claimed.

Counsel For Appellant: Atul K. Jasani

Counsel For Respondent: Suresh Kumar

Case Title: M/s. Tolani Ltd. Versus DCIT

Case No.: Income Tax Appeal No. 242 Of 2004

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