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Commissioner Of Income-Tax v. Baker Mercer India P. Ltd.
Factual and Procedural Background
The Department sought to raise four questions under section 256(2) of the Income-tax Act, 1961, directing the Tribunal to refer these questions for consideration. The questions primarily concern the validity of the Tribunal's cancellation of the Commissioner of Income-tax's order under section 263, the applicability of rule 115 of the Income-tax Rules, 1962, adjustments to the cost of plant and machinery due to exchange fluctuations for depreciation under section 43A, the calculation of capital employed for relief under section 80J, and the entitlement to investment allowance under section 32A in respect of technical know-how.
The assessee had purchased plant and machinery from abroad financed by loans from ICICI repayable in foreign currency. Exchange rate fluctuations increased the rupee liability, leading the assessee to adjust the cost of the assets upwards and claim depreciation accordingly. The Tribunal held that certain provisions were not correctly applied, prompting the Department to request these questions be referred for judicial consideration.
Legal Issues Presented
- Whether the Tribunal was justified in law in cancelling the Commissioner of Income-tax's order under section 263, holding that the provisions of section 263 were not correctly invoked.
- Whether the Tribunal was justified in law in holding that rule 115 of the Income-tax Rules, 1962, was not correctly applied and that no adjustment for exchange fluctuations to the cost of plant and machinery is warranted for depreciation under section 43A.
- Whether the Tribunal was justified in law in holding that no adjustment to the cost or written down value of depreciable assets on account of exchange fluctuations is necessary for calculating ‘capital employed’ in the new industrial undertaking under section 80J.
- Whether the Tribunal was justified in law in holding that the assessee is entitled to investment allowance under section 32A in respect of technical know-how and that no withdrawal of such allowance is required.
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner Of Income-Tax, Bombay City-II v. Emco Electro Pvt. Ltd., [1979] 118 ITR 864 | Broad construction of the term “plant” to include technical know-how for depreciation and development rebate. | Supported the view that technical know-how qualifies as “plant” for investment allowance under section 32A. |
| Scientific Engineering House P. Ltd. v. CIT, [1986] 157 ITR 86 (SC) | Held that “plant” includes technical know-how, documentation, drawings, designs, plans, processing data for depreciation purposes. | Reinforced the inclusion of technical know-how under “plant” for section 32A investment allowance. |
| Commissioner Of Income-Tax (Central) Bombay v. Saraspur Mills Ltd., [1959] 36 ITR 580 | Interpreted “plant installed” broadly as “inducted or introduced” rather than strictly fixed in position. | Applied to justify that “installed” in section 32A does not exclude technical know-how. |
| Commissioner Of Income Tax, Madras v. Mir Mohammad Ali, [1964] 53 ITR 165 | Approved the broad interpretation of “machinery installed” as something inducted or introduced. | Confirmed the reasoning that section 32A’s “installed” does not preclude technical know-how. |
Court's Reasoning and Analysis
The court analyzed each question in light of the statutory provisions and relevant precedents:
- Regarding questions 2 and 3, the court emphasized that section 43A of the Income-tax Act, 1961, clearly mandates that any increase in liability due to exchange rate fluctuations for acquiring assets from abroad must be added to the actual cost of the asset. This increased cost is then the cost of acquisition for depreciation and capital employed calculations. Consequently, the Tribunal's holding that no adjustment was needed was incorrect for question 3, but question 2 was dismissed because rule 115 relates to income accruing or arising, not to asset valuation.
- For question 4, the court examined the meaning of “plant” under section 32A and relevant case law, concluding that technical know-how falls within the broad meaning of “plant” and is therefore eligible for investment allowance. The presence of the word “installed” in the statute does not exclude technical know-how, as prior judicial interpretations treat “installed” as “inducted or introduced.”
- For question 1, the court found that the Tribunal was correct in holding that the Commissioner of Income-tax's invocation of section 263 was not justified, and thus no reference was necessary.
- Ultimately, the court found that questions 1, 2, and 4 did not warrant framing or referral by the Tribunal, while question 3 was answered clearly by section 43A.
Holding and Implications
The rule is discharged with no order as to costs.
This decision directly resolves the questions raised by the Department without requiring the Tribunal to frame these questions for reference. It confirms that:
- The Commissioner of Income-tax's order under section 263 was rightly cancelled by the Tribunal.
- Rule 115 of the Income-tax Rules, 1962, does not apply to valuation adjustments of plant and machinery for depreciation.
- Section 43A requires upward adjustment to the cost of assets for exchange fluctuations when financed by foreign currency loans.
- Investment allowance under section 32A applies to technical know-how, notwithstanding the word “installed.”
No new precedent was established beyond affirming existing statutory interpretations and case law.
Sujata V. Manohar, J.:— At the instance of the Department, the following questions are sought to be raised under section 256(2) of the Income-tax Act, 1961, for the purpose of directing the Tribunal to refer these questions to us:
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in cancelling the order of the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961, holding that the provisions of section 263 were not correctly invoked in this case?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the provisions of rule 115 of the Income-tax Rules, 1962, were not correctly applied to the facts of this case and that no adjustments to the cost of the plant and machinery on account of exchange fluctuations is called for for the purposes of allowing depreciation under section 43A of the Income-tax Act, 1961?
3. Whether, on the facts and in the circumstances of the case, and in law, the Tribunal was justified in holding that no adjustment of the cost or written down value of depreciable assets on account of exchange fluctuation is called for for arriving at the ‘capital employed’ in the new industrial undertaking for the purpose of working out the relief under section 80J of the Income-tax Act, 1961?
4. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessee is entitled to investment allowance under section 32A in respect of technical know-how and that no withdrawal of such allowance granted by the Income-tax Officer in the assessment is called for?”
2. Questions Nos. 2 and 3 relate to the plant and machinery which the assessee had purchased from abroad through the Industrial Credit and Investment Corporation of India Ltd. (ICICI). Loans were advanced for this purpose by the ICICI, repayable in foreign currency. The repayment was made by the assessee by instalments. Rupee payments for equivalent foreign currency were made at the exchange rates intimated by the ICICI.
3. On account of upward revision of the value of the foreign currency visa-vis the rupee, the assessee was required to pay more in terms of rupees while repaying the loans. The assessee, accordingly, had to adjust upwards the cost of its plant and machinery from time to time on account of fluctuations in the exchange rates. The assessee also claimed depreciation on the basis of such additional cost arising as a result of adjustment in the rates of exchange.
4. In view of the clear provisions of section 43A of the Income-tax Act, 1961, which are directly applicable to the present case, it is clear that, when an assessee has acquired an asset from a country outside India for the purposes of his business and, in consequence of a change in the rate of exchange at any time after the acquisition of such asset, there is an increase in the liability of the assessee as expressed in Indian currency for making payment towards the cost of the asset or for repayment of the whole or a part of the moneys borrowed by him in any foreign currency specifically for the purpose of acquiring the asset, the amount by which the liability is so increased shall be added to the actual cost of the asset for the various purposes which are set out in section 43A and the increased cost shall be the cost of acquisition of the asset. The answer to question No. 3 is, therefore, obvious.
5. Rule 115 of the Income-tax Rules, 1962, which is the basis for question No. 2, has no application because the said rule is in respect of income accruing or arising and not in respect of the valuation of plant and machinery. Question No. 2 is, therefore, wholly misconceived and does not arise out of the order of the Tribunal.
6. Question No. 4 relates to investment allowance under section 32A of the Income-tax Act, 1961, in respect of technical know-how. Our High Court, in the case of Commissioner Of Income-Tax, Bombay City-Ii v. Emco Electro Pvt. Ltd., [1979] 118 ITR 864, considered the meaning of the word “plant” for the purpose of depreciation and development rebate. It said that: “plant” is a word of wide import and must be broadly construed. It held that “plant” would include technical know-how also. The Supreme Court, in the case of Scientific Engineering House P. Ltd. v. CIT, [1986] 157 ITR 86, has also held that, for the purposes of depreciation, the term “plant” is wide enough to include technical know-how and documentation such as drawings, designs, plans, processing data, etc.
7. In Income-tax Application No. 106 of 1988 (CIT v. Deepa Aromatics Pvt. Ltd.), however, by an order dated August 3, 1990, we had granted rule on the question whether investment allowance under section 32A of the Income-tax Act, 1961, can be allowed in respect of technical know-how because, under section 32A, the phrase used is “machinery or plant installed”, (emphasis* ours). This would prima facie exclude technical know-how which cannot be installed. Mr. Dastur, learned counsel for the assessee, has, however, drawn our attention, in the present case, to the decision of our court in Commissioner Of Income-Tax (Central) Bombay v. Saraspur Mills Ltd.…Assessee., [1959] 36 ITR 580, where similar provisions relating to development rebate under section 10(2)(vib) of the Indian Income-tax Act, 1922, were considered. The court considered the expression “plant installed” in that section and said that it did not necessarily mean something fixed in position but it should be construed widely in the sense of “inducted or introduced”. This decision has been expressly approved by the Supreme Court in Commissioner Of Income Tax, Madras v. Mir Mohammad Ali , [1964] 53 ITR 165. The Supreme Court also said that “machinery installed” should be interpreted as used in the sense of something which is inducted or introduced.
8. In view of the above decisions which were not pointed out to us in the earlier income-tax application, in our view, the question does not now need any further consideration. Simply because the word “installed” is used in section 32A of the Income-tax Act, 1961, technical know-how does not get excluded from the term “plant”. Section 32A, therefore, applies to technical know-how also. The ratio of the decisions in Commissioner Of Income-Tax, Bombay City-Ii v. Emco Electro Pvt. Ltd., [1979] 118 ITR 864 (Bom) as well as in Scientific Engineering House Pvt. Ltd. v. CIT, [1986] 157 ITR 86 (SC), therefore, applies to the present case. In view of these judgments, the answer to question No. 4 is also obvious. No useful purpose can, therefore, be served now by referring this question under section 256(2) of the Income-tax Act, 1961, for being framed by the Tribunal.
9. As far as question No. 1 is concerned, in our view, the Tribunal has rightly come to a conclusion, in the above circumstances, that no occasion has arisen to invoke the provisions of section 263 of the Income-tax Act, 1961. The answer to question No. 1 is also, therefore, obvious and no purpose would be served by asking the Tribunal to frame this question.
10. The rule is, therefore, discharged, with no order as to costs.
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