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South India Shipping Corporation Ltd. v. Addl. Commissioner Of Income-Tax, Madras
Judgment Summary — Varadarajan, J.
Factual and Procedural Background
The Income-tax Appellate Tribunal, Bangalore Bench, referred a question to this Court arising from the assessee's claim for development rebate in respect of two imported ships. The assessee, a resident shipping company, returned a loss for the assessment year 1967–68 and claimed development rebate at 40% on the cost of the two ships after accounting for the effect of the rupee devaluation of June 6, 1966.
The ships were purchased from a foreign shipbuilding yard and the full payment to the yard was completed on January 25, 1966 and April 21, 1966 (both before the devaluation). Payment arrangements involved the assessee paying 15% and a consortium of West German banks disbursing the balance (85%) directly to the shipyard under an associated loan/credit arrangement.
Procedurally: the ITO allowed a development rebate only on the undisputed actual rupee cost (denying upward adjustment for devaluation), the AAC dismissed the assessee's appeal, and the Tribunal also dismissed the appeal. The Tribunal then referred the central question to this Court: whether the Tribunal was right in holding that no upward adjustment of Rs. 2,64,24,737 (attributable to devaluation) should be made in computing actual cost for development rebate under s.33.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in computing the actual cost for the purpose of calculating development rebate under s.33 no upward adjustment of Rs. 2,64,24,737 (which the assessee had to bear as a result of devaluation of the rupee) should be made?
Arguments of the Parties
Assessee's Arguments
- The assessee claimed development rebate at 40% on the revised rupee cost of the two ships after devaluation, treating the additional liability resulting from devaluation as part of the actual cost of the ships.
- On general accounting and legal principles the extra liability incurred in respect of a capital asset (here, increased rupee liability arising from devaluation) ought to be added to the cost of the asset; the assessee had in fact revised the fleet cost in its balance-sheet (mercantile accounting) to reflect the increased liability.
Revenue / ITO / AAC / Tribunal Arguments
- The ITO allowed development rebate only on the original actual rupee cost, reasoning that s.43A(1) provides for adjustment (such as extra depreciation) but that there is no provision for allowing development rebate on increased liability due to devaluation; s.43A(2) expressly forbids such an allowance for s.33 purposes.
- The AAC held that s.43A(1) applies only where (i) the asset is acquired and (ii) the liability existed before the change in exchange rate took effect; it considered that the increased rupee liability after devaluation related to the assessee's debt to the West German banks and not an outstanding portion of the ship price payable to the shipyard, and therefore could not be added to the cost for development rebate. The AAC relied on case law to decline the assessee's general-principles argument where a special statutory provision applied.
- The Tribunal held the increased liability resulting from devaluation (which arose after acquisition) could not be treated as indirect expenditure for acquiring the assets and that s.43A(2) specifically prohibited adopting an adjusted actual cost (after devaluation) for the purpose of development rebate under s.33; accordingly it dismissed the appeal.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Subodhchandra Popatlal v. CIT, [1953] 24 ITR 566 (Bom) | Authority relied upon by the AAC to support the proposition that general principles cannot override special statutory provisions. | The Court noted that the AAC relied on this decision to decline the assessee's submission that general principles should allow addition of the increased liability to asset cost. The decision was treated as part of the AAC's reasoning but not elaborated upon further by this Court. |
| Southern Agencies Ltd. v. Commissioner Of Income-Tax, [1962] 45 ITR 602 (Mad) | Authority relied upon by the AAC for the proposition that special provisions displace general principles. | The Court recorded that the AAC relied on this decision to reject the assessee's contention that general principles justified adding the increased liability to the cost. The present Court accepted the AAC's approach in light of the statute. |
| CIT v. Kwality Spinning Mills (P) Ltd., [1977] 109 ITR 646 (Mad) | Considered whether an increase in actual cost caused by devaluation (which had occurred before acquisition) could be included in "actual cost" for s.33; observed effect of s.43A(2) in excluding s.43A(1) for s.33 purposes and applied s.43A(1) to compute actual cost where applicable. | The Court distinguished this authority: in Kwality the increase in cost due to devaluation had occurred before acquisition, so that decision upholding development rebate on the increased cost did not apply to the present facts (where devaluation and increased liability occurred after acquisition). |
| Arvind Mills Ltd. v. CIT, I.T. Ref. No.30 of 1975; reported [1978] 112 ITR 64 (Guj) | Held that additional liability incurred on account of devaluation during the relevant previous year in relation to repayment of loan for acquiring imported machinery constituted an element of actual cost for s.33 where the increased liability was an integral part of the original transaction and accounted for under mercantile system. | The Court distinguished Arvind Mills on the facts: there the increased liability was within the contemplation of the parties as an integral part of the original transaction and became part of cost upon drawing the loan. The present case was factually different and therefore Arvind Mills was held not applicable. |
Court's Reasoning and Analysis
The Court's reasoning proceeds from a careful reading of the relevant statutory provisions and of the established facts.
- Statutory framework: s.33 grants development rebate (40% of actual cost for a new ship). "Actual cost" is defined in s.43. Section 43A(1) provides that, where an asset is acquired from outside India and, after acquisition, a change in exchange rate causes an increase or reduction in the assessee's rupee liability in respect of payment for the asset or repayment of foreign-currency borrowings incurred specifically for acquiring the asset, that increase or reduction shall be added to or deducted from the actual cost of the asset (or, as the case may be, other specified capital expenditures), and the adjusted amount is to be taken as actual cost for specified purposes.
- Statutory limitation: s.43A(2) expressly states that 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." The Court treats this as a clear legislative exclusion.
- Factual application: the Court accepted the factual findings — the ships were acquired and full payments to the shipyard completed before the devaluation; the extra rupee liability arose as a result of devaluation and related to the assessee's obligation to the West German banks (which had advanced funds to the shipyard before devaluation).
- Interaction of facts and statute: although it was conceded by revenue's counsel (and asserted by the assessee) that on general principles the increased liability would ordinarily form part of the cost of the asset (and the assessee had reflected the increased cost in its mercantile accounts), the Court held that the clear language of s.43A(2) demonstrates an intent by the legislature to exclude variations due to devaluation from being taken into account for s.33 development rebate calculations.
- Precedent distinctions: the Court considered authorities (Kwality Spinning Mills and Arvind Mills) relied on by parties and distinguished them on factual grounds — in Kwality the increase in cost due to devaluation had occurred before acquisition; in Arvind Mills the increased liability was an integral part of the original transactional arrangement and thus fell within its facts. Because the present case involved devaluation and increased liability occurring after acquisition, those precedents did not assist the assessee.
- Conclusion of analysis: given the express statutory bar in s.43A(2) and the post-acquisition timing of the increased rupee liability, the Court concluded that the general accounting principle (adding the additional liability to cost) could not be applied for the special purpose of computing development rebate under s.33.
Holding and Implications
Holding:
THE TRIBUNAL WAS RIGHT. The Court answered the referred question in the affirmative — in computing the actual cost for the purpose of calculating development rebate under s.33 no upward adjustment of Rs. 2,64,24,737 (which the assessee had to bear as a result of the devaluation of the rupee) should be made. The answer was given against the assessee and in favour of the revenue.
Direct consequences and implications:
- Direct effect on the parties: the assessee's claim for development rebate cannot include the upward adjustment of Rs. 2,64,24,737 attributable to devaluation; the assessee must therefore accept the lower amount of development rebate allowed by the revenue authorities.
- Costs: the Court ordered that the assessee will pay the costs of the revenue and fixed the advocate's fee at Rs. 250.
- Broader implications: the Court's decision rests on the statutory restriction in s.43A(2) and on the factual timing (devaluation occurring after acquisition). The opinion distinguished prior cases on their facts. The opinion does not elaborate broader policy or substantive changes beyond applying the statutory exclusion; it therefore has the direct effect described above on the parties in this dispute.
Administrative direction: A copy of this judgment was ordered to be forwarded to the Income-tax Appellate Tribunal concerned under the Registrar's signature and the seal of the Court (as recorded in the judgment).
The Judgment of the Court was delivered by
Varadarajan, J.:— The question referred by the Income-tax Appellate Tribunal, Bangalore Bench, for the opinion of this court, at the instance of the assessee is this:
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in computing the actual cost for the purpose of calculating development rebate under s. 33 no upward adjustment of Rs. 2,64,24,737 which the assessee had to bear as a result of devaluation of the rupee should be made?”
2. The, assessee, a resident shipping company, returned a loss of Rs. 13,31,088 for the assessment year 1967–68, claiming a development rebate of Rs. 7,32,79,891 at the rate of 40 percent, on the cost of two ships after taking into account the effect of devaluation of the rupee on June 6, 1966.
3. The ITO allowed development rebate to the-extent of only Rs. 5,71,94,305 which alone, according to him, represented the development rebate on the actual cost of the imported ships on the ground that while s. 43A(1) of the-I.T Act provides for extra depreciation allowance on account of the effect of devaluation, there is no provision in the Act for allowing, development rebate on the increased liability arising out of devaluation, and s. 43A(2) expressly forbids such a provision. The ITO decided to allow the development rebate of Rs. 5,71,94,305 in the year, in which a reserve is created in view of the fact that in the year in question there was a loss.
4. On the assessee's appeal to the AAC, it was found that the ships in respect of which development rebate was claimed by the assessee had been purchased from a foreign country on January 25, 1966, and April 21, 1966, during the accounting year ending December 31, 1966. The original rupee cost of these two ships “Chennai Perumai “and” Chennai Ookkam” was Rs. 2,88,65,083 and Rs. 2,87,40,787, respectively. Due to devaluation of the rupee on June 6, 1966, the revised rupee cost of the ships came to Rs. 4,21,17,856 and Rs. 4,19,12,751. The AAC was of the view that s. 43A(1) applies where as a result of the change in the exchange rate there is an increase or reduction in the liability of the assessee in terms of the rupee to pay the price of any asset in foreign currency or to repay monies borrowed in foreign currency specially, for the purpose of acquiring the asset, and that the section does not apply unless, (i) the asset is acquired, and (ii) the liability existed before the change in the exchange rate took effect, that s. 43A(1) restricts the allowance to depreciation, etc., and does not refer to s. 33 dealing with development rebate and that sub-s. (2) of s. 43A specifically excludes development rebate being allowed under s. 33 in cases where the cost of the assets has increased due to devaluation. The submission made on behalf of the assessee before the AAC was that even, apart from s. 43A, on general principles, extra liability incurred in respect of the capital assets has to be added to the cost of the assets. The AAC relied upon the decision in Subodhchandra Popatlal v. CIT, [1953] 24 ITR 566 (Bom) and Southern Agencies Ltd. v. Commissioner Of Income-Tax, Madras., [1962] 45 ITR 602 (Mad) and declined to accept the submission on the ground that general principles cannot be applied where special provisions are applicable. The agreement dated August 6, 1964, between the foreign ship building yard which built the two ships and the assessee provided for payment of 15 per cent, of the cost of the ships on the signing of the agreement and the balance of 85 per cent, in equal half-yearly instalments, the first of them commencing six months after the delivery of the ships, and also for the ship building yard having a right to negotiate with a first class German bank and/or banking syndicate to have credit for the 85 per cent, extended to it subject to the approval of the purchaser of the ships. In accordance with that clause in that agreement a loan agreement was entered into between the assessee and the consortium of West German banks with whom the ship building yard had entered into an agreement, and the consortium of West German banks disbursed the 85 per cent, of the cost of the two ships amounting to DM 94,095,000 to the ship building yard on January 25, 1966, and April 21, 1966, before the devaluation of the rupee took place. The AAC was, therefore, of the view that what remained at the time of the devalution was only the liability of the assessee to discharge its debt due to the consortium of West German banks and not any portion of the price of the ships and that the increased liability due to devaluation of the rupee cannot be added to the original cost of the ships for the purpose of claiming development rebate. In that view, the AAC dismissed the assessee's appeal.
5. In the assessee's further appeal to the Tribunal it was found that the assessee's system of accounting is mercantile. The cost of the fleet of ships of the assessee referable to the payment up to December 31, 1965, was shown in the balance-sheet of the assessee-company as on December 31, 1965, as Rs. 2,76,71,863. But in the balance-sheet as at December 31, 1966, the additions to the fleet were shown as Rs. 18,31,99,728 on the ground that due to the devaluation of the rupee the assessee's liability to the con sortium of the West German banks for the ships acquired before the date of devaluation had gone up by Rs. 3,92,16,681 and that the additional liability had been included as addition to the cost of the fleet. The Tribunal held that the increased liability to the consortium of the West German banks due to devaluation of the rupee, which took place after the two vessels had been acquired by the assessee, cannot be considered to be indirect expenditure laid out for the purpose of acquiring the assets and that though the actual cost of the ships would include the excess payable due to the devaluation of the rupee, there is a specific prohibition in s. 43A(2) of the Act against adopting the adjusted actual cost due to the devaluation for the purpose of development rebate allowable under s. 33 of the Act, and accordingly dismissed the appeal.
6. The facts established are that 15 per cent, of the total cost of the two ships had been paid by the assessee to the foreign ship building yard by the date of signing the agreement entered into between the foreign ship building yard and the assessee on 6th August, 1964, and credit for the balance of 85 per cent, had been given to the ship building yard by the consortium of West German banks with whom the ship building yard had entered into an arrangement in pursuance of the arrangement entered into for that purpose between the assessee and the consortium of West German banks. The payment of the entire cost of the two ships to the ship building yard had been Completed on January 25, 1966, and April 21, 1966, and the ships had been acquired before the devaluation of the rupee took place on June 6, 1966. The additional liability as a result of the devaluation had accrued to the assessee which had to discharge its debt to the consortium of West German banks incurred before the date of the devaluation for the purpose of acquiring the ships. It was conceded by the learned counsel for the revenue that on general principles the additional liability arising out of the devaluation of the rupee would become part of the cost of the ships as it had been done by the assessee in revising the cost of the fleet in the balance-sheet as at December 31, 1966, as Rs. 18,31,99,728 while it had been shown in the balance-sheet as at December 31, 1965, as Rs. 2,76,71,863 as being due to the devaluation of the rupee and the consequent increase in the assessee's liability to the consortium of West German banks incurred for the acquisition of the ships before the date of the devaluation of the rupee.
7. Our attention was drawn to the decision of a Bench of this court in AMI. CIT v. Kwality Spinning Mills (Private) Ltd., [1977] 109 ITR 646 (Mad), where the assessee's claim for development rebate was based on the fact that the actual cost of the machinery had increased by Rs. 48,342 consequent on the increase in the rate of exchange on the devaluation of the rupee, as the machinery was acquired before the date of the devaluation. The learned judges have observed that the effect of sub-s. (2) of s. 43A is to exclude the applicability of s. 43A(1) and, therefore, for the purpose of computing the actual cost of an asset for the purpose of deduction on account of development rebate under s. 33 the only statutory provision relevant is s. 43A(1), defining the expression “actual cost”. The learned judges upheld the assessee's right to development rebate on the actual cost as denned in s. 43A(1) which admittedly included the sum of Rs. 48,342. That decision will not apply to the facts of the present case 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, unlike the present case. The learned counsel for the assessee invited our attention to the decision of a Bench of the Gujarat High Court in I.T Ref. No. 30 of 1975 [Arvind Mills Ltd. v. CIT, since reported in [1978] 112 ITR 64], where the question was whether the additional liability which the assessee incurred on account of the devaluation of the rupee in the midst of the relevant previous year in relation to the repayment of the loan which it had borrowed for acquiring the imported machinery during the said year constituted an element in the actual cost of such machinery to the assessee for the purpose of allowing development rebate under s. 33. The learned judges answered that question in favour of the assessee. This decision also will not apply to the facts of the present case for, in that case, the increased liability on account of devaluation was within the contemplation of the parties as an integral part of the original transaction and it was held by the learned judges that the assessee must be held to have incurred such liability in respect of each instalment, no sooner it started drawing upon the loan account, since the assessee maintained its accounts according to the mercantile system. The learned judges have observed in their judgment (pp. 84, 85) that cases like the one before them:
“where the increased liability is in fact incurred prior to acquisition of the asset and it, therefore, becomes part of the cost of acquisition in its ordinary signification, are not within the ambit of the said section. The said section may be attracted in cases such as, for example, when an assessee maintains his accounts on cash receipt basis and the increased liability in respect of repayment of instalments of purchase price or loan accrues or arises for the first time after the acquisition and installation of the asset.”
8. Section 33(1)(a) provides that in respect of a new ship which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this section and of s. 34, be allowed a deduction in respect of the previous year in which the ship was acquired, a sum by way of development rebate as specified in cl. (b). According to cl. (b), in the case of a ship, the development rebate shall be forty per cent, of the actual cost thereof to the assessee. According to s. 43, in ss. 28 to 41 and in that section, “actual cost” means the actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. Section 43A(1) lays down that:
“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) of 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.” The sub-section restricts the effect of devaluation to, (1) the expenditure of a capital nature on scientific research related to the business carried on by the assessee covered by s. 35(1)(iv); (2) expenditure on acquisition of patent rights or copyrights covered by s. 35A; (3) expenditure bona fide incurred by a company for the purpose of promoting family planning amongst its employees covered by s. 36(1)(ix); and (4) capital asset (not being a capital asset referred to in s. 50) the cost of acquisition thereof for the purpose of s. 48. Section 50 deals with a capital asset in respect of which a deduction on account of depreciation has been obtained by the assessee in any previous year either under the I.T Act, 1961, or the Indian I.T Act, 1922, or under executive orders issued when the I.T Act (II of 1886) was in force. Section 48 relates to the mode of computation of income chargeable under the head “Capital gains”. But s. 43A(2) specifically lays down that:
“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.”
9. Therefore, it is clear that the legislature has clearly intended not to take the variation in the cost of acquisition of an asset arising out of the devaluation of the rupee for the purpose of granting development rebate under s. 33 of the Act. In these circumstances, we are of the opinion that the general principles, according to which the increase in the cost of the asset arising out of devaluation of the rupee must be treated as part of the cost of the asset, cannot be applied for the purpose of granting development rebate under s. 33 of the Act in view of the definite provision against it ins. 43A(2) of the Act, referred to above.
10. Accordingly, we hold that the Tribunal was right in holding that in computing the actual cost for the purpose of calculating development rebate under s. 33 no upward adjustment of Rs. 2,64,24,737, which the assessee had to bear as a result of the devaluation of the rupee, should be made and answer the question in the affirmative and against the assessee and in favour of the revenue. The assessee will pay the costs of the revenue. Advocate's fee Rs. 250.
11. A copy of this judgment under the signature of the Registrar and the seal of this court shall be forwarded to the I.T.A Tribunal concerned.
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