The Judgment of the Court was delivered by

Y. Bhaskar Rao, J.:— These references are made under section 256(1) of the Income-Tax Act, 1961 (hereinafter referred to as “the Act”), at the instance of the assessee and the Revenue.

2. The facts of the case are: The assessee (Widia (India) Limited, Tumkur Road, Bangalore) is a limited company. It acquired certain machinery on deferred payment basis in the year 1967. The subsequent instalments of the price payable by the assessee had gone up because of fluctuation in the rate of foreign exchange. The assessee claimed that, as a consequence, the cost of acquisition of the machinery should be revised and it is on the revised actual cost that investment allowance and depreciation should be granted for the assessment year 1979-80. It is also pointed out that a similar claim had been allowed for the previous assessment year 1978-79 by the order of the Income-Tax Appellate Tribunal dated November 21, 1983. It is contended on behalf of the Revenue that, if the actual cost in the year of installation was not revised, the actual cost of the machinery could not be revised in the subsequent year and, therefore, the assessee would not be entitled to the allowance. The Tribunal found that under sub-section (3)(ii) of section 32A of the Act the investment allowance which could not be set off against the income of the year of installation could be carried forward and that was an enabling provision which allowed the claim in the subsequent year instead of driving the assessee to the rectification of the assessment of the earlier years for reworking of the investment allowance in the year of installation and again carrying it forward for the allowance in the subsequent assessment years. Accordingly, the Tribunal allowed the claim of the assessee. It is contended of behalf of the assessee that the assessee is entitled to the higher rate of depreciation at five per cent, on the value of the plant and machinery. It is contended that the assessee is also entitled to depreciation and investment allowance claimed by the assessee on the capitalised amount by deferred interest payable under the Industrial Development Bank of India Loan Scheme. Learned counsel for the assessee further contended that the assessee is entitled to weighted deduction under section 35B of the Act on the interest on packing credit and on export guarantee commission. It is also contended that the excess available surplus carried over from the earlier year under the provisions of the Payment of Bonus Act can be treated as an outgoing although it is not distributed as bonus in the year and as such the assessee is entitled for the relief for that carried over amount by giving deduction. All the contentions of the assessee were accepted by the Tribunal except the deduction as to bonus. Therefore, the reference was sought by the Revenue and the assessee. Accordingly, the Tribunal made the reference of the following questions:

“1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in confirming the order of the Commissioner of Income-Tax (Appeals) allowing depreciation and extra shift allowance on the increase in the value of machinery and plant consequent on day to day fluctuations of foreign currency?

2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in confirming the order of the Commissioner of Income-Tax (Appeals) allowing higher rate of depreciation at five per cent, on the value of canteen buildings?

3. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in allowing depreciation and investment allowance claimed by the assessee on the capitalised amount by deferred interest payable under the Industrial Development Bank of India Loan Scheme?

4. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the assessee is entitled to weighted deduction under section 35B on interest on packing credit and on export guarantee commission?

5. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that excess available surplus carried over from the earlier year under the provisions of the Payment of Bonus Act cannot be treated as an outgoing as it is not distributed as bonus in this year and hence not eligible for deduction?”

3. We have heard learned counsel on both the sides on the questions referred by the Tribunal.

4. The contentions regarding question No. 1 under reference are as follows:

The point involved in the question is whether the assessee is entitled to depreciation and extra shift allowance on the increase in the value of machinery and plant consequent on the fluctuations of foreign currency. There is no dispute that the assessee has purchased the machinery from a foreign country by taking loan from foreign country in dollars. The assessee entered into an agreement for payment of the purchase money in yearly instalments and accordingly the assessee is paying the amount. There are fluctuations in the value of the rupee and the value of the dollar increased which made the assessee pay more than the amount paid during the previous years. The case of the assessee is that the amount paid in excess must be taken as investment on the machinery and, therefore, depreciation has to be given to such capital value of the machinery. Whereas the Revenue contended that once the assessee purchased the machinery, the value payable or agreed to be payable on the date of purchase should be the capital value and the subsequent increase or decrease in the value of the rupee due to fluctuations cannot be taken into consideration.

5. Section 32 of the Act deals with depreciation to be allowed in respect of buildings, machinery, plant or furniture owned wholly or partly by the assessee and used for the, purposes of the business or profession. Such deduction shall be subject to the provisions of section 34 of the Act. Section 32(1)(ii) of the Act reads as under:

“in the case of any block of assets, such percentage on the written down value thereof as may be prescribed.”

6. Section 43(6) of the Act provides what is “written down value”. It reads as follows:

“(6) ‘written down value’ means—

(a) in the case of assets acquired in the previous year, the actual cost to the assessee;

(b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act, or under the Indian Income-Tax Act, 1922 (11 of 1922), or any Act repealed by that Act, or under any executive orders issued when the Indian Income-Tax Act, 1886 (2 of 1886), was in force:

Provided that in determining the written down value in respect of buildings, machinery or plant for the purposes of clause (ii) of sub-section (1) of section 32, ‘depreciation actually allowed’ shall not include depreciation allowed under sub-clauses (a), (b) and (c) of clause (vi) of sub-section (2) of section 10 of the Indian Income-Tax Act, 1922 (11 of 1922), where such depreciation was not deductible in determining the written down value for the purposes of the said clause (vi).

(c) in the case of any block of assets,—

(i) in respect of any previous year relevant to the assessment year commencing on the 1st day of April, 1988, the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year and adjusted,—

(A) by the increase by the actual cost of any asset falling within that block, acquired during the previous year; and

(B) by the reduction of the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased; and

(ii) in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1989, the written down value of that block of assets in the immediately preceding previous year as reduced by the depreciation actually allowed in respect of that block of assets in relation to the said preceding previous year and as further adjusted by the increase or the reduction referred to in item (i).

Explanation 1.— When in a case of succession in business or profession, an assessment is made on the successor under sub-section (2) of section 170, the written down value of any asset or any block of assets shall be the amount which would have been taken as its written down value if the assessment had been made directly on the person succeeded to.

Explanation 2— Where in any previous year, any block of assets is transferred,—

(a) by a holding company, to its subsidiary company, or by a subsidiary company to its holding company and the conditions of clause (iv) or, as the case may be, of clause (v) of section 47 are satisfied; or

(b) by the amalgamating company to the amalgamated company in a scheme; of amalgamation, and the amalgamated company is an Indian company,

then, notwithstanding anything contained in clause (1), the actual cost of the block of assets in the case of the transferee company or the amalgamated company, as the case may be, shall be the written down value of the block of assets as in the case of the transferor company or the amalgamating company for the immediately preceding previous year as reduced by the amount of depreciation actually allowed in relation to the said preceding previous year.

Explanation 3— Any allowance in respect of any depreciation carried forward under sub-section (2) of section 32 shall be deemed to be depreciation ‘actually allowed’.

Explanation 4— For the purposes of this clause, the expressions ‘moneys payable’ and ‘sold’ shall have the same meanings as in the Explanation below sub-section (4) of section 41.”

7. Section 43A of the Act provides that where an assessee purchases any machinery from a foreign country by paying foreign currency, he is entitled to add or subtract the increase or decrease in the value of the rupee to the capital value for the purpose of showing the written down value depending on the rate of exchange.

8. Section 43(2) of the Act provides the definition of the expression “paid” which is as follows:

“‘paid’ means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head ‘Profits and gains of business or profession’;”

9. By reading the expression “paid” it is evident that it includes the amount paid by the assessee, if he has paid it in lump sum or in instalments in future under an agreement. Thus, in the present case, as per the agreement, the assessee has to pay the amount in instalments for the purchase of machinery and by reading of sections 43(1), 43(2) and 43(6) along with sections 32 and 43A of the Act the only conclusion that can be arrived at is that where an assessee pays the amount in instalments to a foreign bank or to a foreign vendor, in view of the purchase of machinery, as consideration, the amount paid in excess due to increase in the value of foreign currency is deemed to be capital investment and so he is entitled to more depreciation on such value. Our view is fortified by the judgment of a Division Bench of this court in Commissioner Of Income-Tax v. Motor Industries Co. Ltd., [1988] 173 ITR 374, wherein the Division Bench of this court held thus (page 379):

“We have carefully examined the detailed analysis made by the Tribunal on this claim of the assessee. We are of the view that every one of the reasons on which the Tribunal accepted the claim of the assessee that forms part of this question is sound and the same squarely falls within the purview of section 43A of the Act. We are also of the view that this claim of the assessee also attracts the Board's Circular No. F 1 (408/67-TPL dated October 19, 1967) (reproduced at pages 1610 to 1612 of Chaturvedi and Pithisaria's Income Tax Law, 3rd edition) which has properly interpreted the scope and ambit of section 43A of the Act. From this, it follows that our answer to question No. 1 must be in the affirmative.”

10. In view of the above facts and circumstances of the case, we answer question No. 1 in favour of the assessee and against the Revenue.

11. The second question that arises for our consideration is whether allowing the higher rate of depreciation at five per cent, on the value of canteen buildings is correct or not. This question has already been decided by this court in Commissioner Of Income-Tax v. Motor Industries Co. Ltd., [1986] 158 ITR 734. The Division Bench of this court held that the canteen buildings used for the workers who work in the factory to facilitate them to have food during interval and to discharge their duties effectively which will ensure proper production and manufacture in the factory are, therefore, integral parts of the factory, though they are not directly meant for manufacturing purposes. As the canteen buildings are part and parcel of the factory, the assessee is entitled to depreciation at five per cent. This view is also fortified by the recent judgment in Commissioner Of Income-Tax v. Motor Industries Co. Ltd. (No. 2), [1998] 229 ITR 137 (Kar). In view of the law laid down by the Division Bench and the recent judgment referred to above we have no reason to differ from the view. In this view of the matter, we hold that the canteen buildings are to be treated as part and parcel of the factory building and the assessee is entitled to depreciation at five per cent. Therefore, the second question is answered in favour of the assessee and against the Revenue.

12. The third and fifth questions that arise for our consideration are whether the assessee is entitled to deduction towards depreciation and investment allowance on the capitalised amount by deferred interest payable under the IDBI Loan Scheme and the undistributed bonus amount carried over from the previous year. There is no dispute that the assessee has borrowed the amount from the Industrial Development Bank. The assessee has purchased the machinery through negotiable instrument given to the vendor which was encashed by the vendor through the Industrial Bank which paid the amount. Therefore, the assessee has to pay to the Industrial Development Bank the same with interest on the amount paid to the vendor by the bank. As such, the assessee is entitled to claim investment allowance on the capitalised amount by deferred interest payable to the bank. This question, i.e, question No. 3, is squarely covered by the judgment of this court in Commissioner Of Income-Tax v. Widia (India) Ltd., [1992] 193 ITR 475. Similarly, the question on the bonus which has been carried over from the previous year is also covered by the said decision. The Division Bench of this court held that the assessee is entitled to depreciation and investment allowance on the capitalised amount paid or payable in instalments in respect of capital assets under the deferred payment scheme and that the excess available surplus carried over from earlier year under the provisions of the Payment of Bonus Act could not be treated as an outgoing and hence the assessee is not eligible for deduction. Accordingly, we answer question No. 3 in favour of the assessee and against the Revenue and question No. 5 against the assessee and in favour of the Revenue. The remaining question that arises for our consideration is question No. 4 and it is whether the assessee is entitled to weighted deduction under section 35B of the Act on the interest on packing credit and on export guarantee commission. A similar question was considered by this court in CIT v. J.B Advani and Co. (Mysore) (Pvt.) Ltd., [1987] 163 ITR 638 wherein the Division Bench of the court held that the assessee is entitled only for the amount paid to the Export Credit Guarantee Corporation, as the same is permissible under section 35B(1) of the Act. Whereas the weighted deduction on the interest on packing credit is not decided in the case earlier. Therefore, we have to hold on the question that the assessee is entitled to the weighted deduction for the sum paid to the Export Credit Guarantee Corporation. He is not entitled to the weighted deduction on the credit amount for the packages as none of the clauses of section 35B provides for such relief to be granted. Therefore, the question to the extent of the amount paid to the Export Credit Guarantee Corporation is answered in favour of the assessee and the remaining is answered against the assessee and in favour of the Revenue.

13. Accordingly, we furnish our answers to the questions referred to us as above.