Ajit K. Sengupta, J. - (1.) In this reference under Section 256(1) of the Income-tax Act, 1961, for the assessment year 1976-77, the following two questions of law have been referred to this court : "1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the assessee was entitled to depreciation on the extra liability of Rs. 23,61,713 in respect of which the assessee had liability on account of difference in the rate of exchange of the Indian rupee during the relevant accounting year ?
(2.) Whether, on the facts and in the circumstances of the case, the assessee was entitled to development rebate on the aforesaid amount of Rs. 23,61,713 ?" 2. Shortly stated the dispute relates to the assessee's claim for depreciation and development rebate on a sum of Rs. 23,61,713. Initially, the assessee does not appear to have made any claim in this behalf and the claim made was for a sum of Rs. 3,70,998 only, being the difference in the amount of money which the assessee had to pay in excess to some foreign concerns from which it purchased its machinery on account of difference in the rate of exchange of the Indian rupee as revenue expenditure. This amount was disallowed by the assessing authority as being of a capital nature and this conclusion was upheld right up to the Tribunal. The assessing authority, however, had not even granted depreciation on this amount or any other liability incurred by the assessee in this behalf. On appeal, the Commissioner of Income-tax (Appeals) directed the assessing authority to allow depreciation on this amount of Rs. 3,70,998. Before the Tribunal it was contended on behalf of the assessee that instead of this amount the claim should have been allowed on Rs. 23,61,713 inasmuch as as a result of exchange rate difference, the assessee's liability had increased to this extent, though the actual payment of the entire liability may not have been made in this year. A chart relating to various liabilities of the assessee and the increase therein as a result of the difference in the exchange rate was furnished before the Tribunal. The Tribunal was of the opinion that the liability having increased during the relevant accounting year and the assessee having the mercantile system of accounting, obviously the entire increase would go towards increase in the capital cost incurred by the assessee on which the assessee would be entitled to depreciation.
(3.) Similarly, the other limb of the assessee's argument was that it was also entitled to claim development rebate on the additional rupee liability incurred as a result of difference in exchange rate. This claim was rejected by the Commissioner of Income-tax (Appeals) in view of the clear language used in Section 43A(2) of the Income-tax Act. On appeal before the Tribunal, reliance was placed upon a decision of the Madras High Court in Addl. CIT v. Kwality Spinning Mills (P.) Ltd. [1977] 109 ITR 646, wherein such a claim was held to be allowable notwithstanding the provisions of Section 43A(2). This judgment of course was not followed by the same High Court in South India Shipping Corporation Ltd. v. Addl. CIT [1979] 116 ITR 819. However, the Calcutta High Court had in Union Carbide India Ltd. v. CIT, approved the earlier decision of the Madras High Court and expressly dissented from the later decision in South India Shipping Corporation Ltd. v. Addl. CIT [1979] 116 ITR 819. It had been expressly held by the Calcutta High Court after a detailed discussion that the assessee was entitled to development rebate on the extra cost involved because of the exchange rate difference. The Tribunal, therefore, chose to follow the decision of the Calcutta High Court which was binding upon it, and allowed the assessee's claim.;