TMI Blog2007 (7) TMI 357X X X X Extracts X X X X X X X X Extracts X X X X ..... n 158 ITR 595, Gujarat High Court in 146 CTR 207 and Madras High Court in 158 CTR 614 and 148 CTR 442 to decide this issue in favour of the assessee by holding that notwithstanding the fact that the assessee has not incurred the actual liability to make the payment on the strength of fluctuation in exchange rate, yet he is entitled to claim benefit of additional cost/liability said to have been incurred by him in respect of a plant and machinery installed in his plant for claiming depreciation under the Income-tax Act?" Hon'ble High Court of Madhya Pradesh noted that the ITAT, Indore Bench, while deciding the issue decided ITA No. 641/Ind./95 and in para 7 held as under:- "This appeal is filed by the Revenue against the order of CIT(A)-I, Indore, dated 13-6-1995. In this appeal, the Revenue has challenged the order of the CIT(A) on the ground that he has erred in directing the Assessing Officer to allow claim of depreciation on the increased cost of plant and machinery due to fluctuation in excise rate, particularly when no such payment has been made by the assessee. The appeal of the revenue is dismissed following the judgment of the Hon'ble Patna High Court in the case of Ush ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hart. The increase in fluctuation of rates in the foreign exchange is not allowable since there was no actual remittance of foreign currency during the above assessment years. Therefore, on such amounts no depreciation or investment allowance is allowable. The Assessing Officer asked the assessee as to why depreciation may not be disallowed on account of increased cost of assets due to fluctuation of rates in foreign currency. The assessee vide its reply dated 15-3-1994 and 18-3-1994 replied as under:- "15-3-1994: 'As per section 43A of the Income-tax Act, 1961 where an assessee has acquired any capital asset from abroad for the purpose of his business, on credit or on deferred payment terms, or against a loan in foreign currency and the whole or part or cost of such asset or of the loan in foreign currency, is outstanding as on the date on which there is a change in the rate of exchange or currency, the original actual cost to the assessee, of the machinery or plant or other capital asset, is required to be increased for the following purpose:' In respect of assets on which depreciation allowance is admissible, for the purpose of determining the actual cost thereof and als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of business due to fluctuation in rates of exchange would increase the capital cost and the assessee would be entitled to depreciation on such enhanced cost as per section 43A of the Act. The claim of the assessee was, accordingly, allowed. 7. The ITAT, Indore Bench, vide its earlier order dated 28-6-2000 dismissed the departmental appeal vide para 7 quoted above and the Hon'ble High Court of Madhya Pradesh restored the matter to the Tribunal to redecide the issue in accordance with law as mentioned above. 8. The ld. Departmental Representative relied upon the order of the Assessing Officer and submitted that the assessee can increase the cost of assets due to fluctuation of exchange rates when the assessee paid the amount actually at the time of repayment of foreign currency. The ld. Departmental Representative submitted that section 43A is amended and substituted by the Finance Act, 2002 with effect from 1-4-2003 and the increase in the cost of asset due to fluctuation of exchange rate could be added in the year when actual payment is made. The ld. Departmental Representative, therefore, submitted that the intent of the Legislature is very clear even from the amendment that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to foreign exchange fluctuation is to be made only on actual payment by the assessee towards the cost of the assets irrespective of method of accounting adopted by the assessee. Therefore, prior to the assessment year 2003-04 such liability was being adjusted and allowed on accrual basis at the close of the year. The ld. counsel for the assessee further submitted that since the assessee is maintaining books of account on mercantile system of accounting, the liability which accrued in the previous year relevant to the assessment year in question, the assessee correctly added the same to the cost of the asset and claimed depreciation accordingly. The ld. counsel for the assessee also submitted that in the case of Arvind Mills Ltd., the issue for consideration was claim of development rebate on the increased cost under section 43A(2) of the Act. The ld. counsel for the assessee further submitted that the assessee claimed that actual cost for the purpose of allowing depreciation under section 32 of the Act should be increased by the amount of additional liability occurred due to foreign exchange fluctuation. Therefore, the decision of Arvind Mills Ltd.'s case supports the case of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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. Explanation 1.- In this sub-section, unless the context otherwise requires,- (a) 'rate of exchange' means the rate of exchange determined or recognised by the Central Government for the conversion of Indian currency into foreign currency or foreign currency into Indian currency; (b) "foreign currency" and "Indian currency" have the meanings respectively assigned to them in section 2 of the Foreign Exchange Regulation Act, 1947 (7 of 1947). Explanation 2.- Where the whole or any part of the liability aforesaid is met, not by the assessee, but, directly or indirectly, by any other person or authority, the liability to meet shall not be taken into account for the purposes of this sub-section. Explanation 3.- Where the assessee has entered into a contract with an authorized dealer as defined in section 2 of the Foreign Exchange Regulation Act, 1947 (7 of 1947), for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 96 at a time when the rupee exchange rate of a dollar was, say, ten rupees to the dollar. The cost of the plant or machinery would have been debited by him in his books for the year ended 31-3-1966 at Rs. 1 lakh. If the price wholly or in part remained undischarged on 6-6-1966, the assessee would have become liable to pay more money in terms of the Indian rupee to pay in full the price of $10,000. Let us suppose that he had eventually to pay Rs. 1,20,000 in the accounting year 1966-67 to discharge his liability towards the purchase price. The two questions that would arise are:- "(i) Should he enter the additional liability of Rs. 20,000 in his books for the year ended 31-3-1967, during which the additional liability arose consequent on the devaluation or should he reopen his accounts of the earlier year and correct the figure of cost debited therein from Rs. 1,00,000 to Rs. 1,20,000? (ii) On what basis should he claim allowances like depreciation and development rebate under the Income-tax Act which are admissible on the "actual cost to the assessee" of such plant and machinery?" Hon'ble Supreme Court considering the above two questions answered the same as under:- "Revert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Act, the depreciation is to be allowed on the actual cost of the asset less all depreciation actually allowed in respect thereof in earlier years. Thus, where the cost of the asset subsequently goes up because of devaluation, whatever might have been the position in the earlier year, it is always open to the assessee to insist and for the Income-tax Officer to agree, that the written down value in the year in which the increased liability has arisen should be taken on the basis of the increased cost minus depreciation earlier allowed on the basis of the old cost. Thus, in the illustration given earlier, if the asset is one that earns depreciation at 10 per cent, the assessee would have got a depreciation allowance of Rs. 10,000 for the assessment year 1966-67 and that will stand. But, for the assessment year 1967-68 the depreciation allowance will be calculated on an actual cost of Rs. 1,20,000 minus the depreciation earlier allowed of Rs. 10,000 i.e., on Rs. 1,10,000. The written down value and allowances for subsequent years will be calculated on this footing. In other words, though the depreciation granted earlier will not be disturbed, the assessee will be able to ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttance was made, it should have disallowed depreciation allowance as well, provided of course, that this was the requirement of law. The fact that the Tribunal allowed depreciation allowance is indicative of the fact that the Department's contention in this regard was not accepted. In the above premises, the decision of the Tribunal disallowing investment allowance was not correct in law. - CIT v. Arvind Mills Ltd. [1992] 101 CTR (SC) 91 : [1992] 193 ITR 255 (SC) : TC 29R 727 distinguished. Conclusion Investment allowance is allowable on increased cost of plant and machinery on account of fluctuation in exchange rate; investment allowance is not excluded from the purview of section 43A." Hon'ble Madras High Court in the case of Chengalvarayan Cooperative Sugar Mills held- "It is evident by reason of section 43A(1) the amount by which the liability of the assessee is increased or reduced during the previous year by reason of variation in the rate of exchange as between the Indian currency and the foreign currency, in cases, where the assets have been acquired, from a country outside India, such amount shall be added to or as the case may be, deducted from the actual cost o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n holding that the said additional liability was not revenue expenditure - Sutlej Cotton Mills Ltd. v. CIT 1978 CTR (SC) 155 : (1979) 116 ITR 1 (SC) : TC 14R.891 applied. Conclusion Additional liability arising due to fluctuation in foreign exchange rate in respect of payments of outstanding instalments of machinery, cannot be treated as revenue expenditure. Decision in favour of revenue." Hon'ble Madras High Court in the case of South India Viscose Ltd. (No. 2) held- "Depreciation - Actual cost - Exchange rate fluctuation - Higher amount paid due to exchange rate fluctuation being capital in nature is eligible for grant of depreciation thereon - Sivananda Steels Ltd. v. CIT (Tax Case Nos. 1137 and 1138 of 1983, decided on 7-11-1996) followed. Conclusion Higher amount paid due to exchange fluctuation being capital in nature is eligible for grant of depreciation thereon." Hon'ble Gujarat High Court in the case of New India Industries Ltd. held- "During the year previous to the assessment year 1973-74, the assessee had imported certain machinery from Germany. When it had purchased the same, its value, in terms of rupees, was Rs. 26,32,299. Since the assessee r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as paid it in lump sum or in instalments in future under an agreement. In the instant case, as per the agreement, the assessee had to pay the amount in instalments for the purchase of machinery and by reading of clauses (1), (2) and (6) of section 43 along with sections 32 and 43A of the Act the only conclusion that could be arrived at was that where the assessee paid the amount in instalments to a foreign bank or to a foreign vendor, for the purchase of machinery, as consideration, the amount paid in excess due to increase in the value of foreign currency was deemed to be capital investment and so he was entitled to depreciation and extra shift allowance on such increase in value of machinery or plant." Hon'ble Bombay High Court in the case of Padamjee Pulp Paper Mills Ltd. held- "That in view of section 43A of the Income-tax Act, 1961, the additional liability amounting to Rs. 21,36,840 and Rs. 4,89,502 on account of exchange fluctuations with reference to the amount of loan outstanding on the last day of the accounting period at the then prevailing exchange rate had to be added to the actual cost of the machinery for the purpose of computation of depreciation for that year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that section 43A was substituted by the Finance Act, 2002 with effect from 1-4-2003 whereby any adjustment towards liability due to foreign exchange fluctuation is to be made only on actual payment by the assessee towards the cost of the asset irrespective of the, method of accounting adopted by the assessee. This would, therefore, clarify that in the earlier provisions of section 43A as are relevant to the assessment year under appeal, the assessee could make adjustment of his additional liability due to foreign exchange fluctuation while increasing the actual cost of the asset for the purpose of claiming depreciation. The decisions relied upon by the ld. counsel for the assessee support the contention of the assessee that foreign exchange price fluctuation has to be considered for the purpose of adjusting the actual cost even if actual payment was not made in the previous year. We may also mention that in most of the cases relied upon by the ld. counsel for the assessee the decision of the Hon'ble Supreme Court in the case of Arvind Mills Ltd. was relied upon and considered while arriving at the decision in the matter. 14. Considering the above discussion in the light of the d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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