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2010 (2) TMI 23 - SC - Income TaxApplicability of Section 43A – foreign exchange fluctuation - Assessee filed its return of income for assessment year 1986-87 on 30.6.1986. A revised return was filed by it on 27.3.1989 declaring a total income of ₹ 2,10,08,640/-. The A.O. disallowed an amount of ₹ 8,86,280/-, being the roll over premium charges paid by the assessee in respect of foreign exchange forward contracts to Citibank N.A. on the ground that the said charges were incurred in connection with the purchase of a capital asset (plant and machinery), hence, it was not admissible for deduction under Section 36(1)(iii) or under Section 37 of the Act. – CIT(A) allowed the deduction - It may be noted that CIT (A) did not refer to a specific section under which assessee was entitled to such deduction. The CIT(A) did not examine Section 43A of the said Act – ITAT reversed the order of CIT(A) and confirmed the order in assessment – HC reversed the order of ITAT and allowed the deduction – held that - the year-end liability of the assessee had to be looked into - it cannot be said that roll over charge has nothing to do with the fluctuation in the rate of exchange - the contention of the assessee that roll over charges have nothing to do with the fluctuation in the rate of exchange is not acceptable - in this case we are concerned with capitalization of exchange difference in respect of acquisition of fixed assets acquired from abroad. According to Indian Accounting Standards by Dolphy D’Souza, roll over charges are indicative of the increase or decrease in the liability of the company in the next specified period, generally of six months. Roll over charges represent the difference arising on account of change in foreign exchange rates. Roll over charges paid/ received in respect of liabilities relating to the acquisition of fixed assets should be debited/ credited to the asset in respect of which liability was incurred. However, roll over charges not relating to fixed assets should be charged to the Profit & Loss Account. – Decided in favor of revenue
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