TMI Blog2010 (3) TMI 81X X X X Extracts X X X X X X X X Extracts X X X X ..... s entitled to adjust the actual cost of imported assets acquired in foreign currency on account of fluctuation in the rate of exchange at each of the relevant balance sheet dates, pending actual payment of the liability under section 43A, prior to its amendment by finance act, 2002. - 7223 of 2008 ,7224, 7225, 7228, 7229 and 7231 of 2008. - - - Dated:- 15-3-2010 - D.K. JAIN and T.S. THAKUR JJ. .JUDGMENT 1. D.K. JAIN, J. - In these appeals, essentially the following two questions arise for our consideration:- (i) Whether on the facts and circumstances of the case, the additional liability arising on account of fluctuations in the rate of exchange in respect of loans taken for revenue purposes could be allowed as deduction under Section 37(1) of the Income Tax, Act, 1961 (for short "the Act") in the year of fluctuation in the rate of exchange or whether the same is allowable only in the year of repayment of such loans? (ii) Whether the Assessee is entitled to adjust the actual cost of imported capital assets acquired in foreign currency on account of fluctuation in the rate of exchange at each balance-sheet date, pending actual payment of the varied liability? (onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count and in capital account which were outstanding on the last day of the accounting year under consideration and were as per terms of borrowings repayable after the end of the relevant accounting year. Similar treatment was given to the foreign exchange loans taken for general purposes, used partly in revenue account and partly in capital account. Thus, the Assessee's claim for foreign exchange loss/increased liability on revaluation of these foreign exchange loans at the end of the accounting year under consideration both in the revenue account and capital account as also on loans used partly in revenue account and partly in capital account, made on the ground that it had followed mercantile system of accounting in this regard, was disallowed by the Assessing Officer. According to the Assessing Officer, such a loss could be allowed to the Assessee on discharge of liability at the time of actual repayment of these loans. 3. Aggrieved, the Assessee preferred appeals before the Commissioner of Income Tax (Appeals). Insofar as Assessee's claim for foreign exchange loss in revenue account was concerned, the Commissioner (Appeals) affirmed the view taken by the Assessing Officer o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al liability, it was not allowable as deduction under Section 37(1) of the Act. Insofar as the applicability of Section 43A of the Act was concerned, the High Court observed that the said provision is confined only to those liabilities which have become due as per the terms and conditions of written agreement between the Assessee and the foreign creditors but since in the present case, no such agreement was made available by the Assessee at any stage of the proceedings, the claim of the Assessee was not justified. According to the High Court, the variation in foreign exchange was neither quantified, nor it had become due or repaid and, therefore, deductions on that account had been allowed by the Tribunal without application of mind and were, therefore, illegal. Being aggrieved by the said decision, the Assessee is before us in these appeals. 6. Mr. S. Ganesh, learned senior counsel appearing on behalf of the Assessee, submitted that in view of the decision of this Court in CIT v. Woodward Governor India P. Ltd. [2009] 312 ITR 254 (SC), the decision of the High Court cannot be sustained. Learned counsel also argued that in view of the fact that the Committee on disputes had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actually discharged in the year in which the fluctuation in the rate of foreign exchange had occurred and (ii) whether on account of fluctuation in the rate of exchange at the end of the previous year, the Assessee is entitled to adjust the actual cost of imported assets acquired in foreign currency? 10. Having carefully perused the decision of this Court in Woodward's case [2009] 312 ITR 254, we are of the opinion that both the issues stand concluded by the said decision. Dealing with the said issues extensively, speaking for the Bench, S.H. Kapadia, J. summarised the following factors which should be taken into account in order to find out if an expenditure on account of fluctuation in the foreign currency rates, when the Assessee is following mercantile system of accounting, is deductible: (i) whether the system of accounting followed by the assessee is the mercantile system, which brings in the debits of the amount of expenditure for which a legal liability has been incurred even before it is actually disbursed and credits, what is due, immediately it becomes due even before it is actually received; (ii) whether the same system is followed by the assessee from the v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o paragraph 10 of AS-II such adjustment in the carrying amount of the fixed assets was not possible, particularly in the light of section 43(1). The unamended section 43A nowhere required as condition precedent for making necessary adjustment in the carrying amount of the fixed asset that there should be actual payment of the increased/decreased liability as a consequence of the exchange variation. The words used in the unamended section 43A were "for making payment" and not "on payment" which is now brought in by amendment to section 43A, vide the Finance Act, 2002." Opining that the amendment of Section 43A of the Act by the Finance Act, 2002 with effect from 1st April, 2003 is amendatory and not clarificatory and would thus, apply prospectively, the Court explained that under the unamended Section 43A, adjustment to the actual cost takes place on the happening of change in the rate of exchange, whereas under the amended Section 43A, the adjustment in the actual cost is made on cash basis. In other words, under the unamended Section 43A, "actual payment" was not a condition precedent for making necessary adjustment in the carrying cost of the fixed asset acquired in foreign cur ..... X X X X Extracts X X X X X X X X Extracts X X X X
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