TMI Blog1991 (12) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... discharged by the date of devaluation. How this increase in liability has to be (a) accounted for in the books of account of the businessman, and (b) taken into account for purposes of certain allowances available under the Income-tax Act, 1961, are the two issues that have to be considered in this appeal. A simple hypothetical illustration (steering clear of complications that may arise where the purchase is made by borrowing funds therefor from others, where the price is paid in several instalments, where more than one fluctuation in exchange rate intervene and so on) will serve to bring the problem into focus. Let us consider the case of an income-tax assessee, whose previous year ended on March 31, 1966, who had placed an order for plant and machinery costing $ 10,000 on January 1, 1966, 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 March 31, 1966, at rupees one lakh. If the price wholly or in part remained undischarged on June 6, 1966, the assessee would have become liable to pay more money in terms of the Indian rupee to pay in full the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unts or in any notes thereon ... 6.1 The council is of the opinion that, to the extent to which repayment obligations in respect of fixed assets purchased prior to devaluation remain outstanding as on 6th June, 1966 (except those covered by forward exchange contracts), the additional cost of repayment in terms of rupees should be considered as enhancing the cost of the corresponding asset purchased. In cases where identification of the assets which have been purchased out of foreign funds is not possible, some reasonable method of allocation would have to be adopted. 6.2 Depreciation must be provided on the additional cost according to the method of depreciation normally employed by the company. 6.3 The council has recommended to the Government that appropriate amendments be made in the Companies Act to embody the accounting treatment outlined above. It has also been represented to the Government that the consequential amendments should be made in the Income-tax Act to enable businesses to claim such additional depreciation and appropriate development rebate as an allowable deduction for tax purposes. 6.4 Fixed assets which are purchased prior to devaluation but paid for su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ong-term liabilities should be dealt with as under : (i) If the funds represented by the long-term liability have been used for the purchase of assets which continue to appear in the balance sheet at the date of translation, the amount of the difference can be dealt with as suggested in sub-paragraphs (ii) and (iii) below or can be added to or deducted from the cost of the assets to the extent considered appropriate. (ii) If the translation results in a profit, the difference (to the extent not adjusted wholly or partly against the cost of assets) should be transferred to a reserve account and a loss arising on a subsequent translation can be debited to this reserve. (iii) If the translation results in a loss, the difference (to the extent not adjusted wholly or partly against the cost of assets) should be written off in the profit and loss account. If the amount of the difference is substantial, it can be written off in annual instalments over a period of years in proportion to the repayment of the liability in each of the subsequent years. " The Legislature reacted to the situation created by the devaluation of 1966 by effecting two amendments : The first legislative prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... instructions had appeared against "fixed assets" at the very top of the form : "Under each head the original asset and the additions thereto and deductions therefrom during the year and the total depreciation written off or provided up to the end of the year to be stated." To this, a new paragraph, in language identical with that employed in section 43A above, was added by a notification dated January 3, 1968. It read : " Where the original cost aforesaid and additions and deductions thereto, relate to any fixed asset which has been acquired from a country outside India, and in consequence of a change in the rate of exchange at any time after the acquisition of such asset, there has been an increase or reduction in the liability of the company, as expressed in Indian currency, for making payment towards the whole or a part of the cost of the asset or for repayment of the whole or a part of moneys borrowed by the company from any person, directly or indirectly in any foreign currency specifically for the purpose of acquiring the asset (being in either case the liability existing immediately before the date on which the change in the rate of exchange takes effect), the amount b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equent years instead of reopening the closed accounts of the earlier year. This also appears to be in accord with the principle laid down by this court in CIT v. A. Gajapathy Naidu [1964] 53 ITR 114 and CIT v. Swadeshi Cotton and Flour Mills Pvt. Ltd. [1964] 53 ITR 134. This is also the principle subsequently recognised by the amendment to the Companies Act, 1956. Thus, in the illustration given earlier, the actual cost of the asset for the assessment year 1966-67 will be Rs. 1,00,000. The actual cost to be entered in the books, for the assessment year 1967-68, will, however, be Rs. 1,20,000. We may now turn to the second question posed earlier and consider the position on general principles. So far as depreciation allowance is concerned, the position is perhaps a little simpler because it is a recurrent claim. Under the definitions contained in section 32 read with section 43(1) and (6) of the 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 earlie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n favourable to our country. To obviate all these doubts and difficulties, section 43A was enacted. While sub-section (1) of section 43A provides generally for modification of the actual cost of the asset consequent on the variation in exchange rate in the year in which the increase or reduction in liability arises, sub-section (2) contains a clear mandate that the provisions of sub-section (1) are not to be taken into account in computing the actual cost of an asset for the purpose of deduction on account of the development rebate under section 33. This means, according to the Department, that the statute is categorical that any increase or decrease in the liability towards the actual cost of machinery or plant consequent on fluctuations in exchange rates is totally irrelevant and has to be disregarded for purposes of computation of the development rebate allowable thereon. The grievance of the Revenue, the appellant in this appeal, is that, in spite of the clear and categorical language of section 43A(2), not only the Gujarat High Court in the judgment under appeal (reported in Arvind Mills Ltd. v. CIT [1978] 112 ITR 64) but also several other High Courts [ vide : Addl. CIT v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill be allowed to be made in respect of capital assets acquired by the assessee to be used in scientific research related to the class of business carried on by him or patent rights or copyrights acquired from abroad or any capital asset acquired by a company for the purpose of promoting family planning amongst its employees. Further, in computing the capital gains arising to the assessee on the sale or transfer of a capital asset acquired by him from abroad on deferred payment terms or against foreign loan, the additional rupee liability incurred by him in repaying the instalments of the cost or the foreign loan, as the case may be, after the date of devaluation of the rupee, will be added to the original actual cost of the asset. The proposed section also secures that where there is a decrease in the rupee liability of the assessee in respect of assets acquired by him from abroad due to a change in the exchange value of the rupee, the original actual cost of the asset will be correspondingly reduced. The additional rupee liability incurred on imported capital assets or, as the case may be, any decrease in such liability, in the circumstances stated in the earlier paragraph will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year 1967-68, is explained in the following paragraphs. 62. The provisions of the new section 43A apply in a case where an assessee has acquired any capital asset from abroad for the purpose of his business or profession, on credit or on deferred payment terms, or against a loan in foreign currency, and the whole or a part of the 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 of currency. In such a case where, in consequence of the change in the rate of exchange of currency, there is an increase or reduction in the assessee's liability as expressed in Indian currency for payment of the whole or a part of the cost of the assets or of the loan in foreign currency, the original actual cost, to the assessee, of the machinery or plant or other capital asset, is required to be increased or, as the case may be, reduced, correspondingly for the following purposes : ... The above-mentioned adjustment to the original actual cost of the assessee to the imported capital asset is to be made in respect of the previous year in which there is an increase or reduction in the assessee's liability in terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neral principles, where the liability in respect of the cost of a capital asset increases due to devaluation, the increased liability, and not the original one, will really be the actual cost of such asset. There is no difficulty about this and there is no provision in the Act which stands in the way of the application of this principle where the previous year in which the increase in liability arises is the same as that in which the asset is acquired, installed or put to use. In fact, this is what has happened in this case. The asset was acquired/installed in calendar year 1966 and, by the end of this year, the increase in the liability had resulted. Therefore, on ordinary and normal principles of accountancy, the cost of the asset should be and has been debited in the books at the increased figure in the year 1966. That is the actual cost on which the assessee is entitled to development rebate and depreciation. The non-obstante clause, at the commencement of section 43A(1), suggests that the sub-section operates only where there is some provision in the Act which runs contrary to the above principle. There being none, section 43A(1) has no application to this type of a case. Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an be no question of reopening the claim of the earlier allowance at all as the adjustment is permitted by sub-section (1) only in the subsequent year. If development rebate has already been claimed and allowed in an earlier year on the basis of the original cost, the Act prohibits the assessee from seeking either to review the figure of original cost on the basis of devaluation and claiming the deficiency in the earlier year on general principles or to claim it, on the strength of sub-section (1), as an additional allowance in the subsequent year. This is what is made clear by sub-section (2). (v) Counsel claims that the interpretation of the provision suggested by him-viz., that it has application only to cases where actual cost has already been determined in a previous year and the increase in liability arises in a later previous year is fully borne out by the reference therein to types of capital allowances other than depreciation, the language used in the Notes on Clauses ("where an assessee had acquired . . .") and the language used in the circular earlier set out ("for the assessment year 1967-68 and subsequent assessment years" and "adjustment to the original actual cost" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t a specific statutory provision was not at all necessary. Once the provision is there and its terms apply, it should be applied ; it is idle to speculate on what the position would have been otherwise. The facts of the case undoubtedly fall within the terms of section 43A(1). The assessee has acquired, for the purposes of its business, a capital asset from a country outside India by making payment in foreign currency. For this purpose, it has borrowed monies in foreign currency from outside agencies and the liability in respect of such assets is outstanding. At a point of time after the acquisition of the asset, this liability has increased on account of the devaluation of our currency. These conditions being satisfied, the language of the sub-section is attracted. The principal argument of Sri Salve for saying that sub-section (1) is not attracted are two in number. He contends, firstly, that it applies only where the fluctuation in rate occurs in a previous year subsequent to that in which the asset is acquired. He submits that where, as in the present case, the increase in liability occurs in the same year, it has automatically to be given effect to in the accounts of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility or the original liability. This is also a situation which is specifically provided for in the section. It may not, therefore, be correct to base arguments on an assumption that the figure of actual cost has necessarily to be modified for purposes of development rebate or depreciation or other allowances and that the only controversy that can arise will be as to the year in which such adjustment has to be made. In our opinion, we need not discuss or express any concluded opinion on either of these issues. As we had said earlier, there is no need to speculate on all the problems that might have arisen if section 43A has not been there because the statute has resolved these problems. It lays down, firstly, that the increase or decrease in liability should be taken into account to modify the figure of actual cost and secondly that such adjustment should be made in the year in which the increase or decrease in liability arises on account of the fluctuation in the rate of exchange. The result of the above discussion is that once the language of subsection (1) is attracted to a particular case, sub-section (1) applies. Once sub-section (1) is attracted, its application is exclude ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppropriateness of statutory language as urged. As we have discussed above, the provisions of sub-section (1) apply to the present case and the increased liability should be taken as "actual cost" within the meaning of section 43A(1). All allowances including development rebate or depreciation allowance or the other types of deductions referred to in the sub-section would therefore have to be based on such adjusted actual cost. But then sub-section (2) intercedes to put in a caveat. It says that the provisions of sub-section (1) should not be applied for purposes of development rebate. The effect is that the adjusted actual cost is to be taken as the actual cost for all purposes other than for grant of development rebate. Read thus, there is no difficulty in the application of the language of the section to the present case. There is no inappropriateness of language either in sub-section (1) or in sub-section (2). The language used is quite appropriate and meets the situation fully. For the reasons discussed above, we are of the opinion that the language of the provision is perfectly clear. It cannot be interpreted in a restrictive manner as contended for by learned counsel for th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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