TMI Blog1993 (10) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... 4,61,319 being the additional liability paid on account of fluctuation in foreign exchange rate, in respect of the instalments payable for the machinery imported by the assessee under the deferred payment scheme, does not constitute revenue expenditure ? (2) Whether, on the facts and in the circumstances of the case and in law, the Tribunal is right in holding that the sums of Rs. 21,36,840, Rs. 4,89,502 do not constitute additional cost of machinery in terms of section 43A of the Income-tax Act, 1961?" The assessee is a public limited company engaged in the manufacture of certain varieties of paper. For import of machinery from Germany, the assessee obtained a loan from the Industrial Finance Corporation of India which was to be repai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efused to allow capitalisation of the loss amounting to Rs. 21,36,840 and Rs. 4,89,502 on account of exchange fluctuations in respect of the outstanding amount of loan which did not fall due during the relevant assessment years on the ground that this amount being not due at the material time, the additional liability on account of exchange fluctuations in respect of such outstanding loan liability was only notional and could not form part of the actual cost of the asset for the purpose of depreciation. Hence, this reference at the instance of the assessee. So far as the first question is concerned, it is agreed by counsel for the parties that the additional liability on account of fluctuation in the foreign exchange rate in respect of li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the exchange rate fluctuations should be adjusted against the actual cost and not only the amount of increase relatable to the instalments falling due in the particular previous year. Under section 32 read with sub-sections (1) and (6) of section 43 of the Act, depreciation is to be allowed on the actual cost of the asset less all depreciation actually allowed in respect thereof in earlier years. The only controversy is regarding treatment of the enhancement of the undischarged liability consequent to exchange fluctuations. Similar problems did arise consequent to the devaluation of Indian rupee in the year 1966. Section 43A was specially enacted to provide for the treatment of a situation created by the change in the rate of exchange a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 (VII of 1947) . . . (2) The provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creased on account of change in the rate of exchange. Thus, section 43A fully applies and the additional liability so created had to be added to the cost of acquisition. This view is also in consonance with the clarification issued by the Ministry of Finance, by its letter of January 4, 1967, addressed to the Federation of Indian Chambers of Commerce and Industry, the extracts of which have been reproduced in the judgment of the Supreme Court in CIT v. Arvind Mills Ltd. [1992] 193 ITR 255, at page 266. Para 2 of the above letter, which is relevant for the present purpose, is reproduced below : "The Government agrees that for the purpose of the calculation of depreciation allowance, the cost of capital assets imported before the date of de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecifically for the purposes of acquiring the asset. It is a moot question as to whether, in such a case, on general principles, the actual cost of the assessee's plant or machinery would be the revised liability or the original liability. This is also a situation which is specifically provided for in the section .... 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 ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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