TMI Blog2010 (2) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 - 2057 of 2010 - - - Dated:- 26-2-2010 - J U D G M E N T S. H. KAPADIA, J . Leave granted. 2. This batch of civil appeals concerns the nature of roll over premiu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f India Cements Ltd. v. Commissioner of Income-Tax, Madras - (1966) 60 ITR 52. 4. Vide order dated 21.3.2001, the Tribunal held that roll over premium charges (carry forward charges) were required to be paid to the authorized dealer as consideration for permitting the unutilized amount of the contract (balance value of the contract) to be availed of at a latter date and in the circumstances roll over premium charges had to be capitalized under Explanation 3 to Section 43A of the said Act. Consequently, the Tribunal upheld the order of the assessment. 5. Aggrieved by the decision of the Tribunal, the assessee filed an appeal(s) before the Gujarat High Court inter alia challenging the capitalization of the roll over charges paid in respect of foreign currency. The said appeal(s) was allowed by the High Court which came to the conclusion that the roll over premium charge(s) paid by the asssessee was in the nature of interest or committal charge(s), hence, the said charges were allowable under Section 36(1)(iii) of the said Act, hence this civil appeal(s). 6. According to the Department, the roll over charge was required to be capitalized in view of Section 43A of the Act. In an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crease or reduction in the liability of the assessee consequent upon change in the rate of exchange of currency for payment of cost of asset or for payment of loan. According to the assessee, the roll over premium was not paid because of any fluctuation in the rate of exchange. It was paid as a premium to the dealer for the risk taken by the dealer in holding the foreign exchange at pre-determined rate on borrower's account. According to the assessee, roll over charge had nothing to do with the fluctuation in the rate of exchange and was payable even if there was no fluctuation in the liability of the assessee in Indian currency for making payment towards repayment of the money borrowed. Therefore, according to the assessee, Section 43A was not attracted. According to the assessee, the second reason why Section 43A was not applicable was because there was no increase or reduction in the liability for payment of cost of asset as a result of the change in the rate of exchange. On the contrary, according to the assessee, the said payment was made to avoid the increase or reduction in liability as a consequence of the change in the rate of exchange. According to the assessee, only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant assessment years, as under: "43A. Special provisions consequential to changes in rate of exchange of currency—(1) Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange at any time after the acquisition of such asset, there is an increase or reduction in the liability of the assessee 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 the moneys borrowed by him 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 by which the liability aforesaid is so increased or reduced during the previous year shall be added to, or, as the case may be, deducted from, the actual cost of the asset as defined in clause (1) of section 43 or the amount of expenditure of a capital nature referred to in cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 6 June, 1966. It applied where as a result of change in the rate of exchange there was an increase or reduction in the liability of the assessee in terms of the Indian rupee to pay the price of any asset payable in foreign exchange or to repay moneys borrowed in foreign currency specifically for the purpose of acquiring an asset. The Section has no application unless an asset was acquired and the liability existed, before the change in the rate of exchange. When the assessee buys an asset at a price, its liability to pay the same arises simultaneously. This liability can increase on account of fluctuation in the rate of exchange. An assessee who becomes the owner of an asset (machinery) and starts using the same, it becomes entitled to depreciation allowance. To work out the amount of depreciation, one has to look to the cost of the asset in respect of which depreciation is claimed. Section 43A was introduced to mitigate hardships which were likely to be caused as a result of fluctuation in the rate of exchange. Section 43A lays down, firstly, that the increase or decrease in liability should be taken into account to modify the figure of actual cost and, secondly, such adjustmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account. 10. In the present case, one of the main arguments advanced on behalf of the assessee before us was that Section 43A was not applicable because roll over charge stood paid to avoid increase or reduction in liability as a consequence of the change in the rate of exchange. According to the assessee, Section 43A, as it stood at the material time, applied only to cases where there existed a fluctuation in the rate of exchange and since the roll over charge was paid to the authorized dealer by the assessee to avoid increase or reduction in liability on account of such fluctuation, Section 43A read with Explanation 3 thereto would not apply to such roll over charges. We find no merit in this argument advanced on behalf of the assessee. According to the assessee, the cost for carrying forward the contracted foreign currency, not immediately required for repayment, is called the roll over charge(s). As stated above, according to the assessee, Section 43A was not applicable in this case as there was no increase or reduction in liability because such roll over charges were paid to avoid increase or reduction in liability consequent upon change in the rate of exchange. To answer t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t roll over charges are to be capitalized in terms of Explanation 3 to Section 43A as it stood prior to assessment year 2003-04, then, in that event the Tribunal may be directed to grant depreciation allowance on the written down value of the asset not only for the concerned years but also for the subsequent years till the entire value of the asset is written off. According to the assessee, such a direction is required to be given because the depreciation, according to the assessee, is available even for the assessment years after AY 1994-95. On behalf of the assessee it was further submitted, as and by way of alternative submission, that the Department may not be allowed to charge interest or penalty as the issue involved is debatable. 13. We find no merit in the alternative submissions advanced on behalf of the assessee. The Tribunal while holding that roll over charges are required to be adjusted in the carrying amount of fixed asset, has allowed the assessee the benefit of depreciation on the adjusted cost of fixed asset. Hence, it is not necessary for this Court to give direction to the Tribunal, as sought by the assessee. On the facts and circumstances there is no question ..... X X X X Extracts X X X X X X X X Extracts X X X X
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