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Issues: (i) Whether the Commissioner could invoke revisionary jurisdiction under section 263 of the Income-tax Act, 1961, on the ground that the assessing officer failed to apply section 43A and treated the exchange variation as revenue expenditure. (ii) Whether, for the purpose of section 43A, the exchange difference on the entire outstanding foreign currency loan at the end of each accounting year had to be added to the actual cost of the plant and machinery, with depreciation recomputed accordingly.
Issue (i): Whether the Commissioner could invoke revisionary jurisdiction under section 263 of the Income-tax Act, 1961, on the ground that the assessing officer failed to apply section 43A and treated the exchange variation as revenue expenditure.
Analysis: The issue was governed by the settled principle that revision under section 263 is permissible where the assessment order is both erroneous and prejudicial to the interests of the Revenue. The failure to apply section 43A while allowing the exchange variation as revenue expenditure brought the assessment within that revisionary field.
Conclusion: The invocation of section 263 was upheld and the issue was decided against the assessee and in favour of the Revenue.
Issue (ii): Whether, for the purpose of section 43A, the exchange difference on the entire outstanding foreign currency loan at the end of each accounting year had to be added to the actual cost of the plant and machinery, with depreciation recomputed accordingly.
Analysis: The applicable principle under section 43A was that the foreign exchange variation relevant to the capital asset had to be added to the actual cost so that depreciation could be worked out on the enhanced cost. The Court followed the binding precedent on the point and rejected the narrower approach confined only to instalments that fell due during the accounting year.
Conclusion: The issue was answered in favour of the assessee and against the Revenue.
Final Conclusion: The reference was answered partly for the Revenue and partly for the assessee, with the first question going against the assessee and the second question going in its favour.
Ratio Decidendi: An assessment order is revisable under section 263 when failure to apply the correct statutory provision renders it erroneous and prejudicial to the interests of the Revenue, and under section 43A the exchange fluctuation on foreign currency liability attributable to a capital asset is to be adjusted in the actual cost of that asset for depreciation purposes.
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