1993 (10) TMI 16 - HC - Income Tax

Forex fluctuation on deferred machinery instalments not revenue expense; added to actual cost for depreciation u/s 43A

HC held that additional liability arising from foreign exchange fluctuation on deferred instalments for imported machinery does not constitute revenue ... Exchange difference being the additional liability paid on account of fluctuation in foreign exchange rate - instalments payable for the machinery imported by the assessee under the deferred payment scheme - Whether, the Tribunal is right in holding that the sums do not constitute additional cost of machinery in terms of section 43A of the Income-tax Act, 1961? - HELD THAT:- It is agreed by counsel for the parties that the additional liability on account of fluctuation in the foreign exchange rate in respect of liability incurred for the import of machinery by the assessee would not constitute revenue expenditure in view of the decision of the Supreme Court in Sutlej Cotton Mills Ltd. v. CIT [1978 (9) TMI 1 - SUPREME COURT]. We, therefore, answer the first question in the affirmative and in favour of the Revenue. Additional liability on account of exchange fluctuations worked out with reference to the amount of loan outstanding on the last day of the accounting period at the then prevailing exchange rate has to be added to the actual cost of the machinery for the purpose of computation of depreciation for that year. - Section 43A specially provides for the treatment of increased liability of the assessee as expressed in Indian currency for repayment of the moneys borrowed by him from any person in foreign currency specifically for the purposes of acquiring the asset. In the present case, the assessee had acquired a capital asset from a country outside India for the purpose of its business by making payment in foreign currency. For this specific purpose, it borrowed moneys in foreign currency from the Industrial Finance Corporation of India and the liability in respect thereof was outstanding at the end of the relevant previous years. This liability had increased 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.[1991 (12) TMI 1 - SUPREME COURT]. In view of the foregoing discussion and the decision of the Supreme Court referred to above, it is clear that the Tribunal was not justified in holding that the sums did not constitute additional cost of machinery imported by the assessee for the purpose of depreciation. We are of the clear opinion that in view of section 43A of the Act, these amounts are to be added in the cost of acquisition of the asset for the purpose of depreciation for the assessment years concerned. We, therefore, answer question in the negative, i.e., in favour of the assessee and against the Revenue. Issues Involved:The judgment addresses two main issues raised under a reference u/s 256(1) of the Income-tax Act, 1961:1. Whether the exchange difference on account of fluctuation in foreign exchange rate for machinery imported under deferred payment scheme constitutes revenue expenditureRs.2. Whether the sums representing additional cost of machinery due to exchange fluctuations should be added to the actual cost for depreciation purposesRs.Issue 1 - Exchange Difference as Revenue Expenditure:The assessee, a public limited company, imported machinery from Germany under a loan, with the rupee value changing due to foreign exchange rate fluctuations. The Income-tax Officer disallowed the claim for deduction of exchange difference as revenue expenditure, deeming it capital in nature. The Commissioner of Income-tax (Appeals) allowed the claim, but the Tribunal reversed it, considering the loss as capital expenditure. The High Court, following the decision in Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1, affirmed that such exchange differences do not constitute revenue expenditure.Issue 2 - Additional Cost of Machinery for Depreciation:The dispute in question 2 revolves around whether the additional liability due to exchange fluctuations on the outstanding loan amount should be added to the actual cost of machinery for depreciation calculation. The assessee argued that the entire increase in liability should be considered, citing section 43A of the Income-tax Act, 1961. The Court agreed, emphasizing that section 43A mandates the adjustment of increased liability due to exchange rate changes to the actual cost of the asset. Referring to the Supreme Court's interpretation in Arvind Mills Ltd. [1992] 193 ITR 255, the Court held that the sums in question should indeed be added to the cost of acquisition for depreciation purposes.In conclusion, the High Court ruled in favor of the Revenue for Issue 1, affirming that exchange differences do not constitute revenue expenditure. However, for Issue 2, the Court sided with the assessee, directing that the additional sums due to exchange rate fluctuations be added to the cost of machinery for depreciation calculation, in accordance with section 43A of the Income-tax Act, 1961.