Exchange fluctuation tied to fixed asset loans was held capital in nature, with depreciation and allowance relief granted.

Exchange fluctuation linked to foreign currency loans used to acquire plant and machinery was treated as part of the asset cost, so depreciation under section 43A could not be denied and the assessee's claim succeeded. Gains from cancellation of foreign exchange forward contracts entered into to hedge repayment of such capital loans were held to be capital receipts, not taxable revenue income, and the addition was deleted. The Tribunal also admitted an additional legal ground on investment allowance and allowed it on merits, following the assessee's earlier years' orders and the principle of consistency.

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Issues: (i) Whether depreciation under section 43A could be denied in respect of plant and machinery acquired with foreign currency loan on account of exchange fluctuation; (ii) Whether gain arising on cancellation of foreign exchange forward contract was a capital receipt or taxable revenue income; (iii) Whether the assessee was entitled to raise and succeed on the additional ground relating to investment allowance on foreign exchange fluctuation in respect of loans used for acquisition of plant and machinery.

Issue (i): Whether depreciation under section 43A could be denied in respect of plant and machinery acquired with foreign currency loan on account of exchange fluctuation.

Analysis: The assessee had earlier succeeded on the same question for preceding assessment years. The Tribunal followed its own earlier orders and the principle of consistency, relying on the view that exchange fluctuation connected with acquisition of fixed assets affects the cost of the asset and is not to be treated as a separate revenue item.

Conclusion: The issue was decided in favour of the assessee and the depreciation-related ground was allowed.

Issue (ii): Whether gain arising on cancellation of foreign exchange forward contract was a capital receipt or taxable revenue income.

Analysis: The forward contracts were entered into to safeguard repayment of foreign currency loans used for purchase of machinery. The cancellation occurred after the relevant exchange-control regime changed and the record showed that the contracts were linked to fixed capital assets, not trading in foreign currency. Applying the settled distinction between capital and trading receipts, the Tribunal held that gains arising from cancellation of such contracts retain the character of capital receipts when the underlying contract relates to acquisition of capital assets.

Conclusion: The issue was decided in favour of the assessee and the addition on account of cancellation gain was deleted.

Issue (iii): Whether the assessee was entitled to raise and succeed on the additional ground relating to investment allowance on foreign exchange fluctuation in respect of loans used for acquisition of plant and machinery.

Analysis: The additional ground was purely legal and therefore admissible at the appellate stage. On merits, the Tribunal followed its earlier decision in the assessee's own case that investment allowance was allowable in respect of foreign exchange fluctuation arising on loans taken for purchase of plant and machinery already installed and put to use.

Conclusion: The issue was decided in favour of the assessee and the claim was directed to be allowed.

Final Conclusion: The assessee succeeded on all substantive issues decided, resulting in relief on depreciation, treatment of foreign exchange forward contract gains, and investment allowance.

Ratio Decidendi: Where foreign exchange fluctuation or gain from cancellation of a forward contract is directly linked to acquisition of fixed assets or repayment of loans used for such acquisition, the receipt is capital in nature and the related cost or allowance consequences must be worked out accordingly; a pure legal ground may also be entertained at the appellate stage.

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