Assessee can add forex fluctuation liability to asset cost for depreciation. Revenue's appeals dismissed.

The Tribunal concluded that the assessee is entitled to add the additional liability incurred due to foreign exchange fluctuations to the actual cost of the asset, even if no actual payment was made based on the fluctuation rates. Consequently, the assessee is eligible for depreciation on the enhanced cost for the relevant assessment years. The orders of the learned CIT(A) allowing the assessee's claim were confirmed, and both appeals by the revenue were dismissed.

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Issues Involved:
1. Entitlement to claim the benefit of fluctuation rates in currency by adding it to the cost of assets.
2. Justification of reliance on judgments from other High Courts for deciding the issue in favor of the assessee.

Issue-wise Detailed Analysis:

1. Entitlement to Claim the Benefit of Fluctuation Rates in Currency:
The primary issue revolves around whether the assessee is entitled to claim the benefit of fluctuation rates in the currency by adding it to the cost of the assets, even if no actual payment was made based on these fluctuation rates. The ITAT, Indore Bench, initially dismissed the revenue's appeal, supporting the assessee's claim for depreciation on the increased cost of plant and machinery due to fluctuation in the exchange rate, based on judgments from the Patna, Gujarat, and Madras High Courts.

The Hon'ble High Court of Madhya Pradesh remanded the case to the Tribunal, directing it to reconsider the issue in light of the Supreme Court's decision in CIT v. Arvind Mills Ltd. [1992] 193 ITR 255. The Supreme Court in Arvind Mills Ltd. had examined the impact of exchange rate fluctuations on the actual cost of assets and the subsequent eligibility for depreciation.

Upon remand, the Tribunal re-evaluated the matter, noting that the assessee had increased the cost of assets due to foreign exchange rate fluctuations without actual remittance. The Tribunal considered section 43A of the Income-tax Act, which allows adjustments to the actual cost of assets due to exchange rate fluctuations, even if the payment was not made during the relevant assessment years. The Tribunal also acknowledged the assessee's mercantile system of accounting, which supports the accrual of liabilities.

2. Justification of Reliance on Judgments from Other High Courts:
The Tribunal had initially relied on judgments from various High Courts, including Usha Beltron Ltd. (Patna High Court), Windsor Foods Ltd. (Gujarat High Court), Chengalvarayan Co-operative Sugar Mills, and South India Viscose Ltd. (Madras High Court). These judgments uniformly held that additional liability due to exchange rate fluctuations should be added to the actual cost of the asset, thereby allowing depreciation on the enhanced cost.

The Tribunal reaffirmed its reliance on these judgments, highlighting that section 43A of the Income-tax Act, as applicable to the assessment years under appeal, supported the assessee's claim. The Tribunal emphasized that the amendment to section 43A by the Finance Act, 2002, effective from 1-4-2003, which mandates adjustments only on actual payment, was not applicable to the assessment years in question (1990-91 and 1991-92).

The Tribunal also noted that the Supreme Court in Arvind Mills Ltd. had considered the issue of development rebate on increased costs due to exchange rate fluctuations, which indirectly supports the assessee's claim for depreciation on the enhanced cost.

Conclusion:
The Tribunal concluded that the assessee is entitled to add the additional liability incurred due to foreign exchange fluctuations to the actual cost of the asset, even if no actual payment was made based on the fluctuation rates. Consequently, the assessee is eligible for depreciation on the enhanced cost for the relevant assessment years. The orders of the learned CIT(A) allowing the assessee's claim were confirmed, and both appeals by the revenue were dismissed.

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