TaxTMI 
TaxTMI 
1991 (12) TMI 1
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.... funds therefor from others, where the price is paid in several instalments, where more than one fluctuation in exchange rate intervene and so on) will serve to bring the problem into focus. Let us consider the case of an income-tax assessee, whose previous year ended on March 31, 1966, who had placed an order for plant and machinery costing $ 10,000 on January 1, 1966, at a time when the rupee exchange rate of a dollar was, say, ten rupees to the dollar. The cost of the plant or machinery would have been debited by him, in his books for the year ended March 31, 1966, at rupees one lakh. If the price wholly or in part remained undischarged on June 6, 1966, the assessee would have become liable to pay more money in terms of the Indian rupee to pay in full the price of $ 10,000. Let us suppose that he had eventually to pay Rs. 1,20,000 in the accounting year 1966-67 to discharge his liability towards the purchase price. The two questions that would arise are : (1) Should he enter the additional liability of Rs. 20,000 in his books for the year ended March 31, 1967, during which the additional liability arose consequent on the devaluation or should he reopen his accounts of the earli....
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....he assets which have been purchased out of foreign funds is not possible, some reasonable method of allocation would have to be adopted. 6.2 Depreciation must be provided on the additional cost according to the method of depreciation normally employed by the company. 6.3 The council has recommended to the Government that appropriate amendments be made in the Companies Act to embody the accounting treatment outlined above. It has also been represented to the Government that the consequential amendments should be made in the Income-tax Act to enable businesses to claim such additional depreciation and appropriate development rebate as an allowable deduction for tax purposes. 6.4 Fixed assets which are purchased prior to devaluation but paid for subsequently should be recorded at the enhanced cost by conversion at the new rates of exchange. 6.5 Advances made to foreign suppliers for machinery to be supplied should be retained in the books at the actual rupee cost of the advance (i.e., at the old rate of exchange). Any subsequent payment towards the purchase of the machinery by way of final instalment or otherwise would, if paid after devaluation, be converted at the new rate of ex....
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.... results in a profit, the difference (to the extent not adjusted wholly or partly against the cost of assets) should be transferred to a reserve account and a loss arising on a subsequent translation can be debited to this reserve. (iii) If the translation results in a loss, the difference (to the extent not adjusted wholly or partly against the cost of assets) should be written off in the profit and loss account. If the amount of the difference is substantial, it can be written off in annual instalments over a period of years in proportion to the repayment of the liability in each of the subsequent years. " The Legislature reacted to the situation created by the devaluation of 1966 by effecting two amendments : The first legislative provision enacted to meet the situation was the insertion of section 43A in the Income-tax Act, 1961. The relevant portions of this provision, inserted by the Finance (No. 2) Act, 1967, with effect from April 1, 1967, need to be set out in full as the controversy before us turns entirely on a proper interpretation of this provision. It reads : "43A. (1) Notwithstanding anything contained in any other provision of this Act, where an assessee has acqu....
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....aforesaid and additions and deductions thereto, relate to any fixed asset which has been acquired from a country outside India, and in consequence of a change in the rate of exchange at any time after the acquisition of such asset, there has been an increase or reduction in the liability of the company, 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 moneys borrowed by the company 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 is so increased during the year, shall be added to, or, as the case may be, deducted from the cost, and the amount arrived at after such addition or deduction shall be taken to be the cost of the fixed asset. Explanation 1. -This paragraph shall apply in relation to all balance sheets that may be made out as at the 6th day of June, 1966, or any day thereafter and where, at the date of issue of the notification of the Government o....
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....r 1966-67 will be Rs. 1,00,000. The actual cost to be entered in the books, for the assessment year 1967-68, will, however, be Rs. 1,20,000. We may now turn to the second question posed earlier and consider the position on general principles. So far as depreciation allowance is concerned, the position is perhaps a little simpler because it is a recurrent claim. Under the definitions contained in section 32 read with section 43(1) and (6) of the Income-tax Act, the depreciation is to be allowed on the actual cost of the asset less all depreciation actually allowed in respect thereof in earlier years. Thus, where the cost of the asset subsequently goes up because of devaluation, whatever might have been the position in the earlier year, it is always open to the assessee to insist, and for the Income-tax Officer to agree, that the written down value in the year in which the increased liability has arisen should be taken on the basis of the increased cost minus depreciation earlier allowed on the basis of the old cost. Thus, in the illustration given earlier, if the asset is one that earns depreciation at 10%, the assessee would have got a depreciation allowance of Rs. 10,000 for the ....
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.... an asset for the purpose of deduction on account of the development rebate under section 33. This means, according to the Department, that the statute is categorical that any increase or decrease in the liability towards the actual cost of machinery or plant consequent on fluctuations in exchange rates is totally irrelevant and has to be disregarded for purposes of computation of the development rebate allowable thereon. The grievance of the Revenue, the appellant in this appeal, is that, in spite of the clear and categorical language of section 43A(2), not only the Gujarat High Court in the judgment under appeal (reported in Arvind Mills Ltd. v. CIT [1978] 112 ITR 64) but also several other High Courts [ vide : Addl. CIT v. Kwality Spinning Mills P. Ltd. [1977] 109 ITR 646 (Mad), Union Carbide India Ltd. v. CIT [1981] 130 ITR 351 (Cal), CIT v. Arun Spinning Mills [1982] 133 ITR 382 (P & H), CIT v. Coromandel Fertilisers Ltd. [1985] 156 ITR 283 (AP), Addl. CIT v. Chowgule and Co. (P.) Ltd. [1986] 159 ITR 12 (Bom) and CIT v. Cochin Refineries Ltd. [1988] 173 ITR 461 (Ker)] have held that assessees are entitled to development rebate on the enhanced cost, the lone voice speaking dif....
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.... deferred payment terms or against foreign loan, the additional rupee liability incurred by him in repaying the instalments of the cost or the foreign loan, as the case may be, after the date of devaluation of the rupee, will be added to the original actual cost of the asset. The proposed section also secures that where there is a decrease in the rupee liability of the assessee in respect of assets acquired by him from abroad due to a change in the exchange value of the rupee, the original actual cost of the asset will be correspondingly reduced. The additional rupee liability incurred on imported capital assets or, as the case may be, any decrease in such liability, in the circumstances stated in the earlier paragraph will not, however, be taken into account in computing the actual cost of the asset for the purpose of deduction on account of development rebate." Reference must also be made to a circular issued by the Central Board of Direct Taxes on which reliance was placed by both counsel : " 61. The par value of the rupee was lowered by 36.5 per cent. with effect from 6th June, 1966. In consequence of this change, the value, in rupees, of a unit of any foreign currency has i....
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....ge of currency. In such a case where, in consequence of the change in the rate of exchange of currency, there is an increase or reduction in the assessee's liability as expressed in Indian currency for payment of the whole or a part of the cost of the assets or of the loan in foreign currency, the original actual cost, to the assessee, of the machinery or plant or other capital asset, is required to be increased or, as the case may be, reduced, correspondingly for the following purposes : ... The above-mentioned adjustment to the original actual cost of the assessee to the imported capital asset is to be made in respect of the previous year in which there is an increase or reduction in the assessee's liability in terms of Indian currency for payment of the whole or part of the cost of the asset or for repayment of the foreign loan against which the asset has been acquired. With reference to the recent devaluation of the rupee, this will be the previous year in which the date of devaluation, viz., 6th June, 1966, falls ... 65. It has been expressly provided in sub-section (2) of section 43A that the abovementioned provisions for adjustment to the original actual cost of imported c....
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.... use. In fact, this is what has happened in this case. The asset was acquired/installed in calendar year 1966 and, by the end of this year, the increase in the liability had resulted. Therefore, on ordinary and normal principles of accountancy, the cost of the asset should be and has been debited in the books at the increased figure in the year 1966. That is the actual cost on which the assessee is entitled to development rebate and depreciation. The non-obstante clause, at the commencement of section 43A(1), suggests that the sub-section operates only where there is some provision in the Act which runs contrary to the above principle. There being none, section 43A(1) has no application to this type of a case. Section 43A(1) not being applicable, the language of section 43A(2) adds nothing. (ii) Actually, section 43A is intended to meet a different situation, viz., one where the increase in liability occurs in a subsequent accounting year. In such a situation, a question might conceivably arise as to whether the assessee is entitled to reopen its accounts for the earlier year where the asset has been debited at its original cost and development rebate and depreciation allowed on t....
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....ngth of sub-section (1), as an additional allowance in the subsequent year. This is what is made clear by sub-section (2). (v) Counsel claims that the interpretation of the provision suggested by him-viz., that it has application only to cases where actual cost has already been determined in a previous year and the increase in liability arises in a later previous year is fully borne out by the reference therein to types of capital allowances other than depreciation, the language used in the Notes on Clauses ("where an assessee had acquired . . .") and the language used in the circular earlier set out ("for the assessment year 1967-68 and subsequent assessment years" and "adjustment to the original actual cost"). (vi) The Department's theory that section 43A occupies the entire field cannot be accepted unless it is shown either that the section confers for the first time a benefit which would not be otherwise available or that the section was intended not to confer a benefit but to curtail the existing benefits and allowances under the Act. Neither of these premises is correct. The first is incorrect because general principles of accountancy permit the incremental liability to be ....
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....y from outside agencies and the liability in respect of such assets is outstanding. At a point of time after the acquisition of the asset, this liability has increased on account of the devaluation of our currency. These conditions being satisfied, the language of the sub-section is attracted. The principal argument of Sri Salve for saying that sub-section (1) is not attracted are two in number. He contends, firstly, that it applies only where the fluctuation in rate occurs in a previous year subsequent to that in which the asset is acquired. He submits that where, as in the present case, the increase in liability occurs in the same year, it has automatically to be given effect to in the accounts of the previous year irrespective of the language of sub-section (1). That may be so but that is no reason to say that the terms of sub-section (1) are not attracted to the case. We find no merit in the contention of Sri Salve that sub-section (1) will come into operation only in respect of a year subsequent to the year in which the asset is acquired. The language of the sub-section does not contain any such qualification. The interpretation suggested by learned counsel would require the ....
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....ion on either of these issues. As we had said earlier, there is no need to speculate on all the problems that might have arisen if section 43A has not been there because the statute has resolved these problems. It lays down, firstly, that the increase or decrease in liability should be taken into account to modify the figure of actual cost and secondly that such adjustment should be made in the year in which the increase or decrease in liability arises on account of the fluctuation in the rate of exchange. The result of the above discussion is that once the language of subsection (1) is attracted to a particular case, sub-section (1) applies. Once sub-section (1) is attracted, its application is excluded qua development rebate, by the operation of sub-section (2). The contention of learned counsel that the interpretation we have accepted would mean the denial of some concession extended to the assessee is without force. The clarifications given by the Ministry of Finance in January, 1967, the Notes on Clauses and the circular make it clear that the relief proposed to be granted was restricted only to depreciation and amortisation allowances. The anxiety of the Government which ha....