TaxTMI 
TaxTMI 
2010 (2) TMI 23
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....ted dates. The contract was entered into for entire outstanding amount and the delivery of foreign currency was obtained under the contract for instalment due from time to time. The balance value of the contract, after deducting the amount withdrawn towards repayment, was rolled over for a further period up to the date of the next instalment. Assessee filed its return of income for assessment year 1986-87 on 30.6.1986. A revised return was filed by it on 27.3.1989 declaring a total income of Rs.2,10,08,640/-. The A.O. disallowed an amount of Rs.8,86,280/-, being the roll over premium charges paid by the assessee in respect of foreign exchange forward contracts to Citibank N.A. on the ground that the said charges were incurred in connection with the purchase of a capital asset (plant and machinery), hence, it was not admissible for deduction under Section 36(1)(iii) or under Section 37 of the Act. On appeal, the CIT (A) held that the roll over premium charge(s) incurred by the assessee was allowable as it was incurred by the assessee to mitigate the risk involved in higher payment because of adverse fluctuation of rate of exchange. According to CIT (A), roll over premium charge(s) c....
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....nge authorized dealer (Citibank) for providing the entire amount of foreign currency outstanding at an appropriate exchange rate. The authorized dealer in turn agreed to provide, out of such contracted sum, such amount as may be necessary to meet the instalments on due dates and to carry forward the unutilized portion of the foreign currency contracted to meet the subsequent payments. Accordingly, out of the total foreign currency contracted and outstanding, as and when any instalment became due, the borrower deposited the rupee equivalent of the instalment due at the pre-determined rate and carried forward or rolled over the balance unutilized amount of the contracted foreign currency. According to the assessee, this exercise involved a cost for carrying forward the contracted foreign currency, which was not immediately required for repayment. The said cost was called "the roll over charges". According to the assessee, such cost is akin to the interest payable on the rupee equivalent, which the authorized dealer had invested in holding the foreign currency at the borrower's account. This argument was accepted by the High Court. Thus, according to the assessee, the said roll over c....
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....tion 43A. Hence, according to the assessee, in the present case, the assessee had rightly debited the roll over charges in its Profit & Loss Account under the Head Administrative Expenses - Insurance / Bank Charges. According to the assessee, roll over charges are commitment charges. They are in the nature of interest. They are paid in relation to the amounts borrowed. They are akin to the interest payable on the rupee equivalent, which the authorized dealer had invested in holding the foreign currency on the borrower's account. For the afore-stated reasons, it was submitted that roll over charges were allowable as deduction under Section 36(1)(iii) of the Act. According to the assessee, roll over charges were also meant for covering a risk on account of fluctuations between the rupee and the contracted foreign currency. Such risk is built into the roll over charges, hence, such charges were allowable as deduction under Section 36(1)(iii) of the Act. In the alternative, on behalf of the assessee, it was submitted that in the event of this Court coming to the conclusion that roll over charges were not deductible under Section 36(1)(iii) then in that event such charges were deductibl....
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....te of exchange specified in the contract to enable him to meet the whole or any part of the liability aforesaid, the amount, if any, to be added to, or deducted from, the actual cost of the asset or the amount of ependiture of a capital nature or, as the case may be, the cost of acquisition of the capital asset under this sub-section shall, in respect of so much of the sum specified in the contract as is available for discharging the liability aforesaid, be computed with reference to the rate of exchange specified therein." 8. Before analysing the Section quoted above, by way of preface, we need to state that exchange differences are required to be capitalized if the liabilities are incurred for acquiring the fixed asset, like plant and machinery. It is the purpose for which the loan is raised that is of prime significance. Whether the purpose of the loan is to finance the fixed asset or working capital is the question which one needs to answer and in order to ascertain that purpose, the facts and circumstances of the case, including the relevant loan agreement and the correspondence between the parties concerned are required to be looked into. In the present case, it appears th....
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....t minus the depreciation earlier allowed on the basis of the old cost. One more aspect needs to be highlighted. Under Section 43A, as it stood at the relevant time, it was inter alia provided that where an assessee had acquired an asset from a country outside India for the purposes of his business, and in consequence of a change in the rate of exchange at any time after such acquisition, there is an increase or reduction in the liability of the assessee as xpressed in Indian currency for making payment towards the whole or part of the cost of the asset or for repayment of the whole or part of the moneys borrowed by him for the purpose of acquiring the asset, the amount by which the liability stood increased or reduced during the previous year shall be added to or deducted from the actual cost of the asset as defined in Section 43(1). This analysis indicates that during the relevant assessment year adjustment to the actual cost was required to be done each year on the closing date, i.e., yearend. Subsequently, Section 43A underwent a drastic change by virtue of a new Section 43A inserted vide Finance Act, 2002. Under the new Section 43A such adjustment to the cost had to be done onl....
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....r forward cover and which made the assessee pays roll over charges. The word "adverse" in the Note itself presupposes increase in the liability incurred by the assessee during the year ending 31st December, 1986. In the circumstances, we find no merit in the contention of the assessee that roll over charges have nothing to do with the fluctuation in the rate of exchange. Lastly, in this case we are concerned with capitalization of exchange difference in respect of acquisition of fixed assets acquired from abroad. According to Indian Accounting Standards by Dolphy D'Souza, roll over charges are indicative of the increase or decrease in the liability of the company in the next specified period, generally of six months. Roll over charges represent the difference arising on account of change in foreign exchange rates. Roll over charges paid/ received in respect of liabilities relating to the acquisition of fixed assets should be debited/ credited to the asset in respect of which liability was incurred. However, roll over charges not relating to fixed assets should be charged to the Profit & Loss Account. [See page 325] 11. Before concluding, we may state that this judgment is confin....