1. Both of these appeals by the revenue are directed against different orders of the learned CIT(A)-I, Indore, dated 13^th June, 1995 for the assessment years 1990-91 and 1991-92.
2. Both these appeals were disposed of by ITAT, Indore Bench, vide order dated 28^th June, 2000. The revenue preferred the appeals before the Hon'ble High Court of Madhya Pradesh in ITA NOS. 62/2000 and 61/2000 in the matter of CIT v. Mupnar Films Limited, Indore. Hon'ble High Court of Madhya Pradesh admitted the appeals of the revenue for final hearing on the following substantial questions of law: (1) Whether ITAT was justified in holding that assessee is entitled to claim the benefit of fluctuation rates in the currency by adding it into the cost of the assets, though in fact, he did not make the payment on the basis of said fluctuation rates? (2) Whether ITAT was justified in placing reliance upon the law laid down by the Patna High Court in 158 ITR 595, Gujrat High Court in 146 CTR 207 and Madras High Court in 158 CTR 614 and 148 CTR 442 to decide this issue in favour of the assessee by holding that notwithstanding the fact that the assessee has not incurred the actual liability to make the payment on the strength of fluctuation in exchange rate, yet he is entitled to claim benefit of additional cost/liability said to have been incurred by him in respect of a plant and machinery installed in his plant for claiming depreciation under the Incometax Act? Hon'ble High Court of Madhya Pradesh noted that the ITAT, Indore Bench, while deciding the issue decided ITA No. 641/Ind/95 and in para 7 held as under: This appeal is filed by the Revenue against the order of VTI(A)-I, Indore, dt. 13.6.95. In this appeal, the Revenue has challenged the order of the CIT(A) on the ground that he has erred in directing, the A.O. to allow claim of depreciation on the increased cost of plant and machinery due to fluctuation in excise rate, particularly when no such payment has been made by the assessee. The appeal of the revenue is dismissed following the judgment of the Hon'ble Patna High Court in the case of Usha Beltron Ltd. 158 ITR 595, judgment of Hon'ble Gujarat High Court in the case of Windsor Foods Ltd. 146 CTR 207 and judgments of Madras High Court in the case of Chengalvarayan Co-operative Sugar Mills 158 CTR 614 and South India Viscose Ltd. 142 CTR 442. In these cases, the Hon'ble Courts have held that additional liability on account of fluctuation in exchange rate is to be added as additional cost of asset.
Hon'ble High Court of Madhya Pradesh while considering the departmental appeals in ITA Nos. 61 and 62/2000 observed that the Tribunal did not examine the issue in the light of the law laid down by the Hon'ble Supreme Court in the case reported in 193 ITR 255 CIT v. Arvind Mills Limited. It was further observed that it is in this case that their Lordships examined the issue in question which has bearing over the issue urged and that the Tribunal has not made a reference of this case in the impugned order. Hon'ble High Court of Madhya Pradesh, accordingly, set aside the order of the Tribunal and remanded the case to the Tribunal for deciding afresh on merits keeping in view the aforesaid observations as also the case law relied upon by the assessee in support of the case so that a fresh decision strictly in accordance with law can be taken. The order of the Tribunal in para 7 quoted above was set aside and the Tribunal was directed to decide the appeal afresh after narrating the relevant facts necessary for the disposal of appeal in the light of the observations made above. Both the appeals were, accordingly, refixed by the office for hearing.
3. We have heard the learned representatives of both the parties and gone through the material available on record in the light of the directions of the Hon'ble High Court of Madhya Pradesh in remanding the matter to the Tribunal.
4. The learned representatives of both the parties submitted that the facts are recorded by the Assessing Officer in the assessment year 1991-92 though the same pertained to both the assessment years under appeal.
5. We find that the Assessing Officer in para 2.1 of assessment year 1991-92 noted that the assessee has increased the cost of assets due to fluctuation of rates in foreign exchange at Rs. 1,42,03,818/-(Rs.76,24,651/- + 65,79,167) for the assessment years 1990-91 and 1991-92 as shown by the assessee below the depreciation chart. The increase in fluctuation of rates in the foreign exchange is not allowable since there was no actual remittance of foreign currency during the above assessment years. Therefore, on such amounts no depreciation or investment allowance is allowable. The Assessing Officer asked the assessee as to why depreciation may not be disallowed on account of increased cost of assets due to fluctuation of rates in foreign currency. The assessee vide its reply dated 15^th March, 1994 and 18^th March, 1994 replied as under: As per Section 43A of the I.T.Act 1961 where an assessee has acquired any capital asset from abroad for the purpose of his business, on credit or on deferred payment terms, or against a loan in foreign currency and the whole or part or cost of such asset or of the loan in foreign currency, is outstanding as on the date on which there is a change in the rate of exchange or currency, the original actual cost to the assessee, of the machinery or plant or other capital asset, is required to be increased for the following purpose: In respect of assets on which depn. allowance is admissible, for the purpose of determining the actual cost thereof and also its written down value (depn. and inv. allowance, will be calculated with reference to the actual cost of the asset as so adjusted) For applicability of Section 43A, it is enough that increase in liability must relate to capital asset CIT v. lata Hydro Electric Power Supply Co. Ltd. .
The detail of capitalisation of exchange fluctuation is already submitted to you earlier, the photo copy of the same is enclosed herewith for your reference.
The company maintained its accounts on mercantile system Foreign currency loan was increased due to raise in exchange rate due to upward fluctuation in the foreign exchange rate. This increase in liability is also give rise to the size of installments to be paid to financial institutes for payment of foreign currency term loan.
This is also per accounting standards of the institute of Chartered Accountants of India, that increase of liability due to foreign exchange fluctuations should be accounted and capitalised in the year of change and to show true and fair view of the statement of affairs. It was necessary to account for the same under the proper head of account. Since it has been correctly capitalised to the relevant assets. Keeping in view the practical aspects of the transactions and its ultimate effects. Since mercantile accounting system is followed under no circumstances it can be considered on payment basis, which shall from part of the revenue expenses in that particular year of payment.
6. The Assessing Officer did not accept the contention of the assessee since the assessee can increase the cost of asset due to fluctuation of exchange rates when he paid the amount actually at the time of repayment of currency. The Assessing Officer , therefore, noted that in the case of the assessee the cost of assets has been shown including the fluctuation rates which are payable by the company. Therefore, this increase in cost of the asset is not allowable to the cost of assets as per law and the depreciation is not allowed on the same.
7. The findings were challenged before the learned CIT(A) and the same submissions were reiterated as noted above and the learned CIT(A) considering the explanation of the assessee found that the Assessing Officer is not correct because it is an established proposition that installation to the cost of assets used for the purpose of business due to fluctuation in rates of exchange would increase the capital cost and the assessee would be entitled to depreciation on such enhanced cost as per Section 43 A of the Act. The claim of the assessee wsas, accordingly, allowed.
8. The ITAT, Indore Bench, vide its earlier order dated 28^th June, 2000 dismissed the departmental appeal vide para 7 quoted above and the Hon'ble High Court of Madhya Pradesh restored the matter to the Tribunal to redecide the issue in accordance with law as mentioned above.
9. The ld. Departmental Representative relied upon the order of the Assessing Officer and submitted that the assessee can increase the cost of assets due to fluctuation of exchange rates when the assessee paid the amount actually at the time of repayment of foreign currency. The ld. Departmental Representative submitted that Section 43A is amended and substituted by the Finance Act, 2002 with effect from 1.4.2003 and the increase in the cost of asset due to fluctuation of exchange rate could be added in the year when actual payment is made. The ld.Departmental Representative , therefore, submitted that the intent of the legislature is very clear even from the amendment that from actual payment only of the exchange rate due to fluctuation, the assessee can add the same to the cost of asset otherwise the assessee would not be entitled to make the addition to the cost of asset. The ld.Departmental Representative submitted that the decision of the Hon'ble Supreme Court in the case of CIT v. Arvind Mills Limited 193 ITR 255 is not applicable because in that case the issue before the Hon'ble court was with regard to claim of the assessee on account of development rebate on the increased cost.
10. On the other hand, the ld. counsel for the assessee reiterated the submissions made before the authorities below and submitted that the assessee is maintaining books of accounts on mercantile basis and that the assessment years involved in the present appeals are 1990-91 and 1991-92 which were prior to amendment in Section 43A. Therefore, the old provisions would apply to the present appeals and the issue is whether the depreciation on increased cost due to foreign exchange fluctuation on outstanding loan is allowable Under Section 43A of the Act and whether such depreciation is allowable on additional liability so provided for in the accounts on accrual basis even if actual payment was not made during the year. The ld. counsel for the assessee submitted that the Tribunal earlier allowed the claim of depreciation on the increased cost due to foreign exchange fluctuation by relying upon the following decisions: 11. The ld. counsel for the assessee submitted that the Hon'ble Patna High Court while deciding the case of Usha Beltron Limited (supra) has taken into consideration the decision of the Hon'ble Supreme Court in the case of Arvind Mills Limited (supra) as is directed by the Hon'ble High Court of Madhya Pradesh while remanding the matter to the Tribunal. The ld. counsel for the assessee submitted that Section 43A was inserted with effect from 1.4.1967 according to which additional liability due to foreign exchange fluctuation should be added/reduced to actual cost of the asset and the said section is substituted by the Finance Act, 2002 with effect from l.4.2003 whereby any adjustment towards liability due to foreign exchange fluctuation is to be made only on actual payment by the assessee towards the cost of the assets irrespective of method of accounting adopted by the assessee.
Therefore, prior to the assessment year 2003-04 such liability was being adjusted and allowed on accrual basis at the close of the year.
The ld. counsel for the assessee further submitted that since the assessee is maintaining books of accounts on mercantile system of accounting, the liability which accrued in the previous year relevant to the assessment year in question, the assessee correctly added the same to the cost of the asset and claimed depreciation accordingly. The ld. counsel for the assessee also submitted that in the case of Arvind Mills Limited (supra), the issue for consideration was claim of development rebate on the increased cost Under Section 43A(2) of the Act. The ld. counsel for the assessee further submitted that the assessee claimed that actual cost for the purpose of allowing depreciation Under Section 32 of the Act should be increased by the amount of additional liability occurred due to foreign exchange fluctuation.
12. Therefore, the decision of M/s Arvind Mills Limited supports the case of the assessee. The ld. authorised Representative relied upon the same decisions as were relied upon by the Tribunal earlier and also submitted that it has been held in several cases that foreign exchange price fluctuation has to be considered for the purpose of adjusting the actual cost even if actual paymerit was not made: 13. We have considered the rival submissions and the material available on record in the light of the directions of the Hon'ble High Court of Madhya Pradesh while remanding the matter to the Tribunal and also taken into consideration the decisions relied upon by the parties.
Section 43A of the Incometax Act as is applicable to the assessment year under appeal reads as under: 43A. Special provisions consequential to changes in rate of exchange of currency (1) Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange at any time after the acquisition of such asset, there is an increase or reduction in the liability of the assessee 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 the moneys borrowed by him 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 aforesaid is so increased or reduced during the previous year shall be added to, or, as the case may be, deducted from, the actual cost of the asset as defined in Clause (1) of Section 43 or the amount of expenditure of a capital nature referred to (in Clause (iv) of Sub-section (1) of Section 35 or in Section 35A ) or in Clause (ix) of Sub-section (1) of Section 36, or, in the case of a capital asset (not being a capital asset referred to in Section 50), the cost of acquisition thereof for the purposes of Section 48, and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset as aforesaid.
Explanation 1- In this Sub-section, unless the context otherwise requires,- (a) "rate of exchange" means the rate of exchange determined or recognised by the Central Government for the conversion of Indian currency into foreign currency or foreign currency into Indian currency; (b) "foreign currency" and "Indian currency" have the meanings respectively assigned to them in Section 2 of the Foreign Exchange Regulation Act, 1947 ( 7 of 1947).
Explanation 2. Where the whole or any part of the liability aforesaid is met, not by the assessee, but, directly or indirectly, by any other person or authority, the liability to met shall not be taken into account for the purposes of this Sub-section.
Explanation 3.- Where the assessee has entered into a contract with an authorized dealer as defined in Section 2 of the Foreign Exchange Regulation Act, 1947 (7 of 1947), for providing him with a specified sum in a foreign currency on or after a stipulated future date at the rate 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 expenditure 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.
(2) The provisions of Sub-section (1) shall not be taken into account in computing the actual cost of an asset for the purpose of the deduction on account of development rebate under Section 33.
14. In cases where the full price of the asset has been paid for before the date of devaluation, the depreciation will continue to be allowed on the original cost. Only in those cases in which the assessee had an outstanding liability in regard to the purchase price which was discharged after the devaluation that the depreciation will be allowed on the enhanced cost. Instruction No. 474, dated 15^th November, 1972 The issue before the Hon'ble Supreme Court in the case of CIT v. Arvind Mills Limited (supra) was "whether the sum of Rs. 8,67,437/-would form part of the actual cost for the purpose of allowance of development rebate?" It was held in that case that in view of specific provision of Sub-section (2) of Section 43A, the additional liability on account of exchange rate fluctuation is not to form part of the actual cost for the purpose of development rebate even though the additional liability may have arisen in the same year.
15. We may mention that Hon'ble Supreme Court in the case of M/s Arvind Mills Limited (supra) also considered a simple hypothetical illustration while considering the provisions of Section 43A (steering clear of complications that may arise where the purchase is made by borrowing 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. It was considered that the case of an incometax assessee whose previous year ended on March 31, 1996, who had placed an order for plant and machinery costing $ 10,000 on January 1, 1996 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 rupee Rs. 1 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 rupce 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: (i) 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 earlier year and correct the figure of cost debited therein from Rs. 1,00,000 to Rs. 1,20,000? (ii) On what basis should he claim allowances like depreciation and development rebate under the Incometax Act which are admissible on the "actual cost to the assessee" of such plant and machinery? Hon'ble Supreme Court considering the above two questions answered the same as under: Reverting now to the first of the two questions posed earlier in the background of the above principles and amendments, the position appears to be that, on strict accountancy principles, the increase or decease in liability towards the actual cost of an asset arising from exchange fluctuation can be adjusted in the accounts of the earlier year in which the asset was acquired (if necessary, by reopening the said accounts). In that event, the accounts of that earlier year as well as of subsequent years will have to be modified to give effect to variations in depreciation allowances consequent on the redetermination of the actual cost. In other words, in the illustration given earlier, the actual cost of Rs. 1,00,000 and the allowances based thereon shown in the accounts for the financial year 1965-66 would have to be revised to show an actual cost of Rs. 1,20,000 and allowances based on that figure. The figures of written down value and depreciation allowances for subsequent years would also need consequential revision. However, though this is a course which is theoretically advisable or precise, its adoption may create a lot of practical difficulties. That is why the Institute of Chartered Accountants gave an option to business people to make a mention of the effect of devaluation by way of a note on the accounts for the earlier year in case the balance sheet in respect thereof has not yet been finalized but actually to give effect to the necessary adjustments in the subsequent years instead of reopening the closed accounts of the earlier year. This also appears to be in accord with the principle laid clown by this Court in CIT v. A. Gajapathy Naidu and CIT v. Swadeshi Cotton and Flour Mills Pvt. Ltd. (1964) 5. ITR 134.
This is also the principle subsequently recognized by the amendment to the Companies Act, 1956. Thus, in the illustration given earlier, the actual cost of the asset for the assessment year 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 Incometax 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 Incometax 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 assessment year 1966-67 and that will stand. But, for the assessment year 1967-68 the depreciation allowance will be calculated on an actual cost of Rs. 1,20,000 minus the depreciation earlier allowed of Rs. 10,000 i.e. on Rs. 1,10,000. The written down value and allowances for subsequent years will be calculated on this footing. In other words, though the depreciation granted earlier will not be disturbed, the assessee will be able to get a higher amount of depreciation in subsequent years on the basis of the revised cost and there will be no problem.
16. Hon'ble Patna High Court in the case of Usha Beltron Ltd. 158 CTR 595 held- Although investment allowance in Section 32 A and development rebate in Section 33 refer to deductions in respect of the plant and machinery amongst other things, the provisions are not identical.
The provision regarding development rebate was introduced as early as in 1955 in the Indian IT Act, 1922. After the provision was incorporated in the 1961 Act, it underwent amendments in 1963 and 1965 by Acts 43 of 1963 and 15 of 1965. The provision in its present form was substituted in 1967 by Act 20 of 1967. It was by that Act that Section 43 A was also added in the IT Act, The provision regarding investment allowance was introduced for the first time in 1976 by Act 66 of 1976. As both the provisions have held the field together, it is difficult to accept the contention that they are one and the same thing. It was rightly submitted that while introducing the provision regarding investment allowance by adding Section 32 A in the Act the legislature was supposed to be aware of the provision regarding development rebate in Section 33. This becomes more evident from the fact that the provision regarding development rebate finds specific mention in Clause (c) of the second proviso to Sub-section (1) of 32A. It is to be kept in mind that the same Act, i.e. Act 20 of 1967, inserted Section 43A and also amended the substantive provisions regarding development rebate by substituting an altogether new section. The legislature in its wisdom apparently thought it appropriate to exclude development rebate from the purview of Section 43A. It is well settled that where the provisions of enactment are clear and do not admit of any doubt or ambiguity, it is not for the Court to speculate on the reasons of the enactment. If the legislature intended to exclude investment allowance from the application of Section 43A, it could have mentioned the same in the body of Sub-section (2). The argument that actual remittance was not made during the accounting year is neither borne out from Section 43A nor does it appear from the Tribunal order. As a matter of fact, the Tribunal apparently rejected the contention of the Department to that effect as otherwise, on the ground that no remittance was made, it should have disallowed depreciation allowance as well, provided of course, that this was the requirement of law. The fact that the Tribunal allowed depreciation allowance is indicative of the fact that the Department's contention in this regard was not accepted. In the above premises, the decision of the Tribunal disallowing investment allowance was not correct in law. CIT v. Arvind Mills Ltd. distinguished.
Investment allowance is allowable on increased cost of plant and machinery on account of fluctuation in exchange rate; investment allowance is not excluded from the purview of Section 43A.17. Hon'ble Madras High Court in the case of Chengalvarayan Co-operative Sugar Mills 158 CTR 614 held- It is evident by reason of" Section 43A(1) the amount by winch the liability of the assessee is increased or reduced (luring the previous year by reason of variation in the rate of exchange as between the Indian currency and the foreign currency, in cases, where the assets have been acquired, from a country outside India, such amount shall be added to or as the case may be, deducted from the actual cost of the asset, as defined in Clause (1) of Section 43. There can, therefore, be no manner of doubt that the investment allowance which is required to be allowed on the actual cost of machinery or plant, is required to be allowed on the amount by which that actual cost has increased by reason of variation in the rate of exchange as between Indian currency and foreign currency, where the said acquisition is from a foreign country. The fact that the additional liability for the assessee arose in the year subsequent to the date of installation does not come in the way of the investment allowance being allowed to the assessee. Section 43A(1) refers to the amounts by which the liability of the assessee is so increased or reduced 'during the previous year'. The increase in the liability of the assessee during the previous year on account of the change in the rate of exchange is part of the actual cost of the machinery required from a foreign country and the assessee is entitled to investment allowance on the additional cost.
Assessee is entitled to investment allowance on the additional payment on account of liability arising due to fluctuation in foreign exchange rate even in the year subsequent to the date of installation of machinery.
18. Hon'ble Gujarat High Court in the case of Windsor Foods Ltd. 146 CTR 207 held- If a taxpayer incurs obligations and before such obligations have been satisfied by payment there is a variation in the rate of exchange which involves him in a loss on exchange, that loss would be an allowable deduction in the year of payment if, and to the extent to which it is referable to liabilities on revenue account, but not if, and to the extent to which it is referable to liabilities of a capital nature. In the present case, the additional liability arising due to the fluctuation in the exchange rate in the previous year 1979-80 was clearly referable to liabilities of a capital nature and not to liabilities on revenue account. In the previous year in which the liability arose due to fluctuation in the exchange rate, that amount, by which the liability had increased in that previous year, was to be added in the actual cost in the asset in view of the provisions of Section 43A(1) and obviously, therefore, this additional liability was of a capital nature and should never be treated on revenue account. The Tribunal was, therefore, right in holding that the said additional liability was not revenue expenditure - Sutlej Cotton Mills Ltd. v. CIT applied Additional liability arising due to fluctuation in foreign exchange rate in respect of payments of outstanding instalments of machinery, cannot be treated as revenue expenditure.
19. Hon'ble Madras High Court in the case of CIT v. South India Viscose Ltd. 142 CTR 432 held- Depreciation-Actual cost-Exchange rate fluctuation-Higher amount paid due to exchange rate fluctuation being capital in nature is eligible for grant of depreciation thereon-Sivananda Steels Ltd. v. CIT (Tax Case Nos. 1137 & 1138 of 1 983, decided on 7^th Nov. 1996) followed".
Higher amount paid due to exchange fluctuation being capital in nature is eligible for grant of depreciation thereon.
20. Hon'ble Gujarat High Court in the case of New India Industries Ltd. v. CIT 20 5 ITR 933 held- During the year previous to the assessment year 1973-74, the assessee had imported certain machinery form Germany. When it had purchased the same, its value, in terms of rupees, was Rs. 26,32, 299. Since the assessee received that machinery and started using it during the relevant previous year, because of the change in the foreign exchange rate, its liability had increased by Rs. 6,03,172, it claimed depreciation on the increased liability also. The claim was rejected by the Income-tax Officer. The Tribunal was of the view that no enforceable obligation had arisen during the relevant previous year as the first instalment was to be paid in the following accounting year. On a reference: Held, that when the assessee purchased assets at a price, its liability to pay the same arose simultaneously. Merely because the said liability was to be discharged in instalments it could not be said that the liability did not exist or accrue till the instalments became due and payable. It was that liability which had increased on account of fluctuation in the rate of exchange. The case of the assessee fell squarely within the sweep of Section 43A and it was thus entitled to claim the benefit of that section during the assessment year 1973-74 see pp. 939G, 940D,E).
21. Hon'ble Bombay High Court in the case of CIT v. Tata Hydro Electric Supply Company Ltd. 219 ITR 178 held- Held also, that the assessee was entitled to depreciation on the increased repayment liability arising as a result of fluctuations in the rate of exchange of foreign currencies and due to revaluation of foreign currencies.
22. Hon'ble Karnataka High Court in the case of CIT v. Motor Industries Company Ltd. 229 ITR 137 held- Depreciation-Actual Cost-Foreign Exchange-Increase In Value of Asset Due To Fluctuation In Rate of Foreign Exchange-Depreciation Allowable On Such Increase-Income-Tax Act, 1961, Sections 32,43A.23. Hon'ble Karnataka High Court in the case of Widia (India) Ltd v.CCIT 233 ITR 1 held- Held, (i) that Section 43A of the Act provides that where an assessee purchases any machinery from a foreign country by paying foreign currency, he is entitled to add or subtract the increase or decrease in the value of the rupee to the capital value for the purpose of showing the written down value dependinu on the rate of exchange. Section 43(2) defines the expression "paid as follows: "paid" means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head "Profits and gains of business or profession". By reading the expression "paid" it is evident that it includes the amount paid by the assessee, if he has paid it in lump sum or in instalments in future under an agreement. In the instant case, as per the agreement, the assessee had to pay the amount in instalments for the purchase of machinery and by reading of Clauses (1), (2) and (6) of Section 43 along with Sections 32 and 43A of the Act the only conclusion that could be arrived at was that where the assessee paid the amount in instalments to a foreign bank or to a foreign vendor, for the purchase of machinery, as consideration, the amount paid in excess due to increase in the value of foreign currency was deemed to be capital investment and so he was entitled to depreciation and extra shift allowance on such increase in value of machinery or plant.
24. Hon'ble Bombay High Court in the case of Padamjee Pulp And Paper Mills Limited; 210 ITR 97 held- That in view of Section 43A of the Income-tax Act, 1961, the additional liability amounting to Rs. 21,36,840 and Rs. 4,89,502 on account of exchange fluctuations with reference to the amount of loan outstanding on the last day of the accounting period at the then prevailing exchange rate had to be added to the actual cost of the machinery for the purpose of computation of depreciation for that year (see PP. 99H, 100A).
25. Section 43(2) provides "paid" means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head "Profits and gains of business or profession". The provisions of Section 43A apply in a case where an assessee has acquired any asset from abroad for the purpose of his business or profession on credit or on deferred payment terms or against a loan on foreign currency and whole or part of the cost of such asset or of the loan in foreign currency is outstanding as on the date on which there is a change in the rate of exchange 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 liability of the assessee, as expressed in Indian Currency for payment of the whole or a part of the cost of 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 by reduced correspondingly for that purpose. The abovementioned adjustments to the original actual cost of the assessee to the imported assets is to be made in respect of previous year in which there is an increase or reduction in the assessee's liability in terms of Indian currency for the payment of the whole or part of the cost of the asset for the repayment of the foreign loan against which asset has been acquired. The variation of the exchange rate affects the total liability of the assessee outstanding at the end of the previous year and the increase in the total liability due to exchange rate fluctuation should be adjusted against the actual cost. It is not in dispute that the liability of the assessee increased due to fluctuation in rate of currency in the previous year relevant to the assessment year under appeal. The assessee maintained books of accounts on mercantile basis. Therefore, on accrual of liability, the assessee was justified in increasing the cost of the asset in the previous year relevant to the assessment year under appeal. According to Section 43A mentioned above, the additional liability due to foreign exchange fluctuation should be added/reduced to actual cost of the asset irrespective of the fact whether it was paid actually in the previous year relevant to the assessment year under appeal We may mention that Section 43A was substituted by the Finance Act, 2002 with effect from 1.4.200.3 whereby any adjustment towards liability due to foreign exchange fluctuation is to be made only on actual payment by the assessee towards the cost of the asset irrespective of the method of accounting adopted by the assessee. This would, therefore, clarify that in the earlier provisions of Section 43A as are relevant to the assessment year under appeal, the assessee could make adjustment of his additional liability due to foreign exchange fluctuation while increasing the actual cost of the asset for the purpose of claiming depreciation. The decisions relied upon by the ld. counsel for the assessee support the contention of the assessee that foreign exchange price fluctuation has to be considered for the purpose of adjusting the actual cost even if actual payment was not made in the previous year.
We may also mention that in most of the cases relied upon by the ld.counsel for the assessee the decision of the Hon'ble Supreme Court in the case of M/s Arvind Mills Limited (supra) was relied upon and considered while arriving at the decision in the matter.
26. Considering the above discussion in the light of the decision of the Hon'ble Supreme Court in the case of Arvind Mills Limited (supra) and other decisions of various High Courts relied upon by the ld.counsel for the assessee, we are of the view that in view of Section 43A of the Incomelax Act, the assessee is entitled to add the additional liability incurred in the previous year due to foreign exchange fluctuation to the actual cost of the asset even though it did not make the payment on the basis of the said fluctuation rate. We are further of the opinion that in view of the above, these amounts (fluctuation rate) are to be added to the cost of acquisition of the asset for the purpose of grant of depreciation on such enhanced cost to the assessee for the assessment years under appeal. We, therefore, do not find any infirmity in the order of the learned CIT(A) in allowing the appeal of the assessee on this issue.
27. As a result, the orders of the learned CIT(A) are confirmed. We, accordingly, dismiss both the appeals of the revenue. Order pronounced in open Court on 27 July, 2007.