Facts of the Case

The Revenue filed an appeal under Section 260A of the Income-tax Act, 1961 challenging the order of the Income Tax Appellate Tribunal (ITAT) relating to Assessment Year 1992-93. The dispute concerned the assessee's claim for depreciation on the enhanced cost of imported plant and machinery resulting from fluctuations in foreign exchange rates.

The Tribunal had upheld the assessee's contention that, in terms of Section 43A of the Act, the actual cost of imported capital assets was required to be adjusted to reflect the increase in liability caused by exchange rate fluctuations as on the last day of the accounting year. Consequently, depreciation was allowable on the revised cost of the assets.

Issues Involved

  1. Whether the ITAT was justified in allowing depreciation on the increased cost of plant and machinery arising from foreign exchange fluctuation under Section 43A?
  2. Whether depreciation could be allowed on the enhanced cost when the increased liability had not actually accrued during the relevant previous year?
  3. Whether fluctuation in the exchange rate as on the last date of the accounting year could be considered for computing depreciation?
  4. Whether the Tribunal erred in relying upon judicial precedents, including the Supreme Court decision in CIT v. Arvind Mills Ltd.?

Petitioner’s Arguments (Revenue)

The Revenue contended that:

  • Section 43A did not permit adjustment merely on account of a notional increase in liability due to exchange rate fluctuation.
  • Only an actual increase or decrease in liability should be considered for modifying the cost of the asset.
  • The Tribunal wrongly relied upon the decision of the Supreme Court in CIT v. Arvind Mills Ltd.
  • Depreciation on the enhanced value of the asset should not be permitted where the increased liability had not crystallized during the relevant year.

Respondent’s Arguments (Assessee)

The assessee maintained that:

  • Section 43A specifically mandates adjustment of the actual cost of imported capital assets whenever liability changes because of foreign exchange fluctuations.
  • Such adjustment is required for determining the written down value and depreciation allowance.
  • Judicial precedents of the Supreme Court and various High Courts had already settled the legal position in favour of the assessee.
  • The Tribunal correctly applied the law while allowing depreciation on the revised cost of the assets.

Court Order / Findings

The Delhi High Court dismissed the Revenue’s appeal and upheld the Tribunal’s order.

The Court observed that:

  • Section 43A expressly provides that any increase or decrease in liability resulting from foreign exchange fluctuations must be adjusted against the actual cost of the capital asset.
  • The provision begins with a non-obstante clause and therefore overrides other provisions of the Act wherever applicable.
  • Once Section 43A is attracted, adjustment of the actual cost becomes mandatory for depreciation purposes.
  • The Supreme Court in CIT v. Arvind Mills Ltd. (193 ITR 255) had already clarified that fluctuations in foreign exchange affecting liability must be reflected in the actual cost of the asset.
  • The issue stood concluded by binding judicial precedent and did not give rise to any substantial question of law.

Accordingly, the appeal filed by the Revenue was dismissed.

Important Clarification

The Court clarified that:

  • Under Section 43A, exchange rate fluctuations affecting liability for acquisition of imported assets must be taken into account while determining the actual cost of such assets.
  • The resulting increase or decrease in cost directly impacts the computation of depreciation.
  • Even where payment for the asset has already been made, adjustments under Section 43A may still be permissible if foreign currency borrowings obtained for acquiring the asset are affected by exchange rate fluctuations.
  • The principle laid down by the Supreme Court in CIT v. Arvind Mills Ltd. remains applicable and binding.

Sections Involved

Income-tax Act, 1961

  1. Section 43A – Special provisions consequential to changes in rate of exchange of currency
    • Governs adjustment in the actual cost of imported capital assets when there is an increase or decrease in liability due to foreign exchange fluctuation.
    • Central provision involved in the dispute.
  2. Section 32 – Depreciation
    • Relates to allowance of depreciation on plant and machinery.
    • The controversy concerned computation of depreciation on the enhanced cost of imported assets after adjustment under Section 43A.
  3. Section 260A – Appeal to High Court
    • Revenue filed the appeal before the Delhi High Court under this provision, raising alleged substantial questions of law against the ITAT order.

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2003:DHC:18874-DB/DKJ27112003ITA4442003_155552.pdf

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