Facts of the Case

The Revenue filed an appeal before the Delhi High Court under Section 260A of the Income-tax Act, 1961, challenging the order of the Income Tax Appellate Tribunal relating to Assessment Year 1991-92.

The dispute concerned whether the assessee, IFFCO Limited, was entitled to claim depreciation on the enhanced cost of imported plant and machinery arising from fluctuations in foreign exchange rates. The assessee had adjusted the actual cost of the imported capital assets in accordance with the variation in foreign currency liability and claimed corresponding depreciation. The Tribunal accepted the assessee’s claim by relying upon judicial precedents, including the decision of the Supreme Court in CIT vs Arvind Mills Ltd. The Revenue challenged this view before the High Court.

 Issues Involved

  1. Whether the ITAT was correct in allowing depreciation on the increased cost of plant and machinery resulting from fluctuation in foreign exchange rates as on the last date of the accounting year.
  2. Whether increased depreciation could be allowed when the enhanced liability had not actually accrued during the relevant year.
  3. Whether exchange rate fluctuation as on the closing date of the accounting year could be considered for computing depreciation.
  4. Whether the Tribunal erred in relying upon judicial precedents, particularly CIT vs Arvind Mills Ltd., while deciding the issue.

 Petitioner’s Arguments (Revenue)

The Revenue contended that Section 43A does not permit adjustment merely on account of a notional increase in liability arising from exchange rate fluctuations.

It was argued that only an actual increase or decrease in liability should be considered for adjustment of the cost of assets and that depreciation should not be allowed on a revised figure based merely on exchange rate variation as on the closing date of the accounting year.

The Revenue further submitted that the Tribunal had incorrectly relied upon the Supreme Court’s decision in Arvind Mills Ltd. and that the issue involved substantial questions of law requiring consideration by the High Court.

 Respondent’s Arguments (IFFCO Limited)

The assessee contended that Section 43A specifically mandates adjustment of the actual cost of imported capital assets whenever there is an increase or decrease in liability due to foreign exchange fluctuations.

It was argued that for the purpose of determining written down value and depreciation, the actual cost must be recomputed by taking into account the exchange rate prevailing on the relevant date as required under Section 43A.

The assessee relied upon decisions of the Supreme Court and various High Courts, particularly CIT vs Arvind Mills Ltd., to submit that exchange fluctuation adjustments directly affect the actual cost of imported assets and consequently the depreciation allowable thereon.

 Court Order / Findings

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

The Court held that Section 43A specifically provides that any increase or decrease in liability arising due to fluctuations in foreign exchange rates must be adjusted against the actual cost of the capital asset.

The Court observed that Section 43A begins with a non-obstante clause and therefore overrides other provisions of the Act. Once the conditions of Section 43A(1) are satisfied, adjustment to the actual cost of the asset becomes mandatory for depreciation purposes.

The Court further held that the Supreme Court in CIT vs Arvind Mills Ltd. (193 ITR 255) had already settled the legal position. The Tribunal was therefore justified in following the binding precedent.

The High Court concluded that the issue was no longer res integra and that the Tribunal had correctly allowed depreciation after adjusting the cost of imported assets for exchange rate fluctuations. Since no substantial question of law arose from the Tribunal’s order, the appeal was dismissed.

 Important Clarification

  1. Section 43A requires adjustment of the actual cost of imported capital assets whenever foreign exchange fluctuations result in an increase or decrease in liability.
  2. Such adjustment directly affects the written down value of the asset and the depreciation allowable thereon.
  3. The provision operates notwithstanding other provisions of the Act due to its overriding effect.
  4. The Supreme Court in CIT vs Arvind Mills Ltd. (193 ITR 255) authoritatively held that exchange fluctuation adjustments are to be considered for modifying the actual cost of imported assets.
  5. Even where payment for plant and machinery has already been made, exchange rate variations affecting foreign currency borrowing liabilities used for acquisition of the asset can still attract Section 43A adjustments.
  6. Exchange fluctuation adjustments under Section 43A are mandatory once the statutory conditions are fulfilled.

 Sections Involved

  • Section 43A – Adjustment to actual cost of imported capital assets on account of foreign exchange fluctuations.
  • Section 260A – Appeal to the High Court from orders of the Income Tax Appellate Tribunal.

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2003:DHC:18877-DB/DKJ27112003ITA4472003_155651.pdf

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