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 (ITAT) for Assessment Year 1996-97. The dispute concerned the allowability of depreciation on the increased cost of imported plant and machinery arising due to fluctuations in foreign exchange rates.

The assessee had acquired capital assets financed through foreign currency borrowings. Due to fluctuations in foreign exchange rates at the close of the accounting year, the liability relating to the foreign currency loan increased. The assessee adjusted the actual cost of the assets in accordance with Section 43A and claimed depreciation on the revised value.

The Tribunal accepted the assessee’s claim and held that the adjustment in actual cost due to foreign exchange fluctuation was permissible under Section 43A. Aggrieved by the Tribunal’s decision, the Revenue preferred an appeal before the Delhi High Court.

Issues Involved

  1. Whether the ITAT was justified in deleting the addition made by the Assessing Officer by allowing depreciation on the increase in liability caused by foreign exchange fluctuation on a notional basis and not on actual payment?
  2. Whether depreciation could be allowed on the enhanced value of plant and machinery representing the increase in liability arising from fluctuation in foreign exchange rates at the end of the accounting period?
  3. Whether adjustment of actual cost under Section 43A requires actual payment of the enhanced foreign currency liability before depreciation can be claimed?

Petitioner’s Arguments (Revenue)

The Revenue contended that:

  • The Tribunal erred in deleting the addition made by the Assessing Officer.
  • Depreciation should not be allowed on a merely notional increase in liability resulting from foreign exchange fluctuations.
  • The increase in liability had not been actually discharged by payment and therefore could not form part of the actual cost for depreciation purposes.
  • The Tribunal wrongly concluded that the issue was fully covered by the judgment of the Supreme Court in Arvind Mills Ltd.
  • The question raised involved a substantial question of law requiring consideration by the High Court.

Respondent’s Arguments (Assessee)

The assessee submitted that:

  • Section 43A specifically permits adjustment in the actual cost of imported capital assets whenever there is an increase or decrease in liability due to foreign exchange fluctuations.
  • Such adjustment is mandatory and does not depend upon actual repayment of the foreign currency loan.
  • The issue was already settled by judicial precedents including the decision of the Supreme Court in CIT vs Arvind Mills Ltd. (193 ITR 255).
  • The revised liability arising because of exchange fluctuation must be reflected in the written down value of the asset and depreciation should be computed accordingly.
  • Therefore, the Tribunal had correctly allowed depreciation on the adjusted cost of the assets.

Court Order / Findings

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

The Court held that:

  • Section 43A specifically provides for adjustment of the actual cost of capital assets whenever there is an increase or decrease in liability due to foreign exchange fluctuations.
  • The provision begins with a non-obstante clause and therefore overrides any contrary provision in the Act.
  • Once the conditions prescribed under Section 43A(1) are satisfied, adjustment of actual cost becomes mandatory.
  • The enhanced or reduced liability must be taken into account while determining depreciation on the asset.
  • The issue stood concluded by the Supreme Court decision in CIT vs Arvind Mills Ltd. (193 ITR 255), which had already clarified the scope and operation of Section 43A.
  • The Supreme Court had held that the increase or decrease in liability should be reflected in the actual cost of the asset in the year in which such fluctuation occurs.
  • Actual repayment of the foreign currency liability is not a pre-condition for making the adjustment contemplated under Section 43A.

Accordingly, the High Court held that no substantial question of law arose from the Tribunal’s order and declined to entertain the appeal. The appeal was dismissed.

Important Clarification

  • Section 43A mandates adjustment of the actual cost of imported capital assets whenever foreign exchange fluctuations increase or decrease the liability relating to foreign currency borrowings used for acquiring such assets.
  • The adjustment is required in the year in which the fluctuation occurs.
  • Actual payment of the enhanced liability is not necessary for claiming depreciation on the revised cost.
  • The judgment reaffirms the principle laid down by the Supreme Court in CIT vs Arvind Mills Ltd. that exchange fluctuation adjustments directly affect the actual cost and written down value of the asset for depreciation purposes.
  • The decision confirms that depreciation can be claimed on the adjusted value even where the increase in liability remains outstanding at the close of the accounting year.

Sections Involved:

  • Section 43A – Adjustment of actual cost of imported assets due to foreign exchange fluctuation.
  • Section 260A – Appeal to the High Court on a substantial question of law.

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2003:DHC:18871-DB/DKJ21112003ITA3522003_155453.pdf

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