Issue/Justification
Section 43A was inserted in the Income-tax Act, 1961 by Finance (No. 2) Act 1967, which permitted Capitalization of Foreign Exchange Fluctuation Loss in the borrowing used for acquisition of assets outside India. The exchange fluctuation loss on borrowings used for domestically acquired assets is not permitted to be capitalized for tax purposes.
Over the years Rupee has depreciated significantly against the US $ severely impacting the industry particularly those who have exposure to External Commercial Borrowings (ECBs) and Foreign Currency Convertible Bonds (FCCBs).
The provisions of Section 43A are similar to the provision contained in Schedule III to the Companies Act, 2013. As per ‘instructions in accordance with assets should be made out’ as contained in Schedule VI, vide notification No. GSR 129 dated 3-1-1968, the following instructions were inserted:-
“Where the original cost aforesaid and additions and deductions thereto, relate to any fixed asset which has been acquired from a country outside India, and in consequence of a change in the rate of exchange at any time after the acquisition of such asset, there has been an increase or reduction in the liability of the company, 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 moneys borrowed by the company 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 is so increased or reduced during the year, shall be added to, or, as the case may be deducted from the cost, and the amount arrived at after such addition or deduction shall be taken to be the cost of the fixed asset.”
The above provisions were deleted vide notification no. GSR 226(E), dated 31-03-2009 w.e.f. 31-03-2009.
The Schedule VI has been amended vide Notification No. SO 447(E) dt. 28-2-2011 w.e.f. 1-4-2011. In the revised Schedule VI (as also the New Schedule III to the Companies Act, 2013), under the heading “General Instructions” Sr. No. 1 it is stated as under:
“Where compliance with the requirements of the Act including Accounting Standards as applicable to the companies require any change in treatment or disclosure including addition, amendment, substitution or deletion in the head/sub-head or any changes interse, in the financial statements or statements forming part thereof, the same shall be made and the requirements of this Schedule shall stand modified accordingly.”
The Accounting Standards have been notified vide notification GSR 739(E) dt. 7-12-2006. For the above purpose the relevant Accounting Standard is AS-11 ‘The Effects of Changes in Foreign Exchange Rates’
Para 46 and Para 46A of AS-11 were inserted vide notification no G.S.R. 225(E) dated 31st March, 2009 and G.S.R. 914(E) dated 29th December, 2011 respectively. The effect of these notifications is that foreign exchange difference on foreign loans can be capitalized to the cost of the depreciable assets even if the assets are acquired in India. No distinction is made whether the assets are imported or are purchased within India.
Suggestion
It is suggested that Section 43A be amended to allow Capitalization of such foreign exchange loss even for domestically acquired asset.
(SUGGESTIONS FOR RATIONALIZATION OF THE PROVISIONS OF DIRECT TAX LAWS)
