CA Sunil C. Hukkeri

On the question whether an Assessee is entitled to adjust the actual cost of imported assets acquired in foreign currency on account of fluctuation in the rate of exchange at the time of making PAYMENT towards the whole or part of cost of the asset or towards repayment of 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 along with interest, if any.

Section 43A of Income-tax Act contains speacial provision to provide for additional depreciation allowance to the assessee in respect of capital assets whose actual cost is affected by the changes in the rate of exchange of currency.

Depreciation impact on account of foreign exchange fluctuations

The amount by which the liability of the assessee in terms of Indian Rupees is increased or decreased as a result of change in the rate of exchange of the currency, would be added to or as the case may be deducted from the actual cost of the asset as defined in Section 43(1) ***

Consequently, the amounts of depreciation allowable to assessee in respect of the asset would correspondingly be increased or reduced, as the case may be.

*** Section 43 (1) which deals with actual cost of depreciable asset says if on account of devaluation, the liability in respect of repayment of the moneys borrowed for the purchase of machinery increases, it can be legitimately taken into account in determining the actual cost of the assets and calculated depreciation under section 32 on increased cost accordingly]

As a consequence of the insertion of the Section 43A, it has became possible to adjust the increase/decrease in liability relating to acquisition of capital assets on account of exchange rate fluctuation, in the actual cost of the assets acquired in foreign currency and accordingly  depreciation to be allowed with reference to such increased/decreased cost

Situation for depreciation being restricted to 50 per cent of the normal depreciation:-

The above situation is applicable if following conditions are satisfied.

  1. Payment for import of asset is made during the previous year
  2. 2.    It is paid after 180 days during relevant previous year.

[If payment is made before 180 days calculated from relevant previous year then FULL RATE of normal depreciation is allowable]

Condition for adjustment in actual cost of fixed assets:-

ACTUAL PAYMENT of decreased or increased liability is mandatory condition precedent for making adjustment in the carrying amount of the fixed asset.

Expression rate of exchange:-

RATE OF EXCHANGE must be taken to mean rate of exchange recognized by central government for conversion of Indian Rupee into foreign currency.

Proof at the time of scrutiny: – It is important for assessee to keep the records of payment of foreign liability, calculation of realized loss or gain which is added or reduced from actual cost of fixed asset for depreciation purpose to prove income tax department at the time scrutiny.

Accounting standard 11 (The effects of changes in foreign exhchange rates)  vis a vis section 43A

The liability expressed in foreign currency at the reporting date will be increased or decreased based on rates prevailing at the close of reporting period for which corresponding increase or decrease will be routed through profit and and loss statement and not effected in value of related assets where as section 43A provides for increase or decrease only for currency fluctuation at the time of payment. This will have a major implication for increase or decrease in unpaid foreign liability as though creditors for fixed assets for the same has to be increased or decreased in the books of account, the same would not be eligible for depreciation under income tax compuation.


Disclaimer: Every effort has been made to avoid errors & omissions in this article. In spite of this errors may creep in. So expert’s opinions are always welcome. Reader should seek appropriate professional advice before acting on basis of above information.

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Tags : section 43 (27)

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