CASE LAWS DETAILS
DECIDED BY: SUPREME COURT OF INDIA,
IN THE CASE OF: ACIT Vs Elecon Engineering Co. Ltd., APPEAL NO: Civil Appeal Nos. 2057 To 2065 of 2010, DECIDED ON: FEBRUARY 26, 2010
9. Section 43A, before its substitution by a new Section 43A vide Finance Act, 2002, was inserted by Finance Act, 1967 with effect from 1.4.1967, after the devaluation of the rupee on 6 June, 1966. It applied where as a result of change in the rate of exchange there was an increase or reduction in the liability of the assessee in terms of the Indian rupee to pay the price of any asset payable in foreign exchange or to repay moneys borrowed in foreign currency specifically for the purpose of acquiring an asset. The Section has no application unless an asset was acquired and the liability existed, before the change in the rate of exchange. When the assessee buys an asset at a price, its liability to pay the same arises simultaneously. This liability can increase on account of fluctuation in the rate of exchange. An assessee who becomes the owner of an asset (machinery) and starts using the same, it becomes entitled to depreciation allowance. To work out the amount of depreciation, one has to look to the cost of the asset in respect of which depreciation is claimed. Section 43A was introduced to mitigate hardships which were likely to be caused as a result of fluctuation in the rate of exchange. Section 43A lays down, firstly, that the increase or decrease in liability should be taken into account to modify the figure of actual cost and, secondly, such adjustment should be made in the year in which the increase or decrease in liability arises on account of fluctuation in the rate of exchange. It is for this reason that though Section 43A begins with a non- obstante clause, it makes Section 43(1) its integral part. This is because Section 43A requires the cost to be recomputed in terms of Section 43A for the purposes of depreciation (Sections 32 and 43(1)). A perusal of Section 43A makes it clear that insofar as the depreciation is concerned, it has to be allowed on the actual cost of the asset, less depreciation that was actually allowed in respect of earlier years. However, where the cost of the asset subsequently increased on account of devaluation, the written down value of the asset has to be taken on the basis of the increased cost minus the depreciation earlier allowed on the basis of the old cost. One more aspect needs to be highlighted. Under Section 43A, as it stood at the relevant time, it was inter-alia provided that where an assessee had acquired an asset from a country outside India for the purposes of his business, and in consequence of a change in the rate of exchange at any time after such acquisition, there is an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment towards the whole or part of the cost of the asset or for repayment of the whole or part of the moneys borrowed by him for the purpose of acquiring the asset, the amount by which the liability stood increased or reduced during the previous year shall be added to or deducted from the actual cost of the asset as defined in Section 43(1). This analysis indicates that during the relevant assessment year adjustment to the actual cost was required to be done each year on the closing date, i.e., year end. Subsequently, Section 43A underwent a drastic change by virtue of a new Section 43A inserted vide Finance Act, 2002. Under the new Section 43A such adjustment to the cost had to be done only in the year in which actual payment is made. In this case, we are not concerned with the position emerging after Finance Act, 2002. Under Explanation 3 to Section 43A, if the assessee had covered his liability in foreign exchange by entering into forward contract with an authorised dealer for the purchase of foreign exchange, the gain or loss arising from such forward contract was required to be taken into account.
10. In the present case, one of the main arguments advanced on behalf of the assessee before us was that Section 43A was not applicable because roll over charge stood paid to avoid increase or reduction in liability as a consequence of the change in the rate of exchange. According to the assessee, Section 43A, as it stood at the material time, applied only to cases where there existed a fluctuation in the rate of exchange and since the roll over charge was paid to the authorised dealer by the assessee to avoid increase or reduction in liability on account of such fluctuation, Section 43A read with Explanation 3 thereto would not apply to such roll over charges. We find no merit in this argument advanced on behalf of the assessee. According to the assessee, the cost for carrying forward the contracted foreign currency, not immediately required for repayment, is called the roll over charge(s). As stated above, according to the assessee, Section 43A was not applicable in this case as there was no increase or reduction in liability because such roll over charges were paid to avoid increase or reduction in liability consequent upon change in the rate of exchange. To answer this submission, one needs to keep in mind that during the relevant assessment years Section 43A applied to the entire liability remaining outstanding at the year-end, and it was not restricted merely to the instalments actually paid during the year. Therefore, at the relevant time, the year-end liability of the assessee had to be looked into. Further, it cannot be said that roll over charge has nothing to do with the fluctuation in the rate of exchange. In the present case, the Notes to the Accounts for the year ending 31st December, 1986 (Schedule 17) indicates adverse fluctuations in the exchange rate in respect of liabilities pertaining to the assets acquired. This Note clearly establishes existence of adverse fluctuations in the exchange rate which made the assessee opts for forward cover and which made the assessee pays roll over charges. The word “adverse” in the Note itself presupposes increase in the liability incurred by the assessee during the year ending 31st December, 1986. In the circumstances, we find no merit in the contention of the assessee that roll over charges have nothing to do with the fluctuation in the rate of exchange. Lastly, in this case we are concerned with capitalisation of exchange difference in respect of acquisition of fixed assets acquired from abroad. According to Indian Accounting Standards by Dolphy D’ Souza, roll over charges are indicative of the increase or decrease in the liability of the company in the next specified period, generally of six months. Roll over charges represent the difference arising on account of change in foreign exchange rates. Roll over charges paid/received in respect of liabilities relating to the acquisition of fixed assets should be debited/ credited to the asset in respect of which liability was incurred. However, roll over charges not relating to fixed assets should be charged to the Profit & Loss Account.
11. Before concluding, we may state that this judgement is confined to the facts of the present case. We may also clarify that the judgements cited on behalf of the assessee concerning commitment charges, warranty charges, etc., do not apply to the present case. None of these judgements deal with roll over charges. Hence, it is not necessary to discuss those judgements.
12. An alternative argument was advanced on behalf of the assessee that in the event this Court holds that roll over charges are to be capitalized in terms of Explanation 3 to Section 43A as it stood prior to assessment year 2003-04, then, in that event the Tribunal may be directed to grant depreciation allowance on the written down value of the asset not only for the concerned years but also for the subsequent years till the entire value of the asset is written off. According to the assessee, such a direction is required to be given because the depreciation, according to the assessee, is available even for the assessment years after AY 1994- 95. On behalf of the assessee it was further submitted, as and by way of alternative submission, that the Department may not be allowed to charge interest or penalty as the issue involved is debatable.
13. We find no merit in the alternative submissions advanced on behalf of the assessee. The Tribunal while holding that roll over charges are required to be adjusted in the carrying amount of fixed asset, has allowed the assessee the benefit of depreciation on the adjusted cost of fixed asset. Hence, it is not necessary for this Court to give direction to the Tribunal, as sought by the assessee. On the facts and circumstances there is no question of this Court directing dispensation from payment of interest and penalty.