2003 (11) TMI 18 - HC - Income Tax

Depreciation - adjustments in terms of section 43A(1) - (a) Whether, Tribunal was correct in deleting addition under the head depreciation due to foreign exchange rates fluctuation on the notional basis and not on actual payment? (b) Whether, the depreciation has to be allowed on addition in plant and machinery which represents notional increase in liability of foreign currency loan at the closure of the accounting period? Held that even in a case where the assessee has completely paid for the plant and machinery in foreign currency prior to the date of devaluation but the variation in exchange rate affects the liability of the assessee (as expressed in Indian currency) for repayment of the whole or part of the monies borrowed by him from any person, directly or indirectly in any foreign currency specifically for the purposes of acquiring the asset, adjustments in terms of section 43A(1) can be made. - Thus, no fault can be found with the view taken by the Tribunal.

Summary

Issues:
1. Whether depreciation due to foreign exchange rate fluctuation should be calculated on a notional basis or actual payment.
2. Whether depreciation should be allowed on an increase in liability of foreign currency loan for plant and machinery.

Analysis:
1. The first issue raised was whether the Income-tax Appellate Tribunal was correct in deleting the addition under depreciation due to foreign exchange rate fluctuation on a notional basis instead of actual payment. The court found that section 43A of the Income-tax Act, 1961 allows for adjustments to be made based on the foreign exchange rate as on the last date of the previous year. The Tribunal relied on decisions of the Bombay and Gujarat High Courts, as well as the Supreme Court, to support its decision. The departmental representative conceded that the issue was concluded by previous decisions, and the court agreed that the issue was purely legal in nature.

2. The second issue involved whether depreciation should be allowed on an increase in liability of a foreign currency loan for plant and machinery. The court referred to section 43A of the Act, which mandates adjustments to be made against the actual cost of the capital expenditure or acquisition of the asset due to fluctuations in exchange rates. The court emphasized that section 43A overrides other provisions in the Act and is mandatory when its terms are fulfilled. The court cited a Supreme Court decision which clarified that adjustments should be made in the year when the liability increases or decreases due to exchange rate fluctuations, even if the asset was paid for in foreign currency prior to devaluation.

In conclusion, the court dismissed the appeal, stating that the issue had already been settled by previous authoritative pronouncements. The court found no error in the Tribunal's decision and held that there was no substantial question of law involved in the case.