2010 (12) TMI 189 - HC - Income Tax

Depreciation - depreciation of Rs. 585.75 lakhs claimed by the assessee on capitalization of the effect of the fluctuation in the rate of foreign exchange on the outstanding liability - though no amount was actually paid during the year - Held that increase or decrease in liability in the repayment of foreign loan should be taken into account to modify the figure of actual cost in the year in which the increase or decrease in liability arises on account of fluctuation in the rate of exchange - This has to be done irrespective of the date of actual payment in foreign currency - As per the hon ble Supreme Court in CIT v. Woodward Governor India P. Ltd. 2009 -TMI - 32906 - SUPREME COURT - Decided in favor of assesse.

Summary

Issues:
1. Disallowance of depreciation claimed by the assessee on capitalization of the effect of fluctuation in the rate of foreign exchange.

Analysis:
The High Court dealt with an appeal filed by the Revenue under section 260A of the Income-tax Act, 1961 against the order of the Income-tax Appellate Tribunal regarding the disallowance of depreciation claimed by the assessee due to fluctuation in foreign exchange rates. The Assessing Officer had partially disallowed the depreciation claim based on increased asset value due to forex fluctuation. However, the Commissioner of Income-tax (Appeals) upheld the assessee's plea, citing that the change in asset value due to currency fluctuation is not a contingent liability, as per the accounting standard issued by ICAI. The Tribunal also affirmed this finding, leading to the present appeal before the High Court.

The Court noted that the view taken by the Tribunal was consistent with the decisions of the Supreme Court in CIT v. Woodward Governor India P. Ltd. [2009] 312 ITR 254 and Oil and Natural Gas Corporation Ltd. v. CIT [2010] 322 ITR 180. Referring to the precedent set by CIT v. Arvind Mills Ltd. [1992] 193 ITR 255 (SC), it was established that fluctuations in liability repayment for foreign loans should be considered to adjust the actual cost, irrespective of the payment date in foreign currency. Consequently, the Court held against the Revenue's claim and dismissed the appeal, thereby upholding the Tribunal's decision in favor of the assessee.

In conclusion, the judgment clarified the treatment of depreciation claims related to fluctuations in foreign exchange rates, emphasizing the applicability of accounting standards and legal precedents in determining the allowable adjustments to asset values. The decision underscored the importance of recognizing currency fluctuations in assessing actual costs, aligning with established legal principles and judicial interpretations in similar cases.