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TMI Blog1993 (8) TMI 56X X X X Extracts X X X X X X X X Extracts X X X X ..... the year ended December 31, 1973. The assessee had entered into an agreement with the Import-Export Bank of Washington on September 22, 1960, by virtue of which it obtained a loan which was used for the purchase of machinery and other equipment relating to its import-export business. There were two supplementary agreements with the same party on the same subject on September 16, 1963, and January 14, 1965. The assessee was to repay the loan to the said bank in instalments. The value of the loan was recorded in the books of the assessee in terms of rupees adopting the rate of exchange prevailing at that time. Subsequently, there was a devaluation of the rupee in the year 1966 and its revaluation in the year 1971. Apart from that, there were day to day fluctuations in the rate of exchange resulting from the market forces of demand and supply of dollars. During the year under consideration, the assessee found that it had to pay a sum of Rs. 13,59,794 over and above the amount recorded in Its books in order to buy the necessary amount of dollars required for remitting the instalments. In other words, the assessee was required to pay the aforesaid amount over and above the amount origi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court in Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1. Counsel for the assessee, on the other hand, submits that any loss suffered by the assessee as a result of day-to-day fluctuations in the rate of exchange stands on a different footing from the loss occasioned as a result of devaluation and the decision of the Supreme Court in Sutlej Cotton Mills Ltd.'s case [1979] 116 ITR 1 applies only to losses occasioned due to devaluation. Losses on account of fluctuations, in exchange rate due to market factors cannot be treated as on capital account. On a careful consideration of the rival submissions, we find ourselves in agreement with learned counsel for the Revenue. In our opinion, whether the loss suffered by the assessee was a trading loss or not would depend on the answer to the question whether the loss was in respect of a trading asset or a capital asset. It would be a trading loss in the former case and a capital loss in the latter. It makes no difference whether it is occasioned by devaluation brought about by an act of the State or fluctuations in the exchange rates by market forces. The factor or circumstance which causes such fluctuation and the resultant loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e stock-in-trade of a business which is sold at a loss. There can be little doubt that the loss in such a case would clearly be a trading loss. But the loss may also arise by reason of the stock-in-trade being stolen or burnt and such a loss, though occasioned by external agency or act of God, would equally be a trading loss. The cause which occasions the loss would be immaterial : the loss, being in respect of trading asset, would be a trading loss. Consequently, we find it impossible to agree with the High Court that since the loss in the present case arose on account of devaluation of the Pakistani rupee and the act of devaluation was an act of sovereign power extrinsic to the business, the loss could not be said to spring from the business of the assessee. Whether the loss suffered by the assessee was a trading loss or not would depend on the answer to the question, whether the loss was in respect of a trading asset or capital asset. In the former case, it would be a trading loss but not so in the latter. " (emphasis supplied) The Supreme Court also examined the controversy from another angle. It said (at page 7) : "The test may also be formulated in another way by asking the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the matter, there can hardly be any controversy in regard to the fact that the loss caused to the assessee on account of alteration in the rate of exchange is a capital loss. This conclusion of ours gets full support from section 43A of the Act (as inserted with effect from April 1, 1967) which has given statutory recognition to this legal position. Section 43A, so far as relevant reads "43A. (1) Notwithstanding anything contained in any other pro vision of this Act, where an assessee has acquired any asset from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange at any time after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment towards the whole or a part of the cost of the asset or for repayment ofthe 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 (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nge 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. Explanation 1....." These provisions and the effect thereof came up for consideration before the Supreme Court in CIT v. Arvind Mills Ltd. [1992] 193 ITR 255. The Supreme Court summed up the existing position of treatment of additional liability arising from exchange fluctuations as follows (at page 261): "......the position appears to be that, on strict accountancy principles, the increase or decrease in liability towards the actual cost of an asset arising from exchange fluctuation can be adjusted in the accounts of the earlier year in which the asset was acquired (if necessary, by reopening the said accounts). In that event, the accounts of that earlier year as well as of subsequent years will have to be modified to give effect to variations in depreciation allowances consequent on the redetermination of the actual cost. In other words, in the illustration given earlier, the actual cost of Rs. 1,00,000 and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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