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TMI Blog2018 (3) TMI 1821X X X X Extracts X X X X X X X X Extracts X X X X ..... i) As per Section 43A of the Act, the adjustment of the effect of foreign exchange fluctuation rate to the value of fixed assets need to be done only in respect of assets acquired from outside India, that too only on actual payment. In case any asset is purchased locally using foreign currency loan, the subsequent impact of any foreign exchange rate fluctuation on such loan cannot have an impact on the value of fixed assets. When an asset is put to use, the cost of the asset cannot be changed for any change in the value of loan taken for acquiring such asset, except in the case of imported assets, wherein specific treatment is mentioned in section 43A of the Act. iii) The Hon'ble Commissioner of Income Tax has agreed with the conclusion of the Assessing Officer that the special provisions mentioned in section 43A with reference to the assets acquired from outside India need to be applied for the assets acquired locally, needs to be reconsidered. iv) Foreign exchange rate fluctuations are notional figures for reinstating the foreign exchange loans on the date of reporting, to comply with the accounting standard, which has no relevance to the actual value of fixed assets for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been made towards the foreign liability during the year. The assessee company has not made any actual payments during the financial years relevant to asst. years 2004-05 and 2005-06, but has continued to make adjustments in accordance with the old provisions of sec. 43A of the Act. In the above circumstances, the assessee was asked to explain why the depreciation should not be restricted re-computing the WDV of the assets as discussed above. The assessee, vide its letter dated 10-10-2011, stated that the adjustment has been made in accordance with the accounting standard 11 issued by the Institute of Chartered Accountants of India. Though it is mandatory for the Companies to follow the accounting standards, for the purpose of Income tax Act, the provisions of sec. 43A would override the accounting standards. Therefore, based on the above discussion, the depreciation allowed on the following blocks are recomputed as under: Assets WDV as on 10.04.05 Addition Deletion Deprn. Allowed Deprn. allowable Above I80 days Below 180 days Hotel Buildings 214600295 - 12468769 619334 22954212 22021535 Equipments 61428961 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) The other in respect of foreign currency held on revenue account, or as a trading asset or as part of circulating capital of the business. The Delhi High Court found that AS-11 required year-end conversion of monetary items at closing foreign exchange rates, and that foreign exchange rate differences were required to be recognized as income or expenses of the period, except in cases of differences arising on repayment of liabilities incurred for purpose of acquiring fixed assets. According to the CIT(A), the Delhi High Court also noted the tests laid down by the Supreme Court in the cases of Sutlej Cotton Mills Ltd. vs. CIT 116 ITR 1 and CIT vs. Tata Locomotive & Engineering Co. Ltd., 60 ITR 405 and by the Bombay High Court in case of CIT vs. V.S. Dempo & Co. (P) Ltd. 206 ITR 291, for determining when foreign exchange losses or gains were of a capital nature, and when they were of a revenue nature. Thus the Delhi High Court held that the loss on account of foreign exchange rate difference was an actual loss on revenue account, allowable as a deduction, and not a contingent loss. 3.3 The CIT(A) noticed that the Assessing Officer had added the loss on account of the deferred paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of USD 50,000/- @ 43.73 21,86,625/- 16/03/2005 Part payment of principal repayment of USD 75,000/- @ 43.71 32,78,125/- 13/04/2005 Payment of USD 14,400/- @ 43.98 6,33,448/- 05/10/2005 Term loan of NBO closed and balance transferred to UBI term loan of $35,35,309/- 16,76,67,700/- 3.5 The CIT(A) held that the adjustment in the cost of the assets made in A.Y. 2004-05 and 2005-06 that were added back again in the A.Y. 2006-07 as notional decrease in the value of assets was not correct. The CIT(A) held that even if the assessee had not acquired any asset from outside India, the assessee had taken foreign currency loan for acquiring assets, and the change in amount of the loan due to exchange rate fluctuation should be reflected in the cost of the asset, as these assets were acquired by using the foreign currency loan. Therefore, the CIT(A) rejected the assessee's contention that the Assessing Officer was not correct in making such adjustment in the cost of assets as repayment of loan is made and hence the deletion in the value of assets made in the previous years is not notional and the same could not be added back for arriving at the revised WDV of these assets. Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of section 43(1) of the Act, actual cost means actual cost of the capital assets of the assessee reduced by that portion of the cost of the capital assets as has been met directly or indirectly by any other person or authority. The section also has Explanations. However, the section nowhere specifies that any gain or loss on foreign currency loans acquired for purchase of indigenous assets will have to be reduced or added to the cost of assets. 6.1 In the case of CIT Vs. Tata Iron and Steel Co. Ltd. (1998) 231 ITR 285 (SC) where it was held that cost of an asset and cost of raising money for purchase of asset are two different and independent transactions and events subsequent to acquisition of assets cannot change price paid for it. Therefore, fluctuations in foreign exchange rate while repaying installments of foreign loan raised to acquire asset cannot alter actual cost of assets for computing depreciation. Hence, it restricted assessee's right to add such loss incurred on account of currency fluctuations to the cost of asset. Thereby, the decision given by Sutlej and Tata Iron and Steel (supra) are contrary in view. In former mentioned case it restricted the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordance with the accounting practice, has no substance as there is no inconsistency between the said accounting practice and any provisions of the Act." 6.3 Further, the nature of expenditure being capital or revenue does not depend on the purpose for which foreign currency loan was obtained or on nature of ultimate utilization of loan amount. The same was also affirmed by Apex court in case of India Cements Limited vs. CIT (1966) (SC) 60 ITR 52. 6.4 It is to be noted that liability to pay or to provide for loss on account of foreign currency fluctuation does not arises at the time of obtaining/raising foreign currency loan but the same was incurred subsequently on devaluation of currency which is an independent event having no control over it by the assessee. The same currency fluctuation may result into gain or loss which is not ascertainable at the time of taking funds. Hence it cannot be said as capital expenditure. The liability to pay or to provide for foreign currency fluctuation arises only on devaluation of currency and there may not be any liability to pay for loss on currency fluctuation if currency value is inflated subsequently. 6.5 One of the issue involved in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise's monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, should be recognized as income or as expenses in the period in which they arise, with the exception of exchange differences dealt with in accordance with paragraph 15." 6.8 In view of the revision made in AS-11 in 2003, it can be said that treatment of foreign exchange loss arising out of foreign currency fluctuations in respect of fixed assets acquired through loan in foreign currency shall required to be given in profit and loss account. Said exchange loss should be allowed as revenue expenditure in view of amended AS-11 (2003). It may be noted that apex court had followed treatment of exchange loss or gain as per AS-11 (1994). In view of revision made in AS-11, now treatment shall be as per revised AS-11 (2003). Exchange gain or loss on foreign currency fluctuations in respect of foreign currency loan acquired for acquisition of fixed asset should be allowed as revenue expenditure. However, in the Preamble of AS-11 (Revised 2003), it was stated that the Revised Standard supersedes AS-11 (1994) except that in respect of acc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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