IMPORTANT POINT
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.

Headnote:Income Tax Act, 1961- Section 43A- Scope and applicability of- 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, that the increase or decrease in liability should be taken into account to modify the figure of actual cost and, 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- 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 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 indicated that during the relevant assessment year adjustment to 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 (Para 9)
        Income Tax Act, 1961- Section 43A- Assessee a manufacturing company procured a foreign currency loan for expansion of existing business-Assessee booked forward contracts with Citibank for delivery of the required foreign currency on the stipulated dates- The contract was entered into for entire outstanding amount and the delivery of foreign currency was obtained under the contract for instalment due from time to time- The balance value of the contract, after deducting the amount withdrawn towards repayment, was rolled over for a further period up to date of the next instalment- Assessee filed its return of income for assessment year 1986-87 - A.O.disallowed roll over premium charges paid by the assessee in respect of foreign exchange forward contracts to Citibank N.A. on the ground that the said charges were incurred in connection with the purchase of a capital asset (plant and machinery), hence,it was not admissible for deduction under Section 36(1)(iii) or under Section 37 of the Act- On appeal, the CIT (A) held that the roll over premium charge(s) incurred by the assessee was allowable as it was incurred by assessee to mitigate the risk involved in higher payment because of adverse fluctuation of rate of exchange- Tribunal upheld the order of the assessment-Appeals thereagainst-Allowed by High Court –Appeals-In the present case, one of the main contentions of assessee 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- Assessee’s case that 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 authorized dealer by 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-However no merit found in said argument advanced on behalf of assessee- During the relevant assessment years Section 43A applied to the entire liability remaining outstanding at year-end, and it was not restricted merely to the instalments actually paid during the year- Hence, at the relevant time, year-end liability of assessee had to be looked into- Further, it could not be said that roll over charge had nothing to do with the fluctuation in the rate of exchange- In the instant case, Notes to the Accounts for the year ending 31st December,1986 (Schedule 17) indicated adverse fluctuations in the exchange rate in respect of liabilities pertaining to the assets acquired-This Note clearly established 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 presupposedincrease in the liability incurred by the assessee during the year ending 31st December, 1986- In the circumstances, no merit found in the contention of assessee that roll over charges had nothing to do with the fluctuation in the rate of exchange-Appeals allowed (Paras 10 to 14)
       Facts of the Case :
        Assessee a manufacturing company procured a foreign currency loan for expansion of existing business herein in the instant case. Assessee booked forward contracts with Citibank for delivery of the required foreign currency on the stipulated dates. The contract was entered into for entire outstanding amount and the delivery of foreign currency was obtained under the contract for instalment due from time to time. The balance value of the contract, after deducting the amount withdrawn towards repayment, was rolled over for a further period up to date of the next instalment. Assessee filed its return of income for assessment year 1986-87 . A.O.disallowed roll over premium charges paid by the assessee in respect of foreign exchange forward contracts to Citibank N.A. on the ground that the said charges were incurred in connection with the purchase of a capital asset (plant and machinery), hence,it was not admissible for deduction under Section 36(1)(iii) or under Section 37 of the Act. On appeal, the CIT (A) held that the roll over premium charge(s) incurred by the assessee was allowable as it was incurred by assessee to mitigate the risk involved in higher payment because of adverse fluctuation of rate of exchange. Tribunal upheld the order of the assessment. Appeals thereagainst were allowed by High Court.
        2. Present appeals have been filed against said order of High Court.
       Findings of the Court :
        In the present case, one of the main contentions of assessee 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. Assessee’s case that 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 authorized dealer by 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. However no merit was found in said argument advanced on behalf of assessee. During the relevant assessment years Section 43A applied to the entire liability remaining outstanding at year-end, and it was not restricted merely to the instalments actually paid during the year. Hence, at the relevant time, year-end liability of assessee had to be looked into. Further, it could not be said that roll over charge had nothing to do with the fluctuation in the rate of exchange. In the instant case, Notes to the Accounts for the year ending 31st December,1986 (Schedule 17) indicated adverse fluctuations in the exchange rate in respect of liabilities pertaining to the assets acquired. This Note clearly established 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 presupposed increase in the liability incurred by the assessee during the year ending 31st December, 1986. In the circumstances, no merit was found in the contention of assessee that roll over charges had nothing to do with the fluctuation in the rate of exchange. Impugned judgment of High Court was set aside. Accordingly, the civil appeals filed by Department were Allowed.
       Result : Appeals allowed

JUDGMENT

S. H. Kapadia, J.

Leave granted.

2. This batch of civil appeals concerns the nature of roll over premium charge incurred by the assessee as also the scope and applicability of Section 43A of the Income Tax Act, 1961 (“the Act” for short), in the context of such charges.

3. The lead matter in this batch of civil appeals is civil appeal arising out of S.L.P.(C) No.8363 of 2009. It concerns assessment year 1986-87. Assessee is a manufacturing company. It manufactures gears and mechanical handling equipments. It procured a foreign currency loan for expansion of existing business. Since the repayment of loan was stipulated in instalments, assessee desired to ensure that foreign currency required for repayment of the loan be obtained at a pre-determined rate and cost. Accordingly, the assessee booked forward contracts with Citibank for delivery of the required foreign currency on the stipulated dates. The contract was entered into for entire outstanding amount and the delivery of foreign currency was obtained under the contract for instalment due from time to time. The balance value of the contract, after deducting the amount withdrawn towards repayment, was rolled over for a further period up to the date of the next instalment. Assessee filed its return of income for assessment year 1986-87 on 30.6.1986. A revised return was filed by it on 27.3.1989 declaring a total income of Rs. 2,10,08,640/-. The A.O. disallowed an amount of Rs. 8,86,280/-, being the roll over premium charges paid by the assessee in respect of foreign exchange forward contracts to Citibank N.A. on the ground that the said charges were incurred in connection with the purchase of a capital asset (plant and machinery), hence, it was not admissible for deduction under Section 36(1)(iii) or under Section 37 of the Act. On appeal, the CIT (A) held that the roll over premium charge(s) incurred by the assessee was allowable as it was incurred by the assessee to mitigate the risk involved in higher payment because of adverse fluctuation of rate of exchange. According to CIT (A), roll over premium charge(s) constituted an expenditure incurred for raising loans on revenue account, hence, the said expenditure was allowable under the Act. It may be noted that CIT (A) did not refer to a specific section under which assessee was entitled to such deduction. The CIT(A) did not examine Section 43A of the said Act. The CIT(A) relied upon the judgment of the Supreme Court in support of its findings in the case of India Cements Ltd. v. Commissioner of Income-Tax, Madras1 - (1966) 60 ITR 52.

4. Vide order dated 21.3.2001, the Tribunal held that roll over premium charges (carry forward charges) were required to be paid to the authorized dealer as consideration for permitting the unutilized amount of the contract (balance value of the contract) to be availed of at a latter date and in the circumstances roll over premium charges had to be capitalized under Explanation 3 to Section 43A of the said Act. Consequently, the Tribunal upheld the order of the assessment.

5. Aggrieved by the decision of the Tribunal, the assessee filed an appeal(s) before the Gujarat High Court inter alia challenging the capitalization of the roll over charges paid in respect of foreign currency. The said appeal(s) was allowed by the High Court which came to the conclusion that the roll over premium charge(s) paid by the asssessee was in the nature of interest or committal charge(s), hence, the said charges were allowable under Section 36(1)(iii) of the said Act, hence this civil appeal(s).

6. According to the Department, the roll over charge was required to be capitalized in view of Section 43A of the Act. In answer to this basic argument, Mr. P.H. Parekh, learned senior counsel appearing on behalf of the assessee submitted that the roll over contract mechanism came to be devised because at the relevant time forward contracts could be entered into for a period of six months ahead of the required delive

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2010 Supreme(SC) 198

Cases Referred (2)