REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.7223 0F 2008

OIL & NATURAL GAS CORPORATION LTD.,

DEHRADUN THROUGH MANAGING DIRECTOR

—

APPELLANT

VERSUS

THE COMMISSIONER OF INCOME TAX,

DEHRADUN

—

RESPONDENT

WITH

[CIVIL APPEAL NOS.7224, 7225,

7228, 7229 AND 7231 OF 2008]

J U D G M E N T

D.K. JAIN, J.:

1.In these appeals, essentially the following two questions arise

for our consideration:-

(i)

Whether on the facts and circumstances of the case,

the additional liability arising on account of

fluctuations in the rate of exchange in respect of

loans taken for revenue purposes could be allowed as

deduction under Section 37(1) of the Income Tax, Act,

1961 (for short “the Act”) in the year of fluctuation

in the rate of exchange or whether the same is

allowable only in the year of repayment of such

loans?

(ii)

Whether the Assessee is entitled to adjust the actual

cost of imported capital assets acquired in foreign

currency on account of fluctuation in the rate of

exchange at each balance-sheet date, pending actual

payment of the varied liability? (only in C.A.

No.7228/2008 – Assessment Year 1991-92)

2.As, in our opinion, both the afore-noted issues are no more res

integra, we deem it unnecessary to state the facts in detail and

with a view to appreciate the controversy, a brief reference to the

foundational facts in respect of assessment year 1991-92 would

suffice. These are:

The appellant, hereinbefore referred to as “the Assessee”, is a

public sector undertaking, substantially owned by the Government of

India. It is engaged in capital intensive exploration and production

of petroleum products for which it has to heavily depend on foreign

loans to cover its expenses, both capital and revenue, on import of

machinery on capital account and for payment to non-resident

contractors in foreign currency for various services rendered. The

Assessee had made three types of foreign exchange borrowings — (i)

in revenue account; (ii) in capital account and (iii) for general

purposes, partly utilised in revenue account and partly in capital

account. As per terms and conditions of foreign exchange

borrowings, some of the loans became re-payable in the year under

consideration but date of repayment of some loans fell after the end

of the relevant accounting year. The Assessee revalued in Indian

currency all its foreign exchange loans in revenue account, capital

account as also in its general purposes account, outstanding as on

31^st March, 1991 and claimed the difference between their respective

amounts in Indian currency as on 31^st March, 1990 and on 31^st March,

1991 as revenue loss under Section 37(1) of the Act in respect of

loans used in revenue account, and also took into consideration the

similar difference in foreign exchange on capital account loans as

an increased liability under Section 43A of the Act for the purposes

of depreciation. The foreign exchange loss incurred by the Assessee

in the revenue account on account of repayment of these loans made

in the year under consideration was allowed by the Assessing Officer

as a deduction under Section 37(1) of the Act, and he also took into

consideration an increased liability of foreign exchange loans taken

in capital account and repaid in the accounting year, for the

purposes of depreciation, under Section 43A of the Act. He,

however, did not allow to the Assessee its claim for foreign

exchange loss claimed on such foreign currency loans both in revenue

account and in capital account which were outstanding on the last

day of the accounting year under consideration and were as per terms

of borrowings repayable after the end of the relevant accounting

year. Similar treatment was given to the foreign exchange loans

taken for general purposes