ASSISTANT C.L.T., VADODARA versus ELECON ENGINEERING CO. LTD.

Citation: [2010] 3 S.C.R. 108 · Decided: 26-02-2010 · Supreme Court of India · Bench: S.H. KAPADIA · Disposal: Appeal(s) allowed

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Judgment (excerpt)

A 
B 
[2010] 3 S.C.R. 108 
ASSISTANT C.l.T., VADODARA 
v. 
ELECON ENGINEERING CO. LTD. 
(Civil Appeal No. 2057 of 2010) 
FEBRUARY 26, 2010 
[S.H. KAPADIA AND H.L. DAITU, JJ.] 
Income Tax Act, 1961: s.43A, Explanation 3 -
Assessment year 1986-87 ~ Roll over premium charges paid 
c in respect of foreign exchange forward contracts - Treatment 
of - Held: Roll over charges represent the difference on 
account of change in foreign· exchange rates - Under 
Explanation 3 to s. 43A, if liability is incurred in foreign 
exchange by entering into forward contract for purchase of 
0 fixed asset, gain or loss arising from such forward contract is 
required to be capitalised - s.43A applies to the entire liability 
remaining outstanding at the year-end, and it is nof restricted 
merely to the instalments actually paid during the year. 
The question which arose for consideration in these 
E appeals was whether the roll over premium charges paid 
by the assessee for the assessment year 1986-87 in 
respect of foreign exchange forward contracts had to be 
capitalised in terms of Explanation 3 to Section 43A of the 
Income Tax Act, 1961. 
F 
Allowing the appeal, the, Court 
HELD: 1. Exchange differences are required to b~ 
capitalized if the liabilities are incurred for acquiring the. 
fixed asset, like, plant and machinery. It is the purpose for\ 
G which the loan is raised that is of prime significance. In 
order to ascertain whether the purpose of the loan is to 
finance the fixed asset or working capital, the relevant 
loan agreement and the correspondence between the 
H 
108 
ASSISTANT C.l.T, VADODARA v. ELECON 
109 
ENGINEERING CO. LTD. 
parties concerned are required to be looked into. In the 
A 
present case, the relevant contract and correspondence 
were not produced by the assessee, therefore, the Court 
proceeded on the basis that the purpose of the loan 
taken by the assessee was to finance the purchase of 
plant and machinery. [Para 8) [118-D-F] 
B 
CIT. v. Gujarat Alkalis and Chemicals Limited (2008) 2 
sec 475, held inapplicable. 
India Cements Ltd. v. Commissioner of Income-Tax, 
Madras, (1966) 60 ITR 52, referred to. 
C 
2. Section 43A of the Income Tax Act, 1961, before its 
substitution by a new Section 43A by Finance Act, 2002, 
was inserted by Finance Act, 1967 with effect from 
1.4.1967, after the devaluation of the rupee on 6th June, 
D 
1966. It applied where as a result of change in the rate of 
exchange there was an increase or reduction in the 
liability of the assessee in terms of the Indian rupee to 
pay the price of any asset payable in foreign exchange 
or to repay moneys borrowed in foreign currency 
Et 
specifically for the purpose of acquiring an asset. The 
Section has no application unless an asset was acquired 
and ~he liability existed, before ·the change in the rate of 
exchange. When the assessee buys an asset at a price, 
its liability to pay the same arises simultaneously. This 
liability can increase on account of fluctuation in the rate 
F 
of exchange. An assessee who becomes the owner of an 
asset (machinery) and starts using the same, it becomes 
entitled to depreciation allowance. To work out the 
amount of depreciation, one has to look to the cost of the 
asset in respect of which depreciation is claimed. Section 
G 
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, firstly, that th-e 
increase or decrease in liability should be taken into 
account to modify the figure of actual cost and, secondly, 
H 
110 
SUPREME COURT REPORTS 
[2010] 3 S.C.R. 
A 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 
B Section 43A requires the cost to be recomputed in terms 
of Section 43A for the purposes of depreciation. 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 
c 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 t

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