COMMISSIONER OF INCOME TAX, DELHI versus M/S WOODWARD GOVERNOR INDIA P. LTD.

Citation: [2009] 5 S.C.R. 738 · Decided: 08-04-2009 · Supreme Court of India · Bench: S.H. KAPADIA · Disposal: Dismissed

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Judgment (excerpt)

(2009] 5 S.C.R. 738 
"' 
A 
COMMISSIONER OF INCOME TAX, DELHI 
v. 
MIS WOODWARD GOVERNOR INDIA P. LTD. 
(Civil Appeal No. 2206 of 2009) 
B 
APRIL 8, 2009 
[S.H. KAPADIA AND AFTAB ALAM, JJ.] 
Income Tax Act, 1961: 
c 
s. 37(1) - Loan for revenue purpose - Fluctuation in rate 
of exchange - Deduction of additional liability arising therein 
uls 37(1) in year of fluctuation in rate of exchange or in year 
of repayment of such loan - Held: Loss on account of 
exchange difference as on date of balance sheet is item of 
,,. 
expenditure u/s.37(1) and is deductible thereunder - Any 
.. 
D difference, Joss or gain, arising on conversion of said liability 
at closing rate, should be recognized in profit and loss 
account for the reporting period ·- Accounting method 
followed by assessee continuously for a given period of time 
E is presumed to be correct till Assessing Officer points out 
defects therein - No finding by AO on correctness of accounts 
of assessee and also on correctness of accounting standards 
followed by assessee - Thus, claim of assessee for deduction 
of unrealized loss due to foreign exchange fluctuation as on 
last date of previous year to be allowed. 
t 
F 
Accounting Standard-11 - Is giving of accounting 
treatment on the balance sheet date for the effects of changes 
in foreign exchange rates. 
\' 
G 
s. 43A (unamended) - Liability on capital account -
Fluctuation in rate of exchange - Adjustment at each balance 
sheet date pending actual payment of varied liability -
Entitlement of- Held: s. 43A provides for adjustment in actual 
cost of assets pursuant to change in foreign currency 
H 
738 
COMMNR. OF INCOME TAX, DELHI v. WOODWARD 
739 
" 
GOVERNOR INDIA P. LTD. 
exchange rates, actual payment not being a condition A 
precedent- s. 43A corresponds to para 10 of AS-11- Thus, 
adjustment in actual cost of assets pursuant to foreign 
exchange fluctuation are to be made at each balance sheet 
date. 
s. 43A (amended) - Nature of - Held: Is amendatory and 
B 
not clarificatory in nature - Under amended s. 43A adjustment 
in the actual cost is made on cash basis - Actual payment 
of decreased/enhanced liability is made a condition 
precedent for making adjustment in carrying amount of fixed c 
asset. 
The question which arose for determination in these 
appeals is (i) whether the additional liability arising on 
.. 
account of fluctuation in the rate of exchange in respect 
' 
7 
of loans taken for revenue purposes could be allowed as · D 
deduction under section 37(1) of the Income Tax Act, 
1961 in the year of fluctuation in the rate of exchange or 
whether the same could only be allowed in the year of 
repayment of such loans; and (ii) Whether the assessee 
is entitled to adjust the actual cost of imported assets 
E 
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. 
J 
Dismissing the appeals, the Court 
F 
HELD: 1.1. The profits and gains of the previous year 
are required to be computed in accordance with the 
relevant accounting standard. The basis on which stock-
in-trade is valued is part of the method of accounting. It 
is well established, that, on general principles of G 
commercial accounting, in the P&L account, the values 
' 
of the stock-in-trade at the beginning and at the end of 
the accounting year should be entered at cost or market 
value, whichever is lower-the market value being 
ascertained as on the last date of the accounting year and 
H 
740 
SUPREME COURT REPORTS 
[2009) 5 S.C.R. 
A not as on any intermediate date between the 
commencement and the closing of the year, failing which 
it would not be possible to ascertain the true and correct 
state of affairs. No gain or profit can arise until a balance 
is struck between the cost of acquisition and the 
8 proceeds of sale. The word "profit" implies a comparison 
between the state of business at two specific dates, 
usually separated by an interval of twelve months. Stock-
in-trade is an asset. It is a trading asset. Therefore, the 
concept of profit and gains made by business during the 
year can only materialize when a comparison of the 
C assets of the business at two different dates is taken into 
account. Section 145(1) enacts that for the purpose of 
section 28 and section 56 alone, income, profits and 
gains must be computed in accordance with the method 
of accounting regularly employed by the assessee. In the 
D inst

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