- (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 31st March, 1991 and claimed the difference between their respective amounts in Indian currency as on 31st March, 1990 and on 31st 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, used partly in revenue account and partly in capital account. Thus, the Assessee's claim for foreign exchange loss/increased liability on revaluation of these foreign exchange loans at the end of the accounting year under consideration both in the revenue account and capital account as also on loans used partly in revenue account and partly in capital account, made on the ground that it had followed mercantile system of accounting in this regard, was disallowed by the Assessing Officer; According to the Assessing Officer, such a loss could be allowed to the Assessee on discharge of liability at the time of actual repayment of these loans.
(3.) Aggrieved, the Assessee preferred appeals before the Commissioner of Income Tax (Appeals). Insofar as Assessee's claim for foreign exchange loss in revenue account was concerned, the Commissioner (Appeals) affirmed the view taken by the Assessing Officer on the ground that it was a notional liability and the same had not crystallised or accrued in the relevant assessment year. However, as regards the adjustment for increased liability made by the Assessee for the purposes of Section 43A of the Act in respect of foreign exchange loans in capital account, which were outstanding as on 31st March, 1991, the Commissioner accepted the stand of the Assessee and directed the Assessing Officer to allow the benefit of such increased liability for computation of depreciation allowance on plant and machinery purchased out of such foreign exchange loans for the assessment year under consideration.;