Ranganathan, J. - (1.) The devaluation of the Indian Rupee on 6th June, 1966 brought several problems in its wake. One such problem arose out of the consequential enhancement in the liability of an Indian businessman who had imported plant and machinery from abroad, the consideration for which had been fixed in terms of a foreign currency and which had not been fully discharged by the date of devaluation. How this increase in liability has to be (a) accounted for in the books of account of the businessman and (b) taken into account for purposes certain allowances available under the Income-tax Act, 1961, are the two issues that have to be considered in this appeal.
(2.) A simple hypothetical illustration (steering clear of complications that may arise where the purchase is made by borrowing funds therefore from others, where the price as paid in several instalments, where more than one fluctuation in exchange rate intervener and so on) will serve to bring the problem into focus. Let us consider the case of an income tax assessee, whose previous year ended on 31-3-66, who had placed an order for plant and machinery costing $ 10,000 on 1-1-1966, at a time when the rupee exchange rate of a dollar was, say ten rupees to the dollar. The cost of the plant or machinery would have been debited by him, in his books for the year ended 31-3-66, at Rupees One Lakh. If the price wholly or in part remained undischarged on 6-5-1966, the assessee would have become liable to pay more money in terms of the Indian Rupee to pay in full the price of $ 10,000. Let us suppose that he had eventually to pay Rs. 1,20,000 in the accounting year 1966-67 to discharge his liability towards the purchase price. The two questions that would arise are- (i) Should he enter the additional liability of Rs. 20,000 in his books for the year ended 31-3-67 during which the additional liability arose consequent on the devaluation or should he reopen his accounts of the earlier year and correct the figure of cost debited there in from Rs. 1,00,000 to Rs. 1,20,000 (ii) On what basis should he claim allowances like depreciation and development rebate under the Income-tax Act which are admissible on the "actual cost to the assessee of such plant and machinery" Before dealing with these questions it may be useful to refer to certain accountancy principles and statutory provisions that have a bearing on the issues raised.
(3.) Soon after the currency devaluation of 1966, the institute of Chartered Accountants of India issued a statement indicating the manner in which the effects of devaluation should be shown in the accounts. It said: "2.1 Where the accounts of an enterprise are closed on a date prior to 6th June, 1966, but the auditor reports thereon subsequent to that date, the question arises whether it is necessary to include in the accounts or in the auditor's report any reference to the fact of Devaluation and its effects upon the accounts of the company. It is accepted in connection With certain matters that events occurring made in the Income-tax Act to enable after the balance sheet date may be of such a nature that they would have to be taken into account in order to show a true and fair view. The council is, therefore, of the opinion that it is the duty of the Directors of a company to disclose by way of a note on the accounts, the effect (if material) of devaluation upon the accounts of the company and in particular about the extent to which the outstanding liabilities may be increased as a result of devaluation and its effect upon the profit or loss of a company. ********** 2. 2 While this is the recommended procedure, it is permissible for a company to include the effects of devaluation in its accounts ending on a date prior to 6th June, 1966. It would be desirable to make appropriate disclosure of the effect of such inclusion on the true and fair view of the results for the year and the position as at the Balance Sheet date in the accounts or in any notes thereon. ********** 6. 1 The council is of the opinion that to the extent to which repayment obligations in respect of fixed assets purchased prior to devaluation remain outstanding as on 6th June, 1966 (except those covered by forward exchange contracts), the additional cost of repayment in terms of rupees, should ue considered as enhancing the cost of the corresponding asset purchased. In cases where identification of the assets which have been purchased out of foreign funds is not possible, some reasonable method of allocation would have to be adopted. 6. 2 Depreciation must be provided on the additional cost according to the method of depreciation normally employed by the company. 6. 3 The council has recommended to the Government that appropriate amendments be made in the Companies Act to embody the accounting treatment outlined above. It has also been represented to the Government that the consequential amendments should be made in Income tax Act to enable business to claim such additional depreciation an allowable deduction for tax purposes. 6. 4 Fixed assets which are purchased prior to devaluation but paid for subsequently, should be recorded at the enhanced cost by conversion at the new rates of exchange. 6. 5 Advances made to foreign suppliers for machinery to be supplied should be retained in the books at the actual rupee cost of the advance (i.e. at the old rate of exchange). Any subsequent payment towards the purchase of the machinery by way of final instalment or otherwise would, if paid after devaluation, be converted at the new rate of exchange and the total cost of the asset would be the sum of these two figures." (Emphasis added) ;