Section 43A : Foreign exchange fluctuation : on loan liability being notional as no actual payment was made – section 43A of the Act as amended w.e.f. 1st April, 2003 – would not require any adjustment in the cost of the fixed assets.

11. Pr.CIT vs.  Spicer India Ltd. [ Income tax Appeal no.
1129 of 2015 dated: 18^th April, 2018 (Bombay High Court)].  [Affirmed DCIT vs. Spicer India Ltd. [ITA No.
1886/PN/2013; AY: 2003-04;   Dated: 20^th
October, 2014 ; Pune.  ITAT]

Section
43A : Foreign exchange fluctuation : on loan liability being notional as no
actual payment was made –  section 43A of
the Act as amended w.e.f. 1^st April, 2003 – would not require any
adjustment in the cost of the fixed assets.

The assessee is engaged in
manufacturing of axles and propeller shafts and assemblies. On 31^st
March, 2006, the assessment was completed u/s. 143(3) of the Act for the
A.Y.2003-04. Thereafter, the A.O reopened the assessment for the subject AY on
the ground that gain on foreign exchange conversion of loan liabilities, would
require corresponding change in the value of the fixed assets. This not having
been done, has resulted in the assessee claiming excess depreciation.

Consequent to the above
reopening, the A.O passed an order u/s. 
143(3) of the Act r.w.s 147 of the Act, adding the excess depreciation
which has been disallowed to the assessee’s income.

Being aggrieved, the assessee
filed an appeal to the CIT(A). The CIT(A) 
observed that section 43A of the Act deals with the increase or
reduction in the liability of the assessee as expressed in India currency on
account of changes in the rate of exchange of currency. Section 43A of the Act
has been amended w.e.f. 01.04.2013 i.e. from A.Y. 2003-04 to prescribe that the
adjustment of foreign currency fluctuations in respect of foreign currency
borrowings taken for acquiring fixed assets is to be made to the cost or the
WDV of fixed assets only at the time of making payment i.e. on cash basis and
not on accrual basis for the purposes of income tax. In the present case, the
impugned gain on foreign currency fluctuations is a notional gain in as much as
it has resulted on account of translation of foreign loan liability at the end
of the year on accrual basis.

The foreign exchange gain is
not as a result of actual payment made by the assessee. Therefore, the
aforesaid gain cannot be adjusted towards the cost of the fixed assets.
Accordingly, there is no justification for the A.O to have reduced the
depreciation allowance corresponding to the aforesaid exchange gains.

The Revenue being aggrieved, filed an appeal before the Tribunal.
The Tribunal by the dismissed the Revenue’s appeal by inter alia holding
on merits that in view of amended section 43A of the Act, the gain / loss in
the foreign exchange fluctuation on loan liability being notional as no actual
payment was made, section 43A of the Act as amended w.e.f. 1^st
April, 2003 would not require any adjustment in the cost of the fixed assets.
This is so as no actual payment has been made by the assessee during the
previous year relevant to the subject AY. Further, places reliance upon the
decision in Commissioner of Income Tax vs. Woodward Governor India P. India,
(2009) 312 ITR 254.

Being aggrieved, the Revenue
filed an appeal to the High Court. The High Court observed that no payment was
made during the previous year relevant to the subject AY.  The Apex Court in Woodward Governor India
P. India, (supra) while dealing with the amended provisions of section 43A
of the Act has held that “…. with effect from 1^st April, 2003 such
actual payment of the decreased/ enhanced liability is a condition precedent
for making adjustment in the carrying amount of the fixed asset.”

The aforesaid observation of
the Apex Court apply to the facts of the present case. Accordingly, the revenue
appeal was dismissed.