Case: Commissioner of Income Tax Vs. Arvind Mills Limited

The devaluation of the Indianon 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 abroadconsideration for which had been fixed in terms of a foreign currency and whichhad not beenfully discharged by the date of devaluation. How this increase in liability has to be (a) accounted for in the books of account of theand (b) taken into account for purposes of certain allowances available under theAct, 1961, are the two issues that have to be considered in thissimple hypothetical illustration (steering clear of complications that may arise where the purchase is made by borrowing funds thereforfrom others, where the price is paid in several installments, where more than one fluctuation in exchange rate intervene and so on) will serve to bring the problem into focus. Let us consider the case of anassessee, whose previous year ended onwho had placed an order for plant and machinery costing $ 10,1966, at a time when the rupee exchange rate ofdollar 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 endedh. If the price wholly or in part remained undischarged on1966, the assessee would have become liable to pay more money in terms of the Indianto pay in full the price of $ 10,000. Let us suppose that he had eventually to pay Rs. 1,0 in the accounting yearto discharge his liability towards the purchase price. The two questions that would ariseShould he enter the additional liability of Rs. 20,000 in his books for the year endedng 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 therein from Rs. 1,0 to Rs. 1,i) On what basis should he claim allowances like depreciation and development rebate under theAct which are admissible on the "actual cost to the assessee" of such plant ande dealing with theseit may be useful to refer to certain accountancyand statutory provisions that have a bearing on the issueafter 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. IWhere the accounts of an enterprise are closed ondate prior to 6th1966, but the auditor reports thereon subsequent to that date, the question arises whether it is necessary to include in the accounts or inauditors report any reference to the fact of devaluation and its effectupon the accounts of the company. It is accepted in connection with certain matters that events occurring after thedate may be of such a nature that they wouldbe taken into account in order to show a true and fair view. Theis, therefore, of the opinion that it is the duty of theof 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 ofdevaluation and its effector loss of aWhile this is the recommended procedure, it is permissible for a company to include the effectof devaluation in its accountending on aprior to 6th1966. 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 thedate in the accounts or in any notesil is of the opinionto 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 rupeesshould be considered as enhancing the costcorresponding asset purchased. In cases where identification of the assetwhich have been purchased out of foreignis not possible, some reasonable method of allocation would have to beDepreciation must be provided on the additional cost according to the method of depreciation normally employed by theil has recommended to the Government that appropriate amendments be made in the Companies Act to embody the accounting treatmentabove. It has also been represented to the Government that the consequential amendments should be made in theAct to enable businessto claim such additional depreciation and appropriate development rebate as an allowable deduction for taxFixed assets which are purchased prior to devaluation but paid for subsequentlyshould be recorded at thecost by conversion at the new rates ofAdvances made to foreign suppliers for machinery to be supplied should be retained in the books at the actual rupee cost of the advanceat the old rate of exchange). Any subsequent payment towards the purchase of the machinery by way of finalor otherwise wouldif paid after devaluation, be converted at the new rate of exchange and the total cost of thewould be the sum of these twofew years later, the currencies of a large number of countries came to be "floated" in foreign exchange marketsthe exchange rateto be determined from day to dayAlso, the Indian rupee was delinked from theg and its rates of exchange in relation to other currencies came to be determined by the Government on the basis ofs of a selected "basket" of foreign currencies. In the context of these developments, the institute issued a further detailed statement on accounting for foreign exchange transactions. Pointing out that the need for a "foreign currency translation" arises (a) when translatingt of foreignentities in the books of the parentand (b) when determining or restating book values of revenue items and assets and liabilities inof transactions in foreign currencies, the statement addressed itself, inter alia, to three problems: (a) whether all differences should be adjusted in the profit and loss account; (b)nt should be in the year of change or deferred; and (c) whether any part of the difference can be treated as a capital expenditure. On the second issue with which we are concerned here, the statementAt the same time, deferment of the charge to the profit and loss account in all cases till the actual gain or loss is realised on conversion of the foreign currency would result in accounting onh basis and would be contrary to theconcept of accounting.es necessary to distinguish between translation differences whichon translation of current assets andliabilities and translation on differences which arise on translation of. The translation difference arising on the translation ofliabilities should be dealt with as underIf the funds represented by theve been used for the purchase of assets which continue to appear in the balance sheet at the date of translation, the amount of the difference can be dealt with as suggested in(ii) and (iii) below or can be added to or deducted from the cost of the assets to the extent consideredIf the translation results inprofit, the difference (to the extent not adjusted wholly or partly against the cost of assets) should be transferred to a reserve account and a loss arising on a subsequent translation can be debited to thisIf the translation results ina loss, the difference (to the extent not adjusted wholly or partly against the cost of assets) should be written off in the profit and loss account. If the amount of the difference is substantial, it can be written off in annualover a period of years in proportion to the repayment of the liability in each of the subsequentLegislature reacted to the situation created by the devaluation of 1966 by effecting two amendments : The first legislative provision enacted to meet the situation was the insertion of43A in theAct, 1961. The relevant portions of this provision, inserted by the Finance (No. 2) Act, 1967,with effect from, need to be set out in full as the controversy before us turns entirely on a proper interpretation of thisA. (1) Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange at any time after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment

Reasoning: For the reasondiscussed above, we are of the opinion that the language of the provision is perfectly clear. It cannot be interpreted in a restrictive manner as contended for byl for the assessee. In our opinion, it isclear requirement of the statute that, for purposeof development rebate, any increase or decrease in the actual cost consequent on fluctuations inthe exchange rateshould not be taken into account. It may be that theintended to give a different treatment to development rebate from depreciation and other allowances because theof development rebate can result inassessee claiming allowances exceeding the original cost. It may be that thethought that, though development rebate was intended to promote development ofthis could not be allowed at the cost offoreign exchange resources of the country which are also depleted when there is an increase in liability due to devaluationcurrency. It is unnecessary to attribute any particular reasonthe provision when the language of the section is otherwise plain and unambiguous. We do not think that, inface of the language of(2), it would be right to permit the assesseeto claim development rebate on the increasedand ingenious as this argument sounds, we are of opinion that it cannot be accepted. It puts too strained and artificial a construction on the clear language of SectionThis section was specially introduced to provide for the treatment of the situation created by the devaluation of the rupee. It specifically enacts that the amount of increase or decrease in the liability due to exchangerate fluctuation should be adjusted against the actual cost or the capital expenditure or the cost of acquisition referred to in the five provisions of thementioned earlier. Where the terms ofn (1) are fulfilled in any case, it is mandatory to take the actual cost, capital expenditure or cost ofat the higher or lower figure for the purposeof the provisions mentioned irrespective of whatever might have been the position independent of the section. The non obstante clause with which the section begins, indeed, makes it clear that, if the positionbeen different otherwise, it cannot prevail after the introduction of this section. Equally, even if the position would have been the same otherwise, that would be no justification to ignore or disregard the enacted provision on the ground that a specific statutory provision was not at all necessary. Once the provision is there and its terms apply, it should be applied; it is idle to speculate on what the position would have beenfacts of the case undoubtedly fall within the terms of). The assesseeacquired, for the purposes of its business, a capital asset from a country outside India by making payment in foreign currency. For thisit has borrowed monies in foreign currency from outside agencies and the liability in respect of such assets is outstanding. At a point of time after the acquisition of the asset, this liability has increased on account of the devaluation of our currency. These conditions being satisfied, the language of the