REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.7223 0F 2008
OIL & NATURAL GAS CORPORATION LTD., -- APPELLANT
DEHRADUN THROUGH MANAGING DIRECTOR
VERSUS
THE COMMISSIONER OF INCOME TAX, -- RESPONDENT
DEHRADUN
WITH
[CIVIL APPEAL NOS.7224, 7225,
7228, 7229 AND 7231 OF 2008]
J U D G M E N T
D.K. JAIN, J.:
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.
4.Being dissatisfied, both the Assessee as well as the Revenue
carried the matter in further appeals to the Income Tax Appellate
Tribunal (for short “the Tribunal”). The Tribunal observed that the
method of accounting adopted by the Assessee right from the
assessment year 1982-83 is mercantile system; it has been
consistently claiming loss suffered by it on account of fluctuation
in foreign exchange rates on accrual basis; in respect of assessment
years 1982-83 to 1986-87, the Assessee’s claim on this account had
been allowed by the Assessing Officer himself; in respect of
assessment year 1997-98, the Assessee had shown a gain of Rs.293.37
crores on account of fluctuation in foreign exchange because the
Indian Rupee had appreciated as compared to the foreign currency and
that the said amount was taxed as Assessee’s income. Taking all
these factors into consideration, the Tribunal held that the loss
claimed by the Assessee on revenue account was allowable under
Section 37(1) of the Act. The appeal preferred by the Revenue on
the question whether the Assessee was entitled to adjust the actual
cost of imported assets acquired in foreign currency on account of
fluctuation in the rate of exchange, in terms of Section 43A of the
Act, was also dismissed.
5.The Revenue took the matter in further appeal to the High Court.
By a common judgment pertaining to the assessment years 1991-92 to
1994-95 and 1997-98, the High Court has reversed the decision of the
Tribunal on both the issues. Terming the order of the Tribunal as
perverse, having been passed without any material on record and
against the statutory provisions, the High Court has held that the
foreign exchange loss claimed by the Assessee being only a
contingent and notional liability, it was not allowable as deduction
under Section 37(1) of the Act. Insofar as the applicability of
Section 43A of the Act was concerned, the High Court observed that
the said provision is confined only to those liabilities which have
become due as per the terms and conditions of written agreement
between the Assessee and the foreign creditors but since in the
present case, no such agreement was made available by the Assessee
at any stage of the proceedings, the claim of the Assessee was not
justified. According to the High Court, the variation in foreign
exchange was neither quantified, nor it had become due or repaid
and, therefore, deductions on that account had been allowed by the
Tribunal without application of mind and were, therefore, illegal.
Being aggrieved by the said decision, the Assessee is before us in
these appeals.
6.Mr. S. Ganesh, learned senior counsel appearing on behalf of the
Assessee, submitted that in view of the decision of this Court in
Commissioner of Income-Tax Vs. Woodward Governor India P. Ltd.1, the
decision of the High Court cannot be sustained. Learned counsel
also argued that in view of the fact that the Committee on disputes
had expressly refused permission to the Revenue to pursue appeals
before the High Court, in the light of the decisions of this Court
in Oil & Natural Gas Commission & Anr. Vs. Collector of Central
Excise2 and Mahanagar Telephone Nigam Ltd. Vs. Chairman, Central
Board, Direct Taxes & Anr.3, the High Court should not have
entertained the appeals preferred by the Revenue.
7.Mr. B. Bhattacharya, learned Additional Solicitor General,
appearing on behalf of the Revenue, on the other hand, while
candidly admitting that both the issues raised in the present
appeals, have been decided by this Court in Woodward’s case (supra),
submitted that in view of the finding by the High Court that no
agreement between the Assessee and the foreign creditors had been
placed on record, the High Court was correct in law in allowing
Revenue’s appeals.
1
2009 (312) I.T.R. 254 (SC)
2
(1992) Supp (2) SCC 432
3
2004 (267) I.T.R. 647 (SC)
8.At the outset, we may note that although in view of the orders
passed by the Committee on disputes, advising the Revenue not to
file appeals against Tribunal’s orders, we find some substance in
the objection of learned counsel for the Assessee about the
maintainability of Revenue’s appeals before the High Court but as we
have heard learned counsel for the parties on merits of the appeals,
at this stage, we do not propose to go into this question. We also
reject at the threshold the submission of learned counsel for the
Revenue that the claim of the Assessee qua capital account deserved
to be disallowed because no agreement between the Assessee and the
foreign creditors, as observed by the High Court was placed on
record, because no such objection was raised by the Revenue at any
stage of the assessment proceedings nor had the Assessing Officer
rejected the claim of the Assessee on that ground.
9.Thus, the questions surviving for determination are :- (i) that
when the Assessee maintained their accounts on mercantile system of
accounting and there was no finding by the Assessing Officer on the
correctness or completeness of the account and that the Assessee had
complied with the accounting standards, laid down by the Central
Government, can the “loss” suffered by it on account of fluctuation
in the rate of foreign exchange as on the date of balance-sheet be
allowed as expenditure under Section 37(1) of the Act
notwithstanding the fact that the liability had not been actually
discharged in the year in which the fluctuation in the rate of
foreign exchange had occurred and (ii) whether on account of
fluctuation in the rate of exchange at the end of the previous year,
the Assessee is entitled to adjust the actual cost of imported
assets acquired in foreign currency?
10.Having carefully perused the decision of this Court in Woodward’s
case (supra), we are of the opinion that both the issues stand
concluded by the said decision. Dealing with the said issues
extensively, speaking for the Bench, S.H. Kapadia, J. summarised the
following factors which should be taken into account in order to
find out if an expenditure on account of fluctuation in the foreign
currency rates, when the Assessee is following mercantile system of
accounting, is deductible:
(i) whether the system of accounting followed by the
assessee is the mercantile system, which brings in
the debits of the amount of expenditure for which a
legal liability has been incurred even before it is
actually disbursed and credits, what is due,
immediately it becomes due even before it is actually
received;
(ii) whether the same system is followed by the assessee
from the very beginning and if there was a change in
the system, whether the change was bona fide;
(iii) whether the assessee has given the same treatment to
losses claimed to have accrued and to the gains that
may accrue to it;
(iv) whether the assessee has been consistent and definite
in making entries in the account books in respect of
losses and gains;
(v) whether the method adopted by the assessee for making
entries in the books both in respect of losses and
gains is as per nationally accepted accounting
standards;
(vi) whether the system adopted by the assessee is fair
and reasonable or is adopted only with a view to
reducing the incidence of taxation.
Applying these factors on the facts of that case, it was held that
the “loss” suffered by the Assessee, maintaining accounts regularly
on mercantile system and following accounting standards prescribed
by the Institute of Chartered Accountants of India (ICAI), on
account of fluctuation in the rate of foreign exchange as on the
date of balance-sheet was an item of expenditure under Section 37(1)
of the Act, notwithstanding that the liability had not been
discharged in the year in which the fluctuation in the rate of
foreign exchange occurred.
11.We are of the opinion that the ratio of the said decision, with
which we are in respectful agreement, squarely applies to the facts
at hand and, therefore, the loss claimed by the Assessee on account
of fluctuation in the rate of foreign exchange as on the date of
balance-sheet is allowable as expenditure under Section 37(1) of the
Act.
12.On the question whether an Assessee is entitled to adjust the
actual cost of imported 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 with reference
to unamended Section 43A of the Act, in Woodward’s case (supra), the
Court observed thus:
“…what triggers the adjustment in the actual cost of the
assets, in terms of the unamended section 43A of the 1961
Act is the change in the rate of exchange subsequent to the
acquisition of asset in foreign currency. The section
mandates that at any time there is change in the rate of
exchange, the same may be given effect to by way of
adjustment of the carrying cost of the fixed assets acquired
in foreign currency. But for section 43A which corresponds
to paragraph 10 of AS-II such adjustment in the carrying
amount of the fixed assets was not possible, particularly in
the light of section 43(1). The unamended section 43A
nowhere required as condition precedent for making necessary
adjustment in the carrying amount of the fixed asset that
there should be actual payment of the increased/decreased
liability as a consequence of the exchange variation. The
words used in the unamended section 43A were “for making
payment” and not “on payment” which is now brought in by
amendment to section 43A, vide the Finance Act, 2002.”
Opining that the amendment of Section 43A of the Act by the
Finance Act, 2002 with effect from 1st April, 2003 is amendatory and
not clarificatory and would thus, apply prospectively, the Court
explained that under the unamended Section 43A, adjustment to the
actual cost takes place on the happening of change in the rate of
exchange, whereas under the amended Section 43A, the adjustment in
the actual cost is made on cash basis. In other words, under the
unamended Section 43A, “actual payment” was not a condition
precedent for making necessary adjustment in the carrying cost of
the fixed asset acquired in foreign currency but under the amended
Section 43A, with effect from 1st April, 2003, such payment of the
decreased/enhanced liability on account of fluctuation in foreign
exchange rate has been made a condition precedent for making
adjustment in the carrying amount of the fixed asset.
13.We are of the opinion that the decision of this Court in
Woodward’s case (supra) settles the second issue as well. We
respectfully concur with the same and hold that all the assessment
years in question being prior to the amendment in Section 43A of the
Act with effect from 1st April, 2003 the Assessee would be entitled
to adjust the actual cost of the imported capital assets, acquired
in foreign currency, on account of fluctuation in the rate of
exchange at each of the relevant balance-sheet dates pending actual
payment of the varied liability.
14.Resultantly, all the appeals are allowed; the impugned orders are
set aside and both the questions formulated in para 1 (supra) are
answered in favour of the Assessee, leaving the parties to bear
their own costs.
…………………………….J.
(D.K. JAIN)
…………………………….J.
(T.S. THAKUR)
NEW DELHI;
MARCH 15, 2010.