CIT v. Woodward Governor India P. Ltd.

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The Tax PublishersCivil Appeal No. 2206 of 2009 2009 TaxPub(DT) 1628 (SC) : (2009) 030 (I) ITCL 0587 : (2009) 312 ITR 0254 : (2009) 223 CTR 0001 : (2009) 179 TAXMAN 0326 : (2009) 021 DTR 0106 CIT v. Woodward Governor India P. Ltd. INCOME TAX ACT, 1961 Business expenditure - Allowability -Foreign exchange fluctuation Assessee had debited unrealized loss due to foreign exchange fluctuation in foreign currency transaction on revenue items to its profit and loss account on the last date of accounting year. AO viewed that liability as on last date of previous year under consideration was not an ascertained liability, but a contingent liability and, consequently, he made addition to total income. *Held:* As per section 37(1), expenditure cover an amount which was really a loss, even though said amount had not gone out from pocket of assessee. Entity had to report outstanding liability relating to import of raw material using closing rate of foreign exchange and any difference, loss or gain, arising on conversion of said liability at closing rate should be recognized in profit and loss account for reporting period. Hence, loss suffered on account of foreign exchange fluctuation as on date of balance sheet was allowed as deduction under section 37(1). Income-tax Act, 1961, Section 37(1), read with section 145 A.Y. : 1998-99 Decision: In favour of assessee. Case Law Analysis:Indian Molasses Co. Ltd. v. CIT [1959] 37 ITR 66 (SC) [Para 6], Maruti Udyog Ltd. [Civil Appeal arising out of SLP(C) No. 18967 of 2008] [Para 9], M.P. Financial Corpn. v. CIT [1987] 165 ITR 765/[1986] 26 Taxman 42 (MP) (Indore Bench) [Para 14], Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802 / 91 Taxman 340 (SC) [Para 14], United Commercial Bank v. CIT [1999] 240 ITR 355 / 106 Taxman 601 (SC) [Para 16], Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC) [Para 20] and CIT v. Arvind Mills Ltd. [1992] 193 ITR 255 / 60 Taxman 192 (SC) [Para 28]. INCOME TAX ACT, 1961 Depreciation - Actual cost -Amendment in section 43A with effect from 1-4-2003 *Held:* As amended section 43A would be applied prospectively effective from 1-4-2003, therefore, assessee was entitled to depreciation on notionally enhanced value of capital asset due to foreign exchange fluctuation at the end of each financial year and not at the time of payment during the year. Hence, prior to amendment to section 43A, assessee was entitled to adjust actual cost of imported assets acquired in foreign currency on account of fluctuation in rate of exchange at each balance-sheet date, pending actual payment of varied liability. SUBSCRIBE FOR FULL CONTENT

The Tax PublishersCivil Appeal No. 2206 of 2009
2009 TaxPub(DT) 1628 (SC) : (2009) 030 (I) ITCL 0587 : (2009) 312 ITR 0254 : (2009) 223 CTR 0001 : (2009) 179 TAXMAN 0326 : (2009) 021 DTR 0106

CIT v. Woodward Governor India P. Ltd.

INCOME TAX ACT, 1961

Business expenditure - Allowability -Foreign exchange fluctuation

Assessee had debited unrealized loss due to foreign exchange fluctuation in foreign currency transaction on revenue items to its profit and loss account on the last date of accounting year. AO viewed that liability as on last date of previous year under consideration was not an ascertained liability, but a contingent liability and, consequently, he made addition to total income. Held: As per section 37(1), expenditure cover an amount which was really a loss, even though said amount had not gone out from pocket of assessee. Entity had to report outstanding liability relating to import of raw material using closing rate of foreign exchange and any difference, loss or gain, arising on conversion of said liability at closing rate should be recognized in profit and loss account for reporting period. Hence, loss suffered on account of foreign exchange fluctuation as on date of balance sheet was allowed as deduction under section 37(1).

Income-tax Act, 1961, Section 37(1), read with section 145

A.Y. : 1998-99
Decision: In favour of assessee.

Case Law Analysis:Indian Molasses Co. Ltd. v. CIT [1959] 37 ITR 66 (SC) [Para 6], Maruti Udyog Ltd. [Civil Appeal arising out of SLP(C) No. 18967 of 2008] [Para 9], M.P. Financial Corpn. v. CIT [1987] 165 ITR 765/[1986] 26 Taxman 42 (MP) (Indore Bench) [Para 14], Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802 / 91 Taxman 340 (SC) [Para 14], United Commercial Bank v. CIT [1999] 240 ITR 355 / 106 Taxman 601 (SC) [Para 16], Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC) [Para 20] and CIT v. Arvind Mills Ltd. [1992] 193 ITR 255 / 60 Taxman 192 (SC) [Para 28].

INCOME TAX ACT, 1961

Depreciation - Actual cost -Amendment in section 43A with effect from 1-4-2003

Held: As amended section 43A would be applied prospectively effective from 1-4-2003, therefore, assessee was entitled to depreciation on notionally enhanced value of capital asset due to foreign exchange fluctuation at the end of each financial year and not at the time of payment during the year. Hence, prior to amendment to section 43A, assessee was entitled to adjust actual cost of imported assets acquired in foreign currency on account of fluctuation in rate of exchange at each balance-sheet date, pending actual payment of varied liability.