OIL & NATURAL GAS CORPORATION LTD. V. COMMISSIONER OF INCOME TAX & ANR 2010

Citation: 322 ITR 180 (SC)


Judges: Jain D. K. & Thakur T. S. JJ


OIL & NATURAL GAS CORPORATION LTD., -- APPELLANT

DEHRADUN THROUGH MANAGING DIRECTOR


Versus


THE COMMISSIONER OF INCOME TAX, -- RESPONDENT

DEHRADUN



Brief of the case

According to Income-tax Act, 1961 ,section 37(1) state business expenditure and revenue expenses incurred with exchange borrowings

Loss on account of fluctuation in rate of exchange as on the last date of balance sheet.

Now, whether or not or not allowable as a deduction command, so yes it is.


Fact of the case

The Assessee may be a public sector enterprise, considerably closely-held by the govt. of India, engaged in capital intensive exploration and production of crude oil merchandise that it's to heavily depend upon foreign loans. The Assessee had created 3 varieties of exchange borrowings -- (i) in revenue account; (ii) in capital account and (iii) for general functions. It claimed the distinction between their individual amounts in Indian currency as on thirty first March, 1990 and first March 1991 as revenue loss beneath Section 37(1) of the Act. It additionally took into thought the similar distinction in exchange on capital account loans as associate degree inflated liability beneath Section 43A for the needs of depreciation.



Exchange loss incurred by Assessee on account of reimbursement of loans created within the year into consideration was allowed by the Assessing Officer as a deduction beneath Section 37(1) of the Act. He, however, failed to permit the Assessee its claim for exchange loss claimed on such foreign currency loans that were outstanding on the Day of Judgement of the accounting year and were owed at the end of the relevant year. Similar treatment was given to exchange loans taken for general functions, used partially in revenue accounts and partially in capital accounts. The Assessee's claim for exchange loss in revenue account was upheld by the Commissioner of tax (Appeals) on the basis that it absolutely was a notional liability and had not crystallized or accumulated within the relevant assessment year. in line with the Commissioner, such a loss can be allowed to the Assessee on discharge of liability at the time of actual reimbursement of those loans. The court finds that the loss claimed by the Assessee on revenue account was allowable below Section 37(1) of the Act. In respect of assessment year 1997-98, the Assessee had shown a gain of Rs.293.37 crores on account of fluctuation in exchange as a result of the Indian rupee having appreciated. The same quantity of foreign currency was taxed as Assessee's financial gain.



The charm most well-liked by the Revenue on the question whether or not the Assessee was entitled to regulate the particular price of foreign assets non heritable in foreign currency is additionally pink-slipped. The Revenue took the matter in any charm to the court. By a typical judgment relating the assessment years 1991-92 to 1994-95 and 1997-98, the court has reversed the choice of the court on each of the problems. The Assessee is before the U.S. in these appeals. per the court, the deductions on its account had been allowed by the court while not application of mind and were, therefore, illegal. He, however, failed to permit to the Assessee its claim for exchange loss claimed on such foreign currency loans that were outstanding on the Day of Judgement of the accounting year and were owed when the top of the relevant year. Similar treatment was given to exchange loans taken for general functions, used partially in revenue account and partially in capital account. The Assessee's claim for exchange loss in revenue account was upheld by the Commissioner of tax (Appeals) on the bottom that it absolutely was a notional liability and had not crystallized or accumulated within the relevant assessment year. in line with the Commissioner, such a loss can be allowed to the Assessee on discharge of liability at the time of actual reimbursement of those loans.



The court finds that the loss claimed by the Assessee on revenue account was allowable below Section 37(1) of the Act. In respect of assessment year 1997-98, the Assessee had shown a gain of Rs.293.37 crores on account of fluctuation in exchange as a result of the Indian rupee having appreciated. The same quantity of foreign currency was taxed as Assessee's financial gain. The charm most well-liked by the Revenue on the question whether or not the Assessee was entitled to regulate the particular price of foreign assets non heritable in foreign currency is additionally pink-slipped. The Revenue took the matter in any charm to the court. By a typical judgment relating the assessment years 1991-92 to 1994-95 and 1997-98, the court has reversed the choice of the court on each of the problems. The Assessee is before the U.S. in these appeals. per the court, the deductions on its account had been allowed by the court while not application of mind and were, therefore, illegal.



ISSUES

(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?



ARGUMENT

Counsels for the Assessee and the Revenue have argued that the High Court should not have entertained the appeals preferred by the Revenue in the case of Woodward v. Governor India P. Ltd. and Mahanagar Telephone Nigam Ltd. Vs. Chairman, Central Board, Direct Taxes & Anr. Mr. S. Ganesh and Mr. B. Bhattacharya, learned Additional Solicitor General, appearing on behalf of the Revenue, respectively, are to be considered for reconsideration by the Court of Appeal. An expenditure on account of fluctuation in the foreign currency rates, when the Assessee is following a mercantile system of accounting, is deductible under section 37(1) of the Act. S.H. Kapadia, J., speaking for the Bench, described the factors which should be taken into account in order to find out if such an expenditure is deductible. The Court concluded that both the issues relating to the correctness or completeness of the account maintained by the Assessing Officer and whether it complied with the accounting standards laid down by the Central Government are resolved.


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 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. The loss suffered by the Assessee 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 occurred. The ratio of the said decision, with which we are in respectful agreement, squarely applies to the facts at hand.



JUDGEMENT

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. 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 Court held that under the unamended Section 43A of the Finance Act, 2002, actual payment was not a condition precedent for making necessary adjustment in the carrying cost of the fixed asset acquired in foreign currency. With effect from 1st April, 2003, such payment of the decreased/enhanced liability on account of fluctuation in foreign exchange rate has become required for making adjustment in carrying amount. The Court's decision settles the second issue as well and all appeals are set aside.



This article is written by Rashmi Jha of Galgotias University.

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