REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 2057  of 2010

(Arising out of S.L.P. (C) No.8363 of 2009)

Assst. C.I.T., Vadodara      … Appellant (s)

Versus

Elecon Engineering Co. Ltd.        … Respondent(s) WITH

Civil Appeal No. 2058 of 2010 arising out of SLP(C) No.8898 of 2009  Civil Appeal No. 2059 of 2010 arising out of SLP(C)  No.8905 of 2009 Civil Appeal No. 2060 of 2010 arising out of SLP(C)  No.9264 of 2009 Civil Appeal No. 2061 of 2010 arising out of SLP(C)  No.9136 of 2009 Civil Appeal No. 2062 of 2010 arising out of SLP(C) No.13041of 2009 Civil Appeal No. 2063 of 2010 arising out of SLP(C)  No.9135 of 2009 Civil Appeal No. 2064 of 2010 arising out of SLP(C) No.20622 of 2009 Civil Appeal No. 2065 of 2010 arising out of SLP(C) No.16721 of 2009

J U D G M E N T

S. H. KAPADIA, J.

Leave granted.

2. This batch of civil appeals concerns the nature of roll over premium  

charge incurred by the assessee as also the scope and applicability of Section  

43A of the Income Tax Act, 1961 (“the Act” for short), in the context of  

such charges.

3. The lead matter in this batch of civil appeals is civil appeal arising out  

of  S.L.P.(C)  No.8363  of  2009.   It  concerns  assessment  year  1986-87.  

Assessee  is  a  manufacturing  company.   It  manufactures  gears  and  

mechanical handling equipments.  It procured a foreign currency loan for  

expansion of existing business.  Since the repayment of loan was stipulated  

in instalments, assessee desired to ensure that foreign currency required for  

repayment  of  the  loan  be  obtained  at  a  pre-determined  rate  and  cost.  

Accordingly,  the  assessee  booked  forward  contracts  with  Citibank  for  

delivery  of  the  required  foreign  currency  on  the  stipulated  dates.   The  

contract was entered into for entire outstanding amount and the delivery of  

foreign currency was obtained under the contract for instalment due from  

time to time.  The balance value of the contract, after deducting the amount  

withdrawn towards repayment, was rolled over for a further period up to the  

date  of  the  next  instalment.   Assessee  filed  its  return  of  income  for  

assessment year 1986-87 on 30.6.1986.  A revised return was filed by it on  

27.3.1989  declaring  a  total  income  of  Rs.2,10,08,640/-.   The  A.O.  

disallowed an amount of Rs.8,86,280/-, being the roll over premium charges  

paid by the  assessee  in  respect  of  foreign exchange forward contracts  to  

Citibank  N.A.  on  the  ground  that  the  said  charges  were  incurred  in  

connection with the purchase of a capital asset (plant and machinery), hence,  

it was not admissible for deduction under Section 36(1)(iii) or under Section  

2

37 of the Act.   On appeal,  the CIT (A) held that  the roll  over premium  

charge(s) incurred by the assessee was allowable as it was incurred by the  

assessee to mitigate the risk involved in higher payment because of adverse  

fluctuation of rate of exchange.  According to CIT (A), roll over premium  

charge(s) constituted an expenditure incurred for raising loans on revenue  

account, hence, the said expenditure was allowable under the Act.  It may be  

noted that CIT (A) did not refer to a specific section under which assessee  

was entitled to such deduction.  The CIT(A) did not examine Section 43A of  

the said Act.  The CIT(A) relied upon the judgment of the Supreme Court in  

support of its findings in the case of India Cements Ltd. v. Commissioner  

of Income-Tax, Madras – (1966) 60 ITR 52.

4. Vide order dated 21.3.2001, the Tribunal held that roll over premium  

charges (carry forward charges) were required to be paid to the authorized  

dealer as consideration for permitting the unutilized amount of the contract  

(balance value of the contract) to be availed of at a latter date and in the  

circumstances  roll  over  premium  charges  had  to  be  capitalized  under  

Explanation 3 to Section 43A of the said Act.  Consequently, the Tribunal  

upheld the order of the assessment.  

5. Aggrieved  by  the  decision  of  the  Tribunal,  the  assessee  filed  an  

appeal(s)  before  the  Gujarat  High  Court  inter  alia  challenging  the  

3

capitalization of the roll over charges paid in respect of foreign currency.  

The  said  appeal(s)  was  allowed  by  the  High  Court  which  came  to  the  

conclusion that the roll over premium charge(s) paid by the asssessee was in  

the nature of interest or committal charge(s), hence, the said charges were  

allowable under Section 36(1)(iii) of the said Act, hence this civil appeal(s).

6. According to the Department, the roll over charge was required to be  

capitalized  in  view of  Section  43A of  the  Act.   In  answer  to  this  basic  

argument, Mr. P.H. Parekh, learned senior counsel appearing on behalf of  

the assessee  submitted that  the roll  over contract  mechanism came to be  

devised because at the relevant time forward contracts could be entered into  

for a period of six months ahead of the required delivery of foreign currency  

for payment of instalments.  However, the “term loan agreements” stipulated  

repayment  schedule  extending  beyond  the  six  months’  period.  

Consequently,  there  arose  a  need  for  a  mechanism  whereby  foreign  

currencies required to be remitted to meet the instalments falling due beyond  

six  months  were  made  available  at  a  pre-determined  exchange  rates.  

Accordingly,  the  roll  over  contract  mechanism  came  to  be  devised.  

Assessee  accordingly  entered  into  a  contract  with  the  foreign  exchange  

authorized  dealer  (Citibank)  for  providing  the  entire  amount  of  foreign  

currency outstanding at an appropriate exchange rate.  The authorized dealer  

4

in turn agreed to provide, out of such contracted sum, such amount as may  

be necessary to meet the instalments on due dates and to carry forward the  

unutilized portion of the foreign currency contracted to meet the subsequent  

payments.   Accordingly,  out  of the total  foreign currency contracted and  

outstanding,  as  and  when  any  instalment  became  due,  the  borrower  

deposited the rupee equivalent of the instalment due at the pre-determined  

rate and carried forward or rolled over the balance unutilized amount of the  

contracted  foreign  currency.   According  to  the  assessee,  this  exercise  

involved a cost for carrying forward the contracted foreign currency, which  

was not immediately required for repayment.  The said cost was called “the  

roll  over  charges”.   According  to  the  assessee,  such  cost  is  akin  to  the  

interest  payable on the rupee equivalent,  which the authorized dealer had  

invested in holding the foreign currency at the borrower’s account.   This  

argument was accepted by the High Court.  Thus, according to the assessee,  

the  said  roll  over  charges  incurred  by  the  assessee  during  the  relevant  

assessment years was altogether different from increase in cost on account of  

exchange rate fluctuation as envisaged under Section 43A and Explanation 3  

and, consequently, according to the assessee, in this case Section 43A was  

not applicable.  According to the assessee, Section 43A, as it stood at the  

relevant time, applied only when there was an increase or reduction in the  

liability of the assessee consequent upon change in the rate of exchange of  

5

currency for payment of cost of asset or for payment of loan.  According to  

the assessee, the roll over premium was not paid because of any fluctuation  

in the rate of exchange.  It was paid as a premium to the dealer for the risk  

taken by the dealer in holding the foreign exchange at pre-determined rate  

on  borrower’s  account.   According to  the  assessee,  roll  over  charge  had  

nothing to do with the fluctuation in the rate of exchange and was payable  

even if  there was no fluctuation in the liability of  the assessee in Indian  

currency for making payment towards repayment of the money borrowed.  

Therefore,  according  to  the  assessee,  Section  43A  was  not  attracted.  

According  to  the  assessee,  the  second reason why  Section  43A was  not  

applicable was because there was no increase or reduction in the liability for  

payment of cost of asset as a result of the change in the rate of exchange.  

On the contrary, according to the assessee, the said payment was made to  

avoid the increase or reduction in liability as a consequence of the change in  

the rate of exchange.  According to the assessee, only certain charges were  

required to be added to the actual cost under Explanation 3 to Section 43A.  

According to the assessee, the roll over charge was not required to be added  

to  the  actual  cost  nor was it  required to be capitalized as  such roll  over  

charge had nothing to do with the actual cost of the asset.  According to the  

assessee, when a forward contract is entered into with an authorized dealer,  

then, only at the forward rate, assets can be capitalized.  This is what the  

6

assessee  has  in  fact  done.   The  assessee  has  capitalized  the  actual  rate  

difference  and  it  claimed  depreciation  thereof.   The  only  controversy,  

according to the assessee, is in respect of the roll over charges.  According to  

the  assessee,  Explanation  3 does not  talk  of  any roll  over  charges  to  be  

capitalized  under  Section 43A.  Hence,  according to  the  assessee,  in  the  

present  case,  the assessee had rightly debited the roll  over charges in its  

Profit & Loss Account under the Head Administrative Expenses – Insurance  

/  Bank  Charges.   According  to  the  assessee,  roll  over  charges  are  

commitment charges.  They are in the nature of interest.  They are paid in  

relation to the amounts borrowed.  They are akin to the interest payable on  

the rupee equivalent, which the authorized dealer had invested in holding the  

foreign currency on the borrower’s account.  For the afore-stated reasons, it  

was  submitted  that  roll  over  charges  were  allowable  as  deduction  under  

Section 36(1)(iii) of the Act.  According to the assessee, roll over charges  

were also meant for covering a risk on account of fluctuations between the  

rupee and the contracted foreign currency.  Such risk is built into the roll  

over  charges,  hence,  such  charges  were  allowable  as  deduction  under  

Section 36(1)(iii) of the Act.  In the alternative, on behalf of the assessee, it  

was submitted that in the event of this Court coming to the conclusion that  

roll over charges were not deductible under Section 36(1)(iii) then in that  

event such charges were deductible under Section 37 of the Act.  In support  

7

of this contention, learned counsel for the assessee placed reliance on the  

judgment of this Court in CIT v. Gujarat Alkalis and Chemicals Limited,  

(2008)  2  SCC  475 which  held  that  commitment  and  insurance  charges  

payable by the assessee were admissible deductions under Section 37 of the  

Act.

7. At the outset, we quote hereinbelow Section 43A, as it stood at the  

relevant assessment years, as under:

“43A. Special  provisions  consequential  to  changes  in  rate  of  exchange  of  currency—(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 towards the whole or a part of the cost of the  asset  or  for  repayment  of  the  whole  or  a  part  of  the  moneys borrowed by him from any person,  directly or  indirectly,  in  any  foreign  currency  specifically  for  the  purpose of acquiring the asset (being in either case the  liability existing immediately before the date on which  the  change  in  the  rate  of  exchange  takes  effect),  the  amount by which the liability aforesaid is so increased or  reduced during the previous year shall be added to, or, as  the case may be, deducted from, the actual cost of the  asset as defined in clause (1) of section 43 or the amount  of  expenditure of a capital  nature referred to in clause  (iv) of sub-section (1) of section 35 or in section 35A or  in clause (ix) of sub-section (1) of section 36, or, in the  case of a capital asset (not being a capital asset referred  to in section 50), the cost of acquisition thereof for the  purposes of section 48, and the amount arrived at after  such addition or deduction shall be taken to be the actual  

8

cost of the asset or the amount of expenditure of a capital  nature or, as the case may be, the cost of acquisition of  the capital asset as aforesaid.

*** *** ***

Explanation  3:  Where  the  assessee  has  entered  into  a  contract with an authorised dealer as defined in section 2  of  the  Foreign  Exchange  Regulation  Act,  1947  (7  of  1947),  for  providing  him  with  a  specified  sum  in  a  foreign currency on or after a stipulated future date at the  rate of exchange specified in the contract to enable him  to meet the whole or any part of the liability aforesaid,  the amount, if any, to be added to, or deducted from, the  actual cost of the asset or the amount of expenditure of a  capital  nature  or,  as  the  case  may  be,  the  cost  of  acquisition  of  the  capital  asset  under  this  sub-section  shall, in respect of so much of the sum specified in the  contract  as  is  available  for  discharging  the  liability  aforesaid,  be  computed  with  reference  to  the  rate  of  exchange specified therein.”

8. Before analysing the Section quoted above,  by way of preface,  we  

need to state that exchange differences are required to be capitalized if the  

liabilities are incurred for acquiring the fixed asset, like plant and machinery.  

It is the purpose for which the loan is raised that is of prime significance.  

Whether the purpose of the loan is  to finance the fixed asset  or working  

capital is the question which one needs to answer and in order to ascertain  

that purpose, the facts and circumstances of the case, including the relevant  

loan agreement and the correspondence between the parties concerned are  

required to be looked into.  In the present case, it appears that the relevant  

contract and correspondence has not been produced by the assessee.  We are  

9

proceeding on the basis that the purpose of the loan taken by the assessee  

from ICICI was to finance the purchase of plant and machinery.

9. Section  43A,  before  its  substitution  by  a  new  Section  43A  vide  

Finance  Act,  2002,  was  inserted  by  Finance  Act,  1967 with  effect  from  

1.4.1967, after  the devaluation of  the rupee on 6 June,  1966.   It  applied  

where as a result of change in the rate of exchange there was an increase or  

reduction in the liability of the assessee in terms of the Indian rupee to pay  

the  price  of  any  asset  payable  in  foreign  exchange  or  to  repay  moneys  

borrowed in foreign currency specifically for the purpose of acquiring an  

asset.  The Section has no application unless an asset was acquired and the  

liability  existed,  before  the  change  in  the  rate  of  exchange.   When  the  

assessee  buys  an  asset  at  a  price,  its  liability  to  pay  the  same  arises  

simultaneously.  This liability can increase on account of fluctuation in the  

rate  of  exchange.   An  assessee  who  becomes  the  owner  of  an  asset  

(machinery) and starts using the same, it becomes entitled to depreciation  

allowance.  To work out the amount of depreciation, one has to look to the  

cost of the asset in respect of which depreciation is claimed.  Section 43A  

was introduced to mitigate hardships which were likely to be caused as a  

result of fluctuation in the rate of exchange.  Section 43A lays down, firstly,  

that  the  increase  or  decrease  in  liability  should be taken into  account  to  

1

modify the figure of actual cost and, secondly,  such adjustment should be  

made in the  year in  which the  increase or  decrease  in liability  arises  on  

account  of  fluctuation in the rate  of  exchange.   It  is  for  this  reason that  

though Section 43A begins  with  a  non-obstante  clause,  it  makes  Section  

43(1) its integral part.  This is because Section 43A requires the cost to be  

recomputed  in  terms  of  Section  43A  for  the  purposes  of  depreciation  

(Sections  32  and  43(1)).   A  perusal  of  Section  43A makes  it  clear  that  

insofar as the depreciation is concerned, it has to be allowed on the actual  

cost of the asset, less depreciation that was actually allowed in respect of  

earlier years.  However, where the cost of the asset subsequently increased  

on account of devaluation,  the written down value of the asset has to be  

taken  on  the  basis  of  the  increased  cost  minus  the  depreciation  earlier  

allowed  on  the  basis  of  the  old  cost.   One  more  aspect  needs  to  be  

highlighted.  Under Section 43A, as it stood at the relevant time, it was inter  

alia provided that where an assessee had acquired an asset from a country  

outside  India  for  the  purposes  of  his  business,  and  in  consequence  of  a  

change in the rate of exchange at any time after such acquisition, there is an  

increase or reduction in the liability of the assessee as expressed in Indian  

currency for making payment towards the whole or part of the cost of the  

asset or for repayment of the whole or part of the moneys borrowed by him  

for the purpose of  acquiring the asset,  the amount by which the liability  

1

stood increased or reduced  during the previous year shall  be added to or  

deducted from the actual cost of the asset as defined in Section 43(1).  This  

analysis indicates that during the relevant assessment year adjustment to the  

actual cost was required to be done each year on the closing date, i.e., year-

end.  Subsequently, Section 43A underwent a drastic change by virtue of a  

new Section 43A inserted vide Finance Act, 2002.  Under the new Section  

43A such adjustment to the cost had to be done only in the year in which  

actual payment is made.  In this case, we are not concerned with the position  

emerging after Finance Act, 2002.  Under Explanation 3 to Section 43A, if  

the assessee had covered his liability in foreign exchange by entering into  

forward  contract  with  an  authorized  dealer  for  the  purchase  of  foreign  

exchange, the gain or loss arising from such forward contract was required  

to be taken into account.   

10. In the present case, one of the main arguments advanced on behalf of  

the assessee before us was that Section 43A was not applicable because roll  

over  charge  stood  paid  to  avoid  increase  or  reduction  in  liability  as  a  

consequence  of  the  change  in  the  rate  of  exchange.   According  to  the  

assessee, Section 43A, as it stood at the material time, applied only to cases  

where there existed a fluctuation in the rate of exchange and since the roll  

over  charge  was  paid  to  the  authorized  dealer  by  the  assessee  to  avoid  

1

increase or reduction in liability on account of such fluctuation, Section 43A  

read with Explanation 3 thereto would not apply to such roll over charges.  

We  find  no  merit  in  this  argument  advanced  on  behalf  of  the  assessee.  

According  to  the  assessee,  the  cost  for  carrying  forward  the  contracted  

foreign currency, not immediately required for repayment, is called the roll  

over charge(s).  As stated above, according to the assessee, Section 43A was  

not applicable in this case as there was no increase or reduction in liability  

because such roll over charges were paid to avoid increase or reduction in  

liability consequent upon change in the rate of exchange.  To answer this  

submission, one needs to keep in mind that during the relevant assessment  

years Section 43A applied to the entire liability remaining outstanding at the  

year-end, and it was not restricted merely to the instalments actually paid  

during the year.  Therefore, at the relevant time, the year-end liability of the  

assessee had to be looked into.   Further,  it  cannot be said that  roll  over  

charge has nothing to do with the fluctuation in the rate of exchange.  In the  

present case, the Notes to the Accounts for the year ending 31st December,  

1986 (Schedule 17) indicates adverse fluctuations in the exchange rate in  

respect  of  liabilities  pertaining to  the assets  acquired.   This  Note  clearly  

establishes  existence  of  adverse  fluctuations  in  the  exchange  rate  which  

made the assessee opts for forward cover and which made the assessee pays  

roll  over  charges.   The  word  “adverse”  in  the  Note  itself  presupposes  

1

increase in the liability incurred by the assessee during the year ending 31st  

December, 1986.  In the circumstances, we find no merit in the contention of  

the assessee that roll over charges have nothing to do with the fluctuation in  

the  rate  of  exchange.   Lastly,  in  this  case  we  are  concerned  with  

capitalization of exchange difference in respect of acquisition of fixed assets  

acquired  from  abroad.   According  to  Indian  Accounting  Standards  by  

Dolphy D’Souza, roll over charges are indicative of the increase or decrease  

in the liability of the company in the next specified period, generally of six  

months.   Roll over charges represent the difference arising on account of  

change  in  foreign  exchange  rates.   Roll  over  charges  paid/  received  in  

respect  of  liabilities  relating  to  the  acquisition  of  fixed  assets  should  be  

debited/  credited  to  the  asset  in  respect  of  which  liability  was  incurred.  

However, roll over charges not relating to fixed assets should be charged to  

the Profit & Loss Account. [See page 325]

11. Before concluding, we may state that this judgment is confined to the  

facts of the present case.  We may also clarify that the judgments cited on  

behalf of the assessee concerning commitment charges, warranty charges,  

etc., do not apply to the present case.  None of these judgments deal with roll  

over charges.  Hence, it is not necessary to discuss those judgments.

1

12. An alternative argument was advanced on behalf of the assessee that  

in the event this Court holds that roll over charges are to be capitalized in  

terms of Explanation 3 to Section 43A as it stood prior to assessment year  

2003-04,  then,  in  that  event  the  Tribunal  may  be  directed  to  grant  

depreciation allowance on the written down value of the asset not only for  

the concerned years but also for the subsequent years till the entire value of  

the  asset  is  written  off.   According  to  the  assessee,  such  a  direction  is  

required to be given because the depreciation, according to the assessee, is  

available even for the assessment years after AY 1994-95.  On behalf of the  

assessee it was further submitted, as and by way of alternative submission,  

that the Department may not be allowed to charge interest or penalty as the  

issue involved is debatable.   

13. We find no merit in the alternative submissions advanced on behalf of  

the assessee.  The Tribunal while holding that roll over charges are required  

to be adjusted in the carrying amount of fixed asset, has allowed the assessee  

the benefit of depreciation on the adjusted cost of fixed asset.  Hence, it is  

not necessary for this Court to give direction to the Tribunal, as sought by  

the assessee.  On the facts and circumstances there is no question of this  

Court directing dispensation from payment of interest and penalty.

1

14. For  the  afore-stated  reasons,  we  find  merit  in  this  batch  of  civil  

appeals filed by the Department and set aside the impugned judgment of the  

High Court.   Accordingly,  the  civil  appeals  filed  by  the  Department  are  

allowed with no order as to costs.  

……………………………J.                                      (S.H. KAPADIA)

……….………………….J.                                   (H.L. DATTU)   

New Delhi; February 26, 2010.

1