Section 43A- Change in rate of exchange of currency- Implications

The section 43A provides as under:-

1.       Notwithstanding anything contained in other provision of the Act- Overriding all other provision of Income Act

2.       Assessee acquired asset in any previous year from country outside India

3.       For the purpose his business or profession

4.       On account of change in rate of exchange, there is increase or decrease in liability of assessee in Indian Currency, as compared to liability existing at the time of acquisition of asset, at the time of making payment towards:-

a)      Whole or part of the cost of asset

b)      Repayment of the whole or part of  the moneys borrowed in foreign currency for acquiring the asset along with interest if any

5.       The increase or decrease in liability in Indian currency shall be added or deducted from:-

a)      Actual Cost of asset as defined u/s 43(1)

b)      Cost of acquisition of a capital asset (not being a capital asset referred to in section 50)

c)       Ohers

Implications

1.       Interest payable on money borrowed in Foreign Currency

Ø  Suppose assessee borrow US$ 1,0,000 for purchase of asset outside India on1/4/2011. The money is repayable in US$ 20,000 half yearly along with interest @ 3%. The Interest payable is US$ 4500 over tenure of loan (US$ 1500 on 30/9/11 and US$ 1200 on 31/3/2012).

Ø  The rate of exchange on 1/4/2011 is Rs. 45. Further assets was put to use on 1/10/2011

Ø  Suppose rate of exchange on 30/9/2011 and 31/3/2012 is Rs. 50 & 52 respectively

Ø  Treatment of Interest in First year will be as under:-

a)      Interest for period 1/4/2011 – 30/9/2011

·         Original Liability based on rate of exchange as at 1/4/2011 = US$ 1500 * 45 = Rs. 67,5000 – Will be not be allowed as revenue expenditure u/s proviso to section 36(1)(iii), may be capitalised

·         Additional Liability – US$ 1500 *5 (50-45) = 7,500 - Will be capitalised to cost of an asset u/s 43A.

b)      Interest for period 1/10/2011 – 31/3/2012 and for subsequent period (after asset is put to use)

·         Original Liability based on rate of exchange as at 1/4/2011 = US$ 1200 * 45 = Rs. 54,000 – Will be charged to Revenue by virtue of explanation 8 to section 43(1)

·         Additional Liability – US$ 1200 *7 (52-45) = 8,400 - Will be capitalised to cost of an asset u/s 43A, since it override any other provision of Act, including explanation 8 to section 43(1).

2.       Interest payable on deferred payment to Seller.

Ø  Section 43A provides for specific treatment of increase or decrease in interest liability on account exchange fluctuation (additional interest), when money is specifically borrowed for acquisition of asset

Ø  Since no money is borrowed, additional interest will not be regulated by section 43A and will be governed by other provisions of Act- Section 37, explanation  8 to section 43(1)

3.       Additional Depreciation u/s 32(1)(iia)

Ø  Section 32(1)(iia) provides for additional depreciation @ 20% on actual cost of prescribed plant & machinery

Ø  As per section 43A on account of  exchange rate fluctuations , actual cost of asset will be increased or decreased every year in which foreign liability is paid

Ø  Does it means, assessee will keep on adjusting additional depreciation every year in which such increase or decrease is added or reduced from actual cost of asset?

4.       Disposal of Asset acquired from outside India, but Block of asset exist

Ø  Assessee acquires an asset outside India on 1/10/2011, which is falling under block of assets having 15% rate of depreciation

Ø   On 1/4/2012, assessee sold such an asset, but said block still exist.

Ø  Subsequently on account of exchange rate fluctuation, assessee paid additional sum to vendor as compared to amount recorded at the time of acquisition of asset

Ø  Since asset does not exist, will the additional amount be added to block of asset or will be charged to revenue or will be dead cost to assessee?

Ø  However if there is any amalgamation or demerger, whereby asset is transferred to amalgamated or resulting company, actual cost in the hands of amalgamated or resulting company will also considered sum paid on account of exchange rate fluctuation by amalgamating or demerged company by virtue of explanation 7 and 7A of section 43(1).

5.       Cessation of Block, but asset exists.

Ø  Assessee acquires an asset outside India on 1/10/2011, which is falling under block of assets having 15% rate of depreciation

Ø  On 1/4/2012, assessee sold other asset of bloc, as a result value of block reduced to ZERO

Ø  Subsequently on account of exchange rate fluctuation, assessee paid additional sum to vendor as compared to amount recorded at the time of acquisition of asset

Ø  Since block does not exist, will the additional amount be will be charged to revenue or will be dead cost to assessee?