ASSISTANT C.L.T., VADODARAversusELECON ENGINEERING CO. LTD.

                         [2010] 3 S.C.R. 108


A                  ASSISTANT C.l.T., VADODARA
                                    v.
                 ELECON ENGINEERING CO. LTD.
                  (Civil Appeal No. 2057 of 2010)
                         FEBRUARY 26, 2010
B
              [S.H. KAPADIA AND H.L. DAITU, JJ.]

         Income Tax Act, 1961: s.43A, Explanation 3 -
    Assessment year 1986-87 ~ Roll over premium charges paid
c   in respect of foreign exchange forward contracts - Treatment
    of - Held: Roll over charges represent the difference on
    account of change in foreign· exchange rates - Under
    Explanation 3 to s. 43A, if liability is incurred in foreign
    exchange by entering into forward contract for purchase of
0   fixed asset, gain or loss arising from such forward contract is
    required to be capitalised - s.43A applies to the entire liability
    remaining outstanding at the year-end, and it is nof restricted
    merely to the instalments actually paid during the year.

      The question which arose for consideration in these
E appeals was whether the roll over premium charges paid
  by the assessee for the assessment year 1986-87 in
  respect of foreign exchange forward contracts had to be
  capitalised in terms of Explanation 3 to Section 43A of the
  Income Tax Act, 1961.
F
      Allowing the appeal, the, Court

       HELD: 1. Exchange differences are required to b~
  capitalized if the liabilities are incurred for acquiring the.
  fixed asset, like, plant and machinery. It is the purpose for\
G which the loan is raised that is of prime significance. In
  order to ascertain whether the purpose of the loan is to
  finance the fixed asset or working capital, the relevant
  loan agreement and the correspondence between the
                                  108
H
     ASSISTANT C.l.T, VADODARA v. ELECON                 109
            ENGINEERING CO. LTD.
parties concerned are required to be looked into. In the        A
present case, the relevant contract and correspondence
were not produced by the assessee, therefore, the Court
proceeded on the basis that the purpose of the loan
taken by the assessee was to finance the purchase of
plant and machinery. [Para 8) [118-D-F]                         B

     CIT. v. Gujarat Alkalis and Chemicals Limited (2008) 2
sec 475, held inapplicable.
    India Cements Ltd. v. Commissioner of Income- Tax,
Madras, (1966) 60 ITR 52, referred to.                          C

      2. Section 43A of the Income Tax Act, 1961, before its
 substitution by a new Section 43A by Finance Act, 2002,
 was inserted by Finance Act, 1967 with effect from
 1.4.1967, after the devaluation of the rupee on 6th June,      D
 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                 Et
specifically for the purpose of acquiring an asset. The
Section has no application unless an asset was acquired
and ~he 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
                                                                F
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      G
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 th-e
increase or decrease in liability should be taken into
account to modify the figure of actual cost and, secondly,      H
    110     SUPREME COURT REPORTS              [2010] 3 S.C.R.


A 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
B Section 43A requires the cost to be recomputed in terms
  of Section 43A for the purposes of depreciation. 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
c 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
0
  Section 43A, as it stood at the relevant time, it was
  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
E 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
F by which the liability 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 indicated that during the relevant assessment
  year adjustment to the actual cost was required to be
G 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
H payment is made. Under Explanation 3 to Section 43A, if
     ASSISTANT C.1.T., VADODARA v. ELECON             111
            ENGINEERING CO. LTD.
the assessee had covered his liability in foreign exchange   A
by entering into forward contract with an authorized
dealer for the purchase of fixed assets, the gain or loss
arising from such forward contract was required to be
taken into account. [Para 9] [118-G-H; 119-A-H; 120-A-B]
                                                             B
     3. 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 C
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) indicated adverse fluctuations in the
exchange rate in respect of liabilities pertaining to the D
assets acquired. This Note clearly established existence
of adverse fluctuations in the exchange rate which made
the assessee opt for forward cover and which made the
assessee pays roll over charges. The word "adverse" in
the Note itself presupposed increase in the liability E
incurred by the assessee during the year ending 31st
December, 1986. 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 F
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. [Para 10] [121-A-F]
                    Case Law Reference:
                                                             G

    (1966) 60 ITR 52        referred to         Para 3
    (2008) 2 sec 475        held inapplicable   Para 6
                                                             H
-
        112      SUPREME COURT REPORTS                 [2010] 3 S.C.R


    A        CIVIL APPELLATE JURISDICTION : Civil Appeal No.
        2057 of 2010.

            From the Judgment & Order dated 21.7.2008 of the High
        Court of Gujarat at Ahmedabad in Tax Appeal No. 144 of 2001.
    B                                WITH
        C.A. No. 2058, 2059, 2060, 2061, 2062, 2063, 2064, 2065 of
        2010.

            Parag P. Tripathi, ASG, Kunal Bahrai, H. Raghavendra
    C   Rao, Sunita Rani Singh, B.V. Balaram Das for the Appellant.

             Pravin H. Parekh, Shakun Sharma, Sumit Goel, Pallavi
        Shrivastava, Rajat Nair (for Parekh & Co.) for the Respondent.

    o         The Judgment of the Court was delivered by

              S.H. KAPADIA, J. 1. Leave granted.

            2. This batch of civil appeals concerns the nature of roll
        over premium charge incurred by the assessee as also the
    E   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
    F   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
    G   foreign currency requi.red 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
    H
     ASSISTANT C.1.T., VADODARA v. ELECON                 113
     ENGINEERING CO. LTD. [S.H. KAPADIA, J.]
instalment due from time to time. The balance value of the A
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 B
 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    c
machinery), hence, it was not admissible for deduction under
Section 36(1 )(iii) or under Section 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
                                                                 0
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 E
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.
                                                                 F
     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 G
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   H
-
        114      SUPREME COURT REPORTS                 [2010] 3 S.C.R.


    A   filed an appeal(s) before the Gujarat High Court inter alia
        challengir.J the 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
    s   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
    C 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
    D 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
    E 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
    F exchange rate. The authorized dealer in tum 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
    G 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
    H exercise involved a cost for carrying forward the contracted
            ASSISTANT C.l.T., VADODARA v. ELECON                   115
            ENGINEERING CO. LTD. [S.H. KAPADIA, J.J
       foreign currency, which was not immediately required for A
       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, B
       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, c
       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 currency for payment of cost of asset or for payment of loan.
                                                                           0
       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 t~ken 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 E
       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 F
      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 G
      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 H


,..
    116      SUPREME COURT REPORTS                   [201 O] 3 S.C.R.


A   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 assessee has in fact done. The
    assessee has capitalized the actual rate difference and it
B 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
c   had rightly debited the roll over charges in its Profit & Loss
    Account under the Head Administrative Expenses - Insurance
    I 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
0
    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
E 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
F coming to the conclusion that roll over charges were not
    deductible under Section 36(1 )(iii) .then in that event such
    charge~ were deductible under Section 37 of the Act. In
    support of this contention, learned counsel for the assessee
    placed reliance on the judgment of this Court in CIT v. Gujarat
G Alkalis and Chemicals Limited, (2008) 2 SCC 4 75 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
H
    ASSISTANT C.l.T., VADODARA v. ELECON                   117
    ENGINEERING CO. LTD. [S.H. KAPADIA, J.]
stood at the relevant assessment years, as under:                 A

    "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 B
    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 C
    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 D
    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 E
    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, F
    and the amount arrived at after such addition or deauction ·
    shall be taken to be the actual cost of th~ 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.                               ·                     G
    ***   *** ***

    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 (7of1947),       H
    118       SUPREME COURT REPORTS                   [2010] 3 S.C.R.


A         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
B         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
c         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 incyrred for
\ acquiring the fixed asset, like plant and machinery. It is the
D purpose for which the loan is raised that is of prime
   significance. Whether the purpose of the loan is to finance the
   fixed as~et 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
E 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 proceeding on
  the basis that the purpose of the loan taken by the assessee
F 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
G 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 -tq pay the price
  of any asset payable in foreign exchange or to repay moneys
  borrowed in foreign currency specifically for the purpose of
H acquiring an asset. The Section has no application unless an
     ASSISTANT C.l.T., VADODARA v. ELECON                      119
     ENGINEERING CO. LTD. [S.H. KAPADIA, J.]
 asset was acquired and the liability existed, before the change       A
 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         B
 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,       c
 firstly, that the increase or decrease in liability should be taken
 into account to 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    0
 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,      E
 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        F
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            G
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            H
    120     SUPREME COURT REPORTS                   [2010) 3 S.C.R.


A   amount by which the liability 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
B   closinJ 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 a·djustment to the cost had to be donec>nly in the year in
    which actual payment is made. In thrS case, we are not
c   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 fixed
    asseet, the gain or loss arising from such forward contract was
    required to be taken into account
0
         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
E the change in the rate of exchange. According to the assessee,
    Section 43A, as it stood at the material time, applied only to
    cas.es where there existed a fluctuation in the rate of exchange
  . and sinee the roll over charge was paid to the authorized dealer
    by the assessee to avoid increase or reduction in liability on
F 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
G 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
H exchange. To answer this submission, one needs to keep in
      ASSISTANT C.l.T., VADODARA v. ELECON                      121
      ENGINEERING CO. LTD. [S.H. KAPADIA, J.]
  mind that during the relevant assessment years Section 43A A
  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 B
  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 c
  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 increase in
 the liability incurred by the assessee during the year ending 31st
  December, 1986. In the circumstances, we find no merit in the
                                                                      0
  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 Ei
. 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/ F
  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       G
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.        M
    122      SUPREME COURT REPORTS                  [2010] 3 S.C.R.


A         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
B 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
c · 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 debata.ble.

        13. We find no merit in the alternative submissions
D 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 c_ost of fixed asset. Hence, it
  is not necessary for this Court to give direction to the Tribunal,
E 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.

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

    D.G.                                            Appeal allowed.