(1998) 231 ITR 285 (SC)
Computation of actual cost of assets; capitalising the impact of change in foreign exchange rates
No. The cost of an asset and the manner in which the purchase price is raised and repaid are two distinct matters. Fluctuation in the exchange rate on repaying the loan does not alter the actual cost of the asset.
Does a loss arising on repayment of a foreign currency loan, taken to acquire plant, increase the actual cost of that plant for depreciation and related purposes?
The company had acquired plant and machinery, funding the acquisition through borrowings denominated in foreign currency. The rupee subsequently depreciated, so that repaying the loan required a larger rupee outlay than the amount originally reflected when the asset was acquired. The company sought to add that additional rupee burden to the actual cost of the plant, which would have increased the base on which depreciation and other allowances were computed. The Revenue declined, holding that the cost of the asset was fixed at acquisition and that the terms on which the purchase price had been financed were a separate matter.
The claim was rejected in assessment and the matter proceeded by reference to the High Court, which decided against the company. The appeal came before the Supreme Court, which considered the relationship between the cost of an asset and the financing arrangements used to acquire it.
For the assessee
The true economic cost of acquiring the plant is what the company ultimately had to part with, and that figure was increased by the exchange movement on the borrowing raised for the purchase. Confining the cost to the rupee figure recorded at acquisition understates what the asset actually cost the business.
For the Revenue
The cost of an asset is what the assessee paid to acquire it. How that payment was funded — from reserves, from a rupee loan, or from a foreign currency loan — is a matter between the assessee and its lenders. A loss on repaying a loan is a consequence of the financing arrangement, not an addition to the price of the asset.
The Court held that the cost of an asset and the liability to repay the money borrowed to acquire it are distinct and must not be conflated. When the plant was acquired, the price was ascertained and the asset entered the business at that cost. The loan raised to fund the purchase created a separate obligation between the company and its lender, and the rupee burden of discharging that obligation varied with the exchange rate. That variation affected the cost of servicing the borrowing; it did not retrospectively change what the plant had cost. The Court observed that the position would be otherwise only where the statute expressly so provides — as the legislature had done by enacting a specific provision dealing with the capitalisation of exchange differences on liabilities incurred for acquiring assets from outside India — and that such a provision, being a departure from the general principle, operates within its own terms and cannot be extended by analogy. Absent such a provision applying on the facts, the general rule governed and the actual cost stood unchanged.
The IT Act 2025 continues the same structure: Section 39 computes the actual cost of assets and Section 42 provides expressly for capitalising the impact of exchange rate changes, with Section 43 governing foreign exchange fluctuation gains and losses more generally. This decision remains the statement of the general principle against which those specific provisions operate, and is the starting point whenever a taxpayer seeks to build financing costs into the cost base of an asset.