Section 43A: Special Provisions consequential to foreign exchange fluctuations
Before jumping to Tax Treatment of Foreign Exchange Fluctuation, let me first make you understand what Section 43A is all about.
Section 43A: Notwithstanding, anything contained in any other provision of this Act, where an assessee has acquired any asset in any previous year from a country outside India for the purpose of his business or profession and, in consequences of a change in the rate of exchange during any previous year after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as express in Indian Currency (as compared to the liability existing at the time of acquisition of the asset) at the time of making payment-
- towards the whole or a part of the cost of the asset; or
- towards repayment of the whole or a part of the money borrowed by him from any person directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset along with interest, if any,
the amount by which the liability as aforesaid is so increased or reduced during such previous year and which is taken into account at the time of making the payment, irrespective of the method of accounting adopted by the assessee, shall be added to, or, as the case may be, deducted from-
- the actual cost of the asset as defined in section 43(1); 0r
- the amount of expenditure of a capital nature referred to in section 35(1)(iv); or
- the cost of acquisition of a capital asset (not being a capital asset referred to in section 50) for the purpose of section 48
and the amount arrived at after such addition or deduction shall be taken to be 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 as aforesaid:
- Where the whole or any part of the liability aforesaid is met, not by the assessee, but, directly or indirectly, by any other person or authority, the liability so met shall not be taken into account for the purposes of this section.
- Where the assessee has entered into a contract with an authorized dealer for providing him with a specified sum in a foreign currency on or after a stipulated future date a the rate if 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 of the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset under this section shall, in respect of soc 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.
Analysis of section 43A
1. Section 43A applies only in respect of assets acquired from a country outside India through a loan in foreign currency or foreign supplier’s credit.
2. Section 43A shall not apply where an asset is purchased in India through a foreign currency loan.
3. The adjustments referred to in section 43A shall be made only in the previous year in which actual payment is made to:
- the foreign supplier or
- repay the foreign currency loan
4. The adjustment referred to in section 43A shall not made if the foreign currency loan/supplier’s credit is re-instated at the rates of exchange prevailing on 31st Match every year and no actual payment is made.
5. In the case of Arvind Mills Ltd., Supreme Court held that as per section 43A, the increase/decrease in liability at the time of payment has to be adjusted from actual cost of the asset. As per Supreme Court “Actual Cost” referred to in section 43A should be read as “Actual Cost minus Depreciation allowed till date”.
The adjustments referred in section 43A are as under:
If an asset is purchased from foreign with a foreign currency loan of $1,00,000 at the rate $1= Rs.40 i.e. Rs.40,00,000. Now if in case no actual payment is made till the year end then even if the rate of exchange is increased or decreased, no adjustments is required, only depreciation is calculated on Rs.40 lacs @ of 15% i.e. Rs.6 lacs (Additional depreciation is not considered) . In second year rate is increased say $1= Rs.42 and repayment of $10,000 is done till the year end then the cost of asset shall be increased by Rs.20,000 which is added in the WDV i.e. Rs.34 lacs and depreciation is calculated @ 15% on Rs.34,20,000 . On the other hand if rate of exchange is decreased say $1= Rs.38 and repayment of $10,000 is made then actual cost of asset is reduced by Rs.20,000 which shall be reduced from the WDV i.e. Rs.33,80,000 and depreciation is calculated accordingly.
Tax Treatment of Foreign Exchange Fluctuations
If foreign exchange fluctuations are on:
1. Revenue Account:
- Foreign Exchange Fluctuations on Revenue Account means on debtors of export, creditors for expenses payable abroad, then the foreign exchange fluctuations gains shall be taxable under the head of Profits and Gains of business or profession.
- Similarly, the foreign exchange fluctuations loss is deductible under section 37(1) while computing the income under the head “Profits and Gains of business or profession”.
- These foreign exchange fluctuations shall be taxable/deductible on accrual basis if the assessee is following accrual system of accounting.
2. Capital Account:
- Foreign exchange fluctuations on Capital Account means foreign currency loan taken to acquire asset, foreign exchange fluctuations on share capital issued abroad. The foreign exchange fluctuations gains shall be a capital receipt, which is not taxable.
- Similarly, foreign exchange fluctuations loss shall be Capital Loss, which shall have no tax treatment.
- It may be noted that if the foreign exchange fluctuations referred to in section 43A arises after the depreciable asset is transferred but the block of asset still exists, then the foreign exchange fluctuations shall be added to or deducted from the WDV of block of assets.
- If, however, the foreign exchange fluctuations referred to in section 43A arises after the block of assets ceases to exits, then there shal be not tax treatment for such foreign exchange fluctuations. Any gain shall be a Capital Receipt not taxable and any loss shall be capital loss which has no tax treatment.