1.79 Query
Foreign Currency Transaction Company ‘A’ has purchased machinery worth approximately 11 lakh Swiss Francs in the month of May 1980, on deferred payment terms of 180 days. The Company’s year ended on 31st July, 1980. The above machinery was valued at the rate prevailing on 31st May, 1980, i.e. at the time documents were negotiated. On the due date in November 1980, the company paid Rs.8 lakhs. The difference was due to exchange rate favourable to the company. The party’s account which was credited as on 31st May, 1980 is showing a credit balance of Rs.3 lakhs as on 31.11.81 after paying the party, which is obviously not payable to the supplier. The company could have bought the currency in a forward contract at the time of purchase of machine. But, the company took risk and waited till the date of payment and made a gain of Rs. 3 lakhs. Kindly suggest accounting treatment to the above transaction taking the following into account:
1. Whether as per the various acts prevailing in India, is it necessary to give effect to the gain of Rs. 3 lakhs to the particular asset against the above payment.
2. Whether the company can treat the amount (Rs. 3 lakhs) as miscellaneous income and keep the value of the asset same as debited earlier.
3. How such transactions are treated by the Income-tax authorities. If any case law is there, please give references and details.
Opinion October 19, 1981
The opinion of the Committee is as follows:
(1) (a) In terms of the marginal note in the column headed “Instructions in accordance with which assets should be made out” in Part-I A of Schedule VI to the Companies Act, 1956, where in consequence of a change in the rate of exchange at any time after the acquisition of the machinery, there has been a reduction in “the liability of the company, 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 money borrowed by the company 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 is so reduced during the year, shall be deducted from the cost, and the amount arrived at after such deduction “shall be taken to be the cost of the fixed asset”. It is therefore necessary for the company to deduct the gain of Rs. 3 lakhs arising out of the foreign exchange rate fluctuation from the value of the concerned asset.
(b) This opinion of the Committee also accords with the decisions in the cases of Union Carbide (India) Ltd. Vs. C.I.T. (130 ITR 351) and Arvind Mills Ltd. Vs. C.I.T. (1978-112 ITR 64) decided by the Calcutta High Court and the Gujarat High Court respectively.
(2) In view of the reply to Query (1) as given above, the reply to Query (2) is in the negative.
(3) In view of Rule 3 of the Expert Advisory Service Rules, the Committee expresses its inability to express any opinion on Query (3) of the querist. ____________________ |