Dr. B.P Saraf, J.:— By this reference under section 256(1) of the Income-tax Act, 1961, at the instance of the assessee, the Income-tax Appellate Tribunal has referred the following two questions of law to this court for opinion:

“(1) Whether, on the facts and in the circumstances of the case and in law, the Tribunal was right in holding that the exchange difference of Rs. 4,15,057, Rs. 4,61,319 being the additional liability paid on account of fluctuation in foreign exchange rate, in respect of the instalments payable for the machinery imported by the assessee under the deferred payment scheme, does not constitute revenue expenditure?

(2) Whether, on the facts and in the circumstances of the case and in law, the Tribunal is right in holding that the sums of Rs. 21,36,840, Rs. 4,89,502 do not constitute additional cost of machinery in terms of section 43A of the Income-tax Act, 1961?”

2. The assessee is a public limited company engaged in the manufacture of certain varieties of paper. For import of machinery from Germany, the assessee obtained a loan from the Industrial Finance Corporation of India which was to be repaid in instalments on specified dates. The amount of loan was fixed in terms of foreign currency and the assessee was to repay the rupee value thereof in instalments. The rupee value changed from time to time on account of fluctuations in foreign exchange rates. In the past, the assessee was claiming the additional foreign exchange liability arising in respect of instalments due in the year as revenue expenditure and this claim was being allowed on the basis of certain decisions of the Income-tax Appellate Tribunal. For the assessment years 1976-77 and 1977-78, such liability on account of exchange fluctuations came to Rs. 4,15,057 and Rs. 4,61,319, respectively. The Income-tax Officer rejected the claim of the assessee for deduction of these amounts in the computation of its income on the ground that it was an expenditure of capital nature. The claim of the assessee was, however, allowed by the Commissioner of Income-tax (Appeals).

3. The Revenue appealed to the Tribunal. The Tribunal reversed the order of the Commissioner of Income-tax (Appeals) and restored the order of the Income-tax Officer. The Tribunal was of the opinion that the loss on account of exchange fluctuations in the instant case was capital expenditure. The amount of loss on account of exchange fluctuations in respect of the instalments that fell due in the assessment years under reference was allowed to be added to the cost of the machinery for the purpose of computation of depreciation. The Tribunal, however, refused to allow capitalisation of the loss amounting to Rs. 21,36,840 and Rs. 4,89,502 on account of exchange fluctuations in respect of the outstanding amount of loan which did not fall due during the relevant, assessment years on the ground that this amount being not due at the material time, the additional liability on account of exchange fluctuations in respect of such outstanding loan liability was only notional and could not form part of the actual cost of the asset for the purpose of depreciation. Hence, this reference at the instance of the assessee.

4. So far as the first question is concerned, it is agreed by counsel for the parties that the additional liability on account of fluctuation in the foreign exchange rate in respect of liability incurred for the import of machinery by the assessee would not constitute revenue expenditure in view of the decision of the Supreme Court in Sutlej Cotton Mills Ltd. v. CIT, [1979] 116 ITR 1. We, therefore, answer the first question in the affirmative and in favour of the Revenue.

5. The only controversy that survives for consideration is the one raised in question No. 2. The contention of the assessee is that the additional liability on account of exchange fluctuations worked out with reference to the amount of loan outstanding on the last day of the accounting period at the then prevailing exchange rate has to be added to the actual cost of the machinery for the purpose of computation of depreciation for that year. In support of this contention reliance is placed on section 43A of the Income-tax Act, 1961.

6. The contention of counsel for the Revenue is that only that part of the additional liability which can be attributed to the instalments payable during the particular year can be added to the actual cost of the asset in that year and not the amount of loss computed with reference to the total outstanding liability on account of loan obtained for purchase of the machinery in question.

7. We have carefully considered the rival submissions. We find force in the submission of counsel for the assessee that the variation of the exchange rate affects the total liability of the assessee outstanding at the end of the previous year and the increase in the total liability due to the exchange rate fluctuations should be adjusted against the actual cost and not only the amount of increase relatable to the instalments falling due in the particular previous year. Under section 32 read with sub-sections (1) and (6) of section 43 of the Act, depreciation is to be allowed on the actual cost of the asset less all depreciation actually allowed in respect thereof in earlier years. The only controversy is regarding treatment of the enhancement of the undischarged liability consequent to exchange fluctuations. Similar problems did arise consequent to the devaluation of Indian rupee in the year 1966. Section 43A was specially enacted to provide for the treatment of a situation created by the change in the rate of exchange at any time after the acquisition of the asset. Section 43A, so far as relevant, reads as under:

“Section 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 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 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 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 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, 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.

Explanation 1.—In this sub-section, unless the context otherwise requires,—

(a) ‘rate of exchange’ means the rate of exchange determined or recognised by the Central Government for the conversion of Indian currency into foreign currency or foreign currency into Indian currency;

(b) ‘foreign currency’ and ‘Indian currency’ have-the meanings respectively assigned to them in section 2 of the Foreign Exchange Regulation Act, 1947 (VII of 1947)…

(2) The provisions of sub-section (1) shall not be taken into account in computing the actual cost of an asset for the purpose of the deduction on account of development rebate under section 33.”

(emphasis* supplied)

8. From a reading of the above section it is clear that where an assessee had borrowed money for acquisition of any asset from a country outside India and in consequence of the change in the rate of exchange at any time after the acquisition of such asset there is an increase in the liability of the assessee as expressed in Indian currency in repayment of the whole or a part of the moneys borrowed by him from any person in any foreign currency specifically for the purpose of acquiring such asset, the amount by which the liability is so increased shall be added to the actual cost of the asset as defined in clause (1) of section 43 of the Act. This section specially provides for the treatment of increased liability of the assessee as expressed in Indian currency for repayment of the moneys borrowed by him from any person in foreign currency specifically for the purposes of acquiring the asset. In the present case, the assessee had acquired a capital asset from a country outside India for the purpose of its business by making payment in foreign currency. For this specific purpose, it borrowed moneys in foreign currency from the Industrial Finance Corporation of India and the liability in respect thereof was outstanding at the end of the relevant previous years. This liability had increased on account of change in the rate of exchange. Thus, section 43A fully applies and the additional liability so created had to be added to the cost of acquisition. This view is also in consonance with the clarification issued by the Ministry of Finance, by its letter of January 4, 1967, addressed to the Federation of Indian Chambers of Commerce and Industry, the extracts of which have been reproduced in the judgment of the Supreme Court in Commissioner Of Income Tax, Gujarat v. Arvind Mills Ltd.., [1992] 193 ITR 255, at page 266. Para 2 of the above letter, which is relevant for the present purpose, is reproduced below:

“The Government agrees that for the purpose of the calculation of depreciation allowance, the cost of capital assets imported before the date of devaluation should be written off to the extent of the full amount of the additional rupee liability incurred on account of devaluation and not what is actually paid from year to year. The proposed legal provision in the matter is intended to be framed on this basis.”

9. Section 43A also was considered at length by the Supreme Court in Arvind Mills' case, [1992] 193 ITR 255. It was observed (at page 270):

“It is no doubt true that, but for the new section, various kinds of arguments could have been raised regarding the year in which such liability should be adjusted. But, we think, arguments could also have been raised as to whether the actual cost calls for any adjustment at all in such a situation. It could have been contended that the actual cost can only be the original purchase price in the year of acquisition of the asset and that, even if there is any subsequent increase in the liability, it cannot be added to the actual cost at any stage and that, for the purposes of all the statutory allowances, the amount of actual cost once determined would be final and conclusive. Also section 43A provides for a case in which, as in the present case, the assessee has completely paid for the plant or machinery in foreign currency prior to the date of devaluation but the variation in exchange rate affects the liability of the assessee (as expressed in Indian currency) for repayment of the whole or part of the monies borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purposes of acquiring the asset. It is a moot question as to whether, in such a case, on general principles, the actual cost of the assessee's plant or machinery would be the revised liability or the original liability. This is also a situation which is specifically provided for in the section…. As we had said earlier, there is no need to speculate on all the problems that might have arisen if section 43A has not been there because the statute has resolved these problems. It lays down, firstly, that the increase or decrease in liability should be taken into account to modify the figure of actual cost and secondly that such adjustment should be made in the year in which the increase or decrease in liability arises on account of the fluctuation in the rate of exchange.”

10. In view of the foregoing discussion and the decision of the Supreme Court referred to above, it is clear that the Tribunal was not justified in holding that the sums of Rs. 21,36,840 and Rs. 4,89,502 did not constitute additional cost of machinery imported by the assessee for the purpose of depreciation. We are of the clear opinion that in view of section 43A of the Act, these amounts are to be added in the cost of acquisition of the asset for the purpose of depreciation for the assessment years concerned. We, therefore, answer question No. 2 in the negative, i.e, in favour of the assessee and against the Revenue.

11. Under the facts and circumstances of the case, we make no order as to costs.