International Accounting Standards Committee has also revised its accounting standard IAS 21 titled "The effects of changes in foreign exchange rates". These contain accounting principles to be followed for translating foreign currency transactions in the light of Indian and international accounting standards.

Accounting Standard II (AS II) (Revised) of the ICAI provides for the effects of changes in foreign exchange rates, among others, in regard to acquisition or disposition of assets where liability is incurred by way of foreign currency loan etc. In such situations, the transactionis to be initially recorded on the foreign currency rate as on the date of transaction. Where fixed assets are acquired from a country outside India, exchange variation gain or loss arising out of payment towards cost of such assets is to be adjusted in the historical cost of the fixed assets.

Accounting Standard-6 (Revised) suggests that where the historical cost of a depreciable asset has undergone a change due to increase or decrease in long term liability on account of exchange fluctuations, price adjustments, changes in duties or other factors, the depreciation on the revised unamortised depreciable amount should be provided prospectively over the residual useful life of the asset.

Thus if a straight line method of depreciation is followed, annual instalments need to be revised every time because of such cost adjustments. Alternatively, rate of depreciation under reducing balance method needs revision every time for cost adjustments.

Section 43A of the IT Act, 1961 applies in a case where anassessee acquires any capital asset from abroad for the purpose of his business or profession on credit or on deferred payment terms or against a loan in foreign currency and the whole or part of cost of such asset or the loan in foreign currency is outstanding as on the date on which there is a change in the rate of exchange of currency. In such a case, where, in consequence of the change in the rate of exchange or currency, there is an increase or reduction in the assessee's liability as expressed in Indian currency for the payment of the whole or a part of the cost of the assets or of the loan in foreign currency, the original actual cost to the assessee, of the machinery, or plant or other capital asset, is required to be increased or, as the case may be reduced correspondingly, inter alia.

In computing capital gain or loss arising on the sale or transfer of a capital asset acquired from abroad, on deferred payment terms or against a foreign loan, additional rupee liability will be added to the originalcost of the asset, if however, the rupee liability is a decrease; instead of an increase, then, the original cost will be correspondingly reduced.

It is clear from the provisions of section 43A that increase or decrease in liability should be taken into account to modify the figure of actual cost of the capital asset and 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 in terms of Indian currency for payment of the whole or part of the cost of the asset or for repayment of the foreign loan against which the asset has been acquired.

The above position has been accepted by the CBDT in its Circular No 5P dated October 9, 1967.

However ICAI's standards and law as contained in section 43A (supra) are at variance with the law laid down by the Supreme Court in the case of CIT vs Tata Iron and Steel Co Ltd (1998) 231 ITR 285 where the court has said that fluctuation in rate of foreign exchange resulting in gain orloss at the time of repayment of loan would not alter the actual cost incurred for purchase of asset for computing depreciation. According to the court, it is difficult to follow how the manner of repayment of loan can affect the cost of the assets acquired by the assessee. What is the actual cost must depend on the amount paid by the assessee to acquire the asset. The amount may have been borrowed by the assessee, but even if the assessee did not repay the loan it will not alter the cost of the asset. If the borrower defaults in repayment of a part of the loan, the cost of the asset will not change. What has to be borne in mind is that the cost of an asset and the cost of raising money for purchase of the asset are two different and independent transactions. Even if an asset is purchased with non-repayable subsidy received from the government, the cost of the asset will be the price paid by the assessee for acquiring the asset. In the case before the court, the allegation was that at the time of repayment ofloan, there was a fluctuation in the rate of foreign exchange as a result of which, the assessee had to repay a much lesser amount than he would have otherwise paid. This is not a factor which can alter the cost incurred by the assessee for purchase of the asset. The assessee may have raised the funds to purchase the asset by borrowing but what the assessee has paid for it, is the price of the asset. That price cannot change by any event subsequent to the acquisition of the asset. The manner or mode of repayment of the loan has nothing to do with the cost of an asset acquired by the assessee for the purpose of his business.

Thus there is apparent contradiction in the views of the court and the ICAI which requires reconsideration of AS II and AS 6 by the ICAI. Similarly, the provisions of section 43A of the IT Act vis-a-vis cost of assets and WDV need to a relook in view of the above referred decision from the apex court.

The solution to the problem could be to treat fluctuations in exchange rates asprofits or losses independently of the assets acquired. The re-adjustments from time to time consequent to change in exchange rates on the basis of Accounting Standards and section 43 of the IT Act may no longer stand judicial scrutiny in future.

The author is former CBDT chairman and ex-special secretary Union ministry of finance