Sec 43A of the IT Act Vs. AS 11

Suppose a machine was imported for one lakh US dollars when the exchange rate was Rs 45 per dollar. Both in the accounting records as well as in the tax records, the transaction would have been recorded debiting the asset concerned with Rs 45 lakh. But should the asset be financed by supplier’s credit or a specific borrowing for the purpose, the two records would now start pursuing divergent courses with any increase in the actual repayment due to devaluation of the rupee meanwhile vis-À-vis the dollar, swelling the actual cost of the fixed asset in the tax records even while leaving the accounting records undisturbed as it was  On the contrary, any appreciation in the rupee vis-À-vis the dollar would have the opposite effect in the tax records while leaving the accounting records undisturbed once again. These then in brief are the respective mandates of Section 43A of the Income-tax Act, 1961 and Accounting Standard 11 (AS 11).  AS 11 does not tinker with non-monetary items which fixed assets are. Instead, any notional increase or decrease in the rupee liability on the balance sheet date on the touchstone of the exchange rate prevailing on that date is required to be recognised with a corresponding debit or credit to the profit and loss account.

Sagacious shift

Prior to the amendment made by the Finance Act, 2002 to Section 43A, a chronic tinkering was contemplated — any increase or decrease in rupee liability in respect of fixed assets acquired on deferred payment terms or with borrowed funds on account of fluctuation in the exchange rate between the currency in which the payment is required to be made vis-À-vis the rupee, was required to be added or, as the case may be, subtracted from the actual cost of the fixed asset each time there was a change in the exchange rate, thus giving rise to the nightmarish possibility of repeated tinkering with the asset account given the day-to-day fluctuations witnessed in the currency market, especially if the currency in which the payment is required to be made happens to be a floating currency.  Mercifully, the amendment made a sagacious shift in favour of recognising the increase or decrease in such liability only at the time of actual payment, thus dispensing with the need to chronically tinker with the asset account for every notional increase or decrease in the rupee liability.  To be sure, the objectives of a fiscal law and accounting standards cannot always be the same. AS 11 is right on notional increase or decrease in rupee liability being recognised at the balance-sheet date given the fact that otherwise the balance sheet would be guilty of under- or over-valuation of a liability. It is also right in not tinkering with the cost of the fixed asset given the fact that no increase or decrease in the fair value of the asset accrues merely on the strength of the gyrations in the currency market. 

Cost of asset

One can understand a fiscal law providing for a heightened tax incentive such as depreciation on fixed asset and pro tanto there would be a divergence between the written-down value (WDV) of an asset in the tax records vis-À-vis its accounting records. While this may be unavoidable, the gulf between the two sets of records can be bridged by agreeing not to disagree at least on the issue of the cost of the asset.  The I-T Act should allow any increase in the rupee payment on account of acquisition of a fixed asset as expenditure in one shot instead of condescending to amortise the same by way of depreciation. And when there is a reduction in rupee payments, the same should be treated as income straightaway.  AS 11 is not payment fixated like Section 43A. Instead, it mandates revaluation of all monetary items on the balance sheet date. In other words, it has a balance sheet fixation which of course is understandable. One area where the two can converge is the cost of the asset — the I-T Act should emulate AS 11 in not tinkering with it in view of the fact that gyrations in the currency market by themselves do not add to, or detract from, the value of the asset.