2004 (4) TMI 10 - HC - Income Tax

Business expenditure - deduction u/s 37 - non-resident - 1. Whether, Tribunal is correct in holding that the expenditure incurred by the non-resident assessee in converting its rupee earnings into foreign currency for remittance abroad under the terms of the agreement with its Indian collaborators is an admissible business expenditure? 2. Whether, Tribunal is correct in holding that the expenditure incurred by the assessee for remittance abroad of income earned in India is laid out wholly and exclusively for the purpose of its business and is an admissible deduction under section 37? - After the income is received, it becomes capital and for transferring the same on account of fluctuation in exchange rate, the loss occasioned cannot be treated as business expenditure Hence, we answer question No. 1 in favour of the Revenue - question No. 2 is not required to be examined.

Summary

Issues:
1. Whether the expenditure incurred by the non-resident assessee in converting rupee earnings into foreign currency for remittance abroad is an admissible business expenditure?
2. Whether the expenditure incurred by the assessee for remittance abroad of income earned in India is a deductible expense under section 37 of the Income-tax Act?

Analysis:
1. The case involved a non-resident corporation with a branch office in India that entered into a technical service agreement with an Indian company. The corporation incurred a loss in converting Indian rupees into US dollars for remittance abroad. The dispute arose when the corporation claimed this loss as a business expenditure, which was initially denied by the Income-tax Officer. However, the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal allowed the deduction. The Revenue contended that the exchange loss was capital in nature as it occurred after income was received in India. The court analyzed the nature of the income, stating that if the loss in currency conversion is not connected to the business, it cannot be considered as a revenue expenditure. The court referred to precedents and highlighted that if the income is already received and later transmitted to another country with resulting losses due to currency fluctuations, it is not a trading loss or business expenditure. The court ruled in favor of the Revenue, emphasizing that the exchange loss cannot be treated as a business expenditure.

2. The court further discussed the nature of income earned in India and its subsequent transfer abroad. It clarified that income received becomes capital, and any loss due to exchange rate fluctuations during transfer cannot be considered a business expenditure. The court disagreed with the Tribunal's view that the income transferred from India was part of circulating capital, stating that the income earned in India was taxable and not the income that the company's head office would earn abroad. Consequently, the court ruled in favor of the Revenue on the first issue, rendering the examination of the second issue unnecessary. The judgment favored the Revenue's position, emphasizing that the exchange loss on transferring income abroad due to currency fluctuations cannot be treated as a business expenditure.

In conclusion, the court decided in favor of the Revenue, ruling that the exchange loss incurred by the non-resident assessee in converting rupee earnings into foreign currency for remittance abroad is not an admissible business expenditure. The judgment highlighted the distinction between capital and revenue expenditures in the context of currency conversion losses and emphasized the tax treatment of income earned in India and its subsequent transfer abroad.