2007 (9) TMI 458 - AT - Income Tax

Summary

Issues:
1. Allowance of exchange loss as deduction.
2. Nature of exchange loss on external commercial borrowings.

Issue 1: Allowance of exchange loss as deduction
The appeal filed by the Department challenged the order of the CIT(A) directing the Assessing Officer to allow the exchange loss of Rs. 54 lakhs as a deduction. The Assessing Officer disallowed the loss claimed by the assessee, stating it was notional and could only be allowed in the year of loan repayment. The CIT(A) allowed the claim, citing the mercantile system of accounting and referring to a similar decision by the ITAT Delhi Special Bench in the case of Oil & Natural Gas Corporation Ltd. The Departmental Representative argued that such notional losses were not admissible under section 37(1) of the Income-tax Act unless actually expended for business purposes in the relevant year. The representative relied on various court decisions to support the contention that notional losses were not allowable until actual repayment of the loan.

Issue 2: Nature of exchange loss on external commercial borrowings
The dispute centered on the nature of the exchange loss on external commercial borrowings incurred by the assessee due to fluctuation in foreign currency rates. The Assessing Officer considered the loss as notional and contingent, disallowing the deduction. The Departmental Representative argued that such losses could only be claimed when the borrowings were actually repaid. The Authorized Representative, on the other hand, supported the CIT(A)'s decision, citing a Special Bench ruling of the ITAT Delhi that had been confirmed by the Delhi High Court. The ITAT, while acknowledging the arguments put forth by the Departmental Representative, ultimately decided in favor of the assessee, following the precedent set by the Special Bench decision and emphasizing the importance of continuity and predictability in judicial decisions.

In conclusion, the ITAT dismissed the appeal filed by the revenue, upholding the decision of the CIT(A) to allow the exchange loss as a deduction based on the principles of the mercantile system of accounting and the precedent set by the Special Bench ruling, which had been confirmed by the Delhi High Court.