2014 (1) TMI 1741 - AT - Income Tax

Addition towards loss on account of fluctuation in foreign exchange - Held that - It is a fit case for setting aside to the files of the CIT (A) for adjudicating the issue again on if the losses arising out of depreciation of foreign currency is utilized or intended to be utilized for the business which form part of capital. CIT (A) shall analyse afresh if the loss on account of foreign exchange fluctuations which is relatable to the revenue account or capital account. If the loss is relatable to the revenue account , assessee should be entitled to the relief in view of the judgment of the Hon‟ble Supreme Court in the case of CIT vs. Woodword India Pvt. Ltd (2009 (4) TMI 4 - SUPREME COURT ). Accordingly, we set aside the issue to the files of the CIT (A) to adjudicate the issue afresh - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
Assessment of foreign exchange fluctuation loss as trading loss or capital loss.

Analysis:
1. The appeal was filed by the assessee against the order of the CIT (A) confirming the addition of Rs. 1,38,85,900 towards loss on account of fluctuation in foreign exchange for the assessment year 2009-2010.
2. The assessee, engaged in import and export of diamonds, incurred an exchange loss of Rs. 1,38,85,900 due to foreign exchange fluctuations on trading account. The AO disallowed this loss treating it as notional and contingent since the transaction was not completed.
3. The CIT (A) dismissed the appeal, stating that the loss was not allowable as trading loss or loss on account of revenue since the assessee was not holding foreign currency for business purposes. The assessee contended that the loss was related to raw material purchases and accounted for as per AS-11 issued by the ICAI.
4. The ITAT set aside the issue to the files of the CIT (A) for fresh adjudication to determine if the loss on foreign exchange fluctuations was related to revenue or capital account. If found to be related to the revenue account, the assessee would be entitled to relief as per the judgment of the Supreme Court in CIT vs. Woodword India Pvt. Ltd (312 ITR 254).
5. The ITAT allowed the appeal of the assessee for statistical purposes, directing the CIT (A) to reanalyze the issue after providing a reasonable opportunity of being heard to the assessee.

This judgment highlights the importance of correctly categorizing losses on foreign exchange fluctuations as either trading losses or capital losses based on their relation to revenue or capital accounts, as per relevant accounting standards and judicial precedents.