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Issues involved: The judgment addresses the questions of whether the 'exchange loss' due to fluctuations in currency rates is a real loss and allowable as a deduction in computing income.
Exchange Loss Deduction: The assessee, a banking company, claimed deductions for exchange losses during the assessment years 1973-74, 1974-75, and 1975-76. The Income-tax Officer initially disallowed the claim, but the Commissioner (Appeals) allowed it after considering that the loss pertained to current liabilities and was a result of fluctuations in exchange rates. The Tribunal upheld this decision, noting that the loss was due to exchange rate fluctuations and not devaluation, following precedents and principles established by the Supreme Court and previous court decisions. Legal Precedents: The court referred to the Supreme Court's decision in Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1, which established that profit or loss from foreign currency appreciation or depreciation is trading profit or loss if held as part of trading assets. The court also cited CIT v. V. S. Dempo and Co. Pvt. Ltd. [1994] 206 ITR 291, summarizing key principles regarding the nature of losses arising from foreign currency conversion, distinguishing between revenue and capital losses based on the asset's nature at the time of devaluation. Decision and Rationale: Applying the principles from the legal precedents to the case, the court concluded that the exchange loss claimed by the assessee was allowable as a deduction since the foreign currencies were considered stock-in-trade. Therefore, both questions regarding the exchange loss deduction were answered in favor of the assessee and against the Revenue. No costs were awarded in this case.
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