2017 (7) TMI 1095 - HC - Income Tax

Allowable busniss deduction - notional loss on unexplained foreign exchange forward contract - Held that - Apex Court in case of The Commissioner of Income Tax v. Woodward Governor India (P.) Ltd. reported in (2009 (4) TMI 4 - SUPREME COURT). The Apex Court has observed that the loss claimed by the Assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance- sheet was allowable and the Assessee was entitled for the adjustment of actual cost of imported assets. The loss due to foreign exchange fluctuation in foreign currency transactions in derivatives has to be considered on the last date of accounting year and it is deductible under Section 37(1) of the Act.

Summary

Issues:
- Allowability of notional loss on unexplained foreign exchange forward contract under the Income Tax Act for the Assessment year 2009-10.

Analysis:
The Appeal in this case revolves around the Assessment year 2009-10 and the allowability of a notional loss on an unexplained foreign exchange forward contract under the Income Tax Act. The Appellant's counsel argued that the Tribunal erred in allowing the Assessee's claim on the notional loss, contending that it was not justified as the loss was merely notional and not related to the Assessee's main business. The counsel further argued that the notional loss from the foreign exchange forward contract should not be considered allowable under the Income Tax Act. On the other hand, the Respondent's counsel supported the Tribunal's Order.

The Tribunal based its decision on a Judgment of the Apex Court in the case of The Commissioner of Income Tax v. Woodward Governor India (P.) Ltd. The Apex Court in that case had ruled that the loss due to fluctuation in foreign exchange rates as on the balance sheet date was allowable, and the Assessee was entitled to adjust the actual cost of imported assets. The Court emphasized that the loss from foreign exchange fluctuation in derivative transactions should be considered on the last day of the accounting year and is deductible under Section 37(1) of the Income Tax Act.

Ultimately, the High Court found that the Tribunal did not commit any error in applying the Judgment of the Apex Court in Woodward Governor India (P.) Ltd. The Court concluded that in light of the above, no substantial question of law arose, leading to the dismissal of the Appeal with no costs awarded.

This judgment provides clarity on the treatment of notional losses on foreign exchange forward contracts under the Income Tax Act, emphasizing the relevance of the Apex Court's ruling in similar cases. The decision underscores the importance of considering foreign exchange fluctuations in derivative transactions for tax purposes and sets a precedent for future assessments involving such issues.