2010 (11) TMI 117 - AT - Income Tax

Loss on account of exchange rate difference - Held that so far as the exchange loss on refund of advances received from the customers is concerned, the same indeed constitutes admissible deduction irrespective of whether or not the amounts so received were diverted to use by partners. It is so for the elementary reason that the proximate cost of loss having been incurred is receipt of advances from the customers and refunding the same - an exercise which is clearly in the course of normal business operations. As long as the moneys are received in the course of business and as long as the moneys are refunded in the course of business, exchange loss on the same will constitute an admissible expenditure being incidental to the business operations. The requirement of sec. 37 thus ends with transactions for the purposes of business and it is not essential that the funds received during the course of such transactions must also be used for the purposes of business. It is important to bear in mind that the loss which is claimed as deduction is in the course of the business operations and is not in the nature of cost of funds and for this reason the use of funds is not really relevant for the purpose of deciding deductibility of such loss. - Decided in favor of assessee.

Summary

Issues:
1. Whether the loss on account of exchange rate difference should be allowed as a deduction in the computation of the assessee's business income.

Analysis:
The appeal was against the order passed by the CIT(A) concerning the assessment under section 143(3) of the IT Act, 1961, for the assessment year 2006-07. The main issue was whether the loss on account of exchange rate difference should be allowed as a deduction in the computation of the assessee's business income. The Assessing Officer disallowed the loss on exchange rate difference, amounting to Rs. 30,78,862, on the grounds that the amounts received as advances from customers were diverted for personal use by one of the partners. The CIT(A) disagreed with this disallowance, considering the exchange difference as an admissible deduction. The dispute revolved around whether the exchange loss was incidental to the business operations, even if the funds received were diverted for personal use.

The CIT(A) noted that the advances were received during the course of business and that the exchange difference arose due to foreign exchange fluctuation, as per Rule 115 of the I.T. Rules, 1962. The CIT(A) concluded that the loss on foreign exchange should be allowed as a deduction. The Assessing Officer contested this decision, arguing that since the funds were diverted for personal use, the exchange loss should not be deductible under section 37(1) of the Act. The Assessing Officer also claimed that the transactions were not genuine business dealings but accommodation entries.

The counsel for the assessee argued that the exchange loss should be allowed as a deduction as long as the funds were received and refunded during the course of business operations, regardless of their subsequent use. The counsel highlighted that the amounts were received from customers in the course of business and were refunded in the same manner. The counsel emphasized that the exchange loss was not related to the usage of funds but rather to the normal business operations of receiving and refunding advances. The counsel urged to uphold the CIT(A)'s decision.

After considering the arguments, the Tribunal upheld the CIT(A)'s decision, stating that the exchange loss on refund of advances constituted an admissible deduction as it was incurred in the course of normal business operations. The Tribunal emphasized that the deduction for exchange loss was not influenced by the usage of funds but by the fact that the transactions were conducted in the course of business. The Tribunal concluded that as long as the funds were received and refunded in the course of business, the exchange loss was a legitimate expenditure incidental to business operations. Therefore, the appeal was dismissed, affirming the decision of the CIT(A).