2011 (5) TMI 244 - AT - Income Tax

Disallowed - Loss incurred by the assessee on account of fluctuation in the foreign exchange rates - The Hon ble Supreme Court in the case of Radha Swami Satsand vs. ITO reported in 1991 -TMI - 5353 - SUPREME Court , held that loss suffered by the assessee on account of exchange rate fluctuation is allowable expenditure - The assessee may not be able to produce evidence of the utilisation of the capital before the AO but from the orders of the AO in earlier years and in subsequent years impliedly, it is ascertainable that it is used for the working capital which is in a revenue account - As per the case law and past history of the dispute on this issue, allow this ground of appeal and delete the disallowance - Decided in favour of assessee.

Summary

Issues:
Whether the assessee is entitled to a deduction of Rs. 38,30,000 representing the loss incurred due to fluctuation in foreign exchange rates on outstanding foreign currency loan used for working capital purposes.

Analysis:
The judgment pertains to an appeal against the order of the Ld. CIT(A) for the assessment year 1998-99. The Hon'ble High Court dismissed the appeal, leading the assessee to file a miscellaneous application, which was also dismissed by the Tribunal. Subsequently, the Hon'ble Supreme Court set aside the previous orders and remitted the issue back to the Tribunal for a fresh decision. The key issue before the Tribunal was the allowance of a deduction of Rs. 38,30,000 for the loss incurred due to fluctuation in foreign exchange rates on a foreign currency loan utilized for working capital purposes.

The assessee contended that the loss was allowable as a revenue deduction since the loan amount formed part of its circulating capital. The AO had allowed a similar loss in the previous assessment years, indicating a consistent treatment. The Tribunal considered the past history of the dispute and the principle of consistency, following the decision of the Hon'ble Supreme Court in a relevant case. The Tribunal noted that even though the assessee could not provide direct evidence of the loan utilization, it was evident from previous and subsequent years' orders that the loan was used for working capital, justifying the allowance of the loss as a revenue expenditure.

In light of the facts presented and the legal precedents, the Tribunal allowed the appeal and deleted the disallowance of the deduction. The Tribunal emphasized the principle of consistency and the past treatment of similar losses, concluding that the loss due to exchange rate fluctuation was an allowable expenditure. The judgment was pronounced in favor of the assessee on this specific issue.

In conclusion, the Tribunal's decision was based on the assessee's consistent treatment of similar losses in previous years, the characterization of the loan as working capital, and the principle of allowing revenue deductions for such losses. The judgment highlighted the importance of past decisions and legal precedents in determining the allowability of deductions, ultimately ruling in favor of the assessee on the issue of the foreign exchange rate fluctuation loss deduction.