2011 (3) TMI 553 - HC - Income Tax

Disallowance of notional loss on account of fluctuation in the Foreign Exchange rate - The first and foremost requirement is that he must be adopting mercantile system of accounting. Secondly, the said loss should have been claimed not only in the year in dispute, but a continuous course of conduct to show that, that is the way the said claim is reflected in the accounts. Thirdly, it should be bona fide one - Held that all the above conditions are satisfied in the present case - Decided in the favour of assessee

Summary

Issues:
1. Deduction of notional loss on account of fluctuation in the Foreign Exchange rate.
2. Application of conditions prescribed by the Apex Court for claiming national loss.
3. Entitlement to deduction based on mercantile system of accounting and continuous course of conduct.

Analysis:

1. The primary issue in this case revolves around the deduction of notional loss due to fluctuation in the Foreign Exchange rate. The assessee, an Indian company engaged in various activities, claimed deductions based on actual loss incurred because of variations in the Foreign Exchange rate. Both the assessing authority and appellate authority initially disallowed the claimed loss. However, the Tribunal, after considering the year-end statement of liabilities and the actual decrease in the value of the rupee in foreign currency, allowed the deduction. The Tribunal concluded that the loss was not notional or contingent but an actual event, making the assessee eligible for the claimed deduction. The revenue, aggrieved by this decision, appealed against the Tribunal's order.

2. The second issue raised by the appellant revenue concerns the application of conditions prescribed by the Apex Court for claiming national loss. The revenue contended that the Supreme Court has outlined five tests that must be satisfied for an assessee to be entitled to such benefits. The revenue argued that none of the authorities had properly considered whether these tests were fulfilled by the assessee before allowing the deduction. However, the counsel for the assessee asserted that the assessee met all the tests prescribed by the Apex Court, and the Tribunal had correctly granted the relief based on this satisfaction.

3. The final issue addressed in the judgment pertains to the entitlement to deduction based on the mercantile system of accounting and a continuous course of conduct. The Court examined the conditions stipulated by the Apex Court, which include the adoption of a mercantile system of accounting, continuous reflection of the claimed loss in the accounts, and the bona fide nature of the claim. The Tribunal, after evaluating the material on record, found that the conditions were indeed satisfied by the assessee. Consequently, the Court upheld the Tribunal's decision, stating that there was no justification to interfere or impose additional conditions as the requirements set by the Supreme Court were fully met. Therefore, the appeal was dismissed, and no substantial question of law was found to arise for consideration in this matter.