2010 (9) TMI 851 - HC - Income Tax

Loss accrued on account of fluctuation in the rate of foreign exchange Held that - The loss claimed by the assessee on account of fluctuation in the rate of foreign exchange as on the date of balance sheet is allowable as expenditure under Section 37(1) of the Income Tax Act. See CALCUTTA CO. LTD. vs CIT 1959 (5) TMI 3 - SUPREME Court & BHARAT EARTH MOVERS LTD., vs CIT 2000 (8) TMI 4 - SUPREME Court. In favour of assessee.

Summary

Issues:
1. Whether fluctuation in foreign currency can be considered as a revenue expenditure for the assessee.
2. Treatment of bad debts claimed by the assessee.

Issue 1: Fluctuation in Foreign Currency as Revenue Expenditure:

The High Court considered whether the Tribunal was correct in allowing a sum of Rs.3,25,24,941/- as a revenue expenditure for the assessee due to the fluctuation in foreign currency, even though the loan had not been repaid during the current assessment year. The Court referred to the case of ONGC LIMITED vs. THE COMMISSIONER OF INCOME TAX DEHRADUN, where it was held that the loss due to fluctuation in foreign exchange rate is allowable as expenditure under Section 37(1) of the Income Tax Act, 1961. The revenue contended that the assessee should not benefit from the increase in the foreign exchange rate. However, the Tribunal ruled in favor of the assessee based on previous benefits extended and decisions of the Apex Court in cases like CALCUTTA CO. LTD. vs CIT and BHARAT EARTH MOVERS LTD. vs CIT. The High Court upheld the Tribunal's decision, stating that the assessee can claim the loss due to fluctuation in foreign exchange as on the date of the balance sheet, and the revenue's claim was rejected.

Issue 2: Treatment of Bad Debts:

Regarding the claim made by the assessee for bad debts, the matter was remitted to the Assessing Officer by the Tribunal. The High Court confirmed this decision but directed the Assessing Officer to follow the observations of the Apex Court in the case of TRF LIMITED vs COMMISSIONER OF INCOME TAX while passing appropriate orders. This indicates that the treatment of bad debts claimed by the assessee will be subject to further examination and determination by the Assessing Officer in accordance with the guidelines provided by the Apex Court.

In conclusion, the High Court dismissed the revenue's appeal and ruled in favor of the assessee regarding the treatment of the loss incurred due to fluctuation in the foreign exchange rate. The judgment provides clarity on the allowance of such losses as revenue expenditure and emphasizes the importance of following established legal principles in determining tax liabilities related to foreign currency fluctuations.