2021 (7) TMI 306 - HC - Income Tax

Marked to market loss - FCNR loss - foreign currency transactions entered into by the assessee - whether it is speculative and notional in nature and is therefore liable to be disallowed? - HELD THAT - As liability was crystalised and ascertained. The assessee had entered into a binding obligation when it entered into a foreign currency contract and the contract was entered into to protect the assessee from foreign exchange fluctuation. The working capital loan was used for the purpose of business and therefore the same could not have been considered either as notional or speculative transaction. It is pertinent to note that if the assessee has to repay the loan and square off the contract on 31.03.2008 the assessee in addition to prepayment charges has to make a payment - Therefore the finding recorded by the Tribunal that the decision of WOODWARD GOVERNOR INDIA P. LTD. 2009 (4) TMI 4 - SUPREME COURT do not apply to the fact situation of the case cannot be sustained in the eye of law. The working capital loan was used by the assessee for the purpose of business and therefore the assessee had incurred the loss in the course of business and is entitled to claim deduction under Section 37(1) - Decided in favour of assessee.

Summary

Issues:
1. Whether foreign currency transactions entered into by the assessee are speculative in nature and liable to be disallowed as notional loss under the Income Tax Act, 1961.

Analysis:
The appeal was filed against the Income Tax Appellate Tribunal's order regarding the Assessment Year 2008-2009, questioning the treatment of foreign currency transactions as speculative. The Assessing Officer deemed the loss as notional and speculative, disallowing it as revenue expenditure under Section 37 of the Act. The Commissioner of Income Tax (Appeals) upheld this decision, leading to the appeal before the High Court.

The assessee, a company trading in steel tubes, pipes, etc., claimed the loss of Rs. 1,79,99,380 due to foreign exchange fluctuation as a revenue expenditure. The assessee argued that the transaction was not speculative but a business necessity to mitigate higher domestic interest rates. The Tribunal, however, upheld the speculative nature of the transaction, prompting the appeal.

The High Court analyzed the situation, referring to relevant case laws like 'CIT Vs. BADRIDAS GAURIDU P. LTD.' and 'CIT Vs. SOORAJMULL NAGARMULL.' It noted that the assessee's foreign currency swap option was to manage working capital loans, making the loss a revenue expenditure. The Court highlighted that the liability was crystalized and incurred in the course of business, entitling the assessee to claim deduction under Section 37(1) of the Act.

The Court disagreed with the revenue's argument that the loss was not sustained in the course of business, emphasizing the practical business necessity of the foreign currency transaction. It concluded that the loss was not speculative or notional, as the transaction was entered into for business purposes. Therefore, the Court set aside the Tribunal's and Commissioner's orders, allowing the appeal in favor of the assessee.