2007 (3) TMI 204 - HC - Income Tax

Foreign exchange loss suffered by assessee on its borrowings because of fluctuation in foreign exchange rates, so he increased liability on revaluation of such loan deduction is not allowed to assessee for such loss because this is not a contingent notional liability tribunal is not justified in taking such loss on accrual basis for the purposes of determining written down value of assets - assessee is not entitled to adjust the actual cost of assets by such losses arising on notional basis

Summary

Issues:
Appeals under section 260A of the Income-tax Act, 1961 arising from orders passed by the Income-tax Appellate Tribunal, New Delhi regarding foreign exchange losses suffered by the assessee, applicability of section 37 of the Income-tax Act, consideration of foreign exchange losses on capital account, and adjustment of actual cost of assets by foreign exchange losses.

Analysis:
The appeals before the High Court stemmed from the orders of the Income-tax Appellate Tribunal regarding the allowance of foreign exchange losses suffered by the assessee. The primary issues revolved around the deduction of foreign exchange losses on accrual basis, revaluation of foreign exchange borrowings, and the impact of section 43A of the Income-tax Act on determining written down value of assets.

The High Court examined the provisions of section 37 of the Income-tax Act, emphasizing that deductions are allowable only for liabilities enforceable during the relevant assessment year and actually paid in that year. The Tribunal's decision to allow claims not meeting these criteria was deemed baseless and unsupported by material evidence, leading to a dismissal of the claims related to foreign exchange losses on accrual basis.

Regarding the revaluation of foreign exchange borrowings, the Court held that losses arising from such borrowings, used partially in revenue and capital accounts, were not allowable as the liabilities were not due in the assessment year under consideration. The Court highlighted the necessity of written agreements and actual repayments to justify such claims, which were absent in this case.

The Court further delved into the applicability of section 43A of the Income-tax Act, emphasizing its relevance to liabilities due as per written agreements between the assessee and foreign creditors. Since no such agreements were presented by the assessee, the Court deemed the Tribunal's decision to allow deductions without legal justification as erroneous and against statutory provisions.

In conclusion, the High Court quashed the impugned orders passed by the Tribunal, allowing the appeals and setting aside the Tribunal's decisions. The Court emphasized that the decisions of the Committee on Disputes (COD) regarding appeal permissions did not bind the Court, reiterating the importance of addressing substantial legal questions in the appeals.

Overall, the judgment focused on the strict adherence to legal provisions, the necessity of written agreements to support claims, and the requirement for actual repayments to validate deductions, ultimately leading to the dismissal of the appeals based on the outlined issues.