2008 (4) TMI 465 - HC - Income Tax

Business loss- The assessee had taken a loan in foreign exchange from the Citi Bank, UK. It appears that a part of the loan amount was utilized for purchase of capital equipment and that was included in capital work-in-progress. The remaining amount of was utilized by the assessee for its business purposes that is of money-lending and bill discounting. Due to fluctuation in the rate of foreign exchange the assessee suffered a loss and claim deduction. The Assessing officer as well as Commissioner (Appeals) held that since the amount borrowed on capital account the loss would not be treated as revenue loss. Tribunal reversed the order. Held that- though the assessee might have originally borrowed the amount for the purpose of import of capital goods or setting up of plant at the time when the amount was utilized the loan amount had undergone a change and had assumed a new character of stock in trade or circulating capital and, therefore any loss suffered by the assessee on account of Foreign Exchange fluctuation would have to be treated as revenue loss. Thus dismiss the appeal of revenue.

Summary

Issues:
Interpretation of loss due to foreign exchange rate fluctuation as revenue loss or capital loss.

Analysis:
The judgment pertains to an appeal by the Revenue against a decision of the Income-tax Appellate Tribunal regarding the treatment of a loss incurred due to foreign exchange rate fluctuation by an assessee who had borrowed a substantial amount in foreign exchange. The assessee had utilized a portion of the loan for business purposes related to money-lending and bill discounting. The Revenue contended that since the loan was borrowed on capital account, the loss should be considered as a capital loss. However, the Tribunal accepted the assessee's argument that the loss should be treated as a revenue loss based on the utilization of the loan amount at the time of devaluation. The judgment referred to previous decisions by the Bombay High Court and the Delhi High Court to support this interpretation.

The High Court analyzed the relevant legal principles established by previous judgments, emphasizing that the purpose of acquiring the loan is not as significant as the utilization of the loan amount at the time of devaluation. The Court highlighted that in the present case, the loan amount was utilized for the assessee's business activities of money-lending and bill discounting, as confirmed to the Reserve Bank of India. Despite the original intent of the loan being for different purposes, the Court concluded that the loan had changed character at the time of utilization, becoming stock-in-trade or circulating capital. Therefore, any loss incurred due to foreign exchange rate fluctuation should be treated as a revenue loss rather than a capital loss. The Court relied on the decision in Woodward Governor to support this interpretation.

Ultimately, the High Court found no error in the Tribunal's decision and dismissed the appeal by the Revenue, stating that no substantial question of law arises for consideration. The judgment provides a clear interpretation of the treatment of losses due to foreign exchange rate fluctuations, emphasizing the importance of the utilization of loan amounts at the time of devaluation in determining whether the loss should be classified as a revenue loss or a capital loss.