2013 (2) TMI 233 - HC - Income Tax

Foreign exchange loss on account of restatement of CDC loan - whether be treated as a revenue loss? - actual arisen v/s notional - Assessee is a financial company - Held that - As decided CIT v. Woodward Governor India (P.) Ltd 2009 (4) TMI 4 - SUPREME COURT that while even a notional loss can be claimed by way of a business loss deductible item in computing the income of the assessee for the year, made dependent on the manner of conduct of the assessee in respect of the earlier assessment period and particularly as to the assessee has been following this uniformly over a period of years and the test being when there was a notional gain as to whether it had been offered for tax etc. Such claim will have to be examined in the light of the fulfillment of the conditions as indicated by in the case supra for which purpose, the matter may have to go before the assessing officer, who has to apply this test to the claim made by the assessee and then either admit the claim or reject it.

Summary

Issues:
1. Whether a sum claimed as a foreign exchange loss on account of restatement of CDC loan should be treated as a revenue loss despite being notional.

Analysis:
The case involved an appeal by the revenue under Section 260A of the Income Tax Act, 1961, regarding the treatment of a sum of Rs. 80,04,000 claimed as a foreign exchange loss by the assessee, a financial company, for the assessment year 2000-01. The assessing officer rejected the claim, considering it a notional loss and therefore not allowable. However, the appellate Commissioner and the tribunal disagreed, leading to the revenue's appeal.

The Supreme Court's judgment in CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254 was cited during the proceedings. The Supreme Court established that even a notional loss can be claimed as a business loss and deducted in the computation of the assessee's income, subject to certain conditions. These conditions include the assessee following the mercantile system of accounting consistently, treating losses and gains uniformly, maintaining entries as per accounting standards, and adopting a fair and reasonable system not solely for tax reduction purposes.

In light of the Supreme Court's ruling, it was concluded that the tribunal's decision allowing the deduction should be affirmed. However, the claim needed to be reexamined by the assessing officer to ensure compliance with the specified conditions. Therefore, the matter was directed to go back to the assessing officer for further evaluation. The assessing officer was instructed to apply the test of fulfilment of the six conditions outlined by the Supreme Court, issue a notice to the assessee for a hearing, and then make a decision based on the assessment.

In summary, the judgment clarified that while a notional loss can be claimed as a deduction, it must meet specific criteria as laid down by the Supreme Court. The appellate decision was upheld, but the matter was remanded to the assessing officer for a detailed examination of the claim in accordance with the prescribed conditions.