Foreign Exchange Loss is allowable as Deduction u/s 37 of the Income Tax Act: Bombay HC [Read Order]

Foreign Exchange - Finance Ministry - Taxscan

The High Court of Bombay in a recent decision held that the foreign exchange loss is not a “notional” or “speculation” loss and is allowable as a deduction. According to the division bench, the same is eligible for deduction under section 37 of the Income Tax Act. While upholding the order of the ITAT, the Court observed that the CBDT’s instruction which deals with foreign exchange derivative transactions is not applicable to cases of losses in dealings with foreign exchange.

In the instant case, the assessee-company, M/s Vinergy International Pvt. Ltd, while filing return for the relevant previous year,claimed deduction in respect of expenditure / loss of Rs.62.62 lakhs and Rs. 34.37 lakhs as gain on account of foreign exchange fluctuation related to purchase and sales transactions outstanding.The Assessing officer completed the assessment by disallowing the above claim for the reason that it is a contingent liability.

Being aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) in which the said order was sustained. However, the Appellate Tribunal, on second appeal, allowed the claim of the assessee by holding that it is covered under section 37 of the Income Tax Act. Against the said order, the Revenue approached the High Court.

The division bench comprising of Justice M S Sanklecha and Justice A K Meon found that, the impugned order was passed by the Tribunal following te decision in Commissioner of Income Tax Vs. Woodward Governor India (P) Ltd. 312 ITR 254, in which it was held that where the loss suffered by an assessee due to fluctuation of foreign exchange as on the date of balance sheet in respect of purchase and sales of goods (payment have to be made / received) is allowable as expenditure under Section 37(1) of the Act.

Before the High Court the Revenue contended that, subsequent to the above decision the CBDT passed Instruction no. 3 of 2010 dated 31.03.2010 in respect of loss on account of foreign exchange derivatives as per which, the claim of the assessee cannot be accepted.

The Court also opined that the said circular is not applicable to the instant case since the loss was not on account of derivatives but are in fact losses and gains in foreign exchange relating to the purchase and sales transactions i.e. creditors and debtors outstanding as on 31st March, 2010.

Read the full text of the order below.

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