Foreign Exchange Loss to be allowed as Revenue Expenditure and is to be charged into the Profit and Loss Account: ITAT [Read Order]

The Cochin Bench of the Income Tax Appellate Tribunal in the case of M/s Baby Memorial Hospital v. The Assistant Commissioner of Income Tax ruling in favour of the assessee held that Foreign Exchange Loss to be allowed as revenue expenditure and is to be charged into the Profit and Loss account.

The Principal Commissioner of Income Tax found that the assessee had claimed an amount being foreign exchange loss on account of foreign currency loan taken for the construction of a new building and additional equipment. According to the Pr. CIT, the loss on the devaluation of rupees on account of loan utilized for fixed capital was not deductible under Section 37(1) since the expenditure is capital in nature. Therefore the Pr. CIT set aside the assessment and invoked the provision of Section 263 for the limited purpose of verifying whether the foreign exchange loss qualifies for being revenue expenditure.

It has been contended by the assessee that the loss arising on account of fluctuation of the exchange rate with regard to loan availed for the acquisition of fixed assets is a revenue loss and not a capital loss.

The Bench constituting of members George George K and Chandra Poojari held that Foreign Exchange Loss is to be allowed as revenue expenditure and is to be charged into the Profit and Loss account in conferment to Accounting Standard 11 (AS 11).

It was analyzed that Schedule VI of Companies Act suggests treatment of the ‘gain/loss’ as capital in nature and should be adjusted to the cost of the relevant asset, whereas Accounting Standards 11 suggests that treatment of ‘gain/loss’ attributable to foreign borrowings should be reflected in profit and loss account. The same was clarified by way of a Circular by MCA so as to be made as per AS 11 and the exchange difference is required to be recognized in profit and loss account.