Foreign exchange fluctuation loss: Deductibility of such loss for tax purposes
Case Outcome: Assessee
- During the year under consideration, in the profit and loss statement filed along-with the return of income, a sum of Rs. 3.67 Crs was debited by the Assessee on account of derivative loss under the head miscellaneous expenses.
- In this regard, it was explained on behalf of the Assessee Company before the Assessing Officer that the market to market loss was booked on net basis on foreign exchange fluctuation at the year end on mercantile accounting basis and the same was therefore allowable.
- This explanation of the Assessee was not accepted by the Assessing Officer. According to him, the Assessee Company had undergone hedging loss for the entire future period for which the payment was debited as the provision which was not allowable as deduction as clarified in the Instruction No. 3/2010 dated 23.03.2010 issued by the CBDT. He, accordingly, disallowed the claim of the Assessee for deduction of Rs.3.67 Crs being provision for future loss on derivatives due to foreign exchange fluctuation.
- Reliance was placed on the decisions rendered in the case of Hindustan Gum & Chemical Ltd. and South Asian Petrochem Ltd., wherein further reliance was placed on judgment of the Hon’ble Delhi High Court in the case Commissioner of Income Tax Vs Woodward Governor India Ltd. and it was held that foreign exchange fluctuation loss was allowed on accrual basis where the Assessee was carrying or maintaining the mercantile system of accounting subject to mandatory Accounting Standards and commercial principles.
- Further, it was observed that losses on account of fluctuation of foreign exchange rates owing to reinstatement of liability arisen for stock-in-trade were held to be allowable under section 37(1) of the act. Fluctuation in the rate of exchange with respect to loans taken for revenue purposes was allowable as deduction under section 37(1) in the year of fluctuation. The loss on account of fluctuation as on the date of the balance sheet was allowable under section 37 of the Act.
- Therefore, following the same in the present facts of the case the claim of the Assessee for allowing loss on derivative trading due to foreign exchange fluctuation was upheld.
- Issue Outcome: In favour of Assessee
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