Income Tax deduction allowed by Karnataka High Court on loss suffered by assessee on Foreign Rate Fluctuation

Last updated: 18 November 2021

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The Karnataka High Court has ruled in favour of United Spirits Ltd., stating that losses incurred due to foreign exchange fluctuations on the balance sheet date are allowable as expenditure under Section 37(1) of the Income Tax Act. The court found the Assessing Officer's disallowance of the deduction, despite accepting the foreign exchange gain for tax, to be erroneous. This decision confirms that such losses can be claimed as an income tax deduction.

Court :
Karnataka High Court

Brief :
The Hon’ble Karnataka High Court in P.R Commissioner of Income Taxv. M/s United Spirits Ltd. [I.T.A. No. 548/2015 c/w I.T.A No. 37/2010 decided on September 2, 2021] answered in favor of the M/s United Spirits Ltd. ("the Assessee")and held that the loss suffered by an Assessee on account of foreign exchange difference as on the date of the balance sheet is an item of expenditure under Section 37(1) of the Income Tax Act ("IT Act") and further allowed the Income Tax deduction ("ITD") on the loss suffered by an Assessee on account of Foreign Exchange Fluctuation Loss ("FEFL").

Citation :
I.T.A. No. 548/2015 c/w I.T.A No. 37/2010 decided on September 2, 2021

The Hon’ble Karnataka High Court in P.R Commissioner of Income Taxv. M/s United Spirits Ltd. [I.T.A. No. 548/2015 c/w I.T.A No. 37/2010 decided on September 2, 2021] answered in favor of the M/s United Spirits Ltd. ("the Assessee")and held that the loss suffered by an Assessee on account of foreign exchange difference as on the date of the balance sheet is an item of expenditure under Section 37(1) of the Income Tax Act ("IT Act") and further allowed the Income Tax deduction ("ITD") on the loss suffered by an Assessee on account of Foreign Exchange Fluctuation Loss ("FEFL").

The Assessee claimed an amount of Rs.1,80,22,000/- towards the FEFL, but was disallowed by assessing officer ("AO") assuming that the funds raised by the Assessee had been used for certain investments into the share capital of various companies.

Tribunal noted that the Assessee had offered the foreign exchange to tax which had been accepted by the AO, held that the Assessee had established that the loss was in relation to working capital loans and the said loans were not utilized to making the interest as observed by the AO, thus, the said loss was allowed as a deduction.

It was observed, that the interest paid on the loans was allowed by the AO himself as a deduction, however, no loss in connection thereto was allowed. The action of the AO accepting the Foreign Exchange but disallowing the loss appears to be erroneous.

Held that, FEFL suffered by an assessee as on the date of the balance sheet is an item of expenditure under Section 37(1) of the Act.

Ruled, confirming the view of the Tribunal, answered in favor of the Assessee and against the revenue.

FAQ :

The Karnataka High Court ruled that losses suffered by an assessee due to foreign exchange fluctuations as of the balance sheet date are considered expenditure under Section 37(1) of the Income Tax Act and are therefore eligible for income tax deduction.

The case involved the Commissioner of Income Tax and M/s United Spirits Ltd. (the Assessee).

The Assessing Officer disallowed the deduction, assuming the funds raised by the Assessee were used for investments in the share capital of various companies, rather than for working capital.

The Assessee claimed an amount of Rs. 1,80,22,000/- towards Foreign Exchange Fluctuation Loss (FEFL).

The court noted that the Assessee had offered the foreign exchange gain to tax, and established that the loss related to working capital loans, which were not used for interest payments as the AO assumed. The court found it erroneous to accept the foreign exchange gain but disallow the related loss.

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Judgement posted by

Bimal Jain

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FCA, FCS LLB with21 Yrs of Experience inTaxation Indirect and Direct: Education Qualification: B.Com (Hons) Chartered Accountants Company Secretary LLB Qualified SAP FI/CO Consultants Professional Membership: Chairmanof Indirect Tax Committee of PHD Chamber of Commerce Member of Indirec ... Read more

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