Karnataka High Court allows Income Tax Deduction on loss suffered by Assessee on Foreign Exchange Fluctuation Loss [Read Order]

The Karnataka High Court allowed the Income Tax deduction on the loss suffered by an assessee on account of Foreign Exchange Fluctuation Loss.

The assessee, M/s United Spirits Ltd. claimed an amount of Rs.1,80,22,000/- towards the foreign exchange fluctuation loss. The Assessing Officer disallowed the same holding that the assessee had not established the nexus for utilization of the funds raised in FNCR are used for the business purposes. It was assumed by the Assessing Officer that the loan had been used for certain investments into the share capital of various companies. The same has been confirmed by the CIT (A). The Tribunal having noticed that the assessee had offered the foreign exchange to tax which had been accepted by the Assessing Officer 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 Assessing Officer. Thus, the said loss was allowed as a deduction.

The assessee has demonstrated before the Tribunal that increases in investments from Rs.102.92 crores to Rs.380.32 crores was on account of investment of Rs.287 crores in 8% redeemable preference shares of Phipso Distillery Ltd., which was made on 31.03.2005 i.e., on the last day of the year and therefore the working capital obtained on various dates between 02.04.2004 and 31.03.2005 could not have been utilized from the same. It was also pointed out that the interest paid on the loans was allowed by the Assessing Officer himself as a deduction, however, no loss in connection thereto was allowed. The action of the Assessing Officer accepting the Foreign Exchange but disallowing the loss appears to be erroneous.

The division bench of Justice S. Sujatha and Justice Ravi V.Hosmani 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 Act. The view of the Assessing Officer and the CIT (A) that the investments were made on, from the FNCR loans is not based on any supporting material and is only a presumption. Hence, confirming the view of the Tribunal, the court answered in favour of the assessee and against the revenue.

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