I-T - Sec 37 - Whether foreign exchange loss suffered due to devaluation of rupee is notional or actual loss - Whether such loss is allowable only after five tests laid down by Apex Court in Woodward Governor case are satisfied - Yes, rules HC
BANGALORE, MAY 18, 2011: THE issues before the HC are - Whether foreign exchange loss suffered due to devaluation of rupee is notional or actual loss and whether such loss is allowable under Sec 37. Another question is - Whether, before such loss is allowed, five tests laid down by the Apex Court in Woodward Governor case must be satisfied. And the HC says YES.
Facts of the case
Assessee is an Indian Company engaged in the manufacture, sale and service of two-way land mobile communications systems, paging and wireless date system, semi-conductor, cellular infrastructure and telephones, etc. The assessee claimed deductions on the basis of loss sustained because of variation in the Foreign Exchange rate. Both the Assessing Authority as well as Appellate Authority disallowed the said loss. On appeal, the Tribunal held that the assessee was following mercantile accounting system and also followed settled principles of accounting and taxation laws. From the year-end statement of liabilities, due to fluctuation in rate of foreign currency, loss was allowable on a year to year basis, as the loss was not national or contingent, but an actual loss. The event which gave rise to the loss in the decrease in the value of the rupees in the foreign currency. The reduction in the value of the rupee had taken place within the financial year, although the liability had not been discharged by the assessee within the relevant previous year. The reduction in the value of the rupee, therefore was not contingent, but is an actual event. Therefore, it held the assessee was entitled to allowance of the said loss sustained.
On appeal before the High Court, the Revenue assailed the Tribunal's decision by referring the to Apex Court decision in Woodward Governor India (P) Ltd. The counsel for the Revenue contened that though the Supreme Court had held that loss suffered by the assessee in respect of a revenue liability on account of exchange difference as on the date of the balance sheet is an item of expenditure allowable under Section 37(1) in the year of accrual, however, the Supreme Court also held that in order to find out if the expenditure was taxable, five tests had been prescribed. Therefore, only, if the said five tests were satisfied, the assessee would be entitled to said benefit. As in this case, none of the authorities have applied their mind, the Court may direct the authorities to consider whether those tests were fulfilled by the assessee before he was entitled to deduction.
Having heard the parties, the HC held that,
++ the first and foremost requirement of the Apex Court decision is that he must be adopting mercantile system of accounting. Secondly, the said loss claimed should have been claimed not only in the year in dispute, but a continuous course of conduct to show that, that is the way the said claim is reflected in the accounts. Thirdly, it should be bonafide one. The Tribunal on appreciating the material on record had held that the aforesaid conditions were satisfied. It is only after being satisfied of the said conditions, it has granted the relief;
++ in these circumstances, there is no justification to interfere with the said order or to impose any conditions, as the conditions imposed by the Supreme Court all stand fully satisfied. In this view of the matter, no substantial question of law arises for consideration.
BANGALORE, MAY 18, 2011: THE issues before the HC are - Whether foreign exchange loss suffered due to devaluation of rupee is notional or actual loss and whether such loss is allowable under Sec 37. Another question is - Whether, before such loss is allowed, five tests laid down by the Apex Court in Woodward Governor case must be satisfied. And the HC says YES.
Facts of the case
Assessee is an Indian Company engaged in the manufacture, sale and service of two-way land mobile communications systems, paging and wireless date system, semi-conductor, cellular infrastructure and telephones, etc. The assessee claimed deductions on the basis of loss sustained because of variation in the Foreign Exchange rate. Both the Assessing Authority as well as Appellate Authority disallowed the said loss. On appeal, the Tribunal held that the assessee was following mercantile accounting system and also followed settled principles of accounting and taxation laws. From the year-end statement of liabilities, due to fluctuation in rate of foreign currency, loss was allowable on a year to year basis, as the loss was not national or contingent, but an actual loss. The event which gave rise to the loss in the decrease in the value of the rupees in the foreign currency. The reduction in the value of the rupee had taken place within the financial year, although the liability had not been discharged by the assessee within the relevant previous year. The reduction in the value of the rupee, therefore was not contingent, but is an actual event. Therefore, it held the assessee was entitled to allowance of the said loss sustained.
On appeal before the High Court, the Revenue assailed the Tribunal's decision by referring the to Apex Court decision in Woodward Governor India (P) Ltd. The counsel for the Revenue contened that though the Supreme Court had held that loss suffered by the assessee in respect of a revenue liability on account of exchange difference as on the date of the balance sheet is an item of expenditure allowable under Section 37(1) in the year of accrual, however, the Supreme Court also held that in order to find out if the expenditure was taxable, five tests had been prescribed. Therefore, only, if the said five tests were satisfied, the assessee would be entitled to said benefit. As in this case, none of the authorities have applied their mind, the Court may direct the authorities to consider whether those tests were fulfilled by the assessee before he was entitled to deduction.
Having heard the parties, the HC held that,
++ the first and foremost requirement of the Apex Court decision is that he must be adopting mercantile system of accounting. Secondly, the said loss claimed should have been claimed not only in the year in dispute, but a continuous course of conduct to show that, that is the way the said claim is reflected in the accounts. Thirdly, it should be bonafide one. The Tribunal on appreciating the material on record had held that the aforesaid conditions were satisfied. It is only after being satisfied of the said conditions, it has granted the relief;
++ in these circumstances, there is no justification to interfere with the said order or to impose any conditions, as the conditions imposed by the Supreme Court all stand fully satisfied. In this view of the matter, no substantial question of law arises for consideration.
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