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

Last updated: 18 November 2021

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.