Exchange-rate loss deduction denied where devaluation occurred after the accounting year closed

Under the mercantile system, an exchange-rate loss from rupee devaluation was not deductible in the relevant year where the devaluation occurred after the close of the accounting year. The claimed loss arose on 22 December 1981, while the accounting year had ended about two months earlier on Diwali, so the loss did not accrue within that year. The deduction was therefore disallowed, and the issue was answered in favour of the Revenue and against the assessee.

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Issues: Whether the assessee was entitled to claim deduction for loss arising from exchange-rate difference on devaluation when the devaluation occurred after the close of the accounting year.

Analysis: The assessee followed the mercantile system of accounting. The claimed loss arose on account of devaluation of the rupee on 22 December 1981, whereas the accounting year had closed about two months earlier on Diwali. Since the loss did not arise within the relevant accounting year, the claim was not allowable as a deduction in that year.

Conclusion: The claim for deduction was disallowed. The question was answered in the affirmative, in favour of the Revenue and against the assessee.

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