Foreign exchange fluctuation loss and leased-premises renovation costs require verification, bifurcation, and recomputation of taxable income.

Year-end foreign exchange fluctuation may give rise to a real business loss or gain and, on mercantile principles, can be allowed as a deduction subject to verification of the accrued liability and correct quantification; the matter was remanded for fresh determination. Expenditure on renovation of leased office premises could be treated as revenue expenditure to that extent, but amounts paid to the lessor for alteration of the structure did not qualify as revenue expenditure and were not depreciation-eligible in the assessee's hands. The assessment therefore required bifurcation of the two components and recomputation of income.

---

---

Issues: (i) whether foreign exchange loss arising from year-end exchange fluctuation was allowable as deduction; (ii) whether expenditure on renovation of leased office premises and payment to the lessor was allowable as revenue expenditure or fell within the ambit of Explanation 1 to Section 32.

Issue (i): Whether foreign exchange loss arising from year-end exchange fluctuation was allowable as deduction.

Analysis: Year-end fluctuation in foreign currency liability can result in a real loss or gain and must be taken into account in computing business income. At the same time, allowance of such loss depends upon verification by the Assessing Officer in the light of the governing guidelines governing mercantile accounting and determination of accrued liability. The lower authorities had not examined the claim on that footing, and there was also a factual error in the quantum of disallowance recorded in the assessment and appellate orders.

Conclusion: The issue was answered partly in favour of the Revenue, and the matter was remitted for fresh determination of the allowable foreign exchange loss.

Issue (ii): Whether expenditure on renovation of leased office premises and payment to the lessor was allowable as revenue expenditure or fell within the ambit of Explanation 1 to Section 32.

Analysis: Expenditure actually incurred by the assessee for renovation of the office premises could qualify as revenue expenditure, but the payment made to the lessor for alteration of the structure did not partake of the character of revenue expenditure. Such payment also could not be treated as depreciation-eligible capital expenditure in the hands of the assessee, since the assessee had not itself constructed the asset but had merely paid the amount to the lessor. The computation therefore required segregation between the two components.

Conclusion: The issue was answered partly in favour of both the Revenue and the assessee, with only the renovation expenditure being allowable and the payment to the lessor being disallowed.

Final Conclusion: The appellate order was set aside to the limited extent of both issues and the matter was remanded for recomputation of income in accordance with the stated principles.

Ratio Decidendi: Year-end foreign exchange fluctuation may give rise to an allowable business loss subject to verification, while expenditure on a leased building must be bifurcated between deductible renovation and non-deductible payments that do not constitute revenue expenditure or depreciation-eligible cost in the assessee's hands.

---