Business-linked forex loss deductible; capital gains computed on actual consideration, not substituted market value.

Foreign exchange fluctuation loss on business-linked foreign currency loans advanced to sister concerns was treated as a deductible business loss because the borrowings were integrally connected with procurement of raw materials and arose in the course of business. Capital gains were required to be computed on the actual full value of consideration received or accruing on transfer, and market value could not be substituted merely because the shares were sold to related concerns. In the absence of evidence of higher actual consideration, the assessing authority could not replace the sale price with market value. The stated result was that both issues were decided in favour of the assessee.

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Issues: (i) Whether foreign exchange fluctuation loss on loans advanced to sister concerns for business purposes was deductible; (ii) whether capital gains could be computed by substituting the market value of shares for the actual consideration received on sale.

Issue (i): Whether foreign exchange fluctuation loss on loans advanced to sister concerns for business purposes was deductible.

Analysis: The loans were advanced for securing supply of raw materials and were integrally connected with the assessee's business. The fluctuation loss arose on account of exchange-rate changes in outstanding foreign currency loans. The principle applied from the decision in Woodward Governor recognised that exchange variation affecting a business liability or outgoing may be allowed as a deductible business loss where it is incurred in the course of business.

Conclusion: The deduction of foreign exchange fluctuation loss was allowable and the issue was decided in favour of the assessee.

Issue (ii): Whether capital gains could be computed by substituting the market value of shares for the actual consideration received on sale.

Analysis: For computation of capital gains, the statutory expression is the full value of the consideration received or accruing on transfer. That expression refers to what the transferor actually receives and does not permit substitution of market value merely because the transfer was to related concerns. In the absence of evidence that any higher consideration was actually received, the Assessing Officer could not adopt market value. The statutory scheme also showed that where the legislature intended a departure, it made specific provision such as section 50C.

Conclusion: Market value could not be substituted for actual consideration, and the issue was decided in favour of the assessee.

Final Conclusion: The Revenue's appeal raised no merit on either substantive issue, and the Tribunal's allowance of the assessee's claim was sustained.

Ratio Decidendi: Foreign exchange variation on business-linked foreign currency loans may be deductible as business loss, and capital gains must be computed only on the actual full value of consideration received unless the statute expressly authorises substitution.

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