2017 (7) TMI 1194 - HC - Income Tax

Appeal Upheld: Deductibility of Foreign Exchange Losses in Derivatives

The Commissioner of Income Tax-3, Mumbai Versus The Paper Products Ltd.

The appeal contested the Tribunal's decision allowing the Assessee's claim on unexplained foreign exchange forward contract loss for the Assessment year ... Unexplained foreign exchange forward contract - Tribunal holding that the notional loss on unexplained foreign exchange forward contract was in the nature of stock in trade capable of being valued at cost or market price - Held that:- The Tribunal while deciding the Appeal has relied on the Judgment of the Apex Court in case of The Commissioner of Income Tax v. Woodward Governor India (P.) Ltd. [2009 (4) TMI 4 - SUPREME COURT] as observed that the loss claimed by the Assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance-sheet was allowance and the Assessee was entitled adjustment of actual cost of imported assets. The loss due to foreign exchange fluctuation in foreign currency transactions in derivatives has to be considered on the last date of account year and it is deductible under Section 37(1) of the Act - No error has been committed by the Tribunal Issues:Assessment of unexplained foreign exchange forward contract loss for the Assessment year 2008-09.Analysis:The appeal in question concerns the Assessment year 2008-09 where the Appellant contested the Tribunal's decision to allow the Assessee's claim on unexplained foreign exchange forward contract loss. The Appellant argued that the loss was merely notional and should not have been considered as stock in trade, especially since foreign currency trading was not the Assessee's primary business. The Appellant contended that the notional loss from the foreign exchange forward contract at the end of the financial year was not permissible under the Income Tax Act.The Respondent's counsel supported the Tribunal's decision, which was based on the judgment of the Apex Court in the case of The Commissioner of Income Tax v. Woodward Governor India (P.) Ltd. The Apex Court, in the aforementioned case, ruled that losses due to fluctuation in foreign exchange rates at the balance sheet date were allowable and entitled the Assessee to adjust the actual cost of imported assets. The Apex Court further clarified that losses from foreign exchange fluctuations in derivatives should be considered at the end of the accounting year and were deductible under Section 37(1) of the Act.The Tribunal's decision to apply the judgment of the Apex Court in Woodward Governor India (P.) Ltd. was deemed appropriate, as it aligned with the legal principles established by the higher court. Consequently, the Court found no error in the Tribunal's decision and concluded that no substantial question of law arose from the matter. Therefore, the appeal was dismissed, and no costs were awarded in this case.