Foreign exchange loss on loan transaction with subsidiary deductible under Income Tax Act

The ITAT Chennai ruled in favor of the assessee, allowing the appeal and holding that the exchange fluctuation loss on the loan transaction with the foreign subsidiary company was a regular revenue loss and deductible under the Income Tax Act, 1961.

---

---

Issues:
1. Treatment of exchange difference on loan transaction with foreign subsidiary company as notional loss.

Detailed Analysis:
The appeal before the ITAT Chennai arose from the order of the Ld. Commissioner of Income Tax (Appeals) against the order passed by the DCIT, Corporate Circle-4(2), Chennai under section 143(3) of the Income Tax Act, 1961 for the Assessment Year 2015-16. The main issue to be decided was whether the exchange difference arising on the loan transaction with a foreign subsidiary company could be considered as a notional loss.

The assessee had given a loan to its foreign subsidiary company in 2013, which was repaid during the relevant year, resulting in a foreign exchange fluctuation loss. In the previous assessment year, the assessee had earned an exchange gain on the same transaction and had offered it for taxation. However, in the year under consideration, the assessee incurred an exchange fluctuation loss upon receiving the loan back, which was claimed as a revenue loss under section 37(1) of the Act. The assessing officer treated this loss as notional and capital expenditure, disallowing it in the assessment.

The Ld. CIT(A) considered the exchange fluctuation loss as a "mark to market" loss akin to exchange loss on forex-derivatives, deeming it as capital in nature and contingent expenditure. However, the ITAT Chennai found that the Revenue misunderstood the transaction. The ITAT held that the exchange fluctuation loss incurred by the assessee was a regular revenue loss and thus allowable as a deduction, citing the decision of the Hon'ble Supreme Court in CIT vs. Woodward Governor India (P.) Ltd. The ITAT allowed the appeal of the assessee, overturning the lower authorities' decision.

In conclusion, the ITAT Chennai ruled in favor of the assessee, allowing the appeal and holding that the exchange fluctuation loss on the loan transaction with the foreign subsidiary company was a regular revenue loss and deductible under the Income Tax Act, 1961.

---