Foreign exchange fluctuation losses are deductible if liability accrued when contract entered.

The ITAT dismissed the department's appeal and upheld the decision of the Ld. CIT(A) to delete the addition of notional foreign exchange loss as a deduction. The ITAT ruled that the increase in liability due to foreign exchange fluctuation was allowable as a deduction as the liability accrued when the contract was entered into, and the fluctuation was factual, not notional. This decision aligns with the precedent set by the Delhi High Court, affirming that foreign exchange fluctuation losses are deductible based on the prevailing exchange rate at the end of the financial year.

---

---

Issues:
Disallowance of notional foreign exchange loss as deduction.

Analysis:
The appeal was filed by the department against the order of the Ld. CIT(A) deleting the disallowance of notional foreign exchange loss of Rs. 56,16,520 for the assessment year 2009-10. The assessee, engaged in the business of manufacturing and sale of products, had debited an amount on account of loss on foreign exchange during the scrutiny proceedings. The Assessing Officer added back the notional foreign exchange loss to the income of the assessee, which was subsequently deleted by the Ld. CIT(A), leading to the department challenging this deletion before the ITAT.

The Departmental Representative argued that the notional loss was booked by the assessee on the restatement of liability and had not actually occurred during the relevant period. It was contended that true profit or loss could only be determined upon final settlement of the contract, not when the contract remained un-concluded. The Ld. AR for the assessee relied on the judgment of the Delhi High Court in Commissioner of Income Tax vs Woodward Governor India (P) Ltd. to support the claim that the increase in liability due to foreign exchange fluctuation was allowable as a deduction and was not notional or contingent.

The ITAT, after considering the submissions and the precedent set by the Delhi High Court in the Woodward Governor India case, held that the liability arising from the contract was certain and not contingent, as the liability accrued when the contract was entered into. The change in the value of foreign currency was deemed factual, not notional, and the increase in liability due to foreign exchange fluctuation was allowable as a deduction. Therefore, the ITAT dismissed the appeal of the department, upholding the decision of the Ld. CIT(A) in deleting the addition of notional foreign exchange loss.

In conclusion, the ITAT's decision was based on the precedent set by the Delhi High Court regarding the treatment of foreign exchange fluctuation losses as deductions, affirming that such losses were not notional or contingent but allowable as deductions based on the exchange rate prevailing at the end of the financial year.

---