Foreign exchange fluctuation loss on head office funding held allowable as revenue deduction under year-end retranslation principles.

Foreign exchange fluctuation loss on head office funds used for day-to-day project execution and working capital was treated as revenue expenditure because the amounts remained liabilities, were repaid in the same foreign currency, and no capital asset was created. The year-end loss arose only from retranslation due to rupee depreciation, and the same treatment had been accepted in earlier years on identical facts. Article 7(3) of the India-Spain DTAA did not bar a notional disallowance of this nature, so the deduction was allowable and the disallowance failed.

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Issues: Whether the foreign exchange fluctuation loss arising on amounts received from the head office and outstanding in foreign currency at year-end was allowable as a revenue deduction.

Analysis: The amounts received from the head office were used for day-to-day project execution and working capital requirements, were reflected as liabilities, and were repaid in the same foreign currency. The loss arose only because of year-end retranslation due to rupee depreciation. The amounts did not bring into existence any capital asset. The Court also noted that the same claim had been accepted in earlier assessment years on identical facts, and that the bar under Article 7(3) of the India-Spain DTAA did not apply to a notional disallowance of this nature. The principle laid down for exchange differences on balance-sheet date supported allowance of the loss as expenditure.

Conclusion: The foreign exchange fluctuation loss was allowable as a revenue deduction and the disallowance was unsustainable in favour of the assessee.

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