2019 (7) TMI 1158 - HC - Income Tax

Court upholds Assessee's foreign exchange loss claim under Income Tax Act, emphasizing proper inquiry.

Principal Commissioner of Income Tax- 1 Versus M/s. Albasta Wholesale Services Limited

The High Court dismissed the Revenue's appeal against the ITAT order confirming the Assessee's foreign exchange fluctuation loss claim under Section 37 of ... Allowability of Foreign exchange fluctuation loss u/s 37 - difference between amount given by it as loan to its subsidiary in the USA and the amount realized due to fluctuation is claimed as ‘exchange loss’ - non conducting any enquiry - HELD THAT:- Without conducting any inquiry of the fact whether there was any loss on account of the fluctuation in the foreign exchange and rate of the US Dollar within the relevant time, the AO simply disallowed the above amount. This is despite the return being scrutinized under Section 143(3) of the Act. The disallowance could not have been without a preceding inquiry into the claim made by the Assessee. In fact the ITAT in its order noted the submission on behalf of the Assessee that as against US $ 10 million given as loan it received US$10,01,50,000 and US$ 1,50,000 was offered as income of the Assessee for the current AY which was accepted by the AO. However, due to fluctuation in the rate of $ vis-a-vis Rupee, the Assessee realized ₹ 443,07,10,000/-. The difference between the Rupee value of the 10 million US$ advanced in 2008 and received back in 2010 was ₹ 35,42,20,000/- (478,49,30,000 minus 443,07,10,000). This difference was claimed as loss on account of foreign exchange fluctuation. Therefore, the CIT and ITAT were right in reversing the above disallowance.- Decided against revenue Issues:1. Appeal against ITAT order confirming foreign exchange fluctuation loss claim under Section 37 of the Act.Analysis:The High Court dealt with an appeal filed by the Revenue challenging the ITAT order regarding the allowance of a foreign exchange fluctuation loss claim by the Assessee under Section 37 of the Income Tax Act. The Revenue contended that the ITAT erred in confirming the order of the CIT (A) and allowing the Assessee's claim of Rs. 35,42,20,000 as a foreign exchange fluctuation loss. The Revenue pointed out that the Assessing Officer had disallowed the amount without conducting a proper inquiry into the claim made by the Assessee, despite the return being scrutinized under Section 143(3) of the Act. The Assessee had given a loan of US $10 million to its subsidiary in the USA, and upon liquidation, received US $10,01,50,000. Due to fluctuation in the exchange rate, the Assessee realized Rs. 443,07,10,000, resulting in a claimed loss of Rs. 35,42,20,000. Both the CIT and ITAT reversed the disallowance, considering the fluctuation in the exchange rate as the basis for the loss claim.The Court emphasized that the disallowance by the Assessing Officer should have been preceded by an inquiry into the claim made by the Assessee. The ITAT noted the submission that the Assessee received back more than the amount advanced due to exchange rate fluctuations, resulting in a loss of Rs. 35,42,20,000. The Court found that no substantial question of law arose from the ITAT's order, leading to the dismissal of the appeal by the Revenue. The judgment highlighted the importance of conducting a thorough inquiry before disallowing a claim related to foreign exchange fluctuations, especially when the exchange rate variations significantly impact the financial outcome of transactions involving foreign currency.