Foreign exchange fluctuation loss on ECB restatement was held allowable as revenue expenditure, not capital outlay.

Foreign exchange fluctuation loss on year-end restatement of external commercial borrowing used for business purposes was held allowable as revenue expenditure. The restatement complied with mandatory Accounting Standard 11, the loss had consistently been recognised in earlier years and accepted by the revenue, and the fluctuation did not alter the cost of fixed assets. Section 43A was found inapplicable because the assets were purchased in India. The Tribunal applied the principle of consistency and treated the loss as a real liability, not a notional item, so the disallowance was unsustainable.

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Issues: Whether foreign exchange fluctuation loss arising from year-end restatement of external commercial borrowing was deductible as revenue expenditure, or was to be treated as capital expenditure and disallowed.

Analysis: The borrowing had been utilised for business purposes and the year-end restatement was made in accordance with Accounting Standard 11, which was mandatory for companies. The loss had consistently been recognised in the profit and loss account in earlier years and accepted by the revenue. The exchange fluctuation did not alter the cost of the fixed assets, and section 43A of the Income-tax Act, 1961 was found inapplicable on the facts because the assets were purchased in India. The treatment was supported by the principle of consistency and by the view that the fluctuation loss was a real liability, not merely notional.

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

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