Tribunal affirms deduction for foreign exchange loss as allowable expenditure under section 37(1) for AY 2013-14.

The Tribunal upheld the CIT(A)'s decision to allow the deduction for foreign exchange loss under section 37(1) for Assessment Year 2013-14. It determined that the loss, stemming from the restatement of trade receivables and payables, met the criteria of an ascertained liability and was in line with accounting standards. Despite no actual payment, the liability was required to be reflected in financial statements, making it an allowable expenditure under section 37(1) according to legal interpretations and precedents. The Revenue's appeal was dismissed, affirming the deduction for foreign exchange loss.

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Issues:
1. Whether CIT(A) was justified in directing AO to allow deduction for foreign exchange fluctuation loss without actual payment or settlement.
2. Allowability of foreign exchange loss under section 37(1) for Assessment Years 2012-13 and 2013-14.

Analysis:
1. Issue 1 - CIT(A) Decision Justification:
- The appeals questioned whether CIT(A) rightly directed the AO to allow deduction for foreign exchange fluctuation loss without actual payment or settlement. In the case of Assessment Year 2012-13, the department sought to withdraw the appeal due to the tax effect being less than the threshold set by CBDT Circular No.17/2018. Consequently, the appeal was dismissed.

2. Issue 2 - Allowability of Foreign Exchange Loss under Section 37(1):
- The core issue was whether the foreign exchange loss claimed by the assessee for Assessment Year 2013-14 was allowable under section 37(1). The AO contended that the loss was notional and hence not deductible, citing the decision of the Hon'ble Supreme Court in the case of M/s Sanjeev Woolen Mills vs. CIT 279 ITR 434.
- The CIT(A) allowed the deduction, emphasizing that the appellant followed the mercantile system of accounting and the loss was a result of restatement of outstanding trade payables and receivables, meeting the criteria of an ascertained liability under section 37(1).
- The Tribunal upheld the CIT(A)'s decision, citing precedents such as CIT vs. Woodward Governor and Karnataka High Court in the case of CIT vs. Motorola India. It highlighted that the loss due to exchange rate fluctuation on the balance sheet date is an allowable expenditure under section 37(1) as per the Accounting Standards.
- The Tribunal clarified that although there was no actual payment, the liability was required to be reflected in the financial statements as per AS-11 of ICAI. It referenced the Supreme Court's interpretation that an amount constituting a loss, even if not physically paid, could be considered an allowable expenditure under section 37(1).

3. Conclusion:
- The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to allow the deduction for foreign exchange loss. It concluded that the loss, arising from the restatement of trade receivables and payables, qualified as an allowable expenditure under section 37(1) based on relevant legal interpretations and accounting standards.

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