Taxpayer allowed deduction of foreign exchange loss on foreign-currency loan as revenue expenditure under Section 37; fresh plea admitted

SC upheld the ITAT and allowed the taxpayer to deduct foreign-exchange loss on a foreign-currency loan as revenue expenditure under Section 37, rejecting the HC's contrary view. The Court held the loan was for the carrying on of the financing business, not for creating an asset, so exchange loss is wholly deductible. The SC also upheld the ITAT's admission of a fresh revenue plea raised first on appeal, noting the department's representative raised no objection. The assessment is to be reopened and amended to give consequential relief.

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Issues Involved:
1. Deductibility of exchange fluctuation loss.
2. Treatment of erroneously capitalized revenue expenses as revenue expenses.
3. Applicability of Section 43A of the Income Tax Act, 1961.
4. Permissibility of raising new claims before the ITAT.

Detailed Analysis:

1. Deductibility of Exchange Fluctuation Loss:
The appellant company submitted income returns for the assessment year 1997-1998, claiming a loss due to exchange fluctuation amounting to Rs. 1,10,53,909. The assessing officer concluded the assessment with positive taxable income, disallowing the claimed loss. The ITAT reversed this decision, holding that the loss due to exchange fluctuation was a revenue expenditure and thus allowable as a deduction. The ITAT supported its decision by stating that the borrowed funds were utilized for regular finance business, and the loss was incidental to carrying on the business, thus falling within the purview of Section 37 of the Income Tax Act, 1961. The High Court, however, reversed the ITAT's decision, stating that the ITAT had not provided sufficient reasons for its conclusion.

2. Treatment of Erroneously Capitalized Revenue Expenses:
The appellant also claimed a fresh deduction of Rs. 2,46,04,418 for revenue expenses erroneously capitalized in the returns. The ITAT entertained this fresh claim, noting that the department's representative had no objection. The ITAT cited the Supreme Court's decision in National Thermal Power Co. Ltd. vs. Commissioner of Income Tax, which allows for fresh claims to be entertained under Section 254 of the Income Tax Act. The ITAT concluded that the entire claim of Rs. 3,56,57,727 should be allowed as revenue expenditure. The High Court disagreed, stating that the ITAT's conclusion lacked a basis.

3. Applicability of Section 43A of the Income Tax Act:
The ITAT found that Section 43A, which deals with adjustments to the actual cost of assets acquired from a country outside India due to changes in the rate of exchange, did not apply to the appellant's case. The appellant had borrowed money for financing its business, not for acquiring an asset from outside India. The High Court did not specifically address this issue.

4. Permissibility of Raising New Claims Before the ITAT:
The department argued that the appellant could not raise a new claim before the ITAT that was inconsistent with the original return. The ITAT, however, allowed the new claim, citing no objection from the department's representative and relying on the Supreme Court's decision in National Thermal Power Co. Ltd. The department's reliance on Goetze (India) Ltd. vs. Commissioner of Income Tax was dismissed, as the limitation on raising new claims applied to the assessing authority, not the ITAT.

Conclusion:
The Supreme Court upheld the ITAT's decision, allowing the appellant's entire claim of Rs. 3,56,57,727 as revenue expenditure. The Court found that the High Court had missed relevant aspects of the ITAT's analysis and had not considered pertinent Supreme Court decisions. The Supreme Court also clarified that the ITAT had the authority to entertain new claims under Section 254 of the Income Tax Act. Consequently, the High Court's judgment was set aside, and the ITAT's decision was restored. The assessing officer was directed to amend the final assessment order accordingly, treating consequential benefits such as depreciation as unavailable. The appeal was allowed with no order as to costs.

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