Foreign exchange revaluation loss on business loans to a subsidiary is deductible as business expenditure.

Foreign exchange loss on year-end restatement of foreign currency loans advanced to a foreign subsidiary for business purposes was treated as deductible business expenditure under section 37(1). The accounting revaluation of the outstanding loan, in line with the assessee's method of accounting, was not regarded as a capital loss merely because the loan remained unpaid at the balance sheet date. The objection that the loss was notional was not accepted, particularly where the corresponding foreign exchange gain in an earlier year had been recognised and the accounting treatment had not been disputed. The loss was therefore allowable as a deduction.

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Issues: Whether foreign exchange loss arising on restatement or revaluation of foreign currency loans advanced to a foreign subsidiary for business purposes was deductible under section 37(1) of the Income-tax Act, 1961.

Analysis: The assessee had advanced loans and advances to its subsidiaries in connection with its real estate business and revalued the outstanding foreign currency loan at year end in accordance with its method of accounting. The loss was not treated as a capital loss merely because the loan remained outstanding on the balance sheet date. The revenue's objection that the loss was notional did not prevail, particularly since the corresponding foreign exchange gain in an earlier year had been accepted and the accounting treatment had not been disputed. On these facts, the loss was held to be in the nature of business expenditure and allowable under the governing tax principles relating to foreign exchange revaluation.

Conclusion: The foreign exchange fluctuation loss was allowable as a deduction and the disallowance was set aside.

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