Revenue treatment of forex losses and compensatory statutory interest supports deductions where consistency and business purpose are established

Foreign exchange fluctuation losses on outstanding trade payables may qualify as revenue deductions where the taxpayer consistently follows the mercantile system, has treated corresponding gains as revenue in earlier years, and the liability remains connected with ordinary business transactions rather than a loan. The principle of consistency supports a uniform tax treatment across years, subject to Section 37(1) of the Income-tax Act, 1961. Interest on delayed payment of sales tax and service tax may also be deductible where it is compensatory, not penal or linked to an illegal purpose. On these principles, both deductions were treated as allowable and the Revenue's challenges were described as unsuccessful.

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Issues: (i) Whether unrealised foreign exchange fluctuation loss on outstanding trade payables was allowable as deduction; (ii) Whether interest on delayed payment of sales tax and service tax was allowable as deduction.

Issue (i): Whether unrealised foreign exchange fluctuation loss on outstanding trade payables was allowable as deduction.

Analysis: The assessee had consistently recognised foreign exchange gain and loss on the mercantile system and had offered gains to tax in earlier years. The liability remained a trade payable arising from regular business transactions and was not recharacterised as a loan merely because payment was delayed. The factual pattern showed no material change across years, and the principle of consistency required the Revenue to adopt a uniform approach where similar gains had been treated as revenue in nature. The claim was also examined with reference to Section 37(1) of the Income-tax Act, 1961 and the contention based on Section 93 of the Income-tax Act, 1961 was not accepted.

Conclusion: The foreign exchange fluctuation loss was held allowable as revenue deduction and the Revenue's challenge failed.

Issue (ii): Whether interest on delayed payment of sales tax and service tax was allowable as deduction.

Analysis: The interest was treated as compensatory in nature and not as a penalty or fine for breach of law. Following the settled position on such statutory interest and the consistent view that delayed-payment interest is not hit by the bar against illegal or prohibited expenditure, the amount was held deductible under Section 37(1) of the Income-tax Act, 1961.

Conclusion: The interest on delayed payment of sales tax and service tax was held allowable as deduction and the Revenue's challenge failed.

Final Conclusion: Both contested additions were sustained in favour of the assessee, and the Revenue's appeal did not succeed.

Ratio Decidendi: Where a taxpayer consistently follows the mercantile method and treats foreign exchange fluctuation on trade liabilities as revenue in character, the resulting loss is deductible on accrual; similarly, compensatory interest for delayed statutory payments is allowable as business expenditure and is not disallowed merely because the underlying tax liability was paid belatedly.

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