Foreign exchange fluctuation loss on EEFC balances is revenue in nature and deductible as business expenditure.

Foreign exchange fluctuation loss on closing balances in EEFC accounts was treated as a real revenue loss, not a notional or capital loss, because the balances represented export proceeds used in the ordinary course of business and retained the character of circulating capital. Restatement at year-end exchange rates, when consistently recognised under the regular method of accounting, was accepted as reflecting a monetary trading item. Applying the settled principle that exchange gains or losses on trading assets or circulating capital are revenue in nature, the loss was allowable as a business deduction under section 37(1) and the disallowance was deleted.

---

---

Issues: Whether the foreign exchange fluctuation loss arising on the closing balance held in EEFC accounts was a notional or capital loss, and whether such loss was allowable as a revenue deduction under section 37(1) of the Income-tax Act, 1961.

Analysis: The balance in the EEFC accounts represented export sale proceeds received in foreign currency and used in the course of business. On the facts, the unutilised balance retained its character as circulating capital and working capital, not as a fixed capital asset. The loss arose on restatement of a monetary item at the year-end exchange rate and was recognised consistently under the method of accounting regularly employed. Applying the settled principle that foreign exchange gains or losses on trading assets or circulating capital are revenue in character, and following the binding line of authority on exchange fluctuation loss, the disallowance could not be sustained merely because the loss was computed at the balance-sheet date.

Conclusion: The loss was held to be a real business loss of revenue nature and was allowable under section 37(1); the disallowance was deleted.

Ratio Decidendi: Foreign exchange fluctuation loss on monetary trading receipts held as circulating capital in EEFC accounts is a revenue loss allowable as business expenditure under section 37(1) when it is recognised in accordance with the regular method of accounting.

---