Treatment of loss due to foreign exchange fluctuations

[Sanjeev Sharma]

There was a loss on account of Foreign Exchange Fluctations on restatement of Foreign currency loan taken for purchase of Land, Building and Machinery ( indegenous) for a manufacturing project. How will it be treated in Income tax ??

[Rama Krishana]

I am not an expert but wish you to put your views and understanding first so that the same may be discussed further.

[Sanjeev Sharma]

Perplexed at your comments. I find nothing in Income tax Act which applies to this situation. Sec 43A also does not apply to this, being indegenous machinery. I had a problem and that is the reason for this query. If you know, I would appreciate your reply to the query.

[Rama Krishana]

I hope your issue would be solved with the help of Supreme Court decision reported in 2009 -TMI - 32906 - SUPREME COURT - in this case, supreme court has allowed the deduction on account of foreign exchange fluctuation. In this case, a detailed discussion on cost u/s 43A has been made and reasoned decision has been delivered.

[Sanjeev Sharma]

You mean Woodworth case. That does not apply to this situation.It says loss on account of revenue a/c and on account of capital a/c. Loss on account of revenue a/c is allowed as an expense. We have loss on account of capital a/c. In 43A situation, it is capitalised. In non 43A situation, will it be entirely disallowed ??

AI Summary

Foreign exchange fluctuation loss treatment: capitalisation or revenue deduction hinges on asset use and characterisation of the loss.
Issue: whether exchange loss on restatement of a foreign currency loan taken to acquire land, building and indigenous machinery is capital or revenue in character. If capital, the loss may be capitalised as part of asset cost under the capitalisation rule; if revenue, it may be deductible. Section 43A was noted as inapplicable to indigenous machinery here, creating uncertainty whether a capital-account exchange loss not covered by that provision is disallowed or must be assessed by economic substance and use of funds.