Kalpesh Classes

The exchange loss as a result of fluctuations in the rate of exchange of foreign currencies, held as stock-in-trade, is​​ allowable deduction​​ [CIT v. Bank of India (1996) 218 ITR 371 (Bom.)].

Foreign Currency Profits / losses.​​ 

When profit or loss arises to an assessee on account of appreciation in the value of foreign currency on conversion into another currency, such profit or loss would ordinarily be a trading profit if the foreign currency is held by the assessee on revenue account or as trading asset or as part of circulating capital embarked in the business.​​ But, if, on the other hand, the foreign currency is held as a​​ capital asset or as fixed capital such profit or loss would be of capital nature [Sutlej Cotton Mills Ltd. v. CIT (1997) 116 ITR 1(SC)].​​ For example, where foreign exchange earned overseas by the assessee is retained by offshore for payment of capital goods, any surplus arising on repatriation of such foreign exchange will be a capital receipt​​ [CIT v. Tata Locomotive and Engineering Co. Ltd. (1966) ITR405(SC)].

Loss incidental to business - forex loss on advance repayment

In Loksons (P.) Ltd. v. Asstt. CIT [2010]​​ 187 Taxman 55​​ (Bom.) the assessee incurred foreign exchange loss on refund of trading advance in view of order cancellation due to change in the Government policy.​​ The Bombay High Court held that excess payment in that case would meet the commercial expediency factor, as a good businessman will always maintain certain amount of credibility and specially so in a foreign market. The Court held that such loss would qualify as business loss.

When the co-venturers had undertaken a contract for​​ prospecting mineral oil, but each independently taking its own risk, the loss suffered on account of foreign currency transactions was found admissible. These were not independent foreign currency transactions, but loss, booked in conversion of expenditure in foreign currency into rupee expenditure at the prevailing exchange rate on the stipulated date, which was different from the rate at which the actual expenditure was incurred. Such loss was found admissible in CIT v. Enron Oil and Gas India Ltd. [2008] 305 ITR 75 (SC),​​ while affirming the decision of the Uttarakhand High Court in CIT v. Enron Oil and Gas India Ltd. [2008] 305 ITR 68 (Uttarakhand). From the facts, it is clear that it was not a case of foreign exchange loss in the sense that it was not loss suffered in foreign exchange held by the assessee, but only on conversion of different expenditures to uniform rate. Incidentally, it also observed that it was a case of production sharing with each co-venturer taking its own risk, so that there was justification for independent assessment on the reasoning of the Supreme Court, that there were “independent accounting regimes”.​​ 

Treatment of exchange profit under section 10A

Where the assessee books a sale on the basis of a prevailing rate of exchange on which an invoice is raised, but receives a different sum in Indian rupees as sale proceeds, the excess or the shortfall is not an exchange loss or profit in the sense that it is a result of sale of such exchange held by the assessee. It is only sale proceeds. It does not have a different character from the export turnover and it is also part of export profits. In coming to the conclusion, the Tribunal in Renaissance Jewellery P. Ltd. v. ITO [2007] 289 ITR (AT) 65 (Mum) followed a number of decisions of the Tribunal itself in Smt. Sujatha Grover v. Deputy CIT [2002] 74 TTJ 347 (Delhi) and in Priyanka Gems v. Asst. CIT [2005] 94 TTJ 557 (Ahd) apart from the three other unreported decisions. There​​ is also a decision of the High Court in CIT v. Rane (Madras) Ltd. [1999] 238 ITR 377 (Mad), where even a forward contract in foreign exchange, which had nexus with the export of goods could be treated as relating to the activity eligible for deduction in the context of sections 80E and 80-I. The same reasoning should​​ apply for section 80HHC as well.​​ That the profit on account of foreign exchange gain was directly referable to the articles and things exported by the assessee. Such profits were therefore of the same nature as the sale proceeds. The assessee was entitled​​ to exemption under section 10A in respect of such profits.

Forex fluctuation loss

The Supreme Court in CIT v. Woodward Governor India (P.) Ltd. [2009] 179​​ Taxman 327 held that the​​ unrealized loss due to foreign exchange fluctuation in foreign currency transaction on revenue items on the last date of the accounting year is an admissible deduction under section 37(1) so much so that the liability incurred in​​ this regard would constitute an ascertained liability and not a contingent liability.​​ The Apex Court held that the method of accounting undertaken by the assessee continuously and the follow up of Accounting Standards is supreme so that anyone not adhering​​ to the accounting consistency and Accounting Standards would be deprived of such deduction of forex fluctuation loss.

The Apex Court further held that the following factors count in order to judge if an expenditure is deductible :

• whether the​​ system of​​ accounting​​ followed by the assessee is mercantile system, which brings into debit the expenditure amount for which a legal liability has been incurred before it is actually disbursed and brings into credit what is due, immediately it becomes due before it​​ is actually received;

• whether the​​ same system has been followed​​ by the assessee from the very beginning and if there has been a change in the system, whether the change was bona fide;

• whether the​​ assessee has given the same treatment​​ to losses claimed to have accrued to it and to the gains that may accrue to it;

• whether the​​ assessee has been consistent and definite in making entries​​ in the account books in respect of losses and gains;

• whether the​​ method adopted​​ bsy the assessee for making entries in the books, both in respect of losses and gains as per nationally accepted Accounting Standards;

• whether the​​ system adopted by the assessee is fair and reasonable​​ or is adopted only with a view to reduce the incidence of taxation.