Forex loss arising on loan obtained from Foreign Currency Non-Resident a/c for business purpose is allowable: HC

Case Details: PCIT v. United Spirits Ltd - [2022] 134 taxmann.com 17 (Karnataka)

Judiciary and Counsel Details

• • Mrs. S. Sujatha and Ravi V. Hosmani, JJ.
  • E.I. Sanmathi, Adv. for the Appellant. 
  • Suryanarayana T. and Ms. Manasa Ananthan, Advs. for the Respondent.

Facts of the Case

Assessee company was engaged in the business of manufacturing and trading in beers. Assessee took the loan in foreign currency non-resident account (FCRA) and claimed an amount towards the foreign exchange fluctuation loss in relation to fluctuation in the interest rate on said loan.

The Assessing Officer disallowed the same and held that assessee didn’t utilize the fund raised in FNCR for business purposes. It was used for investment into the share capital of various companies for earning interest. The CIT(A) also upheld the order of AO.
However, the Tribunal allowed the assessee’s appeal. Aggrieved-AO filed the instant appeal before the Karnataka High Court.

High Court Held

The Karnataka High Court held that the assessee had demonstrated before the Tribunal that an increase in investments was on account of investment of certain amount in 8 per cent redeemable preference shares of a company, which was made on the last day of the year. Thus, the working capital obtained on various dates could not have been utilized.
It was also pointed out that the interest paid on the loans were allowed by AO as a deduction. However, no loss in connection to that was allowed. The action of AO accepting the foreign exchange but disallowing the loss appears to be erroneous.
Accordingly, the loss suffered by the assessee on account of foreign exchange difference as on the date of the balance sheet was an item of expenditure under section 37(1).

Case Review I

• • Vijaya Bank v. CIT [2010] 190 Taxman 257/323 ITR 166 (SC)followed.

Case Review II

• • Taparia Tools Ltd. v. Jt. CIT [2015] 55 taxmann.com 361/231 Taxman 5/372 ITR 605 (SC)
  • CIT v. Reliance Industries Ltd. [2019] 102 taxmann.com 52/261 Taxman 165/410 ITR 466 (SC)
  • CIT v. Reliance Utilities & Power Ltd. [2009] 178 Taxman 135/313 ITR 340 (Bom.) and
  • CIT Delhi v. Woodward Governer India (P.) Ltd. [2009] 179 Taxman 326/312 ITR 254 (SC)followed.

List of Cases Referred to

• • Vijaya Bank v. CIT [2010] 190 Taxman 257/323 ITR 166 (SC)followed.
  • Taparia Tools Ltd. v. Jt. CIT [2015] 55 taxmann.com 361/231 Taxman 5/372 ITR 605 (SC)
  • CIT v. Reliance Industries Ltd. [2019] 102 taxmann.com 52/261 Taxman 165/410 ITR 466 (SC)
  • CIT v. Reliance Utilities & Power Ltd. [2009] 178 Taxman 135/313 ITR 340 (Bom.) and
  • CIT Delhi v. Woodward Governer India (P.) Ltd. [2009] 179 Taxman 326/312 ITR 254 (SC)followed.