INCOME TAX ACT, 1961

Business loss- Computation-Flucation in foreign exchange rate-Trading or capital loss

Assessee was a manufacturer of bleaching earth which was used for purification of coconut oil. It also exported Fuller's earth to Singapore and Malaysia. It was found that the assessee used to receive advances from the foreign buyers in foreign exchange to be adjusted against the supplies to be made and that the assessee was maintaining some sort of a running account. It showed this amount in its balance sheet under the head 'Current liabilities'. As a result of the fluctuation in the rate of foreign exchange there was an increase in the liability of the assessee as it would have been required to supply somewhat larger quantities of Fuller's earth than what had been agreed to on the basis of prevalent rate at the time of placing of the order. The assessee treated this as a trading loss. But AO as well as CIT(A) did not accept this. Held:the assessee was required to make the adjustments due to the fluctuations in the rate of foreign exchange and that this was permissible in terms of the prevalent accounting standards. It was held that consistent with the accounting practices the assessee could treat the increased liability resulting from the upward revision in the rate as a trading loss on revenue account. The Tribunal followed the decision of the Supreme Court in Sutlej Cotton Mills Ltd. v. CIT (1979) 116 ITR 1 (SC) in which it was held that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a 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. Therefore, appeeal of Revenue was dismissed.

Income Tax Act, 1961 Section 28(i)

Case Law Analysis:Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC), followed.

Decision: In favour of Assessee.
A.Y. 2001-02

CIT v. Taiko Chander Nagar Chemicals (P) Ltd.