MTM loss incurred by assessee on account of foreign exchange fluctuations on working capital loan with foreign currency swap option for business purpose is to be allowed as deduction under section 37(1)


The assessee was a company engaged in business of trading steel tubes, pipes, PVC etc.   The assessee filed its ITR on 23-9-2008 declaring its total income of Rs. 24,27,56,572. On 23-2-2010, it filed a revised return declaring total income as Rs. 22,47,57,192 claiming deduction for provision for loss on account of foreign exchange fluctuation of Rs. 1,79,99,380.

In the assessment order, the AO held that the loss in question being marked to market loss was notional and speculative in nature and the same could not be claimed under section 37(1).  On appeal, the CIT(Appeals) as well as Tribunal, upheld the order of Assessing Officer.


The HC observed that the issue involved in this appeal is squarely covered in decision of Bombay and Calcutta High Court in CIT v. Badridas Gauridu (P.) Ltd. [2003] 261 ITR 256 (Bom.) and CIT v. Soorajmull Nagarmull [1981] 129 ITR 169 (Cal.) respectively.

The HC observed that the assessee had obtained a working capital loan from City Bank and had entered into a foreign currency swap option. The working capital loan outstanding as on the date of entering into foreign currency swap option was Rs. 10,00,00,000/- and the loan liability based on the rates prevailing as on 31-3-2008 comes to Rs. 11,79,99,380/-. Thus, the difference of Rs. 1,79,99,380/- is on account of foreign exchange fluctuation loss.

Based on the copy of the ledger, The HC observed that assessee, in the subsequent financial year i.e. 2008-09 has made a payment of Rs. 2,17,91,846/- as against aforesaid liability of Rs. 1,79,99,380/-. The HC therefore held that the aforesaid liability was crystallised and ascertained.

The HC observed that assessee had entered into a binding obligation, when it entered into a foreign currency contract and the contract was entered into to protect the assessee from foreign exchange fluctuation. The working capital loan was used for the purpose of business and therefore, the same could not have been considered either as notional or speculative transaction. It is pertinent to note that if the assessee has to repay the loan and square off the contract on 31-3-2008, the assessee in addition to prepayment charges, has to make a payment of Rs. 11,79,99,380/-.

The HC held that working capital loan was used by the assessee for the purpose of business and therefore, the assessee had incurred the loss in the course of business and is entitled to claim deduction under section 37(1) of the Act.

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