The Assessing Officer observed that the loss claimed by the assessee on restatement of foreign exchange liability on account of loan on the balance-sheet date was only notional loss as actual loss would arise only in the year of repayment of loan. It was held that in the income-tax assessment only actual expenses could be allowed and not notional expenses. Therefore, as per the Assessing Officer loss could be allowed only in the year when the loans were settled. The Assessing Officer accordingly disallowed the claim of loss.
assessee submitted that the loss had arisen as liability to pay the loan had been incurred on the last day of the accounting period due to fluctuation in foreign currency. Thus loss was not notional or contingent as held by the Special Bench of the Tribunal in the case of Oil & Natural Gas Corpn. Ltd. v. Dy. CIT  83 ITD 151 (Delhi).
It was also submitted that foreign exchange fluctuation loss on restatement of the loan liability at the end of the accounting period was allowable as deduction in view of the judgment of the hon’ble Supreme Court in the case of CIT v. Woodward Governor India (P.) Ltd.  312 ITR 254.
The dispute is regarding allowability of loss on account of foreign exchange fluctuation in respect of foreign currency loan taken by the assessee. The assessee had been restating foreign exchange loan liability on the balance-sheet date which resulted into loss which has been claimed as deduction. The loss/gain on account of foreign exchange fluctuation on restatement of the loan liability on the balance-sheet date is required to be taken into account in computation of income if the loan is on revenue account or is a working capital loan. Loss is allowable as deduction under section 37(1) as held by the hon’ble Supreme Court in the case of Woodward Governor India (P.) Ltd. (supra). The loan in this case had been taken as working capital loan as is clear from the loan agreement wherein the purpose of the loan is clearly mentioned to use it as a working capital to finance the activities of the company. As held by the hon’ble Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT  116 ITR 1, foreign currency fluctuation loss is allowable as deduction if the foreign currency is held on revenue account or as trading asset or as part of circulating capital employed in the business. As regards the year of allowability, the claim has to be allowed on the basis of restatement of the liability on the balance-sheet date as held by the hon’ble Supreme Court in the case of Woodward Governor India (P.) Ltd. (supra). Thus the claim of the assessee is allowable. In case there is gain in a year and the assessee has not offered it to tax, the Revenue is free to take action under law. In these years, admittedly there is loss which is allowable as deduction.