S. 37(1): Foreign exchange loss is not a "notional" or "speculation" loss and is allowable as a deduction. CBDT's Instruction No. 3 of 2010 which deals with foreign exchange derivative transactions (forward contracts) is not applicable to cases of losses in dealings with foreign exchange

The assessee claimed an expenditure / loss of Rs.62.62 lakhs and Rs. 34.37 lakhs as gain on account of foreign exchange fluctuation related to purchase and sales transactions outstanding as on 31st March, 2009 in its Return filed for A.Y. 2009-10.The Assessing Officer did not allow the expenditure / loss of Rs.62.62 lakhs holding it to be a contingent liability while not disturbing the gain of Rs.34.37 lakhs offered for tax by the assessee. In appeal, the CIT(A) upheld the order of the Assessing Officer. On further appeal, the Tribunal allowed the assessee’s appeal holding that the claim of expenditure of Rs.62.62 lakhs is permissible under Section 37 of the Act. The Tribunal placed reliance upon the decision of the Apex Court in Commissioner of Income Tax Vs. Woodward Governor India (P) Ltd. 312 ITR 254 to hold that where the loss suffered by an assessee due to fluctuation of foreign exchange as on the date of balance sheet in respect of purchase and sales of goods (payment have to be made / received) is allowable as expenditure under Section 37(1) of the Act.

The Department filed an appeal before the High Court claiming that Instruction No. 3 of 2010 dated 31st March, 2010 issued by the CBDT in respect of loss on account of foreign exchange derivatives is subsequent to the Apex Court’s decision in Woodward Governor India (P) Ltd. (supra) and was not considered by the Tribunal. It was claimed that this instruction would govern the issue. HELD by the High Court dismissing the appeal:

The loss was not on account of derivatives but are in fact losses and gains in foreign exchange relating to the purchase and sales transactions i.e. creditors and debtors outstanding as on 31st March, 2010. Therefore, Instruction No.3 of 2010 issued by the CBDT would have no application to the facts of the present case. In fact, the issue arising herein would be covered by the principles laid down by the Apex Court in Woodward Governor India (P) Ltd. (supra). Accordingly, as the impugned order of Tribunal followed by the decision of the Apex Court in Woodward Governor India (P) Ltd. (supra) which governs the issue, the question as proposed does not give rise to any substantial question of law. Thus, not entertained.