COMMISSIONER OF INCOME TAX Vs. BANK OF INDIA

JUDGEMENT

(1.) BY this reference made under S. 256(1) of the IT Act, 1961, at the instance of the Revenue, the Tribunal, Bombay Bench 'B' Bombay, has referred the following two questions of law to this Court for opinion:

(2.) THE assessee is a banking company. This reference pertains to the asst. years 1973 74, 1974 75 and 1975 76. During these three assessment years, the assessee claimed deduction for the following amounts as exchange loss : The assessee claimed that these losses were on account of fluctuations in the rates of exchange and, hence, allowable as a deduction in the computation of its income. The ITO did not accept the assessee's contention and disallowed its claim for deduction. The assessee appealed to the CIT(A). The CIT(A) examined the facts of the case and summed up the factual position thus : "At the close of each accounting year, the foreign branch statement of current assets and liabilities is converted at exchange rate ruling on that date. In the process, the foreign branch liability in respect of the head office is also valued at the same rate and the head office surrenders the profit resulting therefrom to tax. As currency is their stock in trade and the balance in the foreign branch represents holding of foreign currencies, the same requires valuation in consonance with the method of accounting and the profit thereon is rightly taxed. As far as the current liabilities and assets of the foreign branches is concerned, due to fluctuation in exchange rate, there may be excess of current liabilities over current assets in respect of the foreign branch on the close of the accounting year." On these facts, the CIT(A) observed that the amount due to the head office was on par with current liabilities because it had been valued at current exchange rates on the valuation date. It was further observed that as the assessee bank was holding many currency balances in foreign branches, all of which had been uniformly dealt with by it, the claim of the assessee for allowance of loss in excess of current liabilities over current assets had to be allowed. The CIT(A) accordingly allowed the claim of the assessee for deduction of loss on account of fluctuation in the rate of exchange. Aggrieved by the order of the CIT(A), the Revenue appealed to the Tribunal. On consideration of the facts and circumstances of the case, the Tribunal dismissed the above appeal of the Revenue and confirmed the order of the CIT(A). While doing so, the Tribunal followed its earlier order in the assessee's own case in respect of the earlier assessment years and observed that the only difference in the facts of that case and the case under reference was that the loss in the years under reference was on account of fluctuations in the rates of exchange and not from devaluation. Hence, this reference at the instance of the Revenue.

(3.) APPLYING the above principles to the facts of the present case, we are of the clear opinion that the Tribunal was right in holding that the exchange loss claimed by the assessee as a result of fluctuations in the rates of exchange of foreign currencies held by it as balance in its foreign branches was an allowable deduction because the foreign currencies were its stock in trade. Accordingly, both the questions referred to us are answered in the affirmative and in favour of the assessee and against the Revenue. In the facts and circumstances of the case, we make no order as to costs.