Exchange loss on refund of advances from customer allowable irrespective of use of funds

DCIT Vs. Diamond ‘R’ US (ITAT Mumbai) – Exchange loss on refund of advances received from the customers is concerned, the same indeed constitutes admissible deduction irrespective of whether or not the amount so received were diverted to use by partners. It is so for the elementary reason that the proximate cost of loss having been incurred is receipt of advances from the customers and refunding the same-an exercise which is clearly in the course of normal business operations.

As the ld counsel for the assessee very appropriately puts it, the deduction for exchange loss cannot be influenced by the usage of funds received in respect of which loss has been incurred because unlike in the case of interest on borrowings which requir3s related funds being used for the purposes of business, the exchange loss on refund of business advances has no such usage requirements. As long as the moneys are received in the course of business and as long as the moneys are refunded in the course of business, exchange loss on the same will constitute an admissible expenditure being incidental to the business operations. In other words, it is a fact of receiving and refunding the advances which is required to be for the purposes of business rather than the use of funds so received and subsequently refunded “for the purposes of business”. The requirement of sec.37 thus ends with transactions for the purposes of business and it is not essential that the funds received during the course of such transactions must also be used for the purposes of business. It is important to bear in mind that the loss which is claimed as deduction is in the course of the business operations and is not in the nature of cost of funds and for this reason the use of funds is not really relevant for the purpose of deciding deductibility of such loss. In view of this discussion, we uphold the stand of the CIT(A) and decline to interfere in the matter.”

Full text of the Judgement is as follows

ORDER

Per Pramod Kumar:

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