The main legal point established in the judgment is that expenditure incurred for the purpose of business and used wholly and exclusively for the business can be claimed as a deduction under Section 37 of the Income Tax Act, 1961, even if it results in a loss. The Court emphasized the commercial sense and business necessity in determining the nature of the expenditure.

ORDER

1. This appeal takes exception to the judgment and order dated 2.4.2008 passed by the Division Bench of the High Court of Karnataka at Bengaluru in I.T.A. No. 633/2004.

2. Briefly stated, the appellant company submitted returns of income on 29.11.1997 for the assessment year 1997-1998, mentioning loss of income, amongst others, owing to exchange fluctuation of Rs. 1,10,53,909/-. After processing the return under Section 143(1)(a) of the Income Tax Act, 1961¹[ for short, "the 1961 Act"], the assessment was completed on 16.3.2000. As against the loss declared by the appellant due to exchange fluctuation, the assessment was concluded by positive taxable income. Against that decision, the matter was carried in appeal by the appellant before the Commissioner of Income Tax (Appeals)²[for short, "CIT(A)"] and eventually, by way of appeal before the Income Tax Appellate Tribunal³[for short, "ITAT"] being I.T.A. No. 795 (Bang)/2000.

3. In the appeal before the ITAT, the appellant not only claimed deduction in respect of loss of Rs. 1,10,53,909/- arising on account of exchange fluctuation, but also set up a fresh claim in respect of revenue expenses to the tune of Rs.2,46,04,418/-, erroneously capitalised in the returns. The ITAT entertained this fresh claim set forth by the appellant and recorded in its judgment that the department's representative had no objection in that regard. Additionally, the ITAT adverted to the decision of this Court in National Thermal Power Co. Ltd. vs. Commissioner of Income Tax, (1997) 7 SCC 489 in support, for entertaining fresh claim of the appellant in exercise of powers under Section 254 of the 1961 Act. The ITAT, in the first place, reversed the finding given by CIT(A) regarding application of Section 43A of the 1961 Act. The ITAT opined that the said provision had no application to the fact situation of the present case. Having said that, it then proceeded to consider the question whether the loss suffered by the appellant owing to exchange fluctuation can be regarded as revenue expenditure or capital expenditure incurred by the appellant, and answered the same in favour of the appellant by holding that it would be a case of expenditure on revenue account and an allowable deduction. The ITAT answered the same in the following words: -

"..... So far as the argument whether the impugned expenditure or loss is revenue or capital in nature we find that the funds borrowed were utilised for the purposes of regular finance business carried on by the assessee. Such an income has also been offered for taxation and accepted by the department. Quantification of exchange fluctuation loss has been done as per rule 115 of the I T Rules. Said rule must be applied in computing the total income of the assessee had held by the Supreme Court in CIT vs. Chowgule Co Ltd. - 218 ITR 384. Further the exchange fluctuation loss is an expenditure incidental to carrying on of business and comes within the purview of section 37 of the Act as the same is incurred wholly and exclusively for the purposes of business. It is nobody's case that the funds borrowed in foreign exchange have been diverted for non-business purposes. In such a case the decision of the Supreme Court in India Cement Case (supra) fully covers the issue in favour of the assessee. We also find that in this case, assessee's claim satisfies all the tests laid down by Supreme Court in 124 ITR 1 extracted supra. In this case entire borrowal of loan and the utilisation of the same, is in trading operations of the company more profitably and the fixed capital in this case is untouched. Hence the expenditure is on revenue account and allowable.

We also find the loss incurred by the assessee cannot be treated as contingent in nature as the loss on account of foreign exchange fluctuation has been quantified in terms of rule 115 of IT Rules and further the liability is real as per terms of the agreement with CDC. Just because the liability is payable in future does not co