LOSS ARISING ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUA- TION WOULD BE ALLOWED AS A REVENUE DEDUCTION AS PER THE PRODUCTION SHARING CONTRACT

The taxpayer was engaged in the business of oil exploration and had entered into a Production Sharing Contract (PSC) with the Government along with other consortium members. The taxpayer
claimed deduction of foreign exchange loss arising on the translation of expenses incurred in foreign currency at the end of the accounting period. The Assessing Officer (AO) held that the loss recognised by the taxpayer was notional and accordingly, did not allow deduction for such loss.
On appeal, the Income tax Appellate Tribunal (Tribunal) and the High Court held that loss arising on account of devaluation of rupee was allowable for tax purposes in the year in which the same had
been incurred. On appeal by the Revenue authorities before the Supreme Court, the Court observed that the PSC established an independent mechanism for the treatment of costs, expenses, income,
profits, etc incurred or earned by the consortium members engaged in oil exploration. Accordingly, the accounting and tax treatment of expenditure / income provided for in the PSC prevailed over
the normal provisions of the Act. The PSC was considered to represent a distinct, complete code, which provided for specific accounting and tax treatment of income/ expenses. In the instant case,
since the PSC provided that the loss arising on account of foreign currency translation could be claimed as a tax deduction in the same year, such expenses were required to be allowed as a tax deduction.