The Assessee pursuant to an agreement dated 15.06.2000 with M/s. Sterling Matchem Trade (P) Ltd. imported certain materials with a six-month credit period for remittance. However, due to some unforeseen circumstances, the Assessee delayed payments beyond the stipulated period, resulting in exchange fluctuation loss to the seller. Pursuant to mutual understanding and Board resolution dated 18.03.2004, assessee agreed to pay ` 45.67 lakhs towards exchange fluctuation loss and Rs.35 lakhs towards premature termination compensation and claimed deduction under section 37 of the Act in the return filed for Assessment Year 2004-05. AO however disallowed Rs . 45.67 lakhs on the ground that the agreement did not expressly provide compensation for exchange fluctuation. Hon’ble High Court allowed the claim of the assessee by observing that assessee’s Board approved compensation payment for exchange fluctuation loss during the relevant financial year and the liability stood crystallised. However, as the compensation was paid in AY 2006-07, deduction under section 37(1) is to be allowed in such subsequent assessment year 2006-07.