The Income Tax Appellate Tribunal (ITAT), Mumbai bench has recently held that income tax cannot be leviable on forex gains arising against on repayment of an interest-free loan by relatives.
During the scrutiny of the income tax return filed by the assessee, an individual, the Assessing Officer noticed that the former received a sum of Rs. 1,12,35,326the assessee explained that on 29th March 2010 the assessee had extended a personal interest-free loan of US $ 2,00,000 to his cousin one Shravan Shyam Shroff in Singapore under LRS (Liberalized Remittance Scheme) issued by the Reserve Bank of India. Two years later, when the loan was repaid in May 2012, the exchange rate was Rs 56.18, thus Shroff received back a higher amount. The Assessing Officer sought to bring to tax the surplus which aggregated to Rs 22.04 lakh. The order was subsequently upheld by the Commissioner of Income Tax (Appeals) by holding that if the giving and taking of loans is not the business of the taxpayer, then the income arising out of the loan is to be treated as interest income or income from other sources.
A single member bench, composed of Pramod Kumar, vice president observed that the benefit or gain that arose was owing to foreign exchange fluctuations, with respect to a transaction that was capital in nature (ie: loan transaction).
“Whether the transaction of loan to NRI/PIO close relative was permissible or not, the fact remains that, beyond any controversy or dispute, such a transaction did take place, and the Assessing Officer has specifically observed that “no infirmity is observed on the advancement of loan to Shri Shyam Sunder Shroff, (but)..the dispute is with respect to gains on foreign exchange fluctuation”. The limited question that was required to be adjudicated by the CIT(A), therefore, was whether given this factual matrix, the gains on foreign exchange fluctuations were required to be taxed in the hands of the assessee or not. Nothing, therefore, turns on the fact, even if that be so, that only rupee denominated loans were permitted to be extended by the assessee to his close relative NRI/PIO cousin,” the Tribunal said.
“In any case, merely because the rupee loans are specifically permitted to the NRI/PIO close relatives, this fact per se cannot lead to the conclusion that foreign exchange denominated loans being extended to the NRI/PIO closerelatives was prohibited. Be that as it may, I am not inclined to, nor do I see any reasons to, deal with the broader question as to whether or not such a transaction of foreign exchange denominated loan, as the assessee has indeed entered into, was permissible or not. That is neither my domain nor my concern. If this transaction was impermissible under the Foreign Exchange Management Act, 1999, the consequences must flow under that legislation itself. The Income Tax Act, 1961 has nothing to do with the consequences, even if that be so, of impermissibility of such transactions under the FEMA or Liberalized Remittance Scheme framed thereunder- at least in the context of dealing with an income,” the Tribunal added.
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