When a parent abroad repays a loan, the foreign exchange gains are not taxable

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Sometimes taxpayers can end up in a unique situation. They could realize monetary gains that are not specified under income tax laws. In such cases, the taxation depends on the interpretation of the provisions of the law on information technology. A common example of this is how bitcoin generated during the “mining” process will be taxed.

In such rare and unique situations, the appraised person may consider that the winnings are not taxable because they are not covered by any IT regulations. The valuation officer, however, will see this as a loss of revenue for the government. Agents generally try to tax these gains.

Let’s look at another example. Suppose you give a personal loan of $ 100,000 to a relative living abroad without charging interest. Let’s say the exchange rate was 70 for a dollar. The lender will have to transfer 70 lakh from India. The borrower repays the money after a few years. Upon redemption, the rupee weakens against the dollar. Say, this is 76 for a dollar. When the borrower transfers $ 100,000, the lender will receive 76 lakh. Due to the difference in the exchange rate, the lender makes 6 additional lakh. No provision of the law on information technology provides for such gains.

The Income Tax Appeals Tribunal (ITAT), Mumbai, recently dealt with a similar case. He argued that gains arising from the fluctuation of the exchange rate upon receipt of repayment of a personal loan will not be taxable.

During an assessment, a tax official noticed that an individual had received 1.12 crore. The taxpayer explained that he had given an interest-free personal loan to his cousin in Singapore. The remittance was made under the Liberalized Remittance Scheme (LRS) of the Reserve Bank of India.

Due to a change in the exchange rate, the amount received on repayment was greater than the money originally advanced. The taxpayer said the loan was purely personal – it was not in the nature of a business transaction. There was no reason for economic gain in this transaction. The assessing agent, however, found the earnings to be taxable and made additions to income, classifying them as interest income.

“The ITAT Mumbai ruled that the money the assessor received could not be taxed as income unless it was income or there were provisions to tax it in under the law, “said Naveen Wadhwa, chartered accountant and deputy managing director of Taxmann.com, a leading publisher of tax and corporate law.

ITAT ruled in favor of the taxpayer, saying gains due to currency fluctuation in this case should not be taxed.

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