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

Sometimes taxpayers can end up in a unique situation. They could realize monetary gains that are not specified in 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. There are different views on this as they are not covered by tax laws.

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 usually try to tax these gains.

Let’s look at another example. Suppose you give a personal loan of $ 100,000 to a relative staying abroad without charging them 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 repayment, 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. There is no provision under the Computer Act for such earnings.

The Income Tax Appeal Tribunal (ITAT) in Mumbai recently dealt with a similar case. He estimated that the gains resulting from the fluctuation of the exchange rate when repaying 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 disbursement was made under the Liberalized Payments System (LRS) of the Reserve Bank of India.

Due to a change in the exchange rate, the amount received upon 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 valuation officer, however, found the earnings to be taxable and made additions to income, classifying it as interest income.

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