By Jagdish T. Punjabi | Prachi Parekh
Chartered Accountants | Devendra Jain
Advocate
25 Aditya Balkrishna Shroff vs. ITO [2021] 127 taxmann.com 343 (Mum-Trib) A.Y.: 2013-14; Date of order: 17th May, 2021 Sections: 2(24), 4, 56
Gain received by assessee owing to fluctuation in foreign exchange rates in respect of loan which was given, as also received back in US dollars, by assessee to his cousin in Singapore under Liberalised Remittance Scheme issued by Reserve Bank of India, is a capital receipt not chargeable to tax
FACTS
In the course of assessment proceedings, the A.O. noticed that as per AIR Information and as per capital account filed by the assessee, he was in receipt of Rs. 1,12,35,326. Upon seeking an explanation, the assessee informed that on 29th March, 2010, he had granted an interest-free loan of US $2,00,000 to his cousin in Singapore. The remittance was made under the Liberalised Remittance Scheme of the RBI. The rate of exchange prevailing on that date was Rs. 45.14. On 24th May, 2012 the assessee received back the said loan of US $2,00,000. The exchange rate on the date of receiving back the loan was Rs. 56.18. Accordingly, the capital account of the assessee was credited with a sum of Rs. 1,12,35,326.
The A.O. was of the view that the difference in amount of Rs. 22,04,568 was of the nature of income. The assessee explained that the loan was given on a personal account to his cousin and was not a business transaction and there was no motive of any economic gain in the transaction. It was done in terms of the Liberalised Remittance Scheme of the RBI inasmuch as it was a permitted transaction and specifically on capital account. It was further explained that the transaction was capital in nature, therefore ‘the gain is in the nature of capital receipt and hence not offered for taxation’.
But these submissions did not impress the A.O. who held that ‘the gain on realisation of loan would partake the character of income under the head “income from other sources”’. Accordingly, he added a sum of Rs. 1,12,35,326 to the total income of the assessee as ‘income from other sources’.
Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the A.O. The assessee then preferred an appeal to the Tribunal.
HELD
The Tribunal held that when a receipt is in the capital field, even if that be a gain, it is in the nature of a capital gain, but then as the definition of income stands u/s 2(24)(vi), only such capital gains can be brought to tax as are permissible to be taxed u/s 45. In other words, a capital gain which is not taxable under the specific provisions of section 45 or which is not specifically included in the definition of income by way of a specific deeming fiction, is outside the ambit of taxable income. All ‘gains’ are not covered by the scope of ‘income’. Take, for example, capital gains. It is not even the case of the authorities below that the capital gains in question are taxable u/s 45. Thus, the reasoning adopted by the A.O. was incorrect.
The Tribunal observed that the CIT(A)’s line of reasoning was no better. While he accepts that the transaction in question was in the capital field, he proceeds to hold that ‘income’ arising out of the loan transaction is required to be treated as ‘interest’ or ‘income from other sources’, but all this was a little premature because he proceeded to decide as to what is the nature of the income or under which head it is to be taxed, without dealing with the foundational plea that the scope of income does not include gains in the capital field. According to the Tribunal, if the transaction was in the capital field, as he accepts, ‘where is the question of a capital receipt being taxed as income unless there is a specific provision of bringing such a capital receipt to tax?’
The Tribunal held that where the loan is in a foreign currency and the amount received back as repayment is exactly the same, there is no question of any interest component at all.
The Tribunal allowed this ground of appeal filed by the assessee.
