There are some unique situations generating gains or income which are not covered by any provisions of the Income Tax Act. As per the facts of the case, the officers of the Income Tax Department decide about the taxability of the gains or the income. Obviously the I-T Department tries to levy tax on such transactions, but still there could be instances where they cannot do so and the receipt in the hands of the taxpayer does not attract any taxability.
Recently the Mumbai Income Tax Appellate Tribunal held that the money that the assessee had received could not be taxed as income unless it is a revenue receipt, or there are provisions to tax it under the law.
Let’s understand the case with the help of an example. Suppose a relative of yours who lives abroad, takes a personal loan of $50000 from you. The exchange rate on the day when the lending took place was Rs. 70. So, the loan amounts to Rs. 35,00,000 in Indian currency. After a few years when the loan is repaid, the rate of exchange stands at Rs. 78. Hence the remittance shall be of Rs. 39,00,000 by way of repayment of the loan. Apparently, there is an exchange difference (gain) of Rs. 4,00,000 (Rs. 39,00,000-35,00,000) that arises during the transaction. This is a unique situation where the money received by way of loan repayment is more than the money lent, and it is not covered by any of the provisions of the Income Tax Act.
On a similar footing, in the Mumbai ITAT case, a tax officer found an individual in receipt of Rs. 1.12 crore. The assessing officer wanted to tax the gains classifying them as interest income. But the Mumbai ITAT ruled in favour of the taxpayer. The loan was purely personal in nature, and it was not a business transaction. The taxpayer had extended an interest free personal loan to his cousin in Singapore and the remittance was made under the Liberalized Remittance Scheme of the RBI. The gains arising due to currency fluctuations should not be taxed as there was no motive for economic gains in that transaction.
Smrutirekha Bhoi