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2021 (5) TMI 1050 - AT - Income TaxTax implications of foreign exchange fluctuation gains arising upon receiving the repayment of a personal loan, extended by the assessee, denominated in US Dollars - As explained that the loan transaction was in terms of the Liberalized Remittance Scheme of the Reserve Bank of India inasmuch as it was a permitted transaction, and specifically on capital account and that the transaction was in capital field and that, therefore, “the gain is in the nature of capital receipt and hence not offered for taxation” - HELD THAT:- It is not even in dispute, and rightly so, that the receipt is in question is in the capital field but the AO has taxed it on the basis that “the gain on realization of loan would partake character of an income under the head income from other sources”, and the CIT(A) has justified such a taxation on the basis, which was altogether different vis-à-vis the reasoning adopted by the AO, that the accretion in rupee terms is to be considered as interest, and is to be taxed as such by observing that “as per provision of the Income-tax Act if giving and taking loan is not the business of the assessee then income arising out of the loan is treated as interest of the income or income from other sources”. None of these reasonings meet our approval. Interest is the amount “payable” in any manner in respect of “moneys borrowed or debts incurred” but in the present case nothing more than principal debt has been paid by the borrower, and unless borrower pays an amount in respect of moneys borrowed or debts incurred, the definition of interest does not come into play. Yes, there was a benefit or a gain to the assessee; that is not even in dispute. The benefit or the gain was not on account of interest payment; that benefit or gain was on account of foreign exchange fluctuation but since the foreign exchange fluctuation with respect to a transaction in capital field, on the facts of this case foreign exchange fluctuation receipt itself turned out to be a capital receipt. CIT(A) was, therefore, in error in holding the foreign exchange fluctuation income to be in the nature of ‘interest’. As for his holding that the income was taxable as income from other sources, that is exactly what the Assessing Officer had also done, and, for the detailed reasons set out above, that approach does not meet my judicial approval either. 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 close relatives was prohibited. Be that as it may, we are 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 impugned addition is not sustainable in law. AO is, accordingly, directed to delete the same. Decided in favour of assessee.
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