ITAT: Forex gains arising against personal loans not taxable

MUMBAI: Forex gains arising in the hands of an individual, on repayment of an interest-free loan by his relative, are not taxable according to a recent order of the Income-tax Appellate Tribunal (ITAT), Mumbai bench. According to tax experts, this order will be useful in many cases.
In this case, Aditya Shroff, had extended a personal interest-free loan of $200,000 to his Singapore based cousin under Reserve Bank’s Liberalised Remittance Scheme. Given the exchange rate of Rs 45.14, the loan transaction translated to Rs 90.30 lakh.
Two years later, when the loan was repaid in May 2012, the exchange rate was Rs 56.18, thus Shroff received back a higher amount. The income tax (I-T) officer sought to bring to tax the surplus which aggregated to Rs 22.04 lakh.
The Commissioner (Appeals) had upheld this course of action. It was the view of the Appellate Commissioner that if the giving and taking of loans is not the business of the taxpayer, then the income arising out of the loan is to be treated as interest income or income from other sources.
This led to Shroff filing an appeal with the ITAT. A single member bench, composed of Pramod Kumar, vice president observed that the benefit or gain that arose was owing to foreign exchange fluctuations, with respect to a transaction that was capital in nature (ie: loan transaction). The order concluded that the forex gains were a non-taxable capital receipt.