Fortifying Non-Taxability Of Gain/Loss Entirely Due To Foreign Exchange Fluctuations

[By Aishwarya Mehta & Kaustubh Bajpayee]

The authors are students at the Maharashtra National Law University, Nagpur. 


Over and Over again, income tax officials find it difficult to ascertain whether a specific receipt is capital in nature and thus exempted from tax liability, or is a revenue receipt and thus, taxable. This imbroglio can be imputed to the fact that the Income Tax Act, 1961 does not lay down any explanation of the expressions “capital receipt” and “revenue receipt”. Hence, in cases where the monetary transaction does not fit appropriately into any provision of the Income Tax Act, 1961, there is a difference of opinion between the income tax officials and the taxpayers every time. On one side, the tax authorities try to expand the sphere of capital gains specified under Section 45 of the IT Act, 1961 by incorporating several transactions under its grab. Adversely, on the other side, the taxpayers assert that the transaction should pertain to capital accounts and thus are non-taxable.

Lately, in the case of Aditya Balkrishna Shroff v ITO, the Mumbai bench of the Income Tax Appellate Tribunal (“ITAT”) expatiated on the tax implications of gains solely due to foreign exchange fluctuations on repayment of personal loans. The crucial points from the order are mentioned below.


In the course of the audit assessment, the Assessing Officer (AO) observed that according to the Annual  Information Return (AIR) and capital account of the Assessee (“Aditya Shroff”), he received Rs. 1,12,35,236. When the assessing officer scrutinized this entry further, the assessee elucidated that he had furnished an interest-free personal loan of USD 2,00,000 (INR90,30,758) to his cousin in Singapore when the foreign exchange rate was 1 USD=INR 45.14. The Assessee also explained that the remittance was made under the Liberalized Remittance Scheme (LRS) provided by the Reserve Bank of India in 2004. The cousin paid back the amount of USD 2,00,000 (INR 1,12,35,326) on May 24, 2012, when the foreign exchange rate was 1 USD=INR 56.18. The assessee explained that due to fluctuation in the foreign exchange rate, the amount received on repayment of the personal loan was more than the amount originally advanced and hence, the receipt is non-taxable. The assessing officer observed that the variance of this transaction was of an income nature and thus taxable. Further, the AO instituted penalty proceedings against him for not disclosing the correct income. The assessee filed an appeal against this order.

The appeal filed by the Assessee before the Commissioner of Income Tax was set aside and the order of the AO was approved on the pretext that only a rupee loan is admissible under the regulations of the Foreign Exchange Management Act (“FEMA”). Thus, the gain received by the assessee should be considered as income from other sources. Discontented with the decision, the assessee filed an appeal with the ITAT.


Whether the gain received on a personal loan solely due to foreign exchange fluctuation is a capital receipt or included in the nature of income?


The ITAT recognized the appeal and held that the gains received on personal loans solely due to foreign exchange fluctuation are to be considered a capital receipt on the following grounds:-

  1. The authorities can’t modify the nature of receipt by expanding the scope of the expression- “income”, which is taxable as per Section 2(24) of the IT Act, 1961.
  2. As per Section 2(24)(vi) of the IT Act, 1961, it is coherent that only such capital gains are taxable as specified under Section 45. Hence, all other capital receipts falling outside the scope of this section are non-taxable.
  3. It is indubitable that the repayment of interest-free personal loans is capital in nature. This perspective of authorities can be considered as putting the cart before the horse- as the subordinate authorities determined the head of income under which the transaction should be taxed, without ascertaining the nature of the same.
  4. The transaction was purely personal in nature and the gain on the personal loan was solely due to the foreign exchange fluctuation.
  5. Even if FEMA sanctions the loan in Indian rupees only, it is not the responsibility of income tax officials to identify whether the loan was permitted in concurrence with the provisions of FEMA. However, non-conformity under FEMA is inconsequential to the analysis under Income Tax Act.


This order illuminates that any gains on repayment of interest-free personal loans solely due to the forex fluctuation cannot be considered taxable income in the hands of the recipient.

Nevertheless, the ITAT could have referred to the case of Sutlej Cotton Mills Ltd v. Commissioner of Income Tax, West Bengal, where the supreme court laid down a test regarding tax liability of gain/loss solely due to foreign exchange fluctuation. The Supreme court held that:-

any gain/loss attributable to appreciation/ depreciation in value of the foreign currency would be trading profit or loss if the foreign currency is held by the on revenue account or as a trading asset or as part of circulating capital embarked in the business. But if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature”.

The ITAT applied the same test in the case of  Havells India Limited v ACIT, where the taxpayer received foreign exchange gain on redemption of shares in the foreign subsidiary. The bench held that the gain on exchange was just an outcome of repatriation of the consideration received in Euro, to INR. Hence, the forex gain cannot be considered a fraction of the consideration received on redemption of shares.


The judgement of the ITAT, Mumbai came when the economic fallout from the pandemic continued to cause hardship for a few fragments of the society. During COVID-19, a number of rich individuals imparted financial assistance to their NRI folks who were outrageously distressed. This decision has fortified that all the receipts in the capital sector are taxable only when they are specified in legal provisions. Contrarily, revenue receipts are always taxable unless where they are specifically exempted. It is pertinent to note that the ITAT, Mumbai has acknowledged that accumulation of gain from forex fluctuation is a capital receipt and thus exempted from tax liability. Nevertheless, an accusation can be claimed by the tax authorities if a personal loan transaction falls foul on provisions of FEMA. The predominant task is to verify any and every financial transaction against all the significant legal provisions regarding the same, to steer clear of perils.

What if this decision is accepted per se? It will become easy for taxpayers in India to lend interest-free personal loans to their relatives living outside India and get a reimbursement of the same amount in foreign currency at a future date through the Liberalised Remittance Scheme. The persistent fall of the Rupee against the dollar would help the taxpayer to get non-taxable income. This could be exploited by the people of India and go against the interests of the exchequer.


Leave a Reply

Your email address will not be published. Required fields are marked *

Contact Us

Kerwa Dam Road., 
National Law Institute University, Bhopal
Madhya Pradesh, India. 462044​.

write to us at –