Sometimes taxpayers can end up in a unique situation. You could make some monetary gains that are not set out in income tax laws. In such cases, taxation depends on the interpretation of the provisions of the IT Act. A common example of this is the taxation of bitcoins that are generated during the “mining” process. There are different views on this as they are not regulated by tax law.
In such rare and unique situations, the assessee may consider that the profits are not taxable because they are not covered by IT regulations. However, the appraiser will see this as a loss of revenue for the government. Officers usually try to tax such profits.
Let’s look at another example. For example, suppose you give a relative who is overseas a personal loan of $ 100,000 with no interest. Let’s say the exchange rate was up £70 for a dollar. The lender needs to transfer £70 lakh from India. The borrower pays back the money after a few years. At the time of repayment, the rupee is weakening against the dollar. Say it is £76 for one dollar. When the borrower transfers $ 100,000, the lender receives £76 lakh. Because of the exchange rate difference, the lender makes £6 lakh extra. According to the IT law, such profits are not provided.
The Income Tax Appellate Tribunal (ITAT) in Mumbai recently looked into a similar case. It has been established that profits generated due to currency fluctuations when repaying a personal loan are not taxable.
During an appraisal, a tax officer noticed that a person had received £1.12 crore. The taxpayer said he gave his cousin an interest-free personal loan in Singapore. The transfer was made under the Liberalized Remittance Scheme (LRS) of the Reserve Bank of India.
Due to a change in the exchange rate, the amount received on repayment was higher than the originally advanced money. The taxpayer said the loan was purely personal – it was not a business transaction. There was no motive for economic gain in this transaction. However, the appraiser found that the profits were taxable and added supplements to the income, classifying them as interest income.
“ITAT in Mumbai took the view that the money the appraiser received could not be taxed as income unless it was a receipt or there were legal provisions to tax it,” said Naveen Wadhwa, Chartered Accountant and Deputy General Manager at Taxmann.com, a leading publisher specializing in tax and corporate law.
The ITAT decided in favor of the taxpayer that profits due to currency fluctuations should not be taxed in this case.
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