The Assessee extended a personal interest free loan of USD 2,00,000 (INR 90,30,758/-) to his cousin in Singapore in accordance with the Liberalized Remittance Scheme (“LRS”) of the RBI on 29/03/2010 when the exchange rate was INR 45.14. At the time of repayment of loan i.e. on 24th may, 2012, the exchange rate was Rs. 56.18 and therefore, when the loan amount of USD 2,00,000 was repaid, the cousin actually repaid INR 1,12,35,326/-. The Assessee submitted that it was a personal loan and the repayment thereof was a capital receipt in his hands but the AO did not accept this explanation and brought such benefit or gain to tax under the head Income from Other Sources. The Assessee paid the impugned tax of Rs.22,02,286/-as a matter of abundant caution without conceding to the taxability thereof. The CIT(A) upheld the order of AO and treated the benefit or gain on account of exchange rate fluctuation as interest income of the Assessee which was altogether a different explanation than the one adopted by the AO.

The Tribunal did not accept the reasoning of the lower authority to tax such benefit or gain. It observed that the lower authorities have erroneously proceeded to hold that the benefit or gain on realization of loan partakes the character of an income under the head income from other sources without going into the foundational plea that the scope of income does not include the gains in capital field. S. 2(24(vi) lays down that “income, includes any capital gains chargeable under section 45”. Thus a capital gain, which is not chargeable to tax under section 45, cannot be included in the Income. It further observed that in the present case, interest as defined u/s. 2(28A) was not payable by the cousin of the Assessee on repayment of loan but only the principal debt amount was repaid. The benefit or gain arising to the Assessee was on account of foreign exchange fluctuation which comes in the capital field and therefore such gain is not taxable as it is a capital receipt in the hands of the Assessee. With respect to the stand adopted by the CIT(A) that under the LRS scheme only Rupee denominated loans were permissible to the non-resident close relatives. The tribunal has taken the stand that nothing turns on the fact that only rupee denominated loans were permitted to be extended by the assessee to his close relative NRI/PIO cousin, that such question was beyond the scope of the CIT(A) or the Tribunal. Therefore, the Tribunal deleted the addition. (AY. 2013-14)