DCIT Vs Sahajanand Medical Technologies Limited (ITAT Surat)
Conclusion: Tax treatment of a foreign exchange fluctuation depended entirely on the nature of the underlying asset or liability. Gains or losses on capital items (like a long-term investment or loan) were not typically recognized for tax purposes until the asset was actually sold or the loan was repaid. If a gain was capital in nature under the core provisions of the Act, an ICDS could not by itself convert it into a taxable revenue receipt.
Held: Assessee-company, which was not engaged in the business of money lending, had advanced a loan in Euros to its foreign subsidiary. On the balance sheet date, the company revalued the outstanding loan from Euros into Indian Rupees. Due to currency fluctuation, this revaluation resulted in a notional foreign exchange gain in its books of account. Assessing Officer (AO), relying on the provisions of the Income Computation and Disclosure Standards (ICDS), treated this “paper gain” as the assessee’s taxable income and made an addition. It was held that since assessee was not a moneylender, the loan advanced to its subsidiary was an investment on the capital account. The gain that arose from the year-end revaluation of such a capital asset was purely notional and did not represent any real income that had actually accrued to assessee or had been received by it. The court concluded that AO was incorrect in adding this notional exchange gain on a capital-field transaction to the assessee’s taxable income, and the addition was deleted.
