Income tax on NOTIONAL exchange gain

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V. P. Vidwans (Querist)
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30 November 2008 Dear colleagues : Please favor me with your professional replies to the following query:
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We are a small Pvt. Ltd. manufacturing Company. We have taken foreign currency loan in US $. Part of the loan is for purchasing capital assets & part is for working capital.
For the purpose of Balancesheet as on 31-3-2008, the outstanding loan amount is converted into Indian Rupees at the rate prevailing on that date. This has resulted in NOTIONAL exchange gain as the Rupee was appreciated vis-à-vis $. (i.e. the outstanding loan liability in terms of INRs is reduced).

Please advise whether income tax is payable for F Y 2007-08 on this NOTIONAL exchange gain. If yes, please inform:

(i) the relevant Section/Rule/Notification reference,
(ii) the tax implications, in case the Rupee depreciates subsequently as compared to 31-3-2008 at the time of making the actual repayment of installments & the actual amount repaid in FY 2008-09 is MORE than its relevant balancesheet amount.

Thanks & regards

Vishwas

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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01 December 2008 Income tax is payable. Pl refer 1) Asst.CIT Vs Samtex Fashions Ltd (2008) 24 SOT 116(DEL). 2) OIL AND NATURAL GAS CORPORATION VS. DY.CIT (2002) 83 ITD 151 (DEL-TRI)

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