Tax treatment on foreign exchange gain

Hello,

That's an interesting question. The profits accrued in the hands of your clients has two compnents. Firstly, the capital gain on holding equity shares and,Secondly, the gain of foreign exchange.

For the first part please refer Rule 115. You will have to assume the FX rate at the last date of the prior month, at the time of purchase and sale, to compute your capital gains. 

Do note that following Rule 115, your rate on sale of assets is the last day of the prior month. You may have rapatriated your sale proceeds back home, at any time, near to the date of sale. Consequently if your currency gains has not accrued in the interim period between sale and repatriation, the second component given below may not be helpful.

To continue,

 With regards to the second component, the issue is unsettled. Following are court judgements for your perusal-

Mere conversion by an assessee of one currency into another currency cannot be considered as exchange so as to attract section 45 read with section 2(47), held in  Jaya Kumar and Dilhar Kumar v CIT (1987) 165 ITR 787 (Kar).

However, a contrary view has been taken in Kirloskar Asea Ltd. v CIT (1979) 117 ITR 82 (Kar) where it was held that tax is leviable under section 45 on capital gain on the conversion (sale) of foreign currency held as capital asset. 

Do note, although JayaKumar was a judgement passed later in time, it made no reference to KirloskarAsea. Both, therefore, stand as of now.

Similarly, Madras High Court held there is no transfer involved in repatriation of Foreign Exchange. The conversion of foreign currency into Indian currency does not involve a transfer from one person to another. It could not be even considered to be an exchange. Judgement passed in EID Parry Ltd. v CIT (1988) 174 ITR 11 (Mad).

The above 3 judgements are commonly quoted in most standard books. Do update this post if you come across similar judgements.

I presume your client's case shall have merit in treating the FX gains, earned after sale, as exempt.

Regards,

Hardik Lakhani