INCOME TAX ACT, 1961

Section 37(1)

Business income - Foreign exchange loss - Allowability - Loss arising on conversion of ECB into share capital

During the scrutiny assessment, AO found that assessee claimed foreign exchange loss in the profit & loss account. Assessee submitted that foreign exchange loss was on account of conversion of ECB denominated in foreign exchange to share capital and the same has been charged to profit & loss account. Assessee further submitted that the conversion of dollar denominated ECB into rupee denominated share capital was comprised of two distinct transactions. AO, however, did not accept contention of assessee and held that act of repayment of ECB and allotment of equity shares to overseas company were not two separate transactions but only one, as there is no separate inflow or outflow of funds for the above two transactions, as such, the conversion of ECB into share capital could not be held to be of revenue nature and disallowed the foreign exchange loss. Held: Conversion of dollar denominated ECB into rupee denominated share capital is comprised of two distinct transactions, namely, allotment of equity shares to the overseas company and repayment of ECB at the prevailing exchange rate and loss arising on conversion of ECB into share capital represented by difference in exchange rate as on the commencement of current financial year and that prevailing on the date of conversion constituted revenue loss.

REFERRED :

FAVOUR : In assessee's favour

A.Y. : 2009-10

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