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AI Drafter - (New and Powerful) ✕ Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter.
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Issues: Whether the loss arising on devaluation of Pakistani currency in respect of unremitted profits standing to the assessee's credit in Karachi was allowable as a business loss or, alternatively, as a bad debt.
Analysis: The amount had originally represented profits earned by the assessee, but after those profits were taken into account and taxed, the balance remained abroad as an asset of the assessee. There was no evidence that the fund was held or intended to be used for trading purposes. On that footing, the diminution in its value on devaluation was not a trading loss but a reduction in the value of a capital asset. The alternative plea of bad debt also failed because the relationship between the assessee and the Karachi concern was that of principal and agent, not debtor and creditor, and in any event the amount had not become bad in the commercial sense; only its value in Indian currency had fallen.
Conclusion: The loss was not allowable as a business loss and could not be deducted as a bad debt. The answer to the referred question was against the assessee and in favour of the Revenue.
Ratio Decidendi: A foreign currency balance, once received or treated as received and retained without proof of trade use, is a capital asset; its diminution on exchange devaluation does not create an allowable trading loss, and a mere fall in exchange value does not convert the amount into a bad debt.
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