Interest on Foreign Currency Loan & Corresponding Forex Loss for Strategic Share Acquisition Held Deductible as Revenue Expenditure

 The tax treatment of interest on funds borrowed to acquire shares hinges on a single, crucial distinction: the purpose behind the acquisition.

• Typical Investment in Shares: Loan → Shares acquired → Objective: investment/dividend income.
  Result: Interest is treated as capital in nature; not deductible as business expenditure.

• Strategic Acquisition of Shares: Loan → Shares acquired → Objective: business expansion/operational integration.
  Result: Interest may qualify as business expenditure under Section 36(1)(iii).

This vital distinction was recently reaffirmed by the Pune ITAT in the case of Bitwise Solutions Pvt. Ltd., extending the principle to allow foreign exchange losses as well.

Facts of the Case

The assessee borrowed a foreign currency loan to acquire shares of its US entity, making it a 100% subsidiary. Crucially, this was not a mere investment. The acquisition was driven by business necessity: ensuring operational continuity, achieving integration, and strengthening customer relationships.

The assessee claimed:

• Interest deduction under Section 36(1)(iii)

• Foreign exchange loss on repayment of the loan

The Revenue disallowed the forex loss, arguing that the borrowing was used to purchase shares—a capital asset—and therefore the resultant loss was also capital in nature.

Tribunal’s Analysis

The Pune ITAT noted that in earlier proceedings concerning the same assessee, it had already held that the interest on this borrowing was allowable as business expenditure. The rationale was simple: the acquisition of the subsidiary was motivated by commercial expediency and business necessity, not by an intent to earn passive income.

Applying this settled principle, the Tribunal employed a logical and powerful test:

“If the interest on the borrowing is allowable as business expenditure, the foreign exchange loss arising from the repayment of the same loan must also be treated as a business expenditure.”

The Tribunal observed that the forex loss was directly linked to the very same borrowing that had already been accepted as revenue in nature. To treat the interest as deductible but the exchange fluctuation loss as capital would be inconsistent and illogical. Accordingly, the forex loss was allowed as a deduction under Section 37 of the Income Tax Act.

The Big Takeaway

When a share acquisition is undertaken for strategic business purposes—such as control, integration, or operational synergy—rather than as a passive investment, both the interest on the loan and any corresponding foreign exchange loss on its repayment qualify as revenue expenditure. This ruling provides much-needed clarity for multinational groups funding overseas subsidiary acquisition