Forex Loss on ECB for Domestic Assets Allowed | ITAT 2026

What Happened?

In a significant ruling issued in November 2026, the Income Tax Appellate Tribunal (ITAT), Chennai bench has held that forex loss arising from External Commercial Borrowings (ECB) used to acquire domestic assets is an allowable revenue expense under the Income Tax Act 2025. This decision clarifies a long-standing ambiguity and provides tax relief to companies that have borrowed in foreign currency to purchase assets within India.

Background & Legal Context

When a company borrows money in foreign currency (like USD, EUR, etc.) through ECB and uses that money to purchase domestic assets, it faces a unique tax situation. Here's what happens:

• ECB Transaction: The company borrows foreign currency at a particular exchange rate (say, 1 USD = ₹83)
• Asset Purchase: The rupee equivalent is used to buy domestic fixed assets or inventory
• Forex Exposure: When the rupee depreciates (say, 1 USD = ₹85), the company faces a forex loss on the outstanding ECB liability
• Tax Question: Whether this forex loss can be deducted as a business expense or must be treated as capital loss

Under Section 37 of the Income Tax Act 2025 (and corresponding Section 37 of IT Act 1961), any expense incurred wholly and exclusively for the purpose of business is deductible. However, the classification of forex losses has been contentious. Some tax officers argued that since the ECB was used for capital assets, the forex loss should also be treated as capital loss (covered under Section 48 for capital gains/losses).

The ITAT Chennai ruling specifically addresses Section 37 of IT Act 2025 and clarifies that:

• The forex loss is incidental to the borrowing activity (which is a revenue/business activity)
• It is not inherent to the asset itself but to the funding arrangement
• Therefore, it qualifies as a revenue expense deductible in the year of loss

This ruling aligns with the principle that the nature of expense depends on the nature of transaction giving rise to it. Since ECB is a borrowing transaction (revenue in nature), the forex loss on ECB remains revenue in nature, regardless of what the borrowed funds were used for.

What Does This Mean for You?

If you are a corporate assessee with ECB:

• Immediate Tax Relief: You can now claim forex losses on ECB as a revenue expense under Section 37, deductible in the year of loss (for AY 2026-27 onwards and retrospectively for earlier years if assessments are still open)
• No Capital Loss Classification: You don't have to wait for asset sale to set off this loss or treat it as a capital loss that can only be carried forward for 8 years against capital gains
• Better Cash Flow: Revenue expense deduction provides immediate tax benefit in the same financial year
• Audit Trail: You should maintain clear documentation showing (a) the ECB amount and currency, (b) the exchange rate at borrowing and reporting dates, (c) the forex loss calculation, and (d) how the borrowed funds were used

If your assessment is under Appeal or Review:

• This ITAT ruling is persuasive authority and strengthens your position if you have been denied this deduction
• You can cite this judgment to the Assessing Officer or in higher appeal forums
• If your assessment was completed and forex loss was disallowed, you may consider filing a Rectification Application or pursuing appeal based on this new ruling

Impact for AY 2026-27 onwards:

Starting with assessments for AY 2026-27, tax officers cannot deny deduction of forex loss on ECB used for domestic assets under Section 37. However, the taxpayer must ensure:

• The ECB is taken for genuine business purpose (not for personal use)
• The borrowed funds are used for acquiring business assets or inventory
• The forex loss is actually incurred (not merely a notional loss)
• Proper documentation and disclosure in tax return Schedule foreign assets/liabilities

What Should You Do Now?

Immediate Steps:

1. Review Your ECB Position: Check if you have any ECB with outstanding liability and whether you have claimed forex losses. Segregate losses that were allowed vs. disallowed.
2. Audit Your Records: Compile documentary evidence: ECB agreement, bank statements showing foreign currency inflow, invoice/receipt of asset purchase, exchange rate documentation, financial statements showing forex loss.
3. Current Year Filings: If you have forex loss on ECB in FY 2026-27, ensure it is properly disclosed and claimed as deduction in Schedule Profit & Loss of your ITR.
4. Open Assessments: If your assessment for AY 2023-24, 2024-25, or 2025-26 is still pending (within 3-year or 6-year period), file a Rectification Application or supplement your return to claim this deduction.
5. Completed Assessments with Disallowance: If forex loss was disallowed in a completed assessment, evaluate whether you have grounds for appeal before ITAT. This ruling significantly strengthens your case.
6. Maintain Going Forward: Keep separate records of forex loss on ECB vs. other forex transactions. Clearly label it as "Revenue Forex Loss on ECB" in your books for audit clarity.

Documentation Checklist:

• Copy of ECB Agreement with schedule of repayment and interest rate
• Bank statements showing receipt of foreign currency and conversion to rupees
• Evidence of asset purchase (invoice, bill of lading, customs clearance, asset receipt)
• Monthly/quarterly exchange rate statements from your banker
• Balance sheet notes showing ECB outstanding liability and forex loss calculation
• Any correspondence with ECB lender or tax consultants

Key Takeaways

• ITAT Ruling (Nov 2026): Forex loss on ECB used for domestic assets is a revenue expense deductible under Section 37 of IT Act 2025, not a capital loss
• Legal Principle: The nature of expense depends on the nature of transaction giving rise to it. ECB is a revenue/borrowing transaction, so forex loss remains revenue-natured
• Tax Benefit: Allows immediate deduction in the year of loss, improving cash flow and tax position (no need to carry forward for 8 years as capital loss)
• Practical Impact: Companies with ECB can now claim forex losses without fear of disallowance; strengthens appeal cases where this was previously denied
• Compliance Requirement: Maintain clear documentation linking ECB to asset purchase and proper forex loss calculation; disclose in tax return and audit reports

Bottom Line: If you operate a business with External Commercial Borrowing and have faced forex losses due to rupee depreciation, this November 2026 ITAT ruling is good news. You can confidently claim these losses as revenue expenses under Section 37 of the Income Tax Act 2025. Ensure proper documentation and disclosure, and consider filing rectification applications or appeals for prior years where this benefit was denied.

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