TMI Blog2021 (11) TMI 143X X X X Extracts X X X X X X X X Extracts X X X X ..... ing any liquidity crunch during the period under consideration. As assessee raised money through GDR s and issued the equity share capital which was treated to be a share capital, therefore the gains on account of foreign exchange fluctuation on such share capital collected in foreign exchange was only the capital receipt - A.O. had not disputed the fact that the money was raised by the assessee by way of GDRs against capital equity therefore the exchange gain which had arisen on account of holding the GDR proceeds, was capital in nature and not liable to tax - Decided in favour of assessee. - ITA No. 1496/Chd/2017 & 1067/Chd/2018 (Assessment Year : 2013-14 & 2012-13) - - - Dated:- 27-10-2021 - SHRI. N.K.SAINI, VP AND SHRI , R.L. NEGI, JM Assessee by: Shri Tejmohan Singh, Advocate Revenue by: Shri Ashok Khanna, Addl. CIT ORDER PER N.K. SAINI, VICE PRESIDENT These two appeals by the assessee are directed against the separate order dt. 01/09/2017 for the A.Y. 2013-14 and 21/06/2018 for the A.Y 2012-13 passed by the Ld. CIT(A)-2, Chandigarh. 2. Since the issues involved are common and the appeals were heard together, so these are being disposed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a capital receipt and was not liable to be taxed. The AO asked the assessee to explain as to why the exchange gain on GDR s should not be treated as revenue receipt and be taxed accordingly. In response the assessee submitted as under: Global depositors Receipt:- menus any instrument in the form of a depository receipt, by whatever name called, created by a foreign depository outside India and authorized by a company making an issue of such depository receipts. A company may after passing a special resolution in its general meeting, issue depository; receipts in any foreign country in such manner, and subject to such conditions, as may be prescribed. Purpose: The fund raised through GDR was meant to finance the ongoing expansion in terms of capital investments, retail business and to meet long term working capital requirement. Benefits to company: Through GDR, company opted to obtain greater exposure and raise capital in die world market, issuing GDRs has the added benefit of increasing the share's liquidity while boosting die company's prestige on its local market as well as in international market. Quantum of GDR: winsome Textile Industries Limite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly MAT on such gain. In computation of Income as per Income tax die same is reduced from die income considering the fact of the above mentioned case and treated as capital receipt 4.2 The AO however did not accept the contention of the assessee. He observed that the assessee during F.Y. 2010-11 issued ₹ 6,45,00,000/- equity shares (GDRs) of ₹ 1/- each at a premium of ₹ 5.94/- for a total consideration of ₹ 44,76,30,000/-. The GDRs were issued with the following objectives: a. To finance the ongoing expansion of capital investment and retail business b. To meet the long term working capital needs of the assessee company 4.3 The AO further observed that after the issue during the F.Y 2010-11, the amount raised was not immediately repatriated to India, it was invested in Aries Capital Fund Ltd. (Formerly known as Aries Money Market Fund) and subsequently repatriated to India over period of four years, the assessee company gained on account of such money market operations because of the increasing dollar value against the Indian rupee and the total exchange rate fluctuation gain accrued. The A.O. observed that during the year under considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest or as exchange gains. So the assessee cannot claim that the money was parked abroad to fulfil certain legal obligations. d. The assessee in itself has declared the realised exchange rate fluctuation gains, that is, the gains on the money repatriated to India (excluding the money stacked abroad) as revenue receipts and declared it as the business income of the assessee. This buttresses the fact that the exchange gains earned by the assessee are revenue receipts and not capital receipts. 4.4 According to the AO the intent of the assessee was to park the fund in money markets and gain out of such investments. Therefore the investment so made was an application of the funds raised and the income or gains so received was out of such application and not out of normal course of repatriation of the capital fund. Therefore, such activity of investment should have been treated as adventure in the nature of business and the gain so received by the assessee should have been treated as the business income. The AO was of the view that the assesses willfully parked the funds raised in banks/money markets abroad to make gains out of such transactions which should have been treated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al business activity and which are not repetitive. 5.4 The case law quoted by the assessee is also not applicable in the case of the assessee as the facts of the case are entirely different as the inherent motive to gain out of exchange rate fluctuation was not clearly visible in that case. 5.5 In view of all the above, the exchange gain earned by the assessee amounting to ₹ 3,12,92,000/- is hereby treated as revenue receipts of the assessee. However, since the assessee has already declared the realised gain of ₹ 52,24,000/- as revenue difference, the balance amount of ₹ 2,60,68,000/- is added to the business income of the assessee. 5. Being aggrieved the assessee carried the matter to the Ld. CIT(A) who sustained the addition by observing in para 3.3 to 3.5 as under: 3.3 The AO sought the explanation of appellant as to why the un-repatriated exchange fluctuation gain should not be taxed as a revenue receipt. In its reply the appellant made the following submissions: Global depositor's Receipt:- means any instrument in the form of a depository receipt, by whatever name called, created by a foreign depository outside India and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture, the amount received on account of exchange fluctuation also had the character of a capital receipt. Consequently the Tribunal on the facts held against the Revenue and set aside the order of the Commissioner of Income Tax. The madras High Court held that evidently the receipt related to the issue of global depository shares by the assessee. The said shares were issued for widening its capital base. The fact remains what was remitted was equivalent to what was received in US dollars. Thus the receipt on account of exchange fluctuation being related to the money received on capital issue, the receipt was only capital nature. Tax Treatment in computation : Company includes the gain arising on exchange fluctuation in Book Profit while calculating the MAT and duly MAT on such gain. In computation of Income as per Income Tax the same is reduced from the income considering the fact of the above mentioned case and treated as capital receipt. The AO, being unsatisfied with explanation of the appellant treated the entire exchange gain earned by the appellant amounting to ₹ 3,12,92,000/- as the revenue receipt for the year. During the course of appellate proceedin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng a capital receipt. As has been highlighted by the Hon'ble Madras High Court in the said case on further appeal by the revenue (order dated 19.06.2012 in TC(A) No. 1023 of 2005), the assessee kept a part of the GDS proceeds abroad. When the money was brought to India, due to strong dollar position, the assessee gained on the repatriated amount. This was claimed as a capital receipt. The Tribunal pointed out that the increase in the value was not due to any activity of the assessee but due to the change in the exchange rate of the Indian rupee to the US Dollar. The receipt on the issue of GDS being capital in nature, the amount received on account of exchange fluctuation also had the character of a capital receipt. The Hon'ble High Court in para 27 of its order held as under: the receipt on account of exchange fluctuation being related to the money received on capital issue, rightly the assessee contended that the receipt was only capital in nature. In the decision reported in 174 ITR 11 EID PARRY LIMITED v. CIT., this Court pointed out on account of exchange fluctuation, if the assessee receives further money, the same represented capital receipt. Considering the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be a test for the purpose of determination of the character of the receipt. Accordingly, and in the view of the above, the action of the AO in treating the balance amount of exchange gains amounting to ₹ 2,60,68,000/- as revenue receipts is upheld and this ground of appeal is dismissed. 6. Now the assessee is in appeal. 7. The Ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the assessee during the year under consideration had earned exchange rate gain on Global Depository Receipts (GDR) amounting to ₹ 3,12,92,000/- out of which gain amounting to ₹ 52,24,000/- was repatriated to India in the same year. It was further submitted that the assessee initially declared the entire exchange rate gain in its P L Account. Subsequently the exchange rate gain which was not repatriated to India amounting to ₹ 2,60,68,000/- which was deducted from the gross total income in the computation sheet as the receipt was the capital receipt and was not liable to be taxed. However the A.O. treated the same as Revenue in nature. It was stated that the GDR means any instrument in the form of a depository r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that even though the activity of parking funds abroad was not part of the normal business activity of the assessee and it did not involve repeated transaction, but it was very well with in the definition of business income as the scope of adventure in nature of trade is vide and include even those transactions which are not part of the normal business activity and which are not repetitive as was the case of the assessee. 8.1 In his rejoinder the Ld. Counsel for the Assessee submitted that there was no financial crunch as alleged by the A.O. and the Ld. DR. 9. After taking note of this submission of the Ld. DR that there was a financial crunch, we directed to produce any evidence to substantiate that company was facing heavy liquidity crunch during the period under consideration. On the direction of the Bench, the A.O. vide letter dt. 03/09/2021 submitted that there was no documentary evidence available in the assessment record which substantiate that the company was facing heavy liquidity crunch during the period under consideration. The copy of the said letter issued by the concerned A.O. is placed on record. 10. We have considered the submissions of both the parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue receipt is liable to be taxed and even if the assessee had made a wrong claim, it is the duty of the A.O. being a quasi judicial authority, to assess the correct income. On this issue the Hon'ble Kerala High Court in the case of Raghavan Nair Vs. Assistant Commissioner of Income Tax and Another (supra) held as under: The powers of the Assessing Officers under the Act are quasi-judicial in nature and they are duty-bound, therefore, to act fairly in the discharge of their functions. They are also invested with the authority to do justice to the assessees. In a case where it is apparent on the face of the record that the assessee has included in his return, an income which is exempted from payment of incometax,- on account of ignorance or by mistake, the Assessing Officer is bound to take into account that fact in a proceeding under section 143 of the Income-tax Act, 1961. In other words, if the capital gains on a transaction are exempted from payment of tax, the Assessing Officer has a duty to refrain from levying tax on the capital gains and the Assessing Officer can-not, in such cases, refuse to grant relief under section 143 of the Act to the assessee on the te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l of the order of the Commissioner of Income Tax shows that evidently receipt of ₹ 69,44,440/- related to the issue of global depository shares by the assessee. The said shares were issued for widening its capital base. The Commissioner pointed out that printed prospectus showed that the object of issuance was with reference to the establishment of offshore software development centre at Chennai. The reminder of the net proceeds was to be used for working capital and for other general corporate purposes. On the deposit on account of exchange fluctuation, the assessee received further sum. The fact remains what was remitted was equivalent to what was received in US dollars. Thus, the receipt on account of exchange fluctuation being related to the money received on capital issue, rightly the assessee contended that the receipt was only capital in nature. In the decision EID Parry Ltd. 's case (supra), this Court pointed out on account of exchange fluctuation, if the assessee receives further money, the same represented capital receipt. Considering the fact that the surplus amount which arose was on account of the exchange fluctuation on the money received on capital account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived at by the Tribunal that the character of the receipt on account of exchange fluctuation is nothing but capital and hence, we do not have any hesitation in rejecting the first question of law. 10.6 In the present case also the assesse raised money through GDR s and issued the equity share capital which was treated to be a share capital, therefore the gains on account of foreign exchange fluctuation on such share capital collected in foreign exchange was only the capital receipt. 10.7 Similarly the ITAT Mumbai Bench in the case of State Bank of India Vs. ACIT (supra) held as under: 42. We have considered the rival submission of the parties and have gone through the orders of authorities below. The Assessing Officer disallowed exchange Gain on repatriation GDR holding that gain of the amount arise from the money raised against the equity capital, had been realized in the normal course of business and was utilized as circulating capital in banking. We have noted that the AO has not disputed the facts that the money raised by way of GDR was raised against capital equity. Before the Id. CIT (A) the assessee contended the similar submissions as before us. After considerin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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