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TMI Blog2023 (2) TMI 565X X X X Extracts X X X X X X X X Extracts X X X X ..... mstances of the case and in law, the Ld.CIT(A) erred in directing the AO to delete the addition of Rs. 1,16,64,751/- as it is unrealized foreign exchange gain even though the same is accounted for by the assessee as per the mercantile system of accounting. 3. The appellant craves leave to amend or alter any ground or add new ground which may be necessary." 3. The issue arising in ground No. 1, raised in Revenue's appeal, is pertaining to the addition on account of premium received by the assessee as short-term capital gains. 4. The brief facts of the case pertaining to this issue are: The assessee is a private limited company and is engaged in the business of manufacturing, trading, and export of aroma chemicals. For the year under consideration, the assessee e-filed its return of income on 10/12/2009 declaring a total loss of Rs.1,39,84,692. The assessee company originally issued fully compulsory convertible preference shares ('FCCPS') and Redeemable Cumulative Convertible Preference Shares ('RCCPS') at a face value of Rs. 10,000 each to M/s Avigo Venture Investments Ltd and M/s Avigo Trustee Company Private Ltd. Thereafter, both the preference shareholders transferred these p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent for A.Y. 2008-09 in the case of the appellant. As far as the conversion of preference shares into equity shares is concerned, it is considered as transfer as per the decision of Hon'ble Supreme Court in the case of Anarkali Sarabhai, 224 ITR 422. In fact, the AO has also cited this decision while supporting his preposition. However, it needs to be noted that the transfer in respect of the preference shares is in the hand of shareholder that is M/s. Satguru Constructions. Even if, the conversion is considered as buyback of shares by the appellant, the buyback was not taxable in the hands of the appellant company for A.Y. 2011-12. It appears that the AO misread the facts of the case and considered the transaction as that of capital gains even after admitting in the same breath that the appellant company had a liability to pay on redeeming the preference shares. At the best, the AO could have challenged the charging of share premium at substantially high rate. However, since the provisions of section 56(2)(7b) are applicable only after A.Y. 2013-14, there was also no scope for addition on that account. Thus, in view of the facts of the case, the conclusion drawn by the AO whil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital gains on receipt of the amount equal to the face value of the preference shares of Universal Corporation (P.) Ltd. on the company redeeming its preference shares?" 9. The Hon'ble Gujarat High Court decided the aforesaid issue by observing as under: "18. In the light of the above discussion, we have no doubt that when the company redeemed preference shares held by the assessee, there was 'transfer' within the meaning of section 2(47) of the Act which would attract section 45. In our opinion, the Tribunal was justified in holding that the assessee was liable to pay tax in respect of the capital gains on receipt of the amount equal to the face value of the preference shares of the company, held by her. We, therefore, answer Question No. 1 in the affirmative and against the assessee." 10. Thus, from the above, it is evident that the conclusion of the Hon'ble High Court that redemption of preference shares will result in transfer within the meaning of section 2(47) of the Act was held to be in the hands of the shareholder, which in the present case is M/s Satguru Constructions. The Hon'ble Supreme Court in Anarkali Sarabhai vs CIT, in [1997] 224 ITR 422 (SC), upheld th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee and added the gain on account of foreign exchange valuation to the total income of the assessee by observing as under: "4.3 the assessee's explanation was examined but are not tenable and hence not accepted. The facts of Woodward Governor India P. Ltd. is not applicable to the case of the assessee for the following reasons: a. The transactions were not completed as on 31st March and this is only a contingent liability; b. The loss accrued on loan transactions which is on capital account and therefore is not a revenue deduction which can be claimed under any provisions of I.T. Act. 4.4 Therefore, an amount of Rs.1,16,64,751/- is disallowed and added to the total income of the assessee." 13. The learned CIT(A), vide impugned order, allowed the appeal filed by the assessee on this issue by observing as under: "4.4.2 I have verified the facts of the case. As per the amended provisions of section 43A of the Act, it is expressly provided that the increase or decrease in the liability of a tax-payer as expressed in indian currency for making payment towards the whole or part of the cost of the asset for repayment of the whole or a part of the moneys borrowed by him fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... einstated at the year-end by considering the year-end rate of foreign exchange. We find that the AO, vide assessment order, made the impugned addition by considering it to be a loss accrued on a loan transaction, which is on a capital account. From the perusal of the financial statement of the assessee, forming part of the paper book, we find that during the year, the assessee has only accounted for gain arising from foreign exchange fluctuation. Therefore, the finding of the AO that loss on foreign exchange valuation was claimed as a deduction is contrary to the material available on record. Further, as per the provisions of section 43A of the Act, as amended by Finance Act 2002, w.e.f. 01/04/2003, the actual payment of the decreased /enhanced liability, due to a change in the rate of exchange subsequent to the acquisition of the asset in foreign currency, is a condition precedent for making adjustment in the cost of the fixed asset. Since the foreign exchange fluctuation gain, in the present case, is only due to the reinstatement of the accounts at the end of the year by considering the year-end rate of exchange, therefore, the same can neither be considered for computing the cos ..... X X X X Extracts X X X X X X X X Extracts X X X X
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