Income Tax Appellate Tribunal - Chandigarh
M/S Winsome Textile Industries Ltd., ... vs Acit, C-4(1), Chandigarh on 27 October, 2021
आयकर अपील य अ धकरण,च डीगढ़ यायपीठ "बी" , च डीगढ़ IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BENCH "B", CHANDIGARH (VIRTUAL COURT) ी एन.के.सैनी, उपा य! एवं ी आर.एल. नेगी, या$यक सद&य BEFORE: SHRI. N.K.SAINI, VP & SHRI , R.L. NEGI, JM आयकर अपील सं./ ITA No. 1496/Chd/2017 नधा रण वष / Assessment Year : 2013-14 M/s Winsome Textile Industries Ltd., बनाम ACIT, C-4(1) SCO 191-92, Sector-34-A, Chandigarh Chandigarh थायी लेखा सं./PAN NO: AAACW1910G अपीलाथ /Appellant यथ /Respondent आयकर अपील सं./ ITA No. 1067/Chd/2018 नधा रण वष / Assessment Year : 2012-13 M/s Winsome Textile Industries Ltd., बनाम ACIT, C-4(1) SCO 191-92, Sector-34-A, Chandigarh Chandigarh थायी लेखा सं./PAN NO: AAACW1910G अपीलाथ /Appellant यथ /Respondent नधा रती क! ओर से/Assessee by : Shri Tejmohan Singh, Advocate राज व क! ओर से/ Revenue by : Shri Ashok Khanna, Addl. CIT सन ु वाई क! तार&ख/Date of Hearing : 21/09/2021 उदघोषणा क! तार&ख/Date of Pronouncement : 27/10/2021 आदे श/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 off by way of this common order for the sake of convenience and brevity.
23. At the first instance we will deal with the appeal in ITA No. 1496/Chd/2017 for the A.Y. 2013-14. Following grounds have been raised in this appeal:
1. That the Learned Commissioner of Income Tax (Appeals) has failed to appreciate the facts and circumstances of the case and has thereby erred in treating unrealized exchange gain as revenue receipt instead of capital receipt.
The action of the Learned Commissioner of Income Tax (Appeals} is unwarranted and against the principle of law and natural justice.
2. That the Learned Commissioner of Income Tax (Appeals) has also erred in concluding that merely keeping foreign currency abroad amounts to adventure in the nature of business.
The appellant prays that the additions being unjustified and unwarranted deserves to be deleted.
In view of the above stated facts and circumstances, it is prayed that the additions made may kindly be deleted or such other relief be granted as is deemed fit.
From the aforesaid grounds it would be clear that the only grievance of the assessee relates to treating the unrealized foreign currency exchange gain as revenue receipt instead of capital receipt.
4. Facts of the case in brief are that the assessee e-filed its return of income on 30/09/2013 declaring NIL income. Subsequently, the assessee revised its return on 18/03/2015 at NIL income. Later on the case was selected for scrutiny through CASS. The assessee company is engaged in manufacturing and export of cotton yarn/blended yarn/mélange yarn and having a spinning unit at Baddi, Himachal Pradesh. The assesse company is also having a dye house in the said premises in which yarn and fibers were dyed in numerous shades.
4.1 During the course of assessment proceedings the AO noticed that the assessee had earned exchange rate gain on GDRs amounting to Rs. 3,12,92,000/- out of which the assessee had repatriated gain amounting to Rs. 52,24,000/- to India in the same year. The AO pointed out that the assessee initially declared the entire exchange rate gain amounting to Rs. 3,12,92,000/- in 3 its profit and loss account. Subsequently, the exchange gain which was not repatriated to India amounting to Rs. 260,68,000/- was deducted from the Gross Total Income in the computation sheet on the pretext that the receipt was 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 Limited during die F. Y. 2010-11, has raised an amount of US $ 9997500 from Global Depository Receipts (GDRs) issue. The board of Directors in their meeting held on 31.03.2011 have issued & allotted 6,45,00,000 equity shares of Re. 1/- each at a premium of Rs. 5.94/- per share each fully paid up underlying the 12,90,000 Global Depository Receipts (GDRs) at a price of US $ 7.75 per GDR. Each GDR represents 50 Equity shares of the company.
Listing of GDR & its underlying shares: The Global Depository receipts (GDRs) of the company were listed in Luxembourg Stock Exchange on 31" March 2011 at Luxembourg. After the allotment of underlying equity shares, the paid up equity capital of the company stands increased from Rs. 13,37,00,000/- to Rs. 19,82,00,000/ comprising of19,82,00,000 equity shares of Re. 1/- each. The number of shares so issued pursuant to GDR i.e. 6,45,00,000 equity shares were also get listed in Bombay Stock Exchange (BSE) 28* April 2011.
Nature of Income on GDR: During the financial year 2012-13. The company earned capital receipt amounting Rs. 260.67Lacs on account of exchange fluctuation i.e. increase in value of GDR lying outside India. Due to exchange rate of the India rupee to the US Dollar.
Tax Implication on Exchange gain on GDR: In die case of LD/61/15 CIT-III, Chennai Vs. PVP Ventures Ltd. June 19, 2002 (MAD) (Assessment Year 2001-02), Tribunal held that value of GDR was not due to the activity of the assessee but due to the 4 change in the exchange rate of the Indian rupee to the US Dollar. The receipt on the issue of GDRs being capital nature, die amount received on account of exchange fluctuation also had the character of a capital receipt. Consequently, the Tribunal on die 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 die 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 die money received on capital issue, the receipt was only capital nature.
Tax treatment in computation: Company includes die 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 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 Rs. 6,45,00,000/- equity shares (GDRs) of Rs. 1/- each at a premium of Rs. 5.94/- for a total consideration of Rs. 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 consideration the assessee repatriated Rs. 7,77,06,000/- to India which included gain of Rs. 52,24,000/- which was shown as a revenue receipt but the exchange gain on the amount which was not repatriated to India was taken as unrealized gains and was deducted from the income of the assessee on the pretext that it 5 was a capital receipt. The AO pointed out that the assessee had never contested on the issue of realized & unrealized gain and that as to whether only realized gains to be taxed or both realized and unrealized gains should be taxed on accrual basis. The AO was of the view that the exchange gain should have been treated as a revenue receipt and not a capital receipt for the following reasons:
a. There is no legal obligation on the assessee company to park the fund abroad. The assessee has stated that pending certain compliances, a part of the issue proceeds are parked in Escrow account outside India. This is not acceptable as there is no requirement, whatsoever, to keep the money stacked abroad. Moreover, if at all, for the sake of discussion, the contention of the assessee is accepted, the requirement to keep the money abroad has to be for the total issue proceeds and cannot be for a part of it as done by the assessee. This shows that the intention of the assessee has been to gain out of the falling rupee against the dollar.
b. The assessee company issued the GDRs on 29the March,2011. The money however was not repatriated to India immediately. This was done during a situation where the company has been facing heavy liquidity crunch. Attention is drawn towards the fact that one of the objectives of issuing GDRs is for meeting the long term working capital needs of the assessee company. It is highly unlikely that a company would keep the money stashed in foreign banks when the liquidity position of the company is bad. This again shows that the money was parked abroad solely with the aim of gaining out of such funds.
c. After the first repatriation of funds during the FY 2012-13 amounting to Rs. 5,61,60,000/-, the balance money was transferred and parked in money market operations through money market operator namely, Aries Capital Fund Ltd. This again shows that the assessee company had parked the money as a financial instrument in money market operations abroad in order to gain profits out of such operation either in the form of interest 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 6 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 as business income of the assessee and not mere capital receipt which is part of the normal GDR issue.
4.5 The AO was of the view that the activity of the assessee falls within the definition of business income as the scope of adventure in the nature of trade and added the sum of Rs. 2,60,68,000/- as the business income of the assessee by observing in para 5.1 to 5.5 of the assessment order dt. 29/02/2016 as under:
5.0 Sec. 2(13) of the Income Tax Act, 1961 defines the term 'business'. The term 'business' includes -
• any trade, commerce or manufacture; or
• any adventure or concern in the nature of trade, commerce or
manufacture.
5.2 The term 'Adventure in the nature of trade' has not been defined in the
Income Tax Act, 1961. As far as the dictionary meaning of the word 'adventure' is concerned, it implies a pecuniary risk, a venture, a commercial purpose. The word 'venture' is defined as a commercial activity in which there is a risk of loss as well as a chance of gain. The term 'trade' in the context of the definition of the expression 'business' is a wider concept and once this term associated with the term 'adventure' the scope further enlarged. The adventure in the nature of trade is allowed to transaction that constitutes a trade or business but may not be a business itself. The business has characterized by some of essential ventures such as repetitive transactions, holding of stock-in-trade, dealing with the customers and implied intention between the parties, etc., but, contrary to this even an isolated transaction can satisfy the description of an adventure in the nature of trade. For an adventure, it is not necessary that there should be a series of transactions. A single transaction can constitute an adventure in the nature of trade.
5.3 In the case of the assessee, there has been an adventure or venture. The GDR receipts so stacked abroad is exposed to the risk of loss as well as a chance of gain. Eventhough, the activity of parking the funds abroad is not part of the normal business activity of the assessee and it does not involve repetitive transaction, it very well falls within the definition of business income as the scope 7 of 'adventure in the nature of trade' is wide and includes even those transaction which are not part of the normal 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 Rs. 3,12,92,000/- is hereby treated as revenue receipts of the assessee. However, since the assessee has already declared the realised gain of Rs. 52,24,000/- as revenue difference, the balance amount of Rs. 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 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 the world market issuing GDRs has the added benefit of increasing the share's liquidity while boosting the company's prestige on its local market as well as in international market.
Quantum of GDR: winsome Textile industries Limited during the FY 2010-11 has raised an amount of US$ 9997500 from Global Depository Receipts (GDRs) issue. The board of Directors in their meeting held on 31.03.2011 have issued & allotted 6,45,00,000/- equity shares of Re. 1/- each at a premium of Rs 5.94/- per share each fully paid up underlying the 12,90,000 Global Depository Receipts (GDRs) at a price ofUSS 7.75 per GDR. Each GDR represents 50 shares of the company.
Listing of GDR & its underlying shares: The Global Depository receipts (GDRs) of the company were listed in Luxembourg Stock Exchange on 31th March 2011 at Luxembourg. After the allotment of underlying equity shares, the paid up equity capital of the company stands increased from Rs 13,37,00,000/- to Rs 19,82,00,000/- comprising of 19,82,00,000 equity shares of Re. 1 each. The number 8 of shares so issued pursuant to GDR i.e. 6,45,00,000/- equity shares were also get listed in Bombay Stock Exchange (BSE) 28lh April 2011.
Nature of Income on GDR: During the financial year 2012-13. The company earned capital receipt amounting Rs 260.67 Lacs on account of exchange fluctuation i.e. increase in value of GDR lying outside India. Due to exchange rate of the India rupee to the US Dollar.
Tax implication on Exchange gain on GDR: In the case of LD/61/15 CIT-III, Chennai vs PVP Ventures Ltd. June 19,2002 (MAD) (AY 2001-12), Tribunal held that value of GDR was not due the 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 GDRs being capital nature, 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 Rs 3,12,92,000/- as the revenue receipt for the year. During the course of appellate proceedings, the appellant reiterated it submission made before the AO. It was submitted that Rs. 2,60,68,000/- not repatriated and not received in India is in the nature of capital receipt and hence not liable to be taxed.
3.4 I have carefully considered the facts of the case, submissions made by the appellant and the findings of the AO as contained in the assessment order. A coherent analysis of the above brings out the following undisputed facts-
> The appellant raised capital through GDR during FY 2010-11; > The capital so raised was not repatriated immediately; > The capital raised was instead reinvested in "Aries Capital Fund Ltd. (Formerly known as Aries Money Market Fund)";
> During the relevant assessment year the appellant has earned Rs. 3,12,92,000/- by way of exchange rate gain;
> Out of this Rs. 52,24,000/- was repatriated back to the country during the year; > In its profit and loss account the appellant included the entire foreign exchange gain of Rs 3,12,92,000/-;
> Rs.52,24,000/- i.e. only the amount repatriated during the year was offered as income of the appellant for the relevant assessment year;
9> The balance amount of Rs. 2,60,68,000/- which was not repatriated back to the country was treated as capital receipt and was deducted from the gross total income in the computation sheet;
The above facts itself portrays the contradictions adopted by the appellant itself. The appellant does not controvert the AO's finding that Rs. 3,12,92,000/- was earned by it during the relevant year. However, on the one hand it claims that part of this earning which was repatriated back is in the nature of 'revenue receipt' and thus taxable while the balance un-repatriated amount is in the nature of 'capital receipt'. In the light of this, the questions need to be answered are (1) whether part of the same source of receipt (i.e. foreign exchange gain) can be treated as "revenue receipt" and part of it as "capital receipt" and (2) whether repatriation back to the country is the yardstick on the basis of which such distinction/ classification has to be made.
The appellant has relied upon the decision of Hon'ble ITAT Chennai in the case of CIT-III Chennai vs PVP Ventures Ltd. in support of its claim that the exchange gain on the value of GDR is not taxable being 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 fact that the surplus amount which arose was on account of the exchange fluctuation on the money received on capital account and not on account of any transaction by the assessee, as a trading asset or as part of circulating capital, this Court held that the surplus amount arising on account of exchange fluctuation has to be treated as capital receipt. In the decision reported in 337 ITR 21 CIT v. JAGATJIT INDUSTRIES LIMITED, the Delhi High Court considered the similar situation. Referring to decision reported in 116 ITR 1 SUTLEJ COTTON MILLS LIMITED v. CIT it held that for the purpose of determination of the character of the receipt, one has to know whether the amount was held by the assessee on capital account or in any other account. Thus receipts on account of exchange fluctuation on the money held on the allotment of shares has to be held as capital only. "
It has also been held in the case of TVS SUNDARAM IYENGAR & SONS v.CIT. (222 ITR 344) that profits on account of exchange fluctuation would ordinarily be trading profits if the foreign currency was held by the assessee on a revenue account or as a trading asset or as part of circulating capital embarked in the business.
103.5 In the above backdrop, the facts of the case of PVP Ventures Ltd. can be distinguished from that of the appellant. In the case of PVP Ventures Ltd. the gain was on account of foreign exchange fluctuation on the GDR at the time of repatriation. In the case of the appellant the GDR raised have already been reinvested in Aries Capital Fund and it is the proceeds of these reinvestments which have resulted in the fluctuation gain - a fact never disputed by the appellant either at the time of assessment proceedings or at the time of appellate proceedings. It is not the proceeds of GDR which resulted in the gains when repatriated back to India; rather it is the proceeds of appellant's reinvestments of such GDR in Aries Capital Fund which has resulted in the gains. In other words, the exchange fluctuation arose on account of transaction by the assessee of foreign currency held as a trading asset or as part of circulating capital and not on account of any money received on capital account, More importantly the appellant itself has treated a part of such repatriated gains as revenue receipts and hence repatriation of the amount earned by way of 'exchange gain cannot 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 Rs 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 Rs. 3,12,92,000/- out of which gain amounting to Rs. 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 Rs. 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 receipt, by whatever name called, created by a foreign depository outside India and authorized by a company making an issue of such depository receipts and that the 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. It was stated that the 11 funds were raised through GDR to finance the ongoing expansion in terms of capital investments that an amount of US $ 9997500 from GDR issue had been raised and the Board of Directors in its meeting held on 31/03/2011 have issued and allotted 6,45,00,000/- equity shares of Re. 1/- each at a premium of Rs. 5.94/- per share each fully paid up underlying the GDR at a price of US$ 7.75 per GDR and each GDR represents 50 equity shares of the company. It was contended that the assessee through GDR depicted to obtain greater exposure and raised the capital in the world market, therefore the foreign exchange fluctuation gain was capital in nature and the Ld. CIT(A) was not justified in sustaining the action of the A.O. who treated the said fluctuation gain on the GDR as revenue receipt.
7.1 The Ld. Counsel for the Assessee drew our attention towards page no. 52 of the assessee's paper book and submitted that as per the RBI's Guidelines the GDR can be kept abroad. It was stated that the gain on account of foreign exchange fluctuation was attributable to the share capital and such gain was on capital account. The reliance was placed on the following case laws:
• CIT Vs. PVP Ventures Ltd. reported in 23 taxmann.com 286 (Madras) • State Bank of India Vs. ACIT reported in 91 taxmann.com 312 (Mum) • Peerless General Finance And Investment Company Ltd. Vs. CIT [2019] 416 ITR 1 (SC) • Raghavan Nair Vs. Asst. CIT And Another [2018] 402 ITR 400 (Ker)
8. In his rival submissions the Ld. DR strongly supported the orders of the authorities below and reiterated the observations of the A.O. at page no. 5 of the assessment order dt. 29/02/2016. It was further submitted that when the liquidity position of the assessee was very bad then why the money was kept outside India and that the activity of the assessee was adventure or venture in nature of business. It was further submitted that the GDR receipts so staked abroad was exposed to the risk loss as well as the chances of gains. He further 12 submitted 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 and perused the material available on the record. In the present case the assessee during the year under consideration raised an amount of US$ 9997500 from GDR's and issued 6,45,00,000/- equity share of Rs. 1/- each at a premium of Rs. 5.94/- per share for a total consideration of Rs. 44,76,30,000/-. The GDR's were issued with objective to finance the ongoing expansion of capital investment, retail business and to meet the long term working capital need of the assessee company. The amount raised was not immediately repatriated to India and was invested in the Aries Capital Fund Limited. Subsequently it was repatriated to India over a period of four years. On the GDR's, exchange rate fluctuation gain accrued during the year under consideration for a sum of Rs. 3,12,92,000/- out of which gain of Rs. 52,24,000/-(realized gain) on repatriated GDRs was considered as 13 revenue receipt but the exchange gain on the amount which was not repatriated to India was taken as unreliazed gains and considered as capital receipt. The A.O. held that the money was not repatriated to India immediately and it was done during the situation where the company had been facing heavy liquidity crunch. To clarify this observation of the A.O., this Bench of the ITAT directed the Ld. Sr. DR to clarify from the concerned A.O. In response, the A.O. vide letter dt. 03/09/2021 addressed to the Ld. Sr. DR ITAT, Chandigarh informed that " there was no documentary evidence available in the assessment record which substantiate that company was facing heavy liquidity crunch during the period under consideration" copy of the said letter is placed on record. We therefore are of the view that the said observation of the A.O. that the money was not repatriated to India even when the assessee was facing heavy liquidity crunch was not in accordance with the material available on the record, in other words there was no such liquidity crunch as alleged by the AO. The another reason given by the A.O. for considering the exchange rate fluctuation gain as revenue receipt was that the assessee itself declared the gain on the money repatriated to India as the business income of the assessee, therefore the total gain was the revenue receipt and not a capital receipt.
10.1 In our opinion the A.O. being a quasi judicial authority is required to ascertain true nature of the receipt, only the 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 income- tax,- 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 14 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 technical plea that the assessee has not filed a revised return. It is so since the paramount duty of the Assessing Officer is to complete the assessments in accordance with law."
10.2 Similarly the Hon'ble Apex Court in the case of Peerless General Finance and Investment Company Ltd. Vs. CIT (supra) held as under:
"(iii) That the "theoretical" aspect of the transaction was the fact that the assessee had treated the subscription receipts as income. The reality of the situation, however, was that the business aspect of the matter, when viewed as a whole, lead inevitably to the conclusion that the receipts in question were capital receipts and not income."
10.3 From the ratio laid down in the aforesaid referred to cases, it would be clear that even if the assesse had treated one receipt as an income and in real situation the said receipt was not an income, it was the duty of the A.O. being a quasi judicial authority to tax the real income and not what had been offered by the assessee.
10.4 Now, the question arises as to whether the exchange rate fluctuation gain was a revenue receipt or the capital receipt in the hands of the assessee. It is relevant to point out that the assessee company issued the GDRs with the objectives to finance ongoing expansion of capital investment, it was a onetime activity and it was not the intention of the assessee to park the money abroad solely with the aim of gaining out of such funds and it was also not the intention of the assessee to keep money in foreign banks and that its liquidity position was bad as alleged by the A.O. In the present case, we have earlier mentioned in the former part of this order that no documentary evidence was placed on record by the Department which substantiate that the assessee company was facing any liquidity crunch during the period under consideration.
10.5 As regards to the nature of gain on exchange rate fluctuation, the Hon'ble Madras High Court in the case of CIT Vs PVP Ventures Ltd. (supra) held as under:
1527. As regards the merits on the character of the receipt as capital in nature, we agree with the Tribunal's view and the submission made by learned senior counsel for the assessee placing reliance on the decision in Sutlej Cotton Mills Ltd. 's case (supra) as well as in EID Parry Ltd. 's case (supra). As far as this aspect is concerned, a perusal of the order of the Commissioner of Income Tax shows that evidently receipt of Rs. 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 and not on account of any transaction by the assessee, as a trading asset or as part of circulating capital, this Court held that the surplus amount arising on account of exchange fluctuation has to be treated as capital receipt. In the decision in Jagatjit Industries Ltd. 's case (supra), the Delhi High Court considered the similar situation. Referring to decision in Sutlej Cotton Mills Ltd. 's case (supra) it held that for the purpose of determination of the character of the receipt, one has to know whether the amount was held by the assessee on capital account or in any other account. Thus receipts on account of exchange fluctuation on the money held on the allotment of shares has to be held as capital only. The Delhi High Court pointed out that the money was received on allotment of shares by way of GDR and the amount was collected in US Dollars. The gain on account of exchange fluctuation was attributable to the share capital and such gain on capital account. Referring to the fact that 21% of the gain was taken as revenue receipt, since the same was utilised for general corporate uses, the Delhi High Court held that the entire money collected in foreign exchange represented share capital. Thus the use of this share capital, i.e. how this money is to be utilised, would be of no consequence. It pointed out that even if money is raised by issuance of equity shares domestically, the money thus collected as share capital is to be treated as capital receipt. Merely because part of the share capital is used as a working capital, the character of the receipt would not become a revenue receipt. Thus, once this aspect becomes clear and the entire money raised through issue of equity shares is to be treated as share capital, the gains on account of foreign exchange fluctuations, in the event such share capital collected in foreign exchange, hence is only capital receipts and the determination as to whether it is to be treated as capital receipt or revenue receipt cannot depend upon the end use of the share capital.
28. We are in respectful agreement with the judgment of the Delhi High Court Jagatjit Industries Ltd. 's case (supra), which in turn had applied the decision of the Apex Court. In the circumstances, going by the reasoning of the Tribunal, quite apart from the jurisdictional aspect, we have no hesitation in accepting the conclusion arrived at by the Tribunal that the character of the receipt on 16 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 considering the submissions of assessee the Id CIT (A) concluded that the law has been laid down by various courts that the test to be applied in case of exchange at fluctuation is whether the depreciation/appreciation in value has taken place in a capital asset or in a trading asset or in other words in fixed capital or circulating capital. It was further held by Id CIT (A) that GDR's form part of the share capital of the bank and are not in the nature of loan. The exchange gain has arisen on account of holding of GDR proceed and their subsequent repatriation to India. Accordingly, the exchange gain is capital in nature and not liable to tax. Moreover, the Assessing Officer has not disputed those facts that the money raised by way of GDR was raised against capital equity. Thus, we find that the Id CIT (A) allowed the ground of appeal after considering the fact that GDR proceeds are part of capital receipt. Hence, do not find any illegality or infirmity in the order passed by CIT (A).
In the result this ground of appeal is dismissed 10.8 In the present case also the 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. We therefore considering the totality of the fact and by keeping in view the ratio laid down by the Hon'ble Madras High Court and the ITAT Mumbai Bench "A" in the aforesaid referred to cases are of the view that the Ld. CIT(A) was not justified in confirming the action of the A.O. in treating the foreign exchange fluctuation gain in the hands 17 of the assessee as revenue receipt. Accordingly we set aside the impugned order and direct the A.O. to treat the exchange gain fluctuation earned by the assessee on the GDR's raised against equity capital as capital receipt and not the revenue receipt.
11. The facts for the Assessment Year 2012-13 in ITA No. 1067/Chd/2018 are identical to the facts involved in ITA No. 1496/Chd/2017 for the A.Y. 2013-14, therefore our findings given in the former part of this order shall apply mutatis mutandis to both the appeals under consideration.
12. In the result, appeals of the assessee are allowed.
(Order pronounced in the open Court on 27/10/2021 )
Sd/- Sd/-
आर.एल. नेगी एन.के.सैनी,
(R.L. NEGI ) ( N.K. SAINI)
या$यक सद&य/ Judicial Member उपा य! / VICE PRESIDENT
AG
Date: 27/10/2021
आदे श क! त,ल-प अ.े-षत/ Copy of the order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent
3. आयकर आय/
ु त/ CIT
4. आयकर आय/
ु त (अपील)/ The CIT(A)
5. -वभागीय त न4ध, आयकर अपील&य आ4धकरण, च7डीगढ़/ DR, ITAT, CHANDIGARH
6. गाड फाईल/ Guard File आदे शानस ु ार/ By order, सहायक पंजीकार/ Assistant Registrar