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(1) Interest on Loan to AEs at LIBOR plus rate allowed to AEs Rs. 7,83,82,483/- (2) Interest on 9% OFCD Rs. 21,08,42,301/- 
                                                    Total Rs.                   Rs. 28,92,24,784/-

.                                             A.Y. 2007-08
5. Assessee was asked to explain why this amount should not be added to the total income. Assessee filed a detailed reply explaining that the assessee had sourced the loans to AE out of the excess funds lying idle out of the issue of FCCBs. Certain portion of the FCCB proceeds were deployed in fixed deposits in overseas banks. It was brought to the notice of the A.O that the assessee has charged interest to the AEs at 3.81% being the 12 month LIBOR rate. The assessee strongly objected to the charge of LIBOR+ rate of interest. In so far as, the money raised through Foreign Currency Convertible Bonds, it was explained that since money raised through FCCB was not permitted to be parked/brought in India unless it was actually deployed for permitted capital expansions/acquisitions, therefore, it was decided to invest money on the wholly owned subsidiary being an Associated Enterprise.

58.Insofar as the loans received by way of ECG/FCCB, the ld. CIT(A) was of the opinion that these borrowings were for the purpose of capital expansion of the business since the proceeds can be used for capital purposes only. Therefore, there is no case for any addition on account of forex gain in respect of reinstatement of FCCB and conversion of FCCB into equity shares as well as repayment of ECB since these gains/receipts are held as capital receipt only. The ld. CIT(A) confirmed the addition of Rs. 14,33,80,289/-

60.We have given a thoughtful consideration to the factual matrix. The main particulars of foreign exchange gain are as under:-

S. No. Particulars of Foreign Exchange gain Amount (Rs.)
(i) Forward Contracts in respect of investment in Caraco and OFCD in 14,33,80,289/-
Global
(ii) Reinstatement of FCCB and Exchange gain on conversion of FCCB 29,62,23,740/-
                        into equity shares
           (iii)        Repayment of ECB                                                   13,78,089/-
The other particulars relating to foreign exchange loss are on account of reinstatement of bank balance/bank deposit out of FCCB proceeds and reinstatement of loan given to subsidiaries out of FCCB proceeds/reinstatement of investment in mutual funds out of FCCB proceeds. The appellant has treated the forex loss in respect of the above also as capital loss. Thus, the net forex gain treated as Capital receipt is reported at Rs. 31,03,51,524/-.

61.In our considered opinion profits accrued to the assessee is not in the course of any trading activity but on account of appreciation on account of hedging in forex even if the same has been held for investment purposes. Therefore, such gains have to be treated as capital receipt. For this proposition, we draw support from the decision of the Hon'ble High Court of Bombay in the case of Homi Mehta Sons Pvt. Ltd. 222 ITR 528. We find that the forward contract in respect of investment in Caraco and OFCD in . A.Y. 2007-08 Global are on capital account and any profits received by assessee on cancellation of forward contract would not change its character same being in connection with a capital asset and, therefore, has to be treated as capital receipt. For this proposition, we draw support from the decision given in the case of Mahindra & Mahindra Ltd. 5 SOT 217 (Mum.).