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2015 (9) TMI 556 - AT - Income TaxRevision u/s 263 - as per CIT(A) AO did not verify the claim of the Assessee for deduction u/s.35D of the Act, by taking note of the definition of capital employed and as to whether share premium can be considered as part of the capital employed and whether FCCBs can be considered as debentures and taken as part of capital employed for the purpose of allowing deduction u/s.35D of the Act - Held that - In the present case, the 1st year in which relief was allowed u/s.35D of the Act has since been modified. Though such modification happened after the order u/s.263 of the Act, which order is impugned in this appeal, it cannot be said that the 1st year of allowance of deduction u/s.35D of the Act stands allowed as claimed by the Assessee. In none of the decisions relied upon by the Assessee, it has been held that even if the 1st year of allowance of a claim is withdrawn at a later point of time, still the revisional order would be bad in law on the ground that the 1st year a claim had been allowed. We are of the view in such circumstances, the exercise of jurisdiction cannot be attacked on the ground that it is only in the 1st year of allowance of a claim which is to be allowed over a period of time that jurisdiction u/s.263 can be exercised. We therefore reject this argument of the learned counsel for the Assessee. - Decided against assessee. Relief on the basis of Cost of Project u/s.35D(3)(a) - Held that - It is only the fixed assets, being land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenditure on development of land and buildings), which are acquired or developed in connection with the extension of the industrial undertaking or the setting up of the new industrial unit of the Assessee that should be considered. The Assessee issued GDRS and FCCBs and incurred expenditure in this regard. The proceeds of the issue were used to acquire shares of two foreign companies and thereby gain control of the two foreign companies. Therefore there were no fixed assets that were acquired or developed in connection with the extension of the industrial undertaking or setting up of the new industrial unit of the Assessee. The argument of the learned counsel for the Assessee cannot therefore be sustained and shares acquired cannot be treated by any stretch of imagination as land or building, plant or machinery etc., and treated as cost of project for the purpose of allowing deduction u/s.35D - Decided against Assessee. Share Premium - whether can be regarded as part of the Issued Share capital while computing Capital Employed ? - Held that - Sec.254(2) and the regular assessment proceedings, cannot be applied in the context of provisions of Sec.263 of the Act. The power u/s.263 of the Act is a supervisory power and protection of the interest of the revenue owing to an erroneous order is the salutary purpose of those provisions. The provisions of Sec.78 of the Companies Act, 1956 on which the decision of Sirhind Steel Ltd. (2005 (9) TMI 218 - ITAT AHMEDABAD-D) proceeded provides for a limited fiction of treating share premium as part of paid up capital for the purpose of reduction of the same. Sec.78(2) of the Companies Act, 1956 prohibits use of share premium for any purpose other than the purposes set out therein. Can it be said that share premium could be employed in the business of the Assessee as share capital? In our view therefore there is no merit in the contention of the learned counsel for the Assessee that share premium should be regarded as part of the issued share capital for allowing deduction u/s.35D of the Act - Decided against the Assessee. Treatment to FCCB - whether FCCBs can be considered as Debentures and taken as part of capital employed for allowing deduction u/s.35D? - Held that - Conclusions of the CIT are unsustainable. In the light of the definition of Debentures as contained in the Companies Act, 1956 to include Bonds and in the light of the fact that the FCCBs in question are in the nature of bonds as defined in the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 wherein the meaning FCCBs is given as bonds issued in accordance with the said scheme and subscribed by a non-resident in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole, or in part, on the basis of any equity related warrants attached to debt instruments, we are of the view that FCCBs are to be regarded as debentures and consequently be considered as part of capital Employed for allowing deduction u/s.35D of the Act. - Decided in favour of the Assessee. Unrealised foreign exchange gain - Whether should be treated as Income or not? - Held that - In our view the facts of the case in the decision of the Madras High Court in the case of PVP Ventures Ltd. (2012 (7) TMI 696 - MADRAS HIGH COURT ), is identical to the facts of the case of the Assessee in this appeal. FCCBs are instruments issued to investors for raising funds which is repayable after certain period. It is a debt instrument. The increase or decrease in liability on account of fluctuation in foreign exchange as on the date of the Balance sheet would increase or decrease the liability of the Assessee and such liability would be on capital account. Therefore the gain or loss would be on capital account and not taxable. - Decided in favour of the Assessee.
Issues Involved:
1. Exercise of jurisdiction under Section 263 of the Income Tax Act. 2. Eligibility of relief based on "Cost of Project" under Section 35D(3)(a) of the Act. 3. Inclusion of Share Premium as part of Issued Share Capital for computing "Capital Employed." 4. Treatment of Foreign Currency Convertible Bonds (FCCBs) as Debentures. 5. Taxability of Unrealized Foreign Exchange Gain. Detailed Analysis: Issue No. 1: Exercise of jurisdiction under Section 263 of the Income Tax Act The Assessee argued that the AO did make enquiries regarding the deduction under Section 35D of the Act before completing the assessment. The Assessee relied on the decision of the Delhi High Court in CIT Vs. Sunbeam Auto Ltd., which distinguished between "lack of enquiry" and "inadequate enquiry." The Tribunal found that the AO did not specifically examine the computation of capital employed for allowing the deduction under Section 35D of the Act. The Tribunal held that the jurisdiction under Section 263 of the Act was validly exercised as the AO did not verify several perspectives, including the definition of capital employed and the treatment of foreign exchange gains. The Tribunal referenced the Karnataka High Court's decision in CIT Vs. Infosys Technologies Ltd., supporting the Revenue's stand. Thus, this issue was decided against the Assessee. Issue No. 2: Eligibility of relief based on "Cost of Project" under Section 35D(3)(a) of the Act The CIT held that the cost of acquisition of the two businesses shown as "Investments" in the Assessee's Balance sheet could not be called "Fixed Assets" as defined under Section 35D(3)(a). The Assessee's argument that the term "cost of project" should include the acquisition of shares was rejected. The Tribunal agreed with the CIT, stating that the Assessee chose the option of claiming deduction based on 5% of capital employed under Section 35D(3)(b), and the shares acquired could not be treated as land, buildings, or plant and machinery. Thus, this issue was also decided against the Assessee. Issue No. 3: Inclusion of Share Premium as part of Issued Share Capital for computing "Capital Employed" The CIT, relying on the Delhi High Court's decision in Berger Paints India Ltd. Vs. CIT, held that share premium could not be regarded as part of capital employed. The Tribunal upheld this view, stating that the provisions of Section 78 of the Companies Act, 1956, which the Assessee relied upon, did not support the inclusion of share premium as part of issued share capital for the purpose of Section 35D of the Act. Thus, this issue was decided against the Assessee. Issue No. 4: Treatment of Foreign Currency Convertible Bonds (FCCBs) as Debentures The CIT rejected the Assessee's claim that FCCBs should be equated with debentures due to lack of evidence. However, the Tribunal found that FCCBs, defined as bonds under the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993, should be regarded as debentures. Consequently, FCCBs were to be considered as part of "capital employed" for allowing deduction under Section 35D of the Act. Thus, this issue was decided in favor of the Assessee. Issue No. 5: Taxability of Unrealized Foreign Exchange Gain The Assessee argued that the gain on restatement of FCCB liability was on capital account and not taxable, citing the Supreme Court's decision in Woodward Governors and the Madras High Court's decision in CIT Vs. PVP Ventures Ltd. The Tribunal agreed with the Assessee, stating that the gain or loss on restatement of FCCB liability, being on capital account, was not taxable. Thus, this issue was decided in favor of the Assessee. Conclusion: The Tribunal partly allowed the appeal of the Assessee, deciding against the Assessee on issues 1, 2, and 3, while deciding in favor of the Assessee on issues 4 and 5.
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