2015 (4) TMI 1281 - AT - Income Tax

Nature of transaction - revenue or capital - foreign exchange fluctuation gain on reinstatement/ realization of ECB loans etc. and profit from export of computer software. - taking into account the prevailing exchange rate as on the end of accounting year is liable to tax or not - HELD THAT - Whether the gain or loss should be brought to tax or allowed as deduction depends upon whether the foreign currency transactions were carried on account of capital or revenue items. If the foreign currency transactions are undertaken on capital account, the gain made out of such transaction is outside ambit of taxation, of course subject to the application of provisions of Section 43A of the Act. If the transactions undertaken are on account of revenue items, the gain is clearly taxable and so the loss also is clearly allowable. The assessee except making bald assertion that the transactions were undertaken on account of capital items no evidence was brought on record to establish that the foreign currency transactions were undertaken on capital items. AO also had failed to undertake this exercise. The Hon ble Supreme Court in the case of CIT Vs. Woodward Governor India Pvt. Ltd. reported in 2009 (4) TMI 4 - SUPREME COURT had clearly held that the actual payment was not a condition precedent for making adjustment in respect of foreign currency transactions as the end of the closing year. We are therefore, unable to concur or agree with the view of the learned CIT(Appeals), that liability could arise only when the contract would have matured, as such a stand is totally divorced from the accounting principles and is in variance with the principle upheld by the Hon ble Apex Court in the case Woodward Governor India (P.) Ltd. (Supra). It can also be seen that the decision in the case of Woodward Governor India (P.) Ltd. (Supra) has been rendered with regard to items in the revenue account and capital account. We restore the matter to the file of AO with the direction that to re-do the assessment keeping in view the principles enunciated above after affording a reasonable opportunity of being heard to the assessee.

Summary

Issues:
Cross appeals filed by the assessee and Revenue against the order of the Commissioner of Income Tax (Appeals) for the Assessment Years 2007-08 & 2008-09.

Analysis:
1. The Revenue appealed against the order of the Commissioner of Income Tax (Appeals) regarding the addition of &8377; 65,45,376/- on account of business income. The Assessing Officer added this amount due to foreign exchange fluctuations, but the CIT(A) partly allowed the claim, stating that gains from restatement of foreign currency transactions should not be taxed if no actual payment was made. The Revenue contended that the entire amount should be taxed as business income, while the assessee argued that the fluctuations were on capital items. The Tribunal referred to legal precedents and directed the Assessing Officer to reassess the issue considering the nature of the foreign currency transactions.

2. The assessee's appeal challenged the addition of &8377; 78,226/- due to foreign exchange fluctuations, which the CIT(A) upheld as chargeable to tax, denying deduction under section 10A of the Act. The grounds of appeal questioned the CIT(A)'s decision to ignore Section 43A of the Act and confirmed the addition as capital gain. However, as the Revenue's appeal was remitted for reassessment, the Tribunal dismissed the assessee's appeal since the issue no longer existed.

In conclusion, the Tribunal partly allowed the Revenue's appeal, remitting the matter for reassessment, and dismissed the assessee's appeal due to the grounds becoming irrelevant. The judgment emphasized the distinction between taxing gains based on the nature of foreign currency transactions, whether on capital or revenue account, and the importance of following established legal principles in determining tax liability related to foreign exchange fluctuations.