2009 (9) TMI 62 - HC - Income Tax

Capital receipt versus revenue receipt - to whether the receipt on account of exchange rate fluctuation of foreign exchange receipt is a capital receipt or revenue receipt irrespective of the source of the said income. An alternate plea was also taken by the Revenue to the effect that 22% of the funds were utilized for working capital, which is in a nature of circulating capital and therefore, 22% of the gain on account of exchange rate fluctuation is to be held as revenue receipt. held that - to whether the loss suffered by the appellant was a trading loss or a capital loss could not be answered unless it was first determined whether the amounts were held by the appellant on capital account or on revenue account in the present case, funds kept in UK were raised by issuing capital, thus it was held on capital account. Applying this test given due to exchange fluctuation would be capital gain answered in favor of assessee.

Issues:
1. Whether the receipt on account of exchange rate fluctuation of foreign exchange receipt is a capital receipt or revenue receipt?
2. Whether 22% of the funds utilized for working capital should be considered as revenue receipt?
3. Whether the entire gain on account of exchange rate fluctuation should be treated as capital receipt or revenue receipt?
4. Whether the Tribunal's decision directing the Assessing Officer to treat the entire gain as not liable to tax is correct?
5. Whether the Tribunal's order is perverse and ignored relevant facts and provisions of law?

Issue 1:
The primary issue in this case is whether the receipt on account of exchange rate fluctuation of foreign exchange receipt is a capital or revenue receipt. The appellant, a multi-product company, raised share capital overseas and accounted for gains from exchange rate fluctuation in its balance sheet. The Assessing Officer initially treated the entire gain as revenue receipt, but the CIT(A) differentiated between capital and revenue receipts based on the end use of the share capital. The Tribunal, following a judgment of the Madras High Court, held that the gain was a capital receipt. The Revenue challenged this decision, arguing that the entire gain should be taxable. The High Court upheld the Tribunal's decision, emphasizing that the nature of the funds raised determines the treatment of the gain.

Issue 2:
Another aspect of the case involved whether 22% of the funds utilized for working capital should be considered as revenue receipt. The Revenue contended that a portion of the share capital was used for working capital, and hence, 22% of the gain should be treated as revenue receipt. However, the High Court rejected this argument, stating that the utilization of share capital for working capital does not automatically classify the gain as revenue receipt. The source of the funds, in this case, the share capital raised, is crucial in determining the nature of the gain.

Issue 3:
The crux of the matter revolved around whether the entire gain on account of exchange rate fluctuation should be treated as capital receipt or revenue receipt. The High Court analyzed the source of the funds and the purpose for which they were raised. It was established that since the share capital was raised in foreign exchange and utilized as per approved end uses, the gain from exchange rate fluctuation was rightly treated as a capital receipt. The Court emphasized that the end use of the share capital does not alter its fundamental nature as a capital receipt.

Issue 4:
The High Court addressed the challenge to the Tribunal's decision directing the Assessing Officer to treat the entire gain as not liable to tax. The Revenue raised questions regarding the correctness of the Tribunal's order and its alleged ignorance of relevant facts and provisions of law. However, the Court found in favor of the assessee, upholding the Tribunal's decision based on the nature of the funds raised and the treatment of gains from exchange rate fluctuation.

Issue 5:
In considering the Tribunal's order, the High Court examined whether it was perverse and if it ignored relevant facts and provisions of law. The Court highlighted the distinction between the present case and precedents cited by the Revenue, emphasizing that the funds raised through share capital issuance were held on capital account, leading to the gain being classified as a capital receipt. The Court dismissed the appeals, deciding in favor of the assessee and affirming the capital nature of the gain from exchange rate fluctuation.

← Previous Next →