2024 (10) TMI 242 - AT - Income Tax

Addition on account of translation gain - CIT(A) had deleted the said disallowance made by the ld. AO on the ground that translation gain had not arose out of any revenue transaction but is merely as a result of merger of the US Branch Balance Sheet converted from USD to INR with the balance sheet of the assessee as per AS 11 issued by ICAI - HELD THAT - We find from the financials of the assessee, the translation gain arising out of revenue transactions had been duly offered to tax by the assessee in the return of income. CIT(A) held that the disallowance is to be deleted even on the principles of consistency as the revenue cannot be allowed to take a divergent stand for translation loss and translation gain. We find that this issue is no longer res integra in view of the CBDT Circular No. 10 of 2017 dated 23.3.2017 wherein it was held that the losses / gains arising by valuation of monetary assets and liabilities of the foreign operations as at the end of the year cannot be treated as real income of the assessee. This Circular has been heavily relied upon in the case of Chamber of Tax Consultants vs Union of India 2017 (11) TMI 465 - DELHI HIGH COURT - We do not find any infirmity in the said action of the CIT(A) granting relief to the assessee. Accordingly, the Ground No.1 raised by the revenue is dismissed. Nature of receipt - treating the excise duty refund as capital receipt, which were earlier treated as revenue receipt - HELD THAT - The intention behind the exemption scheme was to attract fresh investment so as to generate employment and for industrial development of the region. The subsequent notifications issued in the year 2008 substantially diluted the benefit granted by the original notification on the ground that there was substantial revenue loss to the Government. The Hon ble High Court held that the notifications issued in the year 2008 to be invalid to the extent they were sought to be applied to the new unit set up in the Kutch District of Gujarat in compliance of the original notification in the year 2001 on the ground that it was contrary to the principles of promissory estoppel. Further it was clearly held by the Hon ble Gujarat High Court that the purpose of the original notification issued in the year 2001 was to incentivize and promote setting up of industries in the Kutch Region of Gujarat thereby clearly satisfying the purpose test thereon. Hence it could be safely concluded that the excise duty refund received is clearly in the nature of capital receipt not chargeable to income tax. We find that the ld. CIT(A) had rightly decided the issue in favour of the assessee and we do not find any infirmity in the said order granting relief to the assessee. Accordingly, the Ground No. 2 raised by the revenue is dismissed.

Summary

Issues Involved:
1. Deletion of addition on account of translation gain.
2. Treatment of excise duty refund as capital receipt.

Issue-wise Detailed Analysis:

1. Translation Gain:
The primary issue in the appeal for the Assessment Year (AY) 2005-06 was whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in deleting the addition on account of translation gain. The assessee, engaged in the manufacture of pipes, had an overseas branch in the USA. The financial results of this branch were merged with the assessee's accounts, and the translation of these financials from USD to INR resulted in a notional translation gain of Rs 3,32,46,356/-. The assessee excluded this gain from its taxable income, arguing that it was notional and arose from capital items, not revenue transactions. The CIT(A) agreed with the assessee, emphasizing that the translation gain was not real income and was consistent with past treatment accepted by the revenue. The judgment referenced CBDT Circular No. 10 of 2017, which supports the view that such notional gains should not be treated as real income. Consequently, the tribunal found no error in the CIT(A)'s decision to grant relief to the assessee, dismissing the revenue's ground.

2. Excise Duty Refund:
The second issue involved whether the CIT(A) was correct in treating the excise duty refund of Rs 1,63,15,661/- as a capital receipt. Following an earthquake in the Kutch District, the Central Government issued a notification granting excise duty exemptions to new industrial units set up in the region. The assessee established eligible units within the stipulated timeframe and received excise duty refunds, initially treated as revenue receipts. However, the assessee later claimed these refunds as capital receipts, not chargeable to tax, under the 'purpose test' of the incentive scheme. The CIT(A) admitted this additional legal ground and ruled in favor of the assessee, determining that the refunds were capital in nature, as their purpose was to incentivize industrial development in the earthquake-affected region. The tribunal upheld this view, referencing the Supreme Court's decision in CIT vs Ponni Sugars and Chemicals Ltd, which emphasizes the purpose of grants in determining their taxability. The tribunal dismissed the revenue's objection, affirming the CIT(A)'s decision.

Conclusion:
The tribunal dismissed the revenue's appeals for AY 2005-06 and 2006-07, as well as the assessee's appeal for AY 2006-07. The decisions were based on consistent application of legal principles regarding notional gains and the purpose of government incentives.