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2020 (4) TMI 744 - AT - Income TaxRectification u/s 154 - CIT (A) held that forex loss or gain arising on account of Foreign exchange fluctuation pertaining to Foreign currency convertible bonds (FCCB) utilized for general business purpose and not with respect to capital account is in the nature of Capital Loss - HELD THAT - Assessee has been consistently following the same treatment for all the subsequent. During the course of original assessment proceedings, while responding the query on section 14A the assessee has specifically stated that foreign currency convertible bonds were used for capital account purposes. The revenue has not rebutted the fact that the assessee has followed the same treatment in earlier years. Paper book wherein the assessing officer has reproduced the assessee s submission in its order. We notice that the assessee has contended before the AO that as per the settled law foreign exchange gain on capital account transaction is not chargeable to tax, therefore, the case is covered in favour of the assessee. Hence, we find merit in the contention of the Ld. counsel that there is no infirmity in the findings of the Ld. CIT(A). Action of the AO in passing order u/s 154 coordinate Bench in the assessee s own case for the AY 1996-97 has upheld the findings of the Ld. CIT (A) holding that as per the settled law the only mistake apparent from record can be rectified u/s 154 of the Act and a debatable issues cannot be said to be a mistake apparent from record. - Decided against revenue.
Issues Involved:
1. Legality of the order passed by the Assessing Officer (AO) under Section 154 of the Income Tax Act. 2. Nature of foreign exchange fluctuation gain or loss related to Foreign Currency Convertible Bonds (FCCB) and its taxability. Detailed Analysis: 1. Legality of the Order Passed by the AO under Section 154: The revenue challenged the order of the Commissioner of Income Tax (Appeals) [CIT(A)] which held that the AO's order under Section 154 was "bad in law." The AO had passed the order to rectify what was considered a "mistake apparent from the record" by adding the foreign exchange fluctuation gain to the total income of the assessee. The CIT(A) set aside this rectification, stating that the issue was not free from doubt and required a long-drawn exercise, which does not qualify as a mistake apparent from the record under Section 154. The CIT(A) relied on the judgment of the Hon’ble Supreme Court in the case of T S Balaram, ITO vs. Volkart Bros. (1971) 82 ITR 50 (SC), which stated that a mistake apparent from the record must be an obvious and patent mistake, not something that requires extensive reasoning or where there may be two opinions. The Tribunal upheld the CIT(A)'s view, emphasizing that debatable issues cannot be rectified under Section 154. 2. Nature of Foreign Exchange Fluctuation Gain or Loss: The main contention was whether the foreign exchange fluctuation gain related to FCCBs utilized for general business purposes should be treated as capital or revenue in nature. The CIT(A) held that the gain was on capital account, following the precedent set by the Hon’ble Supreme Court in the case of Sutlej Cotton Mills Ltd. vs. CIT (116 ITR 1) (SC). The Supreme Court had established that profit or loss from foreign currency held as a capital asset or fixed capital is of a capital nature. The CIT(A) also referenced the Supreme Court judgment in Tata Locomotive and Engineering Company Ltd., which held that if foreign currency is held for capital purposes, any profit or loss from its appreciation or depreciation is capital in nature. Additionally, the CIT(A) noted that the issue of taxability of such gain is beyond the scope of Section 154, as it is not a clear-cut mistake apparent from the record. The Tribunal supported the CIT(A)'s decision, noting that the assessee had consistently treated foreign exchange fluctuation gains on capital account in the same manner in previous years, and the revenue had not contested this treatment. The Tribunal also referenced the judgment of the Hon’ble Madras High Court in CIT vs. PVP Ventures, which upheld that foreign exchange gains on capital account transactions are capital receipts and not taxable. Conclusion: The Tribunal dismissed the revenue's appeal, affirming that: - The AO's order under Section 154 was invalid as it dealt with a debatable issue, not a mistake apparent from the record. - The foreign exchange fluctuation gain related to FCCBs utilized for capital purposes is of a capital nature and not taxable. The Tribunal upheld the CIT(A)'s order, emphasizing that the CIT(A)'s findings were based on settled legal principles and consistent judicial precedents. The revenue's appeal for the assessment year 2007-08 was dismissed.
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