2021 (11) TMI 143 - AT - Income Tax

Exchange Fluctuation gain on the GDR - Nature of receipt - revenue or capital gain - real income theory - HELD THAT - Even if the assesse had treated one receipt as an income and in real situation the said receipt was not an income, it was the duty of the A.O. being a quasi judicial authority to tax the real income and not what had been offered by the assessee. Whether the exchange rate fluctuation gain was a revenue receipt or the capital receipt in the hands of the assessee? - Assessee company issued the GDRs with the objectives to finance ongoing expansion of capital investment, it was a onetime activity and it was not the intention of the assessee to park the money abroad solely with the aim of gaining out of such funds and it was also not the intention of the assessee to keep money in foreign banks and that its liquidity position was bad as alleged by the A.O. In the present case, we have earlier mentioned in the former part of this order that no documentary evidence was placed on record by the Department which substantiate that the assessee company was facing any liquidity crunch during the period under consideration. As assessee raised money through GDR s and issued the equity share capital which was treated to be a share capital, therefore the gains on account of foreign exchange fluctuation on such share capital collected in foreign exchange was only the capital receipt - A.O. had not disputed the fact that the money was raised by the assessee by way of GDRs against capital equity therefore the exchange gain which had arisen on account of holding the GDR proceeds, was capital in nature and not liable to tax - Decided in favour of assessee.

Issues Involved:
1. Treatment of Unrealized Foreign Currency Exchange Gain: Revenue Receipt vs. Capital Receipt.
2. Assessment of Adventure in the Nature of Business.

Detailed Analysis:

Issue 1: Treatment of Unrealized Foreign Currency Exchange Gain: Revenue Receipt vs. Capital Receipt

The primary grievance of the assessee was the classification of unrealized foreign currency exchange gain as a revenue receipt instead of a capital receipt. The assessee argued that the exchange rate gain on Global Depository Receipts (GDR) should be treated as a capital receipt, not liable to tax.

Facts and Arguments:
- The assessee, engaged in manufacturing and export, raised funds through GDRs to finance expansion and meet long-term working capital requirements.
- The assessee initially declared the entire exchange rate gain in its profit and loss account but later deducted the unrealized gain from the Gross Total Income, treating it as a capital receipt.
- The Assessing Officer (AO) contended that the funds were parked abroad to gain from exchange rate fluctuations, thus treating the gain as a revenue receipt.

AO’s Observations:
- The AO noted that the funds raised were not immediately repatriated to India but were invested in Aries Capital Fund Ltd., leading to gains from exchange rate fluctuations.
- The AO argued that there was no legal obligation to park the funds abroad and that the intention was to gain from the falling rupee against the dollar.
- The AO classified the activity as an adventure in the nature of business, thus treating the gains as business income.

CIT(A)’s Decision:
- The Commissioner of Income Tax (Appeals) (CIT(A)) upheld the AO's decision, distinguishing the case from PVP Ventures Ltd. where the gain was on account of foreign exchange fluctuation on GDR at the time of repatriation.
- The CIT(A) noted that the gains arose from reinvestments in Aries Capital Fund, not directly from the GDRs, and thus treated the gains as revenue receipts.

Tribunal’s Analysis and Decision:
- The Tribunal considered the submissions and material on record, noting that the funds were raised through GDRs for capital investment and not for speculative purposes.
- The Tribunal highlighted the AO's failure to substantiate the claim of liquidity crunch faced by the company.
- Citing the Hon’ble Madras High Court in CIT Vs. PVP Ventures Ltd., the Tribunal emphasized that exchange gains on capital receipts should be treated as capital in nature.
- The Tribunal referred to the ITAT Mumbai Bench in State Bank of India Vs. ACIT, which held that gains from GDR proceeds are capital in nature.

Conclusion:
- The Tribunal concluded that the exchange rate fluctuation gain on GDRs raised against equity capital should be treated as a capital receipt and not a revenue receipt.
- The Tribunal set aside the impugned order and directed the AO to treat the exchange gain fluctuation as a capital receipt.

Issue 2: Assessment of Adventure in the Nature of Business

The AO classified the activity of parking funds abroad and gaining from exchange rate fluctuations as an adventure in the nature of business, thus treating the gains as business income.

Arguments and Observations:
- The AO argued that the funds were invested in money market operations abroad to gain profits, classifying it as an adventure in the nature of business.
- The CIT(A) upheld this view, noting that the gains arose from reinvestments in Aries Capital Fund, not directly from GDRs.

Tribunal’s Analysis and Decision:
- The Tribunal disagreed with the AO's classification, emphasizing that the funds were raised for capital investment and not for speculative purposes.
- The Tribunal noted that the AO failed to provide evidence of liquidity crunch and that the funds were part of the capital base.
- The Tribunal reiterated that the gains from exchange rate fluctuations on capital receipts should be treated as capital in nature.

Conclusion:
- The Tribunal rejected the AO's classification of the activity as an adventure in the nature of business.
- The Tribunal directed the AO to treat the exchange gain fluctuation on GDRs as a capital receipt.

Final Judgment:
- The appeals of the assessee were allowed, and the AO was directed to treat the exchange gain fluctuation on GDRs as a capital receipt for both assessment years under consideration.

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