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TMI Blog2012 (7) TMI 696X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 263 of the Act. Merely because part of the share capital is used as a working capital, the character of the receipt would not become a revenue receipt. Thus, once this aspect becomes clear and the entire money raised through issue of equity shares is to be treated as share capital, the gains on account of foreign exchange fluctuations, in the event such share capital collected in foreign exchange, hence is only capital receipts and the determination as to whether it is to be treated as capital receipt or revenue receipt cannot depend upon the end use of the share capital. - Following the decision in CIT v. JAGATJIT INDUSTRIES LIMITED (2009 (9) TMI 62 - DELHI HIGH COURT), decided in favor of assessee. Regarding ESOP - the assessee had to follow SEBI direction and by following such direction, the assessee claimed the ascertained amount as liability for deduction. - the expenditure on issue of shares under the Employees Stock Option could be allowed as staff welfare expenditure - Decided in favor of assessee. - TC(A). No. 1023 of 2005 - - - Dated:- 19-6-2012 - Mrs. Justice CHITRA VENKATARAMAN, Mr. Justice K.RAVICHANDRA BAABU, JJ. For Appellant: Mr.T. Ravikumar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passing of the assessment order, the Assessing Authority examined the details filed by the assessee and arrived at the conclusion. Hence, there was nothing to hold the assessment as erroneous or prejudicial to the interest of the Revenue. The Commissioner of Income Tax however held that Income Tax Officer had passed the order without application of mind and the assessment was made in a casual manner, and crucial issues were not looked int. In the circumstances, he justified the invoking of the jurisdiction under Section 263 of the Income Tax Act. 5. As far as the issue of income derived from the exchange fluctuation is concerned, it is seen that the said income related to issue of shares in the form of GDS. The assessee kept a part of the money abroad. When the money was brought to India, due to strong dollar position, the assessee gained on the repatriated amount. This was claimed as a capital receipt, the fact which was not disputed by the Commissioner of Income Tax. Thus, the amount had direct nexus with the capital raised and consequently the assessee contended the same was a capital receipt. The Commissioner of Income Tax pointed out that there was no dispute with regard to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was a revenue expenditure to be debited to the Profit and Loss Account as it was only a notional and contingent expenditure. In the circumstances, the Commissioner of Income Tax held that the shares allotted under Employees Staff Option Plan and Employee Staff Purchase Scheme Guidelines, 1999, having not stated anything about the manner of treatment to this expenditure, the difference in the value at which the shares were allotted and the market value of the shares did not warrant any allowance as expenditure. Ultimately, the Commissioner of Income Tax passed an order directing the Assessing Officer to revise the assessment. Thus, holding that the revision proceedings were validly initiated, the income received on account of exchange fluctuation was held as a revenue receipt and be taxed as such and the Staff Welfare expenditure was to be disallowed. 8. Aggrieved by this disallowance, the assessee went on appeal before the Income Tax Appellate Tribunal contending that the exchange fluctuation being on the capital field, the resultant receipt on account of exchange fluctuation was rightly held by the Assessing Officer as a capital receipt and excluded the same in computing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee was asked for the reasons as to why the receipt should not be treated as revenue receipt. This showed conflict in the mind of the Commissioner as to the basis on which the order was sought to be revised on the ground that the assessment made was erroneous and hence prejudicial to the interest of the Revenue. Consequently, on the ground that the proceedings were not properly initiated in the manner known to law, the revisional proceedings was accordingly set aside. 9. On the scope of jurisdiction under Section 263 of the Act, the Tribunal relied on the decision of the Karnataka High Court reported in 192 ITR 547 COMMISSIONER OF INCOME TAX v. LF D'SILVA, wherein the Karnataka High Court held that "the scope of the proceeding has to be ascertained with reference to the purpose and the basis of the initiation of proceedings". The Karnataka High Court held that the proceedings under Section 263 of the Income Tax Act is not in the nature of granting a second innings to the department to enter upon fishing expedition. Thus, in the circumstances the Tribunal agreed with the assessee as to the total absence of jurisdiction to proceed on the different angle from the one which w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l held that it was not a case of contingent liability depending on the various factors on which the assessee had no control. The expenditure in this behalf was an ascertained liability, thus the expenditure incurred being on lines of the SEBI guidelines, there could be no interference in the relief granted by the Assessing Authority for the expenditure arising on account of Employees Stock Option Plan. This expenditure incurred as per SEBI guidelines and granted by the Officer could not be considered as erroneous one calling for exercise of jurisdiction under Section 263 of the Act. 12. In considering the other issues, the Tribunal ultimately pointed out the various grounds raised by the assessee as regards invoking of jurisdiction under Section 263 of the Act on the plain language of the said provision. The assessee contended that all that the Commissioner could do in exercise of power under Section 263 of the Act was either to enhance the assessment or modify the assessment or cancel the assessment and to give a direction for fresh assessment. Considering the words of "enhancing or modifying" as well as the use of word 'or' which is a disjunction thereafter, the Commissioner co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er on exchange fluctuation; on the issue of shares and on the issue of Employees Stock Option Plan could only be seen as an academic exercise by the Revenue. 16. As far as questions Nos. 3 and 4 are concerned, in the light of the order passed by the Tribunal on merits as well as in the absence of jurisdiction, the question is purely academic and this Court need not go into that. On the question of receipt on account of exchange fluctuation, learned senior counsel for the assessee pointed out that on a consideration of material and the purpose of issue of GDS, to widen the capital, the Assessing Authority rightly held that receipts on exchange fluctuation being capital in nature the same could not be considered while working out the relief under Section 80HHE. Apparently, the Commissioner did not find fault with that nature of receipt being treated as capital one. He submitted that however, for the reasons best known to him, after receipt of the objection from the assessee on the grounds of reasoning to the inclusion of 90% of the income in working out the relief under Section 80HHE, suddenly, the Commissioner shifted his stand to treat the receipt as revenue receipt, which is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... totally unnecessary for one to embark on the purpose for which the amount is spent. In the circumstances, learned senior counsel for the assessee submits that the Commissioner committed serious error in looking at how the amount raised on the issuance of offered shares was spent on other corporate expenses. 20. As regards the staff welfare expenditure, the assessee reiterated the stand taken before the authority concerned. Learned senior counsel for the assessee submitted that when the assessee had acted in compliance of SEBI requirements, which is also a statutory body, question of Revenue's feeling prejudicial by this act could not arise. 21. As regards questions 3 and 4, learned senior counsel for the assessee pointed out that the Tribunal itself held that the questions are merely academic one. Having regard to the fact that the issue on jurisdiction as well as on merits the Tribunal answered the questions in favour of the assessee, there is no fault in the order of the Tribunal in holding that these questions are purely academic in nature. 22. Heard learned standing counsel for the Revenue as well as learned senior counsel for the assessee and perused the records. 23. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us means involving error, deviating from the law, therefore invalid. Thus, an order cannot be termed as erroneous unless the same is not in accordance with law. If an Income Tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner. The Bombay High Court pointed out that the provisions under Section 263 of the Act does not visualise a case of substitution of the judgment of the Commissioner for that of the Income Tax Officer, who passed the order. The said view was reiterated by the Apex Court in the decision referred to above. Thus, any and every erroneous order cannot be the subject matter for revision under Section 263 of the Act, unless the second requirement of it being prejudicial to the interest of the Revenue exists. For this, there must be prima facie material on record to show that tax which is lawfully exigible has not been imposed or that by the application of the relevant statute, on an incorrect or incomplete interpretation a lesser tax than what is just has been imposed. The Bombay High Court further held that the Commissioner can direct further enquiry or fresh determination only after coming to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reed with the assessee as well as with the Assessing Officer, the Commissioner of Income Tax however issued a letter dated 21.1.2004 taking the view that the receipt arising on account of exchange fluctuation was revenue in character. There are no reasons indicated as to why he suddenly shifted his stand as regards the character of the receipt from capital to revenue. 26. Leaving this aside, the fact remains that there is no proper initiation of proceedings under Section 263 of the Act and there are no grounds for shifting the stand of the Commissioner which are different from the one which prompted him to initiate proceedings under Section 263 of the Act. Even though learned standing counsel for the Revenue submitted that the said letter dated 21.1.2004 should be construed as a second show cause notice, as pointed out by the Tribunal in its order, there was nothing on record to show that the letter was in continuation of proceedings already initiated under Section 263 of the Act and the letter was not signed by the Commissioner and the same was signed by some other Officer on his behalf and it was only a letter and not a show cause notice. Thus, apart from the fact that there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LIMITED v. CIT it held that for the purpose of determination of the character of the receipt, one has to know whether the amount was held by the assessee on capital account or in any other account. Thus receipts on account of exchange fluctuation on the money held on the allotment of shares has to be held as capital only. The Delhi High Court pointed out that the money was received on allotment of shares by way of GDR and the amount was collected in US Dollars. The gain on account of exchange fluctuation was attributable to the share capital and such gain on capital account. Referring to the fact that 21% of the gain was taken as revenue receipt, since the same was utilised for general corporate uses, the Delhi High Court held that the entire money collected in foreign exchange represented share capital. Thus the use of this share capital, ie. how this money is to be utilised, would be of no consequence. It pointed out that even if money is raised by issuance of equity shares domestically, the money thus collected as share capital is to be treated as capital receipt. Merely because part of the share capital is used as a working capital, the character of the receipt would not becom ..... X X X X Extracts X X X X X X X X Extracts X X X X
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