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TMI Blog2021 (11) TMI 143X X X X Extracts X X X X X X X X Extracts X X X X ..... ction of the Learned Commissioner of Income Tax (Appeals} is unwarranted and against the principle of law and natural justice. 2. That the Learned Commissioner of Income Tax (Appeals) has also erred in concluding that merely keeping foreign currency abroad amounts to adventure in the nature of business. The appellant prays that the additions being unjustified and unwarranted deserves to be deleted. In view of the above stated facts and circumstances, it is prayed that the additions made may kindly be deleted or such other relief be granted as is deemed fit. From the aforesaid grounds it would be clear that the only grievance of the assessee relates to treating the unrealized foreign currency exchange gain as revenue receipt instead of capital receipt. 4. Facts of the case in brief are that the assessee e-filed its return of income on 30/09/2013 declaring NIL income. Subsequently, the assessee revised its return on 18/03/2015 at NIL income. Later on the case was selected for scrutiny through CASS. The assessee company is engaged in manufacturing and export of cotton yarn/blended yarn/mélange yarn and having a spinning unit at Baddi, Himachal Pradesh. The assesse c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipts (GDRs) of the company were listed in Luxembourg Stock Exchange on 31" March 2011 at Luxembourg. After the allotment of underlying equity shares, the paid up equity capital of the company stands increased from Rs. 13,37,00,000/- to Rs. 19,82,00,000/ comprising of19,82,00,000 equity shares of Re. 1/- each. The number of shares so issued pursuant to GDR i.e. 6,45,00,000 equity shares were also get listed in Bombay Stock Exchange (BSE) 28* April 2011. Nature of Income on GDR: During the financial year 2012-13. The company earned capital receipt amounting Rs. 260.67Lacs on account of exchange fluctuation i.e. increase in value of GDR lying outside India. Due to exchange rate of the India rupee to the US Dollar. Tax Implication on Exchange gain on GDR: In die case of LD/61/15 CIT-III, Chennai Vs. PVP Ventures Ltd. June 19, 2002 (MAD) (Assessment Year 2001-02), Tribunal held that value of GDR was not due to the activity of the assessee but due to the change in the exchange rate of the Indian rupee to the US Dollar. The receipt on the issue of GDRs being capital nature, die amount received on account of exchange fluctuation also had the character of a capital receipt. Conseq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO was of the view that the exchange gain should have been treated as a revenue receipt and not a capital receipt for the following reasons: a. There is no legal obligation on the assessee company to park the fund abroad. The assessee has stated that pending certain compliances, a part of the issue proceeds are parked in Escrow account outside India. This is not acceptable as there is no requirement, whatsoever, to keep the money stacked abroad. Moreover, if at all, for the sake of discussion, the contention of the assessee is accepted, the requirement to keep the money abroad has to be for the total issue proceeds and cannot be for a part of it as done by the assessee. This shows that the intention of the assessee has been to gain out of the falling rupee against the dollar. b. The assessee company issued the GDRs on 29the March,2011. The money however was not repatriated to India immediately. This was done during a situation where the company has been facing heavy liquidity crunch. Attention is drawn towards the fact that one of the objectives of issuing GDRs is for meeting the long term working capital needs of the assessee company. It is highly unlikely that a company woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... * any adventure or concern in the nature of trade, commerce or manufacture. 5.2 The term 'Adventure in the nature of trade' has not been defined in the Income Tax Act, 1961. As far as the dictionary meaning of the word 'adventure' is concerned, it implies a pecuniary risk, a venture, a commercial purpose. The word 'venture' is defined as a commercial activity in which there is a risk of loss as well as a chance of gain. The term 'trade' in the context of the definition of the expression 'business' is a wider concept and once this term associated with the term 'adventure' the scope further enlarged. The adventure in the nature of trade is allowed to transaction that constitutes a trade or business but may not be a business itself. The business has characterized by some of essential ventures such as repetitive transactions, holding of stock-in-trade, dealing with the customers and implied intention between the parties, etc., but, contrary to this even an isolated transaction can satisfy the description of an adventure in the nature of trade. For an adventure, it is not necessary that there should be a series of transactions. A si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oosting the company's prestige on its local market as well as in international market. Quantum of GDR: winsome Textile industries Limited during the FY 2010-11 has raised an amount of US$ 9997500 from Global Depository Receipts (GDRs) issue. The board of Directors in their meeting held on 31.03.2011 have issued & allotted 6,45,00,000/- equity shares of Re. 1/- each at a premium of Rs. 5.94/- per share each fully paid up underlying the 12,90,000 Global Depository Receipts (GDRs) at a price of USS 7.75 per GDR. Each GDR represents 50 shares of the company. Listing of GDR & its underlying shares: The Global Depository receipts (GDRs) of the company were listed in Luxembourg Stock Exchange on 31th March 2011 at Luxembourg. After the allotment of underlying equity shares, the paid up equity capital of the company stands increased from Rs. 13,37,00,000/- to Rs. 19,82,00,000/- comprising of 19,82,00,000 equity shares of Re. 1 each. The number of shares so issued pursuant to GDR i.e. 6,45,00,000/- equity shares were also get listed in Bombay Stock Exchange (BSE) 28lh April 2011. Nature of Income on GDR: During the financial year 2012-13. The company earned capital receipt amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant assessment year the appellant has earned Rs. 3,12,92,000/- by way of exchange rate gain; * Out of this Rs. 52,24,000/- was repatriated back to the country during the year; * In its profit and loss account the appellant included the entire foreign exchange gain of Rs. 3,12,92,000/-; * Rs. 52,24,000/- i.e. only the amount repatriated during the year was offered as income of the appellant for the relevant assessment year; * The balance amount of Rs. 2,60,68,000/- which was not repatriated back to the country was treated as capital receipt and was deducted from the gross total income in the computation sheet; The above facts itself portrays the contradictions adopted by the appellant itself. The appellant does not controvert the AO's finding that Rs. 3,12,92,000/- was earned by it during the relevant year. However, on the one hand it claims that part of this earning which was repatriated back is in the nature of 'revenue receipt' and thus taxable while the balance un-repatriated amount is in the nature of 'capital receipt'. In the light of this, the questions need to be answered are (1) whether part of the same source of receipt (i.e. for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of exchange fluctuation on the money held on the allotment of shares has to be held as capital only." It has also been held in the case of TVS SUNDARAM IYENGAR & SONS v.CIT. (222 ITR 344) that profits on account of exchange fluctuation would ordinarily be trading profits if the foreign currency was held by the assessee on a revenue account or as a trading asset or as part of circulating capital embarked in the business. 3.5 In the above backdrop, the facts of the case of PVP Ventures Ltd. can be distinguished from that of the appellant. In the case of PVP Ventures Ltd. the gain was on account of foreign exchange fluctuation on the GDR at the time of repatriation. In the case of the appellant the GDR raised have already been reinvested in Aries Capital Fund and it is the proceeds of these reinvestments which have resulted in the fluctuation gain - a fact never disputed by the appellant either at the time of assessment proceedings or at the time of appellate proceedings. It is not the proceeds of GDR which resulted in the gains when repatriated back to India; rather it is the proceeds of appellant's reinvestments of such GDR in Aries Capital Fund which has resulted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity shares of the company. It was contended that the assessee through GDR depicted to obtain greater exposure and raised the capital in the world market, therefore the foreign exchange fluctuation gain was capital in nature and the Ld. CIT(A) was not justified in sustaining the action of the A.O. who treated the said fluctuation gain on the GDR as revenue receipt. 7.1 The Ld. Counsel for the Assessee drew our attention towards page no. 52 of the assessee's paper book and submitted that as per the RBI's Guidelines the GDR can be kept abroad. It was stated that the gain on account of foreign exchange fluctuation was attributable to the share capital and such gain was on capital account. The reliance was placed on the following case laws: * CIT Vs. PVP Ventures Ltd. reported in 23 taxmann.com 286 (Madras) * State Bank of India Vs. ACIT reported in 91 taxmann.com 312 (Mum) * Peerless General Finance And Investment Company Ltd. Vs. CIT [2019] 416 ITR 1 (SC) * Raghavan Nair Vs. Asst. CIT And Another [2018] 402 ITR 400 (Ker) 8. In his rival submissions the Ld. DR strongly supported the orders of the authorities below and reiterated the observations of the A.O. at page no. 5 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,000/-(realized gain) on repatriated GDRs was considered as revenue receipt but the exchange gain on the amount which was not repatriated to India was taken as unreliazed gains and considered as capital receipt. The A.O. held that the money was not repatriated to India immediately and it was done during the situation where the company had been facing heavy liquidity crunch. To clarify this observation of the A.O., this Bench of the ITAT directed the Ld. Sr. DR to clarify from the concerned A.O. In response, the A.O. vide letter dt. 03/09/2021 addressed to the Ld. Sr. DR ITAT, Chandigarh informed that " there was no documentary evidence available in the assessment record which substantiate that company was facing heavy liquidity crunch during the period under consideration" copy of the said letter is placed on record. We therefore are of the view that the said observation of the A.O. that the money was not repatriated to India even when the assessee was facing heavy liquidity crunch was not in accordance with the material available on the record, in other words there was no such liquidity crunch as alleged by the AO. The another reason given by the A.O. for considering the exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 10.4 Now, the question arises as to whether the exchange rate fluctuation gain was a revenue receipt or the capital receipt in the hands of the assessee. It is relevant to point out that the 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. 10.5 As regards to the nature of gain on exchange rate fluctuation, the Hon'ble Madras High Court in the case of CIT Vs PVP Ventures Ltd. (supra) held as under: 27. As regards the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, i.e. 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 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. 28. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GDR proceeds are part of capital receipt. Hence, do not find any illegality or infirmity in the order passed by CIT (A). In the result this ground of appeal is dismissed 10.8 In the present case also the 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. We therefore considering the totality of the fact and by keeping in view the ratio laid down by the Hon'ble Madras High Court and the ITAT Mumbai Bench "A" in the aforesaid referred to cases are of the view that the Ld. CIT(A) was not justified in confirming the action of the A.O. in treating the foreign exchange fluctuation gain in the hands of the assessee as revenue receipt. Accordingly we set aside the impugned order and direct the A.O. to treat the exchange gain fluctuation earned by the assessee on the GDR's raised against equity capital as capital receipt and not the revenue receipt. 11. The facts for the Assessment Year 2012-13 in ITA No. 1067/Chd/2018 are identical to the facts involved in ITA No. 1496/Chd/2017 for the A.Y. 2013 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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