2022 (1) TMI 1337 - AT - Income Tax

Tribunal upholds CIT(A)'s decisions on capital gains and foreign exchange, dismissing Revenue's appeal.

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. It held that the addition of short-term capital gains was ... Short Term Capital Gains - premium received by assessee for transferring Redeemable Cumulative Convertible Preference Share and Fully Compulsory Convertible Preference Shares to equity shares during the year - AO allowed the appeal filed by the assessee on this issue and held that the transfer in respect of preference shares is in the hand of the shareholder - HELD THAT:- As in case Anarkali Sarabhai [1982 (6) TMI 50 - GUJARAT HIGH COURT] redemption of preference shares will result in transfer within the meaning of section 2(47) of the Act was held to be in the hands of the shareholder, which in the present case is M/s Satguru Constructions. The Hon’ble Supreme Court in Anarkali Sarabhai [1997 (1) TMI 5 - SUPREME COURT] upheld the aforesaid findings of the Hon’ble Gujarat High Court. Further, the aforesaid decision of the Hon’ble Gujarat High Court was followed in Kartikeya V. Sarabhai [1981 (8) TMI 36 - GUJARAT HIGH COURT] which was affirmed by the Hon’ble Supreme Court in Kartikeya V. Sarabhai vs CIT, [1997 (9) TMI 2 - SUPREME COURT] relied upon by the learned DR. In the present case, it is to be appreciated that the conversion of preference shares into equity shares is in the hands of the shareholder, i.e. M/s Satguru Constructions. Thus, gain, if any, arising from such a conversion will only be taxable in the hands of the shareholder. Therefore, in view of the above, we find no infirmity in the findings of the learned CIT(A) on this issue. As a result, ground No. 1 raised by the Revenue is dismissed. Issues Involved:1. Addition of Short-Term Capital Gains on account of premium received for transferring Redeemable Cumulative Convertible Preference Shares (RCCPS) and Fully Compulsory Convertible Preference Shares (FCCPS) to equity shares.2. Addition of unrealized foreign exchange gain.Issue-wise Detailed Analysis:1. Addition of Short-Term Capital Gains:The Revenue challenged the deletion of the addition of short-term capital gains arising from the premium received by the assessee for transferring RCCPS and FCCPS to equity shares. The assessee, a private limited company engaged in manufacturing, trading, and exporting aroma chemicals, had issued FCCPS and RCCPS at a face value of Rs. 10,000 each to two entities. These shares were later transferred to another entity, and during the assessment year, the preference shares were redeemed by issuing equity shares and crediting the security premium account. The AO treated the credited amount as short-term capital gains, relying on the Gujarat High Court decision in Anarkali Sarabhai vs CIT, which held that redemption of preference shares results in a transfer within the meaning of section 2(47) of the Act.The CIT(A) allowed the assessee's appeal, stating that the transfer of preference shares is in the hands of the shareholder, not the company. The CIT(A) noted that any gain from the conversion should be taxed in the hands of the shareholder, M/s Satguru Constructions, and not the assessee company. The Tribunal upheld the CIT(A)'s decision, emphasizing that the conversion of preference shares into equity shares is a transfer in the hands of the shareholder, and any gain arising from such conversion is taxable in the shareholder's hands. The Tribunal found no infirmity in the CIT(A)'s findings and dismissed the Revenue's appeal on this ground.2. Addition of Unrealized Foreign Exchange Gain:The Revenue also challenged the deletion of the addition of Rs. 1,16,64,751/- as unrealized foreign exchange gain. The assessee had a gain on foreign exchange valuation due to loan transactions with a foreign entity. The AO added this gain to the total income, considering it a contingent liability and not a revenue deduction. The CIT(A) allowed the assessee's appeal, stating that as per the amended provisions of section 43A of the Act, the increase or decrease in liability due to foreign exchange fluctuation should be adjusted only upon actual payment. The CIT(A) referred to the Supreme Court decision in CIT vs. Woodward Governor India Pvt. Ltd., which held that such adjustments are to be made only when actual losses are suffered.The Tribunal upheld the CIT(A)'s decision, noting that the foreign exchange fluctuation gain was due to the reinstatement of accounts at the year-end and not an actual transaction. The Tribunal found that the AO's finding of a claimed deduction for foreign exchange loss was contrary to the material on record. The Tribunal concluded that the unrealized gain could not be considered for computing the cost of fixed assets or as income for the year under consideration. The Tribunal dismissed the Revenue's appeal on this ground.Conclusion:The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. The Tribunal found that the addition of short-term capital gains was not justified as the transfer was in the hands of the shareholder, and the unrealized foreign exchange gain could not be considered income as per the amended provisions of section 43A of the Act. The order was pronounced in open court on 24/01/2023.