2023 (2) TMI 565 - AT - Income Tax

Tribunal confirms tax treatment on capital gains & foreign exchange fluctuations

Asstt. Commissioner of Income Tax Circle–15 (1) (1), Mumbai Versus M/s. Privi Speciality Chemicals Ltd. (Erstwhile Privi Organics Ltd.)

The Tribunal upheld the CIT(A)'s decision to delete the additions related to short-term capital gains and unrealized foreign exchange gain. The judgment ... Short Term capital Gains - premium received by assessee for transferring Redeemable Cumulative Convertible Preference Share and Fully Compulsory Convertible Preference Shares to equity shares - CIT 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:- 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. In Anarkali Sarabhai [1997 (1) TMI 5 - SUPREME COURT] upheld the findings of the Hon’ble Gujarat High Court[1982 (6) TMI 50 - GUJARAT HIGH COURT] Further, the aforesaid decision of the Hon’ble Gujarat High Court was followed in Kartikeya V. Sarabhai vs CIT [1997 (9) TMI 2 - SUPREME 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. Addition on account of unrealised foreign exchange gain - HELD THAT:- From the perusal of the financial statement of the assessee, forming part of the paper book, we find that during the year, the assessee has only accounted for gain arising from foreign exchange fluctuation. Finding of the AO that loss on foreign exchange valuation was claimed as a deduction is contrary to the material available on record. Further, as per the provisions of section 43A of the Act, as amended by Finance Act 2002, w.e.f. 01/04/2003, the actual payment of the decreased /enhanced liability, due to a change in the rate of exchange subsequent to the acquisition of the asset in foreign currency, is a condition precedent for making adjustment in the cost of the fixed asset. Since the foreign exchange fluctuation gain, in the present case, is only due to the reinstatement of the accounts at the end of the year by considering the year-end rate of exchange, therefore, the same can neither be considered for computing the cost of the fixed assets for which loan was availed in foreign currency, nor any question arises for considering the said gain as income of the assessee for the year under consideration. Therefore, we find no infirmity in the impugned order passed by the learned CIT(A) on this issue deleting the addition made by the AO. As a result, ground No. 2 raised in Revenue’s appeal 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 Rs. 1,16,64,751/- as unrealized foreign exchange gain.Issue-wise Detailed Analysis:1. Addition of Short-Term Capital Gains:The first issue pertains to 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, issued preference shares at a face value of Rs. 10,000 each to two entities. These shares were later transferred to another entity, M/s Satguru Construction. During the assessment year, the preference shares were redeemed by issuing equity shares and crediting Rs. 22,06,90,470 to the Security Premium Account. The AO treated this amount as short-term capital gains, citing the decision of the Hon'ble Gujarat High Court in Anarkali Sarabhai vs CIT (1982) 138 ITR 437 (Guj.), and added it to the total income of the assessee.However, the learned CIT(A) allowed the appeal filed by the assessee, stating that the transfer of preference shares is in the hands of the shareholder, M/s Satguru Constructions, and not the assessee. The learned CIT(A) noted that the conversion of preference shares into equity shares is considered a transfer as per the decision of the Hon'ble Supreme Court in Anarkali Sarabhai, 224 ITR 422. The AO's decision to treat the conversion as capital gains was deemed erroneous, leading to the deletion of the addition of Rs. 22,06,91,000.Upon appeal, the Tribunal upheld the findings of the learned CIT(A), emphasizing that the gain from the conversion of preference shares into equity shares is taxable in the hands of the shareholder, not the assessee. The Tribunal dismissed the Revenue's appeal on this ground.2. Addition of Unrealized Foreign Exchange Gain:The second issue concerns 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. During the assessment proceedings, the AO added this gain to the total income, arguing that the transactions were not completed as of 31st March and that the loss accrued on loan transactions is on capital account, not a revenue deduction.The learned CIT(A) allowed the appeal filed by the assessee, referencing the amended provisions of section 43A of the Act, which state that the increase or decrease in liability due to foreign exchange fluctuation should be adjusted only on actual payment of the loan. The CIT(A) also cited the Hon'ble Supreme Court's decision in CIT vs. Woodward Governor India Pvt. Ltd., 312 ITR 254, which supports this interpretation. The CIT(A) concluded that the unrealized gain on foreign exchange fluctuation should not be considered as income, leading to the deletion of the addition.The Tribunal, upon review, found no infirmity in the CIT(A)'s order. It noted that the foreign exchange fluctuation gain resulted from the reinstatement of accounts at the year-end and should not be considered for computing the cost of fixed assets or as income for the year under consideration. Consequently, the Tribunal dismissed the Revenue's appeal on this ground as well.Conclusion:In conclusion, the Tribunal dismissed the Revenue's appeal on both grounds, upholding the CIT(A)'s decision to delete the additions related to short-term capital gains and unrealized foreign exchange gain. The judgment emphasized the proper interpretation of tax liability concerning the conversion of preference shares and the treatment of foreign exchange fluctuations under the Income Tax Act.