AI Drafter 
TaxTMI 
TaxTMI 
2021 (11) TMI 143
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....s revenue receipt instead of capital receipt. The action 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 y....
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.... 50 Equity 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 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 capit....
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....ealized gain and that as to whether only realized gains to be taxed or both realized and unrealized gains should be taxed on accrual basis. The 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 tha....
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.... under: 5.0 Sec. 2(13) of the Income Tax Act, 1961 defines the term 'business'. The term 'business' includes - • any trade, commerce or manufacture; or • 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....
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.... meet long term working capital requirement. Benefits to company: Through GDR, company opted to obtain greater exposure and raise capital in the world market issuing GDRs has the added benefit of increasing the share's liquidity while boosting 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....
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.... the following undisputed facts- • The appellant raised capital through GDR during FY 2010-11; • The capital so raised was not repatriated immediately; • The capital raised was instead reinvested in "Aries Capital Fund Ltd. (Formerly known as Aries Money Market Fund)"; • During 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 dur....
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....rted in 337 ITR 21 CIT v. JAGATJIT INDUSTRIES LIMITED, the Delhi High Court considered the similar situation. Referring to decision reported in 116 ITR 1 SUTLEJ COTTON MILLS 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." 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 proc....
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....hrough GDR to finance the ongoing expansion in terms of capital investments that an amount of US $ 9997500 from GDR issue had been raised and the Board of Directors in its meeting held on 31/03/2011 have issued and 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 GDR at a price of US$ 7.75 per GDR and each GDR represents 50 equity 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. report....
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....sion of capital investment, retail business and to meet the long term working capital need of the assessee company. The amount raised was not immediately repatriated to India and was invested in the Aries Capital Fund Limited. Subsequently it was repatriated to India over a period of four years. On the GDR's, exchange rate fluctuation gain accrued during the year under consideration for a sum of Rs. 3,12,92,000/- out of which gain of Rs. 52,24,000/-(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 t....
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.... was the fact that the assessee had treated the subscription receipts as income. The reality of the situation, however, was that the business aspect of the matter, when viewed as a whole, lead inevitably to the conclusion that the receipts in question were capital receipts and not income." 10.3 From the ratio laid down in the aforesaid referred to cases, it would be clear 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. 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 all....
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....ton Mills Ltd. 's case (supra) 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, 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 rec....