SOMA TECH PVT. LTD.,SURAT vs. PR. CIT-2, SURAT

आयकर अपील�य अ�धकरण, सुरत �यायपीठ, सुरत INCOME TAX APPELLATE TRIBUNAL SURAT BENCH, SURAT BEFORE SHRI PAWAN SINGH, Hon'ble JUDICIAL MEMBER AND Dr. SHRI ARJUN LAL SAINI, Hon'ble ACCOUNTANT MEMBER (Virtual Hearing) आ.अ.सं./I.T.A No.344/SRT/2018 �नधा�रण वष�/Assessment Year: 2013-14 Soma Tech Pvt. Ltd., Vs. The Principal 301, Soham House, Commissioner of Income Opp. St. Xavier’s School, Tax-2, Surat. Ghod Dod Road, Surat. [PAN: AAKCS 5265 N] अपीलाथ� / Appellant ��यथ�/Respondent �नधा�रतीक�ओर से /Assessee by Shri Hiren Vepari – CA राज�वक�ओर से /Revenue by Shri Ritesh Mishra – CIT-DR

सुनवाई की तारीख/ Date of hearing: 17.05.2021& 04.06.2021 उ�घोषणा क� तार�ख/Pronouncement on: 07.06.2021 आदेश /O R D E R PER PAWAN SINGH, JUDICIAL MEMEBER: 1. This appeal by the assessee is directed against the order of ld. Principal Commissioner of Income Tax-2, Surat, hereinafter referred as “Ld. PCIT”, dated 21.03.2018 passed under section 263 of the Income Tax Act, 1961. The assesse has raised the following grounds of appeal: “1. On the facts and in circumstances of the case as well as law on the subject, the learned Pr. CIT has erred in passing the order u/s. 263 although the assessment order passed u/s. 143(3() of the I.T.Act, 1961 was neither erroneous nor prejudicial to the interest of the revenue. 2. On the facts and in circumstances of the case as well as law on the subject, the learned Pr. CIT has erred in considering the expenditure of Rs. 15,34,118/- (Rs. 9,90,518/- + Rs. 5,43,600/-) as capital expenditure of the assessee on account of exchange rate difference on returning of share application money and

Soma Tech Pvt. Ltd., Vs. Pr.CIT-2, Surat../ ITA No.344/SRT/2018 for A.Y. 2013-14 thereby erred in giving direction to modify the assessed income of the assessee. 3. It is therefore prayed that above order passed by Pr. CIT u/s. 263 may please be quashed or modified as your honour deem it proper. 4. Appellant craves leave to add, alter or delete any ground(s) either before or in the course of hearing of the appeal.” 2. Brief facts of the case are that the assessee is a Private Limited engaged in the trading of medical instruments. The assessee filed its return of income for assessment year (A.Y.) 2013-14 on 14.10.2018 declaring taxable income of Rs.64.73 lakhs. The return was selected for scrutiny. The Assessing Officer (AO) after serving the statutory notice under section 143(2) and 142(1) of the Act proceeded for assessment. The AO after considering the various explanations, furnished by the assessee, made addition on account of various expenses of Rs.1,08,460/-. The additions were made on adhoc basis, being 20% various expenses of Rs.5,42,286/- debited by the assessee. The assessment was completed under section 143(3) on 17.03.2016. Thereafter, the assessment was revised Ld. PCIT by exercising his power under section 263 vide his order dated 21.03.2018. Before passing the order, the ld. PCIT issued show cause notice under section 263 dated 29.01.2018 by taking view that on verification of balance sheet, Profit and Loss Account, computation of income furnished by assessee, during the assessment proceedings, the assessee returned the share application money to Soma Tech Inc. (USA) of 2

Soma Tech Pvt. Ltd., Vs. Pr.CIT-2, Surat../ ITA No.344/SRT/2018 for A.Y. 2013-14 Rs.1,76,23,119/- on 07.05.2012 and Rs.66,37,861/- on 12.11.2012. The ld. PCIT further noted that exchange difference of Rs.9,90,518/- and Rs.5,43,600/- were credited to Soma Tech Inc. (USA). Further, as per the Profit and Loss Account of the assessee, the assessee debited total exchange difference of Rs.26,69,857/-, which includes Rs.15,34,118/-, as revenue expenditure. On the aforesaid observation, the Ld. PCIT took his view that expenditure of Rs.15,34,118/- [Rs.9,90,518/- + Rs.5,43,600/-] on account of exchange rate difference on returning share application money is required to be treated as capital expenditure and was required to be disallowed in the assessment order. On the aforesaid observation, the Ld. PCIT issued show cause notice on 29.01.2018 by taking view that assessment order passed by the AO is erroneous and prejudicial to the interest of the Revenue. 3. In response to show cause notice, the assessee filed its reply on 26.02.2018. The contents of reply is extracted by Ld. PCIT in para 3 of the impugned order. In the reply, the assessee contended that assessee company received share application money of Rs.1.66 crore in earlier years which was paid during the year in US Dollar of 3,30,000/- equivalent to Indian Rs.1.76 crore on 07.05.2012 and the exchange rate difference of Rs.9,90,518/- was transferred to exchange difference rate account. Similarly, the assessee had also received share 3

Soma Tech Pvt. Ltd., Vs. Pr.CIT-2, Surat../ ITA No.344/SRT/2018 for A.Y. 2013-14 application money of Rs.10.83 lakhs and Rs.54.51 lakhs on 16.05.2012 and 18.05.2012 respectively, and the same was returned on 12.11.2012 by way of Indian Currency of Rs.66.37 lakhs [equivalent to US Dollar 1,20,000] and difference amount of Rs.5,43,600/- was transferred to exchange rate difference rate account. The assessee explained that they have correctly transferred the said amounts to exchange difference rate account and claimed as revenue expenditure for the reasons that share application money was received by assessee for development of its existing running finance and the amount was utilised during the period by the assessee company for the purpose of business activities. It was further submitted that assessee is engaged in providing medical instruments and equipment related to Biomedical and imaging system like CT- Scan and MRI machines and other equipment’s used in the operation theatre and in intensive care units (ICU’s). In the assessee company, 25% of stock holding is by Soma Tech Inc.(USA), who is also engaged in similar line of business in USA. The assessee’s associated company in US base is distributing and branding partner of DUNLEE, a Philips Health Care for South Asia Region and the said company had financed the Philips Company to give sub-distributorship for the DUNLEE to the assessee company for Indian Territory. As DUNLEE brand of instruments and equipment’s was being introduced in India, 4

Soma Tech Pvt. Ltd., Vs. Pr.CIT-2, Surat../ ITA No.344/SRT/2018 for A.Y. 2013-14 there was a need of heavy fund for development of its market and to setup the establishment. Thus assessee’s associate company is US based provided fund to the assessee as it was not having huge fund for expansion of its business. The assessee further stated that in the meantime, the assessee company was financed by DUNLEE for promotion of marketing requirements for introduction of new market for its office produce in various states in India in requirement of fund. Since USA base associate company of assessee is the Authorised Dealer of DUNLEE, the DUNLEE provided necessary fund to the assessee by way of External Commercial Borrowings [ECB]. Hence, the assessee company returned the share application money to USA based its associated company. The share application money was used wholly and exclusively for the purpose of carrying business and hence, the exchange rate difference aroused out of repayment of share application money was a Revenue expenditure and assessee company accordingly claimed in the Return of Income. 4. The assessee also stated that during the course of assessment, the assessee provided all the details related to the share application money, exchange rate difference, necessary explanation with regard to repayment of share application money and the business activities of the assessee company. The assessment order was finalized after considering all these details. The assessee finally submitted that the assessment 5

Soma Tech Pvt. Ltd., Vs. Pr.CIT-2, Surat../ ITA No.344/SRT/2018 for A.Y. 2013-14 order is not erroneous or prejudicial to the interest of the Revenue. 5. The reply furnished by the assessee was not accepted by the ld. PCIT. The Ld. PCIT took his view that share application money received form part of capital receipt and its subsequent return form part of capital expenditure. Any exchange rate differences arising out of such capital amount also form part of capital expenditure. Thus, the expenditure of Rs.15,34,118/- on account of exchange rate difference on refund share application money is nothing but a capital expenditure. On this aforesaid observation, the ld. PCIT held that assessment order dated 17.03.2016 passed by the AO is erroneous in so far as which is prejudicial to the interest of the revenue. The assessment order was set-aside with the direction to reframe the assessment de- novo. Aggrieved by the order of Ld. PCIT, the assessee has filed present appeal before this Tribunal. 6. We have heard the submission of learned Authorised Representative (ld. AR) of the assessee and learned Departmental Representative- Commissioner of Income tax (ld. CIT-DR) for the Revenue and perused the orders of lower authorities and record carefully. The assessee has also filed detailed written submissions with copy of various decision of record under the signature of unknown person. The name and designation of that signatory is not mentioned on the said written submissions. The 6

Soma Tech Pvt. Ltd., Vs. Pr.CIT-2, Surat../ ITA No.344/SRT/2018 for A.Y. 2013-14 ld. AR of the assessee submits that during the assessment, the AO examined the issue in depth. The ld. AR submits that during assessment, the AO issued notice under section 142(1) of the Act dated 12.10.2015. In the said notice in question no. (x), the assessee was asked to furnish the complete details with regard to exchange rate difference. The assessee vide its reply dated 19.10.2015, furnished complete details of exchange rate difference which consist of exchange rate difference debited on 07.05.2012 of Rs.9,90,518/- and on 12.11.2012 of Rs.5,43,600/-. The ld. AR for the assessee further submits that the assessee vide its reply dated 22.12.2015 filed before the AO explained the complete fact. The assessee explained about the receipt of share application money in previous financial year. The assessee was unable to issue the share and therefore, as per provision of Companies Act and guidelines of Reserve Bank of India (RBI) the amount was returned back during the year under consideration on 07.05.2012. The assessee furnished copy of bank realisation certificate. Further, for another transaction wherein the assessee received share application money of Rs.74,94,000/- on 14.11.2011 and Rs.91,38,600/- on 16.11.2011 total of Rs.1,66,32,600/-. Due to technical reasons, the assessee could not issue share and therefore as per the provisions of Companies Act and guidelines of RBI the assessee was required return the share application money, which was 7

Soma Tech Pvt. Ltd., Vs. Pr.CIT-2, Surat../ ITA No.344/SRT/2018 for A.Y. 2013-14 returned on 07.05.2012. The assessee also received Rs.10,83,000/- on 06.05.2012 and Rs.54,51,250/- on 18.05.2012 which were also returned on 12.11.2012. The assessee also explained the fact leading to non-utilization/non- issuance of share by the assessee company. The AO was fully satisfied with the explanation furnished by the assessee and passed the assessment order. The ld. AR for the assessee invited out attention on the contents of assessment order dated 17.03.2016 and office Note attached with the assessment order. The learned AR for the assessee submitted that in the office Note the AO has mentioned the details about the share application money received against un-allotted shares, brief contention of the assessee, reference of provisions of Companies Act and guidelines of Reserve Bank of India (RBI). The reference regarding the details furnished by assessee and the same is kept on record. On the basis of aforesaid submission, the learned AR for the assessee submits that the AO was fully convinced and accepted the contention of assessee, and passed assessment order after due deliberation on the issue. The learned AR submits that the Ld. PCIT had a different belief that would not permit him to take the order in revision when the AO has taken a plausible, possible view in accordance with law, after examining all the materials. The ld. AR for the assessee filed copy of various case laws on the ratio that if the assessing officer 8

Soma Tech Pvt. Ltd., Vs. Pr.CIT-2, Surat../ ITA No.344/SRT/2018 for A.Y. 2013-14 takes one of the possible views; the assessment order cannot be branded as erroneous. 7. On merits, the ld. AR for the assessee submits that exchange difference fluctuating on account of refund of share application money is of revenue expenses. The ld. AR for the assessee in other way explain that if any gain would have resulted on account of exchange difference it would be assessable under section 28 of the Act. The ld. AR for the assessee further explain that section 43A of the Act is the only reference required capitalization of foreign exchange allows, that too only in case of borrowing. The share application money is neither a liability, nor a borrowing and secondly even if it were to be impossibly held as a liability there has been absolutely insignificant addition which the assessee would have sourced from its own funds. To support his contention, the learned AR of the assessee relied upon the following decisions:  ITA No.686 & 687/PN/2011 (Pune ITAT), Rohit Exhaust Systems Pvt. Ltd.  312-ITR-254 (SC), Woodward Governor India P. Ltd.,  [2010] 326 ITR 435 (Delhi), Indian Toners & Developers Ltd.,  189 Taxman 292 (SC), Oil & Natural Gas Corpn. Ltd.,  184-TTJ-741 (Mumbai), Yash Raj Films (P) Ltd.,  105-TTJ-591 (Delhi ‘D’), Silicon Graphics Systems (I) Ltd,  161-Taxman-166 (Jp. Trib.), Indian Shaving Products Ltd.,  200-Taxman-177(Kar.) (Mag.),Wipro Finance Ltd., 9

Soma Tech Pvt. Ltd., Vs. Pr.CIT-2, Surat../ ITA No.344/SRT/2018 for A.Y. 2013-14  180-TTJ-727 (Pune), Cooper Corporation (P) Ltd.,  153-ITD-241 (Chennai), Toll (India) Logistics (P.) Ltd, and  144-ITD-448 (Delhi), Qualcomm India (P.) Ltd. 8. On the other hand, the ld.CIT-DR for the Revenue supported the order of Ld. PCIT. The ld.CIT-DR submits that before revision the order of Ld. PCIT has clearly held that the assessment order is passed without making proper enquiries or verification, which ought to have been made. The share application money received form part of capital receipt and its subsequent return would form part of capital expenditure, thus the expenditure on account of exchange rate difference is nothing but a capital expenditure. Thus, the assessment order passed by the AO is erroneous and in so far as prejudicial to the interest of the Revenue. The AO has taken a view which is not a sustainable view under the law. The ld. CIT-DR prayed for dismissal of the appeal. 9. We have considered the rival submission of both the parties. We have also deliberated on written submissions and various case laws relied by ld. AR for the assessee during his submission as well as all those decisions which are placed on record. We have also gone through the various documentary evidences filed in the form of paper book (PB) on behalf of the assessee. We have noted that during the assessment the Assessing Officer issued notice under section 143(2)/142(1) of the Act dated 12.10.2015 seeking reply on the issue of foreign exchange rate difference. The 10

Soma Tech Pvt. Ltd., Vs. Pr.CIT-2, Surat../ ITA No.344/SRT/2018 for A.Y. 2013-14 assessee filed its reply dated 19.10.2015 and again on 22.12.2015 and furnished required details of exchange rate difference and after examining the issue, the assessing officer passed the assessment order under section 143(3) on 17.03.2016. The assessing officer at the time of passing the assessment written a Note on the investigation conducted by him on the issue of exchange rate difference and the amount paid by the assessee on return of share application money. For completeness of this order, the contents of the said office Note are extracted below; “Office Note 1. The case is selected for scrutiny in CASS. The reason for scrutiny selection mentioned in the ITD is “Large scale share application money received against the unallocated shares.” During the assessment proceedings, the assessee was requested to furnish the complete details of the share application money received against unallotted shares. The AR of the assessee submitted that due to technical reasons the company could not allot the shares to Soma Tech INC. as per the guidelines and the provisions of the Companies Act and Reserve Bank of India, it must be return to the applicant. The details furnished by the assessee were examined and placed on record. Mainly part of the share application was received in AY 12-13 which return back in AY 13-14 and one lot was received in AY 13-14 for operational expenses purpose which was wrongly entered as share application money, the bank advice however was showing the amount as operational expenses only and not share application money. The clarification in this regard has been kept on file. 2. Further, during the assessment proceedings, the books of accounts of the company were called for and examined on the test check basis. No incriminating details/ unexplained deviations of figures in the books of account were found. All

Soma Tech Pvt. Ltd., Vs. Pr.CIT-2, Surat../ ITA No.344/SRT/2018 for A.Y. 2013-14 details furnished by the company wre examined and placed on record.

Place: Surat Sd- Date: 17/03/16 (SANDEEP KUMAR) Deputy Commissioner of Income-tax, Circle -2(1)(2) Surat” 10. We find that the ld. PCIT, before passing under section 263 of the Act identified the issue that exchange rate difference on returning share application money is required to be treated as capital expenditure, same was required to be disallowed as per the contents of show cause notice dated 29.01.2018. The assessee in its reply dated 26.02.2018 explained that the issue was examined by Assessing Officer and that the assessment order is not erroneous. We find that the assessee while filing reply before ld. PCIT, twisted the facts and stated that share application money was received by assessee for development of its existing running finance and the amount was utilized during the period for the purpose of business activities. The assessee also tried to justify that exchange rate difference on returning share application money is revenue expenditure; same was required to be allowed as such. No such contention was raised before assessing officer. The Ld. PCIT not accepted the explanation furnished by the assessee. The Ld. PCIT took his view that the share application money received form part of capital receipt and its subsequent return would form part of

Soma Tech Pvt. Ltd., Vs. Pr.CIT-2, Surat../ ITA No.344/SRT/2018 for A.Y. 2013-14 capital expenditure, thus the expenditure on account of exchange rate difference is nothing but a capital expenditure. 11. The Hon’ble Supreme Court in a leading case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 832 held that a bare reading of section 263 of the Income-tax Act, 1961, makes it clear that the prerequisite for the exercise of the jurisdiction by the Commissioner suo motu under it, is that the order of the Income-tax Officer is erroneous insofar as it is prejudicial to the interests of the revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the revenue. If one of them is absent - if the order of the Income-tax Officer is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue - recourse cannot be had to section 263(1) of the Act. The provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous, that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase 'prejudicial to the interests of the revenue' is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. 13

Soma Tech Pvt. Ltd., Vs. Pr.CIT-2, Surat../ ITA No.344/SRT/2018 for A.Y. 2013-14 The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the revenue. If due to an erroneous order of the Income-tax Officer, the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the revenue. The phrase 'prejudicial to the interests of the revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer, cannot be treated as prejudicial to the interests of the revenue, for example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the Income-tax Officer is unsustainable in law. 12. The Hon’ble Jurisdictional High Court in well known leading case in CIT Vs Arvind Jewellers (259 ITR 502), while relying on the decision of Hon’ble Apex Court has taken a view that the provisions of section 263 cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous, that section will be attracted and incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being 14

Soma Tech Pvt. Ltd., Vs. Pr.CIT-2, Surat../ ITA No.344/SRT/2018 for A.Y. 2013-14 erroneous. The Supreme Court has also made it clear that the phrase 'prejudicial to the interests of the revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer and that every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue. It was further emphatically stated that when an ITO adopts one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the ITO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the ITO is unsustainable in law. 13. Now, the sole question for our consideration is whether the expenditure incurred by the assessee on account of foreign exchange fluctuation on return of Share capital money is “capital account” or in “revenue account”. If the expenses incurred by the assessee is really ‘revenue’ in nature, the assessment order passed by the assessing officer in certainly not erroneous, being sustainable in law, though it may be prejudicial to the interest of revenue and the twin conditions for revising the order will not meet out. But, if the expenditure incurred by the assessee is ‘capital’ in nature, the order passed by the assessing officer certainly would be erroneous being not sustainable in law; thereby the twin conditions of the provisions of section 263 will be meet out simultaneously. 15

Soma Tech Pvt. Ltd., Vs. Pr.CIT-2, Surat../ ITA No.344/SRT/2018 for A.Y. 2013-14 14. Now adverting to the facts of the instant case. It is the case of the assessee received share application money from its associated/ foreign entity. It is settled position under the law that share capital is always treated as ‘capital receipt’. The assessee received the share capital in the form of foreign currency (US dollar). The assessee could not allot the share to its group company due to technical reasons and ultimately had to return the same. However, in the mean time the currency conversion rate was fluctuated and the assessee while returning the share application money has to pay the difference of the foreign exchange fluctuation difference, which the assessee claimed it to be revenue in nature. Admittedly, the foreign exchange difference paid by the assessee was paid on the capital receipt. The said exchange difference was not paid by the assessee in the course of its business nor was it in the form of borrowing. As noted above the assessee in its reply before ld. PCIT tried to justify the exchange rate difference as revenue expenses by pleading that the share application money was utilized for the purpose of business activities. This stand of the assessee is not tenable as the assessee never allotted the share to its US based associated company. The assessee has taken a another stand that the assessee company convinced DUNLEE for providing necessary funds by way of ECB and the assessee returned the share application money. 16

Soma Tech Pvt. Ltd., Vs. Pr.CIT-2, Surat../ ITA No.344/SRT/2018 for A.Y. 2013-14 15. We find that during the assessment the assessing officer obtained certain information with regard to the expenses of foreign exchange. The assessing officer after seeking reply from the assessee instead of passing any speaking order kept all such information in the form of a Note appended with the assessment order, which we have extracted (supra). The assessing officer, thus, impliedly allowed the said foreign exchange fluctuation expenditure as revenue expenditure in favour of the assessee. The ld PCIT while revising the assessment order clearly held that share application received form part of capital receipt and its subsequent return form part of capital expenditure, any exchange rate difference associated with such capital payment also form part of capital expenditure and that the expenses of Rs. 15,34,118/- is nothing but a capital expenditure. 16. It is settled position in law that issuance of shares is not a trading transaction. On issuance of shares, the assets of the company are increased by the amount so obtained from the share subscribers. The amount of share application money is not profit or gain of trade undertaken by the assessee company and the share application amount are not to be brought in to the accounts for taxation purpose being on the side of capital account. Capital expenditure is allowable deduction if statue expressly so provided. Similarly an item of expenditure, though wholly and exclusively incurred for the purpose of business or 17

Soma Tech Pvt. Ltd., Vs. Pr.CIT-2, Surat../ ITA No.344/SRT/2018 for A.Y. 2013-14 profession, is not admissible as an allowance if it is of capital in nature. The criteria which can be invoked in distinguishing between the ‘capital receipt’ and ‘revenue receipt’ will also serve to distinguish between capital disbursement and revenue disbursement. 17. We find that the issue involve in the present case is directly covered by the decision of Hon’ble Delhi High Court in CIT Vs Jagatjit Industries Ltd (2011) 337 ITR 21 Delhi. The fact of the said case are that assessee in that case is a multi-product company engaged in the business of alcoholic beverages, malted milk foods, dairy products, etc. During the relevant assessment year, the said assessee company issued certain equity shares overseas by way of GDR and collected the money in the US Dollars as share capital. The share capital raised had to be mandatorily retained overseas and was to be repatriated into the country as and when required for approved end uses and, therefore, the assessee kept the entire share capital in fixed deposits with a bank in the US. During the year under appeal, the assessee had accounted for certain gain arising from exchange rate fluctuation of foreign currency in its balance sheet. The assessing officer treated the same as revenue receipt exigible to tax. On appeal, the Commissioner (Appeals) held that the share capital was to be used for acquiring fixed capital assets, the gain on exchange fluctuation to that extent was to be 18

Soma Tech Pvt. Ltd., Vs. Pr.CIT-2, Surat../ ITA No.344/SRT/2018 for A.Y. 2013-14 treated as capital receipt and the share capital raised was to be utilized for other business expenses, the said gain was to be treated as revenue receipt exigible to tax. On cross appeals, the Tribunal dismissed the appeal of the revenue but allowed the appeal of the assessee treating the entire gain as capital receipt. On further appeal by the revenue the Hon’ble High Court held that, once that 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 of such share capital being collected in foreign exchange, 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. 18. We further noted that Hon’ble Madras High Court in Continuum Wind Energy (India) (P) ltd Vs DCIT [2020] 122 taxmann.com 102 (Mad) also held that when the assessee incurred foreign exchange loss on foreign currency loan which was utilized by the assessee for purchase of fixed asset, as loss was to be regarded as capital in nature not allowable under section 37(1). 19. Both the above referred decisions were confronted to the learned AR for the assessee and he was asked to furnish his comment on 04.06.2021. The learned AR for the assessee filed his written submissions dated 31.05.2021on record, copy of which was supplied to the ld. CIT-DR for revenue. In the written 19

Soma Tech Pvt. Ltd., Vs. Pr.CIT-2, Surat../ ITA No.344/SRT/2018 for A.Y. 2013-14 submissions dated 31.05.2021, the ld. AR for the assessee and tried to distinguish both the decision with the facts of his case. The learned AR for the assessee in his written submissions dated 31.05.2021 also questioned the authority/ power of the Bench in raising the legal question. It is stated by learned AR in his written submissions that none of the case laws was either cited by ld. PCIT in his order or by ld. CIT-DR in his submission. It is submitted that in Jagatjit Industries case (supra) the share application money was collected outside India and gain arising thereon would constitute ‘capital receipt’. It is also submitted that the share application money are application and never a part of ‘capital asset’ until allotment of shares as per section 42 of Companies Act 2013. The said case deals with the exchange gain in connection with the allotted share capital movements, while assessee’s case deals with return of application money. On the second decision rendered by Hon’ble Madras High Court in Continuum Wind Energy (India) (P) Ltd (supra), the ld AR for the assessee submitted that this decision deals with the foreign exchange fluctuation in relation to the borrowings made for the purpose of acquiring fixed asset, wherein the foreign exchange fluctuation were held to be a capital as referred in section 43A, thus required to be capitalized instead of expenses. The ld. AR for the assessee further stated that the case of the assessee pertains to borrowing for the purpose of meeting the brand 20

Soma Tech Pvt. Ltd., Vs. Pr.CIT-2, Surat../ ITA No.344/SRT/2018 for A.Y. 2013-14 building expenditure. The ld. AR for the assessee further reaffirmed his reliance on various case laws relied during the hearing on 17.05.2021. 20. We again examined the reply furnished by the assessee before assessing officer. In reply dated 22.11.2015, the assessee clearly mentioned that amount was received on account of share application money of Rs.74,94,000/- on 14.11.2011 and on Rs.91,38,600/- on 16/11/2011 and the same was return on 07.05.2012 and that amount of Rs.10,83,000/- received on 16.05.2012 and Rs. 54,51,250/- received on 18.05.2012, were also return back on 12.11.2012. The assessee in its reply stated that it was wrongly shown as ECB loan which was corrected in the next financial year. Thus, there is no averment in the reply of the assessee that the amount of share application money was received for ‘brand building’ of the assessee company. Again turning to the core issue that the share application money in nothing but a ‘capital receipt’ and its return will not change its character. Even otherwise the assessee has not incurred any other amount except the exchange rate difference, which in our considered view is nothing but a ‘capital expenses’. 21. The ratio of various case laws relied by ld. AR for the assessee is not helpful to the assessee. We find the Pune Tribunal in ACIT Vs Rohit Exhaust System Pvt. Ltd (ITA NO. 687/PN/2011) held that interest paid on refund of share application money is 21

Soma Tech Pvt. Ltd., Vs. Pr.CIT-2, Surat../ ITA No.344/SRT/2018 for A.Y. 2013-14 revenue expenditure. In the said case the assessee treated the said money as borrowed capital and was used for its business purpose and paid interest on borrowed money, thus the facts of this case law is not helpful to the assessee. In CIT Vs Woodward Governor India Pvt Ltd (supra) it was held that gain on fluctuation in exchange would be revenue receipt. In the said case the liability was arising out of loan availed for the purpose of business. Similarly in Oil & Natural Gas Corporation Ltd,(supra) the liability on foreign exchange fluctuation on the amount of loan availed for thr purpose of business. Similarly, the Hon'ble Karnataka High Court in Wipro Finance Ltd (supra) it was held that where loan availed by the assessee in foreign currency increased due to fluctuation in foreign exchange rate, the excess amount repaid by the assessee was to be allowed as revenue expenditure. The other case law relied by ld. AR for the assessee also pertains to the loan transactions and are not helpful to the assessee. 22. Thus, in view of the aforesaid legal discussion, we are of the considered view that order passed by Assessing Officer is not sustainable in law and hence not only erroneous but in so far as prejudicial to the interest of the Revenue. Therefore, the twin conditions that orders is erroneous and in so far as prejudicial to the interest of revenue, as prescribed under section 263, are fulfilled in the present case. Thus, the order passed by Ld. PCIT 22

Soma Tech Pvt. Ltd., Vs. Pr.CIT-2, Surat../ ITA No.344/SRT/2018 for A.Y. 2013-14 passed under section 263 dated17.03.2016 is upheld. The grounds of appeal raised by assessee are dismissed. 23. In the result, appeal of the assessee is dismissed. Order pronounced on 07 June 2021 by placing result on notice board. Sd/- Sd/- (Dr. ARJUN LAL SAINI) (PAWAN SINGH) (लेखा सद�य/ACCOUNTANT MEMBER) (�याियक सद�य/JUDICIAL MEMBER) सुरत/ Surat, �दनांक Dated: 07 June 2021 / SGR Copy of order sent to- Assessee/AO/Pr. CIT/ CIT (A)/ ITAT (DR) Guard file of ITAT. By order / / TRUE COPY / / Assistant Registrar, Surat