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Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
Before: SHRI R. K. PANDA & SHRI VINAY BHAMORE
Assessment Year : 2020-21 DCIT, Circle-8, Pune. Vs. Advik Hi Tech Pvt. Ltd., Gat No.357, Plot No.99, Village- Kharabwadi, Tal.- Khed, Chakan- 410501. PAN : AACCA3106E Appellant Respondent Assessee by : Shri Sharad A. Shah & Shri Rohit S. Tapadiya Revenue by : Shri Amol Khairnar Date of hearing : 21.11.2024 Date of pronouncement : 18.02.2025 आदेश / ORDER PER VINAY BHAMORE, JM: These cross appeals filed by the Assessee as well as by the Revenue are directed against the order dated 16.10.2023 passed by Ld.CIT(A)/NFAC for the Assessment Year 2020-21 respectively.
2. Facts of the case, in brief, are that the assessee is a company registered under the provisions of the Companies Act, 1956. It is engaged in the business of manufacturing of automotive component. It is also engaged in catering to the electric needs of a number of domestic and overseas customers across four continents in the two wheeler engine and transmission system. The assessee company also has wind power, solar and investment segments. The assessee company e-filed its original return of income for assessment year under consideration on 15.02.2021 declaring total income of Rs.42,98,03,730/-. Subsequently, the assessee company revised its return of income on 26.05.2021. The said ITR was processed u/s.143(1) on 25.12.2021 on total income of Rs.42,99,14,760/- after making adjustment of Rs.1,11,030/- to the total income of the appellant. Thereafter, the case was selected for complete scrutiny under CASS. Notices u/s.143(2) and 142(1) were issued along with questionnaire. In response to the said notices, the assessee company furnished the written submissions before the Assessing Officer. The assessment was completed on 29.09.2022 u/s.143(3) of the IT Act by making following additions/disallowances :-
(i) Forex gain : Rs.52,44,688/- (ii) Disallowance u/s.14A : Rs.19,61,074/- (iii) Disallowance of 80G claimed on : Rs.67,87,728/ account of CSR spends (iv) Disallowance of Education Cess : Rs.48,00,000/- (v) Late deposit of employees’ : Rs.18,66,524/- contribution of PF/ESI (vi) Disallowance of deduction u/s 35(2AB) : Rs.13,46,18,011/- 3. After considering the reply of the assessee, Ld. CIT(A)/NFAC partly allowed the appeal of the assessee and confirmed the disallowance of Rs.67,87,728/- claimed as deduction u/s 80G, confirmed the disallowance on account of deduction of Rs.13,46,18,011/- claimed u/s 35(2AB) and also directed the Assessing Officer to tax Rs.52,44,688/- as capital gain. It is this order against which the assessee is in appeal before this Tribunal. 3.1 However, Ld. CIT(A)/NFAC also directed the Assessing Officer to allow the deduction claimed by the assessee u/s.80IA of Rs.2,77,33,581/- and u/s.80IC of Rs.7,17,05,933/-, against which the Revenue is in cross appeal before this Tribunal.
First, we shall take up the appeal of the assessee in ITA No.1158/PUN/2013.
– By Assessee : 5. The appellant has raised the following grounds of appeal :-
1. The Ld AO and Ld CIT(A) ought to have considered the second revised return (first time after merger) filed in consequence of Merger order dt 23-04-2020 (certified order was issued by NCLT on 02-03-2021) in view of SC decision in case of Dalmia Power 420 ITR 0339.
2. The Ld. AO erred in and Ld CIT(A) erred in confirming disallowing an amount of INR 67,87,728/- claimed as deduction under section 80G of the Act, holding that the contributions towards Corporate Social Responsibility ("CSR") of the Appellant were not eligible for the said deduction under section 80G of the Act. 2.1 The learned AO and Learned CIT(A) has erred in fact and law, by holding that the donation paid by the Appellant forms part of the mandatory requirement of the Companies Act 2013 and consequently not eligible for deduction under section 80G of the Act
3. The Ld. AO and Ld CIT(A) erred in not allowing the weighted deduction of Rs. 13,46,18,011/ claimed u/s 35(2AB) for the reason of non-issuance of Form 3CL by DSIR authority. 3.1 Without prejudice to above, the assessee prays your honor to consider Form 3CL received subsequent to the CIT(A) order (received on 19-10-2023) (a separate prayer for admission of additional evidence is being filed). 3.2 Without prejudice to above, the assessee prays allowance of research and development expenses u/s 35(1) in respect of amount not considered for weighted deduction u/s 35(2AB) by DSIR in form 3CL.
4. The Ld AO and Ld CIT(A) ought not to have taxed Rs.52,44,688/ on account of additional amount recognized on fluctuation of exchange rate in respect of capital asset being shares of foreign company sold during the year. 4.1 The Ld AO and Ld CIT(A) ought to have considered the computation of capital gain as per rule 115 4.2 On without prejudice basis, The Ld AO and Ld CIT(A) ought not to have been taxed the amount as income which was contingent in the nature as on the last date of the Balance Sheet.
The appellant craves its right to add to or alter the Grounds of Appeal at any time before or during the course of hearing of the case."
6. The assessee has raised as many as five grounds of appeal. The Ground No.1 is not pressed by the assessee, the same is dismissed as not pressed. Ground no.5 is general in nature, hence needs no adjudication.
7. In Ground No.2, the assessee has challenged the disallowance of Rs.67,87,728/- claimed as deduction u/s 80G of the IT Act, being in the nature of expenditure related to Corporate Social Responsibility (CSR). 7.1 Ld. AR appearing from the side of the assessee submitted before us that the assessee has spent Rs.1,35,75,456/- towards CSR as per the guidelines issued by the Companies Act, 2013 and simultaneously the assessee has claimed 50% deduction on this amount i.e. Rs.67,87,728/- u/s 80G of the IT Act, which was disallowed by the Assessing Officer. In this regard, Ld. AR submitted that this issue is covered in favour of the assessee by the Co-ordinate Bench of this Tribunal in the case of the assessee itself i.e. in for assessment year 2021-22 order dated 09.10.2024. Accordingly, it was requested before the Bench to allow the deduction of Rs.67,87,728/-.
8. Ld. DR appearing from the side of the Revenue relied on the orders passed by the subordinate authorities on this issue and further requested to confirm the same.
9. With regard to the above Ground No.2, we have heard Ld. Counsels from both the sides and perused the material available on record. In this regard, we find that the Co-ordinate Bench of this Tribunal (supra) has already decided the identical issue in favour of the assessee by observing as under :- “8. We have heard the Ld. Representatives of the parties and perused the records. The facts are not in dispute. We find that an identical issue came up for consideration before the Co-ordinate Bench of Pune Tribunal in the case of Credit Suisse Services (India) Private Limited (supra) wherein the Tribunal dismissed the appeal of the Revenue relying on the decision of the ITAT Bangalore in the case of Allegi Services (India) Pvt. Ltd. V. ACIT in wherein it was held that the assessee is entitled to claim deduction u/s 80G with respect to donations forming part of CSR expenses. The relevant observations and findings of the Co- ordinate Bench of Pune Tribunal in the case of Credit Suisse Services (India) Private Limited (supra) are as under :
[R] “3. Both the learned representatives next invited our attention to the CIT(A)'s impugned detailed discussion allowing the assessee’s sec.80G deduction claim as under : “5. Decision I have carefully perused grounds of appeal
, facts of the case, submissions made by the Appellant, assessment order and other evidences on records. 5.1. Ground 1. Vide this Ground, the Appellant has challenged action of the AO in making the disallowance of Rs.4,55,13,521/- u/s 80G with respect to the donations forming part of Corporate Social Responsibility (‘CSR’). In this regard, the Appellant has submitted that : • The amount paid to various funds is without any consideration in return and is in the nature of irrevocable contribution. Thus, such contributions partake the character of donation • Since, all other requisite conditions under section 80G have been satisfied and not in dispute, the Appellant is eligible for deduction under section 80G of the Act. The institution to whom the Donations are made are duly registered under section 80G(5) of the Act • The CSR expenditure is not allowed only for the purpose of section 37 for computing business income. If such expenditure is otherwise allowable as deduction under other provisions of the Act, the same cannot be disturbed. • The donations/expenditure made by the Appellant is towards women empowerment, education, environmental research etc. and forms part of CSR expenditure as per Schedule VII of the Companies Act, 2013. • The legislature has restricted the benefit only in two specific cases being ‘Swachh Bharat Kosh’ (‘SBK’) and ‘Clean Ganga Fund’ (‘CGF’) as per sub-clause (iiihk) and (iiihl) of section 80G(2)(a) of the Act, thereby implying that CSR contribution to other eligible institution qualifies for deduction under section 80G of the Act. The Appellant has made CSR contribution to funds other than SBK and CGF, thus, claim under section 80G of the Act shall be allowed.
• The said claim, as discussed above, is supported by the Explanatory Memorandum to Finance Bill 2014 with restriction placed only in relation to specified funds under section 80G, clarification issued by MCA and multiple favourable decisions. I have considered the submissions made by the Appellant. I find that the issue is covered in favour of the Appellant by various decisions of Hon’ble Tribunals. I find that Hon’ble ITAT Bangalore in the case of Allegi Services (India) Pvt Ltd vs ACIT, (ITA No.1693/Bangalore/2019) has decided this issue in favour of the assessee. Relevant part of the said decision is reproduced as under : “Brief facts of the case are as under: 2. Assessee is a company and filed its return of income on 30/11/2016 declaring income of Rs.73,44,38,310/-. The case was selected for scrutiny and notice under section 143 (2) and 142 (1) along with questionnaire was issued to assessee. In response to statutory notices, representative of assessee appeared before Ld.AO and filed requisite details as called for.
Ld.AO from the details furnished by assessee observed that assessee claimed deduction amounting to Rs.8,40,000/- under section 80 G of the Act, towards donation paid. Ld.AO was of the opinion that claim made under section 80 G of the Act, was not allowable as the amount was forming part of CSR expenses debited to profit and loss account. Ld.AO was of the opinion that donation made outside CSR expenses was only eligible to be claimed under section 80 G of the Act. ………………………… 14. In our view, expenditure incurred under section 30 to 36 are claimed while computing income under the head, ‘Income form Business and Profession”, where as monies spent under section 80G are claimed while computing ‘‘Total Taxable income” in the hands of assessee. The point of claim under these provisions are different.
Further, intention of legislature is very clear and unambiguous, since expenditure incurred under section 30 to 36 are excluded from Explanation 2 to section 37(1) of the Act, they are specifically excluded in clarification issued. There is no restriction on an expenditure being claimed under above sections to be exempt, as long as it satisfies necessary conditions under section 30 to 36 of the Act, for computing Business and Profession”.
For claiming benefit under section 80G, deductions are considered at the stage of computing “Total taxable income”. Even if any payments under section 80G forms part of CSR payments ( keeping in mind ineligible deduction expressly provided u/s.80G), the same would already stand excluded while computing, Income under the head, “Income form Business and Profession". The effect of such disallowance would lead to increase in Business income. Thereafter benefit accruing to assessee under Chapter VIA for computing “Total Taxable Income” cannot be denied to assessee, subject to fulfillment of necessary conditions therein.
We therefore do not agree with arguments advanced by Ld.Sr.DR.
In present facts of case, Ld.AR submitted that all payments forming part of CSR does not form part of profit and loss account for computing Income under the head, “Income from Business and Profession”. It has been submitted that some payments forming part of CSR were claimed as deduction under section 80G of the Act, for computing “Total taxable income”, which has been disallowed by authorities below. In our view, assessee cannot be denied the benefit of claim under Chapter VI A, which is considered for computing ‘Total Taxable Income”. If assessee is denied this benefit, merely because such payment forms part of CSR, would lead to double disallowance, which is not the intention of Legislature.
On the basis of above discussion, in our view, authorities below have erred in denying claim of assessee under section 80G of the Act. We also note that authorities below have not verified nature of payments qualifying exemption under section 80G of the Act and quantum of eligibility as per section 80G(1) of the Act.
Under such circumstances, we are remitting the issue back to Ld.AO for verifying conditions necessary to claim deduction under section 80G of the Act. Assessee is directed to file all requisite details in order to substantiate its claim before Ld.AO. Ld.AO is then directed to grant deduction to the extent of eligibility.
Accordingly grounds raised by assessee stands allowed for statistical purposes. In the result appeal filed by assessee stands allowed." In view of the above facts and respectfully following the decision of Hon’ble ITAT Bangalore in the case of Allegi Services (India) Pvt Ltd (supra), I am of the considered view that the appellant is entitled to claim deduction u/s 80G with respect to the donations forming part of CSR expenses. However, in this regard, I direct the AO to verify whether the Appellant satisfies the requisite conditions prescribed for deduction u/s 80G. In case it satisfies the conditions for deduction u/s 80G, the claim of Rs. 4,55,13,521/- has to be allowed. If found contrary, the stand of the AO stands confirmed. The AO is directed to give effect by passing a speaking order. The Appellant is directed to furnish all relevant details online before the AO for verification. Ground is, thus, allowed for statistical purpose.”
4. Mr. Murkunde vehemently argued in favour of the Revenue’s pleadings that the Ld. CIT(A)'s herein has erred in law and on facts in accepting the assessee’s sec.80G deduction claim of Rs.4,55,13,521/- qua “CSR expenditure” not exigible for relief u/sec.37 of the Act.
5. The assessee has drawn strong support from Ld. CIT(A)'s above extracted detailed discussion.
6. We have given our thoughtful consideration to the foregoing rival stands and find no merit in the Revenue’s instant sole substantive grievance. Suffice to say, the Revenue’s only argument is that once the impugned expenditure is not allowable u/sec.37 of the Act; the same is also not exigible to sec.80G deduction as well. We find no substance in Revenue’s instant sole substantive grievance as the Ld. CIT(A)'s detailed discussion has considered a catena of case law of various judicial forums (supra) already accepting the very issue in assessee’s favour and against the department. We thus adopt judicial consistency herein as well to uphold the Ld. CIT(A)'s detailed discussion accepting the assessee’s sec.80G deduction claim. Rejected accordingly.”
9. Respectfully following the decision of the Co-ordinate Bench of Pune Tribunal in the case of Credit Suisse Services (India) Private Limited (supra) and in the absence of any contrary material brought Revenue to take a different view, we set aside the order of Ld. CIT(A) on the issue and allow the appeal of the assessee.
In the result, the appeal of assessee is allowed.”
10. Respectfully following the above decision of the Tribunal passed in the case of assessee itself, we set-aside the order of Ld.CIT(A)/NFAC and direct the Assessing Officer to allow the deduction u/s 80G of Rs.67,87,728/-. Thus, ground no.2 is allowed.
In Ground No.3, the assessee has challenged the disallowance of deduction of Rs.13,46,18,011/- claimed u/s 35(2AB) of the IT Act. 11.1 Ld.AR appearing from the side of the assessee submitted before us that the assessee has incurred R&D revenue expenditure of Rs.8,97,45,340/- (capital expenditure of Rs.1,53,27,687/- and revenue expenditure of Rs.7,44,17,653/-) and debited the same in the profit & loss account and shown the eligible deduction u/s 35(2AB) at Rs.13,46,18,011/-. However, the report in Form 3CL was not received from DSIR (prescribed authority) till the completion of the assessment proceedings and in the absence of Form 3CL, AO has disallowed above deduction which was Ld.CIT(A)/NFAC. It was submitted before us that the assessee had complied with all the conditions for obtaining Form 3CL from DSIR but the same was not issued by DSIR even till the completion of first appeal proceedings. Ld. AR submitted before us that now Form 3CL has been received by the assessee and the same is being produced before the Bench as an additional evidence. Since Form 3CL could not be submitted either before the Assessing Officer or before Ld. CIT(A)/NFAC and now that Form 3CL has been received by the assessee therefore the deduction u/s 35(2AB) of Rs.13,46,18,011/- should be allowed.
Ld. Departmental Representative for the Revenue (ld.DR) appearing from the side of the Revenue relied on the orders of the subordinate authorities on this issue and requested to confirm the same.
With regard to the above ground no.3, we have heard Ld. Counsels from both the sides and perused the material available on record. We find that the assessee has claimed deduction u/s 35(2AB) amounting in all to Rs.13,46,18,011/- but since the assessee could not produce Form 3CL before the Assessing Officer, the above deduction was disallowed. Even in first appeal, Form 3CL was not furnished by the assessee, therefore, Ld. CIT(A)/NFAC confirmed the disallowance of Rs.13,46,18,011/-. We find the AO in his order has agreed in principle that whenever the assessee furnishes Form 3CL, the deduction will be allowed to the assessee in accordance with Form 3CL. Since the assessee has received Form 3CL and furnished the same before the Bench as an additional evidence, the same is admitted for consideration. Admittedly, the disallowance u/s 35(2AB) of Rs.13,46,18,011/- was made for want of Form 3CL which is now available with the assessee. Considering the totality of the facts of the case and in the interest of justice, we deem it appropriate to set-aside the order passed by Ld. CIT(A)/NFAC in this regard and remit the matter to the file of the Assessing Officer with a direction to consider this Form 3CL and pass consequential order as per fact & law. Thus, ground no.3 is allowed for statistical purposes.
In ground no.4, the assessee has challenged the action of the Assessing Officer(AO) imposing income tax on Forex Gain as business income & subsequent direction of Ld. CIT(A)/NFAC to Assessing Officer to tax Forex Gain of Rs.52,44,688/- as capital gain instead of not liable to tax being capital in nature. 14.1 Ld. AR appearing from the side of the assessee submitted before us that the assessee has sold shares to a foreign party and the capital gain arising out of this transaction was offered to tax & there is no dispute regarding capital gain arising on sale of share transaction. The sale transaction took place on 14.01.2020, however, the sale consideration in foreign currency was not received by the assessee till 31.03.2020. The assessee has re- valued the amount being receivable as on 31.03.2020 ie on the last day of the accounting year, this has resulted into gain of Rs.52,44,688/- as Forex Gain which was taxed by the AO as normal business income & in first appeal LD CIT(A) has directed to tax the same as capital Gain but in the same assessment year. It was contended before the bench that the same is not taxable being capital receipt. Alternatively it was claimed that the consideration was received in subsequent financial year i.e. on 02.04.2020 and even if the same was required to be taxed it should be taxed in Assessment Year 2021-22.
15. Ld. DR appearing from the side of the Revenue relied on the orders passed by the subordinate authorities on this issue and requested to confirm the same.
16. With regard to the above ground no.4, we have heard Ld. Counsels from both the sides and perused the material available on record. We find that LD CIT(A) has partly allowed this ground by observing as under “4.4.1. In this case, the appellant has sold Shares of Advik PT Indonesia to a foreign party. The sale took place on 14- 01-2020. The appellant has submitted that the capital gain arising from the sale of shares was duly and correctly offered to tax as per the specific provisions of Income Tax read with Rule 115. The sale price of shares of foreign company was fixed on 14-01-2020 only vide share sale agreement executed. The appellant has submitted that the receivables were required to be restated in view of accounting standards as the sale price was receivable as on 31-03-2020 and a gain of Rs.52,44,688/- arose. Consideration was finally received by the appellant company on 02.04.2020. The appellant has contended that such forex gain does not arise directly out of the sale of investment, but it is arising out from the sale price receivable and the appellant has considered capital receipt/capital account traneaction. However the AD hasi gani respect of the business income of the appellant. 4.4.2. On examination of the facts of the case, it is observed that the appellant has considered the sale of Advik PT Indonesia to a foreign party as capital in nature and The capital pain arising out of this transaction was offered to tax. The basis of exchange rate was considered as on 14.01.2020. However, the sale consideration was not received by the appellant till 31.03.2020. This has resulted into gain of Rs.52.44 888-as the appellant has revalued the sale consideration to be received as on 31.03.2020, in is observed in this case that the main issue relates to taxation of pain on foreign exchange at the last day of the previous year. The appellant has revalued the amount receivable from the foreign party on a/c of sale of shares and recognised the gain of Rs. 52,44,688/- by following ICDS-VI but claimed that it is not taxable being a capital receipt. This issue has been examined and it is seen that the appellant has rightly followed the ICDS-VI in recognising the forex gain as on last day of the previous year but failed to offer it as income as per clause 5(10 of the same ICDS, which is as under:- "Recognition of Exchange Differences 5. (i) In respect of monetary items, exchange differences arising on the settlement thereof or on conversion thereof at last day of the previous year shall be recognised as income or as expense in that previous year. (ii) in respect of non-monetary items, exchange differences arising on conversion thereof at the last day of the previous year shall not be expense in that previous year shall not be recognised as income or as expense in that previous year.” Further, it is seen that there is a specific provision in the Act, which prescribes that any income or loss arising on account of any change in foreign exchange rates shall be treated as income or loss. The relevant provision is reproduced herewith: "Taxation of foreign exchange fluctuation. 43AA. (1) Subject to the provisions of section 43A, any gain or loss arising on account of any change in foreign exchange rates shall be treated as income or loss, as the case may be, and such gain or loss shall be computed in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145.
(2) For the purposes of sub-section (1), gain or loss arising on account of the effects of change in foreign exchange rates shall be in respect of all foreign currency transactions, including those relating to- (i) monetary items and non-monetary items (ii) transaction of financial statements of foreign operations; (iii) forward exchange contracts; (iv) foreign currency translation reserves.” Plain reading of the provision of ICDS-VI and Income Tax Act, it is seen that there is similarity in the provision for taxation of loss or gain on foreign exchange. After considering the above discussion, I am of the considered view that the forex gain of Rs. 52.44,688/-on transfer/sale of shares is taxable in the hands of the appellant in the present assessment year. However, I am also of the view that this amount is to be considered as capital gain on transfer/sale of shares instead of business income because the transaction relates to sale of shares and does not relate to the normal business transaction. Thus, this ground of appeal is hereby partly allowed. 16.1 In this regard we find that a special section i.e.43AA was inserted in the statute book w.e.f 01-04-2017 which deals with taxation of foreign exchange fluctuation and reads as under : Taxation of foreign exchange fluctuation. 43AA.(1) Subject to the provisions of section 43A, any gain or loss arising on account of any change in foreign exchange rates shall be treated as income or loss, as the case may be, and such gain or loss shall be computed in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145.
(2) For the purposes of sub-section (1), gain or loss arising on account of the effects of change in foreign exchange rates shall be in respect of all foreign currency transactions, including those relating to— (i) monetary items and non-monetary items; (ii) translation of financial statements of foreign operations; (iii) forward exchange contracts; (iv) foreign currency translation reserves. 16.2 We find this section has already been considered by Ld.CIT(A). This section talks about ICDS (Income Computation & Disclosure Standards) as notified u/s.145(2) of the IT Act. The applicable/ relevant ICDS VI reads as under : F. Income Computation and Disclosure Standard VI relating to the effects of changes in foreign exchange rates Preamble This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" and not for the purpose of maintenance of books of account. In the case of conflict between the provisions of the Income-tax Act, 1961 ('the Act') and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent. Scope 1. This Income Computation and Disclosure Standard deals with: (a) treatment of transactions in foreign currencies; (b) translating the financial statements of foreign operations; (c) treatment of foreign currency transactions in the nature of forward exchange contracts. Definitions 2. (1) The following terms are used in this Income Computation and Disclosure Standard with the meanings specified:
(a) "Average rate" is the mean of the exchange rates in force during a period. (b) "Closing rate" is the exchange rate at the last day of the previous year. (c) "Exchange difference" is the difference resulting from reporting the same number of units of a foreign currency in the reporting currency of a person at different exchange rates. (d) "Exchange rate" is the ratio for exchange of two currencies. (e) "Foreign currency" is a currency other than the reporting currency of a person. (f) "Foreign operations of a person" is a branch, by whatever name called, of that person, the activities of which are based or conducted in a country other than India. (g) "Foreign currency transaction" is a transaction which is denominated in or requires settlement in a foreign currency, including transactions arising when a person:— (i) buys or sells goods or services whose price is denominated in a foreign currency; or (ii) borrows or lends funds when the amounts payable or receivable are denominated in a foreign currency; or (iii) becomes a party to an unperformed forward exchange contract; or (iv) otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a foreign currency. (h) "Forward exchange contract" means an agreement to exchange different currencies at a forward rate, and includes a foreign currency option contract or another financial instrument of a similar nature; (i) "Forward rate" is the specified exchange rate for exchange of two Currencies at a specified future date; (j) "Indian currency" shall have the meaning as assigned to it in section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999); (k) "Monetary items" are money held and assets to be received or liabilities to be paid in fixed or determinable amounts of money. Cash, receivables, and payables are examples of monetary items; (l) "Non-monetary items" are assets and liabilities other than monetary items. Fixed assets, inventories, and investments in equity shares are examples of non-monetary items; (m) "Reporting currency" means Indian currency except for foreign operations where it shall mean currency of the country where the operations are carried out. (2) Words and expressions used and not defined in this Income Computation and Disclosure Standard but defined in the Act shall have the meaning assigned to them in the Act. Foreign Currency Transactions Initial Recognition 3(1) A foreign currency transaction shall be recorded, on initial recognition in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. (2) An average rate for a week or a month that approximates the actual rate at the date of the transaction may be used for all transaction in each foreign currency occurring during that period. If the exchange rate fluctuates significantly, the actual rate at the date of the transaction shall be used. Conversion at Last Date of Previous Year 4. At last day of each previous year:— (a) foreign currency monetary items shall be converted into reporting currency by applying the closing rate; (b) where the closing rate does not reflect with reasonable accuracy, the amount in reporting currency that is likely to be realised from or required to disburse, a foreign currency monetary item owing to restriction on remittances or the closing rate being unrealistic and it is not possible to effect an exchange of currencies at that rate, then the relevant monetary item shall be reported in the reporting currency at the amount which is likely to be realised from or required to disburse such item at the last date of the previous year; and (c) non-monetary items in a foreign currency shall be converted into reporting currency by using the exchange rate at the date of the transaction. (d) non-monetary item being inventory which is carried at net realisable value denominated in a foreign currency shall be reported using the exchange rate that existed when such value was determined. Recognition of Exchange Differences 5. (i) In respect of monetary items, exchange differences arising on the settlement thereof or on conversion thereof at last day of the previous year shall be recognised as income or as expense in that previous year. (ii) In respect of non-monetary items, exchange differences arising on conversion thereof at the last day of the previous year shall not be recognised as income or as expense in that previous year. Exceptions to Paragraphs 3, 4 and 5 6. Notwithstanding anything contained in paragraphs 3, 4 and 5; initial recognition, conversion and recognition of exchange difference shall be subject to provisions of section 43A of the Act or Rule 115 of Income-tax Rules, 1962, as the case may be. Financial Statements of Foreign Operations 7. The financial statements of a foreign operation shall be translated using the principles and procedures in paragraphs 3 to 6 as if the transactions of the foreign operation had been those of the person himself. Forward Exchange Contracts 8. (1) Any premium or discount arising at the inception of a forward exchange contract shall be amortised as expense or income over the life of the contract. Exchange differences on such a contract shall be recognised as income or as expense in the previous year in which the exchange rates change. Any profit or loss arising on cancellation or renewal shall be recognised as income or as expense for the previous year. (2) The provisions of sub-para (1) shall apply provided that the contract: (a) is not intended for trading or speculation purposes; and (b) is entered into to establish the amount of the reporting currency required or available at the settlement date of the transaction. (3) The provisions of sub-para (1) shall not apply to the contract that is entered into to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction. For this purpose, firm commitment, shall not include assets and liabilities existing at the end of the previous year. (4) The premium or discount that arises on the contract is measured by the difference between the exchange rate at the date of the inception of the contract and the forward rate specified in the [R] contract. Exchange difference on the contract is the difference between: (a) the foreign currency amount of the contract translated at the exchange rate at the last day of the previous year, or the settlement date where the transaction is settled during the previous year; and (b) the same foreign currency amount translated at the date of inception of the contract or the last day of the immediately preceding previous year, whichever is later. (5) Premium, discount or exchange difference on contracts that are intended for trading or speculation purposes, or that are entered into to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction shall be recognised at the time of settlement. Transitional Provisions 9. (1) All foreign currency transactions undertaken on or after 1st day of April, 2016 shall be recognised in accordance with the provisions of this standard. (2) Exchange differences arising in respect of monetary items or non- monetary items, on the settlement thereof during the previous year commencing on the 1st day of April, 2016 or on conversion thereof at the last day of the previous year commencing on the 1st day of April, 2016 , shall be recognised in accordance with the provisions of this standard after taking into account the amount recognised on the last day of the previous year ending on the 31st March, 2016 for an item, if any, which is carried forward from said previous year. (3) The financial statements of foreign operations for the previous year commencing on the 1st day of April, 2016 shall be translated using the principles and procedures specified in this standard after taking into account the amount recognised on the last day of the previous year ending on the 31st March, 2016 for an item, if any, which is carried forward from said previous year. (4) All forward exchange contracts existing on the 1st day of April, 2016 or entered on or after 1st day of April, 2016 shall be dealt with in accordance with the provisions of this standard after taking into account the income or expenses, if any, recognised in respect of said contracts for the previous year ending on or before the 31st March, 2016.
16.3 From the perusal of above ICDS VI clause 4(a), we are of the considered opinion that the assesse has rightly converted the receivable foreign currency on last day of the previous year which resulted into forex gain of Rs 52,44,688/- & as per ICDS VI clause 5(i) the assesse was also required to disclose the forex gain of Rs.52,44,688/- as income of the previous year which he failed to disclose. To this extent alone, we agree with the finding of Ld.CIT(A) wherein he holds that the forex gain is taxable during the period under consideration but we do not find favour with the second part of his finding wherein he directs to tax the impugned forex gain as capital gain income for which the Revenue is in appeal. We find that ICDS VI is applicable to Income from Profits & gains of business or profession & to Income from other sources only but does not apply to Income from capital Gain. We further find that the AO in his order has categorically stated that the transaction of sale of share (related to capital Gain) was over in the month of January, 2020 when the shares were sold, but thereafter when the receivable amount was converted on the last day of the previous year the resultant forex gain cannot be said to be related with Capital gain transaction but certainly related to the normal [R] business transaction or income from other sources. Accordingly we dismiss the ground of appeal raised by the assesse in this regard. This finding also decides the Ground No 4 of revenue’s appeal.
17. In the result, the appeal filed by the assessee in is partly allowed for statistical purposes.
18. Now, we shall take up the appeal of the Revenue in for adjudication. – By Revenue : 19. The Revenue has raised the following grounds of appeal :- “1) On the facts and circumstances of the case and in law, the ld. CIT(A) erred in directing to grant deductions claimed by the assessee u/s.801A of Rs. 2,77,33,581/- and u/s.80IC of Rs. 7,17,05,933/- which were not allowed by the AO in the computation, on the ground that no such disallowance/discussion was made in the assessment order. 2) On the facts and circumstances of the case and in law, the ld. CIT(A) erred in not exercising his powers as conferred in clause (a) of sub-section (1) of Sec.251 of the Act in respect of the issue of allowance of deductions u/s.801A & 80IC of the Income Tax Act, 1961 and decide the issue on merit. irrespective of the fact the AO had not granted the said deductions in the computation. 3) On the facts and circumstances of the case and in law, the ld. CITIA) erred in not exercising his powers as conferred in sub- section (4) of Sec.250 of the Act in respect of the claim of deductions u/s.801A & 801C of the Income Tax Act, 1961 by carrying out enquiries on the issue either by himself or through the AO, given the fact that the AO had not granted the said deductions in the computation and the case was selected for complete scrutiny.
4) On the facts and circumstances of the case and in law, the ld. CIT(A) erred in holding that the forex gain of Rs. 52,44,688/ earned by the assessee on transfer/sale of shares during the year would be taxable under the head 'capital gains' when such gains ought to have been taxed as normal income as provided in Section 43AA of the Act as was correctly done by the AO.”
20. In ground no.4, the Revenue has challenged the direction of Ld. CIT(A)/NFAC to tax the foreign gain of Rs.52,44,688/- as capital gains instead of normal income as held by the AO. In the preceding paragraphs while deciding the appeal of the assessee, we have already discussed the related issue in details & for the reasons mentioned in the above paragraphs the appeal filed by the revenue on this ground is allowed. Accordingly we set-aside the order passed by Ld. CIT(A)/NFAC on this issue and the order passed by the AO on this issue is upheld. Accordingly, this ground no.4 raised by the Revenue is allowed.
In Ground Nos.1, 2 and 3, the Revenue has challenged the direction of Ld. CIT(A)/NFAC to the Assessing Officer to allow the deduction as claimed by the assessee u/s.80IA of Rs.2,77,33,581/- and u/s 80IC of Rs.7,17,05,933/-. Ld. DR appearing from the side of the Revenue submitted before us that the order passed by Ld. CIT(A)/NFAC in this regard is unjustified.
It was submitted by Ld. DR that Ld. CIT(A)/NFAC has not conducted any enquiry before allowing the deduction u/s 80IA and 80IC as claimed by the assessee. Accordingly, it was requested by Ld. DR to confirm the disallowance made by the Assessing Officer.
Ld. AR appearing from the side of the assessee submitted before us that the deduction u/s 80IA of Rs.2,77,33,581/- and u/s 80IC of Rs.7,17,05,933/- was duly claimed by the assessee in his return of income. It was further submitted that Ld. Assessing Officer/CPC has also not made any disallowance regarding these claims. It was submitted before the Bench that the assessee is claiming these deductions since long and the deduction u/s.80IA was allowed by Ld.CIT(A)/NFAC and even by the Co-ordinate Bench of this Tribunal in other assessment years. Regarding deduction u/s.80IC, it was submitted that this deduction was also being claimed since last many years and the same was never disallowed in the past. Ld. AR further submitted that complete details with respect to these claims furnished before the Assessing Officer but he has not whispered anything about the disallowance of these claims in the assessment order. But to the surprise of the [R] assessee in the computation of income both these deductions were disallowed. It was therefore contended before the Bench that the order passed by Ld.CIT(A)/NFAC may kindly be confirmed being justified.
With regard to the above Ground Nos.1, 2, and 3 raised by the Revenue, we have heard Ld. Counsels from both the sides and perused the material available on record. In this regard, we find that Ld. CIT(A) has allowed this ground by observing as under :- “4.2.1 In this case, the appellant has claimed Rs.9,94,39,514/- as deductions under section 801A and 80IC of the Act in the ITR. The claim of deduction u/s 801A and 80IC is amounting to Rs.2.77,33,581/- and Rs.7,17,05,933/- respectively. The appellant has claimed that it has submitted complete details of all these deductions during the assessment proceedings and the AO did not raise any issue on these claims in the entire assessment proceedings. The appellant has claimed that the show cause notice issued by the AO was not having reference to any disallowance on these deductions claimed. Further, the assessment order does not state anything about disallowance on these deductions. However, the deductions were denied in the computation sheet. The appellant also stated that a rectification application dated 3.10.2022 was submitted before the AO but the AO didn't give any effect till date. 4.2.2. On examination of the facts, it is observed that the appellant had claimed 80-IA and 80-IC I the original ITR as well as revised returns and the AO didn't taken any adverse view in the assessment order with respect to these deductions. Further, it is seen that there was a disallowance of Rs. 1,11,030/- only in intimation order u/s 143(1), which also confirm that there was no denial of deduction u/s 801A and 80IC in the processing order. The appellant has raised this issue before the AO after passing of the assessment order after perusal of the computation sheet provided to it by filing a rectification order. In view of the above facts, I don't find any reason for denial of deduction u/s 801A & 80IC in the computation sheet and [R] the time limit for passing the rectification order has already been passed. Therefore, AO is directed to allow these deductions in computation sheet of tax and revised the tax liability accordingly. Thus, this ground of appeal
is hereby allowed.”
24. In this regard we find that LD CIT(A) has appreciated the fact that the Assessing Officer has not discussed anything about the disallowance of these deductions in his assessment order. However, from the perusal of computation sheet annexed with the assessment order, these disallowances are apparent. It was the contention of Ld. AR that in the notice u/s 143(2) a specific query was raised by the Assessing Officer with respect to deduction claimed u/s 80IA and 80IC and in reply to the same, the assessee has furnished complete details and explanation but the same was never discussed in the assessment order. The above notice u/s 143(2) is placed before us in the paper book and from its perusal we find that a specific query was made by the Assessing Officer & after receiving the reply no adverse inference was made by the AO. We find force in the arguments of Ld. AR that the assessee answered the query raised with regard to deduction claimed u/s 80IA and 80IC and the Assessing Officer without raising any further queries disallowed these deductions without discussing in [R] the assessment order, which is unjustified. We further find that this is not the first year when these deductions were claimed by the assessee instead these deductions were claimed by the assessee since last many years i.e. starting from assessment year 2009-10 onwards. The deduction u/s 80IA was also allowed by Ld. CIT(A)/NFAC and Co-ordinate bench of this Tribunal in preceding assessment years and the deduction u/s 80IC was also allowed by the Assessing Officer in the preceding assessment years. Accordingly, considering the totality of the facts of the case and in view of the detailed reasoning given by Ld. CIT(A) on this issue, we are of the considered opinion that there is no infirmity in the order passed by Ld. CIT(A)/NFAC. Accordingly, we do not hesitate to confirm the same. Thus, ground nos.1, 2 and 3 raised by the Revenue are dismissed.
In the result, the cross appeal filed by the Revenue in is partly allowed.
To sum up, the appeal filed by the Assessee in is partly allowed for statistical purposes and