COMMISSIONER OF INCOME TAX vs. JAGATJIT INDUSTRIES LTD.

Whether Reporters of Local newspapers may be allowed to see the Judgment? 2. To be referred to the Reporter or not? 3. Whether the Judgment should be reported in the Digest?

Common question which arises for consideration in all these appeals filed by the Revenue is as to whether the receipt on account of exchange rate fluctuation of foreign exchange receipt is a capital receipt or revenue receipt irrespective of the source of the said income. An alternate plea was also taken by the Revenue to the effect that 22% of the funds were utilized for working capital, which is in a nature of circulating capital and therefore, 22% of the gain on account of exchange rate fluctuation is to be held as revenue receipt.

The assessee is the same in all these appeals and the aforesaid issue arose in various Assessment Years, under the following facts and circumstances.

The assessee is a multi-product company engaged in the business of alcoholic beverages, malted milk food, dairy products, etc. During the assessment year 1997-98, the assessee company had issued 2,52,10,000 equity shares overseas by way of GDR and collected USD 1,57,17,000 as share capital. It was equivalent to Rs.55 Crores (net of 2009:DHC:4106-DB

As per the facts emerging from ITA No. 369/2007, in the relevant assessment year, there was a fluctuation gain amounting to 2009:DHC:4106-DB

Both the Revenue as well as the assessee preferred appeals against the aforesaid order to the Income Tax Appellate Tribunal (hereinafter referred to as ‘the Tribunal’). The Tribunal has dismissed the appeal of the Revenue, but allowed the appeal preferred by the assessee. Effect is to delete the entire gain from the income treating the same as capital receipt. The Tribunal has held that this issue under the controversy is covered by the judgment of Madras High Court in the case of EID Parry Ltd. Vs. CIT, 174 ITR 11, wherein it was held that if foreign currency is held as capital asset or as fixed capital, profit or 2009:DHC:4106-DB

It is, in these circumstances, the order of the Tribunal is challenged by the Revenue. According to the Revenue, following questions of law need to be determined: a) Whether the Income Tax Appellate Tribunal was correct in law in directing the Assessing Officer to treat the entire gain on account of exchange rate fluctuation as arisen to the assessee is not liable to tax? b) Whether the order of the Income Tax Appellate Tribunal is perverse as it has ignored the relevant facts on record as well as ignored the relevant provisions of law?

It would be relevant to point out at this stage that initially for the Assessment Year 1997-98, the entire gain on the foreign exchange fluctuation was treated by the Assessing Officer as capital gain and, therefore, the amount was not added to the income of the assessee. However, this order was revised by the Commissioner of Income Tax in exercise of his powers under Section 263 of the Income Tax Act, pointing out that part of the share capital raised was to be utilized for working capital, which aspect was not considered by the Assessing 2009:DHC:4106-DB

Insofar as the orders of the two authorities below treating gain on exchange rate fluctuation at 79% is concerned, it was not seriously debated or disputed by the learned counsel for the Revenue. Even otherwise, up to this stage there is hardly any issue inasmuch as the assessee had raised share capital by issuing equity shares overseas by way of GDR and collected the money in US Dollars. This was done with the prior permission of the Ministry of Finance, Government of India. Since the money thus raised represented share capital in foreign exchange, the gain on account of exchange rate fluctuations was attributable to the said share capital, such a gain would obviously be a capital gain.

The only argument which, in these circumstances, needs consideration is as to whether 21% of the said gain should be treated as revenue receipt because of the reason that 21% of the capital was to be utilized for general corporate uses. In this respect, it is difficult to accept the submission of the learned counsel for the appellant. It is 2009:DHC:4106-DB

Learned Tribunal has rightly held that relevant consideration would be to see the source of funds under which it was held and not the ultimate utilization of the funds, relying upon the following judgments: i) Commissioner of Sales Tax, Delhi v. The Motor & General Finance Ltd., 94 ITR 582. ii) The Travencore Rubber & Tea Co. Ltd. v. C.I.T., T i d 243 ITR 158 2009:DHC:4106-DB

The leaned counsel for the Revenue had relied upon the judgment of the Supreme Court in the case of Sutlej Cotton Mills Limited v. Commissioner of Income-tax Calcutta, 116 ITR 1 and Sahney Steel and Press Works Ltd., Hyderabad etc. v. Commissioner of Income- tax, Andhra Pradesh-I, Hyderabad 228 ITR 253. These are not applicable in the present case inasmuch as in the case of Sutlej Cotton Mills Limited (supra), profits were earned by the company in Pakistan. There was devaluation of rupee by Pakistan and when subsequently those profits were remitted to India, there was loss due to exchange fluctuation. The question was as to whether such a loss was business loss or not. The Supreme Court opined that this question as to whether the loss suffered by the appellant was a trading loss or a capital loss could not be answered unless it was first determined whether the amounts were held by the appellant on capital account or on revenue account. This judgment rather goes against the revenue inasmuch as in the present case, funds kept in UK were raised by issuing capital, thus it was held on capital account. Applying this test given due to exchange fluctuation would be capital gain. Likewise, in Sahney Steel and Press Works Ltd., Hyderabad (supra), the amounts received were production incentive and operational subsidy and not capital subsidy and therefore, the subsidy payments were treated as revenue and not capital. 2009:DHC:4106-DB

It is also to be kept in mind that in the present case even the utilization of the share capital in the ratio of 79% : 21% was as per the approval granted by the Ministry of Finance, Government of India. We thus, decide the aforesaid questions against the Revenue and in favour of the assessee. As a consequence, all these appeals are dismissed with costs. (A.K. SIKRI) JUDGE