COMMISSIONER OF INCOME TAX vs. JAGATJIT INDUSTRIES LTD.

A.K. SIKRI, J.

- 1. 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. - 2. The assessee is the same in all these appeals and the aforesaid issue arose in various Assessment Years, under the following facts and circumstances. - 3. 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 issue expenses) at the conversion rate of RS.35/- per dollar. The



- 6. 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?

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 Officer and matter was remanded back to the AO for fresh consideration. Thereupon, the AO passed the orders treating 78%

2009:DHC:13395-DB


Even if money is raised by issuance of equity share domestically, un money thus collected as share capital is treated as capital receipt. Obviously, for setting up or for expansion of business, part of the said share capital raised can be utilized for acquiring assets and from other part, the other expenses can be met treating the same as 'working capital'. Merely because the part of the share capital is used as 'working capital' that has never been treated as revenue receipt. Once this 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 such share capital 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.

- 10. 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., Trivandrum, 243 ITR 158. - 11. The leaned counsel for the Revenue had relied upon the judgment of



approval granted by the Ministry of Finance, Government of Inuia.

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) IUDGE

(VALMIKI J. MEHTA)

September 25, 2009.