R Systems International Ltd., New Delhi V. ACIT, New Delhi

ITA 4247/DEL/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 90998 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 7 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-04-2015
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: F
• Next Hearing Date: 07-04-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 22-09-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: VIKRAM SAHAY
• Keywords: Capital asset; Business income; Depreciation; Opportunity of being heard

Judgement Text

IN TH E INCOME TAX APPELLATE TRIBUNAL DELHI BENCH F : NEW DELHI BEFORE SHRI G .C. GUPTA , HON BLE VICE PRESIDENT AND SHRI I NTURI RAMA RAO , ACCOUNTANT MEMBER ITA NO. 4247 /DEL/201 1 ASSESSMENT YEAR 200 7 - 0 8 R SYSTEMS INTERNATIONAL LTD. VS. ACIT, CIRCLE 15( 1), B - 104A, GREATER KAILASH - I, NEW DELHI. NEW DELHI (PAN AABCR 9541B ) ITA NO. 4 9 49 /DEL/201 1 ASSESSMENT YEAR 200 8 - 09 DCIT, CIRCLE - 15(1), VS. R SYSTEMS INTERNATIONAL LTD. C.R. BUILDING, I.P. ESTATE, B - 104A, GREATER KAILASH - I, NEW DELHI. NEW DEL HI - 48 (PAN AABCR 9541B) ( APPELLANT) (RESPONDENT) DATE OF HEARING : 0 7 .0 4 .2015 DATE OF PRONOUNCEMENT : 24 . 0 4 .2015 APPELLANT BY : S RI SATYEN SETHI, ADVOCATE AND SRI A.T. PANDA, ADVOCATE RESPONDENT BY : SHRI VIKRAM SA HAY , SR. DR ORDER PER SHRI I NTURI RAMA RAO , A M : 1. THESE ARE CROSS APPEALS FILED BY THE ASSESSEE AND REVENUE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX(APPEALS) - XVIII, NEW DELHI DATED 27.07.2011 FOR THE ASSESSMENT YEARS 2007 - 08 & 2008 - 09. THE APPEAL BEARING ITA NO. 4247/DEL/2011 BY THE ASSESSEE AND THE APPEAL BEARING ITA NO .4949/DEL/2011 BY THE REVENUE. IT A NO S . 4247&4 9 49 /DEL /201 1 2 2. FIRST WE SHALL TAKE UP ITA NO .4949/DEL/2011 APPEAL FILED BY THE REVENUE . THE ASSESSEE IS A COMPANY INCORPORATED THE PROVISIONS OF COMPANI ES ACT. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND IT ENABLED SERVICES FOR THE AY 2007 - 08. THE ASSESSEE COMPANY FILED THE RETURN OF INCOME ON 30.10.2007 , DECLARING A TOTAL INCOME OF RS.4,96,43,190/ - . AFTER PROCESSING THE RE TURN OF INCOME U/S 143(1) OF THE ACT, THE CASE WAS SELECTED FOR SCRUTINY ASSESSMENT AND FINALLY THE ASSESSMENT WAS COMPLETED U/S 143 (3) OF THE ACT , VIDE ORDER DATED 16.12.2010 AT A TOTAL INCOME OF RS.5,65,96,889/ - . THE DISPARITY BETWEEN THE RETURN ED INCOME AND ASSESSED INCOME IS O N ACCOUNT OF MAKING ADDITION OF RS.66,23,602/ - ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION IN RESPECT OF THE FOREIGN CURRENCY TRANSACTIONS AT THE END OF THE ACCOUNTING YEAR . THE ASSESSEE FURNISHED WORKING OF THE DIFFERENCE ARISING O UT OF FOREIGN EXCHANGE FLUCTUATION S AS FOLLOWS: - CAPITAL NATURE REALISED REINSTATEMENT TOTAL RSYSTEMS SINGAPORE LOAN ACCOUNT 3,99,806 3,99,806 SCHEDULE - 4 (PAGE 7) EC NET LOAN ACCOUNT 1,27,440 23,22,704 24,50,144 SCHEDULE - II (PAGE 12) DEFERRED COMPENSA TION TO R SYSTEMS SOLUTIONS INC(WEB CONVERSE) SHAREHOLDERS (49,214) 48,84,182 48,34,968 SCHEDULE - 12 (PAGE 12 R/W 29 & 30) DEFERRED COMPENSATION TO EC NET SHAREHOLDERS - (10,61,316) (10,61,316) SCHEDULE - 12 (PAGE 12 R/W 29 & 30) TOTAL 78,226 65,45,376 66, 23,602 IT A NO S . 4247&4 9 49 /DEL /201 1 3 REVENUE NATURE REALISED REINSTATEMENT TOTAL EXCHANGE FLUCTUATION ON DEBTORS AND OTHER TRADE ASSETS/LIABILITIES 10,50,897 (46,988) 10,03,909 BANK ACCOUNTS (15,94,111) (3,39,694) (19,33,805) EXCHANGE FLUCTUATION ON DEBTORS AND OTHER TRADE ASS ETS/LIABILITIES (25,82,304) (1,789,455) (43,71,759) BANK ACCOUNTS 42,53,700 (2,026,152) 22,27,548 TOTAL 11,28,182 (4,202,289) (30,74,107) NET FOREIGN EXCHANGE FLUCTUATION AS PER PROFIT & LOSS A/C 12,06,408 23,43,087 35,49,495 THE ASSESSING OFFICER H AD NOT ACCEPTED THE CONTENTION OF THE ASSESSEE THAT NET AMOUNT OF RS.35,49,495/ - SHOULD NOT BE ADDED BACK IN AS MUCH AS FOREIGN EXCHANGE FLUCTUATION HAD ARISEN ON CAPITAL ITEMS. HOWEVER, THE ASSESSING OFFICER HELD THAT THE GROSS AMOUNT OF RS.66,23,602/ - SH OULD BE BROUGHT TO TAX. THE ASSESSING OFFICER HAD ALSO DISAGREED WITH THE CONTENTION OF THE ASSESSEE THAT THE FOREIGN EXCHANGE GAINS MADE ON ACCOUNT OF RESTATEMENT OF THE FOREIGN CURRENCY TRANSACTION AS AT END OF ACCOUNTING YEAR SHOULD NOT BE TAXED. THE LD . ASSESSING OFFICER HELD THAT THERE WAS NO FIRST DEGREE NEXUS BETWEEN THE INCOME OF FOREIGN EXCHANGE FLUCTUATION GAIN ON REINSTATEMENT/REALIZATION OF ECB LOANS ETC. AND PROFIT FROM EXPORT OF COMPUTER SOFTWARE. BEING AGGRIEVED THE ASSESSEE PREFERRED AN APPE AL BEFORE THE CIT(A) - XVIII, NEW DELHI WHO VIDE ORDER DATED 27.07.2011 HAD PARTLY ALLOWED THE CLAIM BY HOLDING THAT THE GAINS MADE OUT OF RESTATEMENT OF FOREIGN CURRENCY TRANSACTION (WITHOUT ACTUAL PAYMENT) SHOULD NOT BE BROUGHT TO TAX IT A NO S . 4247&4 9 49 /DEL /201 1 4 AS IT REPRESENTS ONLY NOTIONAL PROFIT. HOWEVER, HE FURTHER HELD THAT THE GAINS MADE OUT OF FOREIGN EXCHANGE FLUCTUATION IN THE CASE OF ACTUAL REPAYMENT SHOULD ALONE BE BROUGHT TO TAX. AGGRIEVED BY THIS ORDER, THE REVENUE COME UP WITH THE PRESENT APPEAL BEFORE US RAISING THE FO LLOWING GROUNDS OF APPEAL: 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS.65,45,376/ - MADE BY THE AO ON ACCOUNT OF BUSINESS INCOME. 2. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN NOT APPRECIATING THE FACT THAT THE AM OUNT OF RS.65,45,376/ - IS BUSINESS INCOME OF THE ASSESSEE OTHER THAN INCOME ELIGIBLE FOR CLAIM OF DEDUCTION U/S 10A OF THE ACT. 3. THAT THE APPELLANT CRAVES TO BE ALLOWED TO ADD ANY FRESH GROUNDS OF APPEAL AND/OR DELETED OR AMEND ANY OF THE GROUND OF APPEA L. 3 . THE LD. DR HAD VEHEMENTLY ARGUED THAT THE AMOUNT OF RS.65,45,376/ - SHOULD BE BROUGHT TO TAX SINCE IT IS NOTHING BUT BUSINESS INCOME OF THE ASSESSEE AND HE FURTHER ARGUED THE CIT(A) WITHOUT EXAMINING THE MATTER IN DETAIL WRONGLY HELD THAT THE AMOUNT SHOULD NOT BE BROUGHT TO TAX ON NOTIONAL BASIS. ON THE OTHER HAND, LD. AR HAD RELIED ON THE ORDERS OF THE CIT(A) AND CONTENDED THAT NO PROFITS CAN BE TAXED AS NOTIONAL BASIS AND ALSO SUBMITTED THAT THE FOREIGN EXCHANGE FLUCTUATIONS HAD ARISEN ONLY ON CAPI TAL ITEMS. 4 . WE HEARD THE RIVAL PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE ISSUE INVOLVED IN THE APPEAL IS WHETHER THE DIFFERENCE AMOUNT ARISING OUT OF RESTATEMENT OF FOREIGN CURRENCY TRANSACTIONS TAKING INTO ACCOUNT THE PREVAILING EXCHANG E RATE AS ON THE END OF ACCOUNTING YEAR IS LIABLE TO TAX OR NOT. THE HON BLE IT A NO S . 4247&4 9 49 /DEL /201 1 5 SUPREME COURT IN THE CASE OF SUTLEJ COTTON MILLS LTD. VS. CIT REPORTED IN [1979] 116 ITR 1 HAS HELD AS UNDER: - (PAGE 13) THE LAW MAY, THEREFORE, NOW BE TAKEN TO BE WELL SETTLED THAT WHERE PROFIT OR LOSS ARISES TO AN ASSESSEE ON ACCOUNT OF APPRECIATION OR DEPRECIATION IN THE VALUE OF FOREIGN CURRENCY HELD BY IT, ON CONVERSION INTO ANOTHER CURRENCY, SUCH PROFIT OR LOSS WOULD ORDINARILY BE A TRADING PROFIT OR LOSS IF THE FOREIGN CUR RENCY IS HELD BY THE ASSESSEE ON REVENUE ACCOUNT OR AS A TRADING ASSET OR AS A PART OF CIRCULATING CAPITAL EMBARKED IN THE BUSINESS. BUT, IF ON THE OTHER HAND, THE FOREIGN CURRENCY IS HELD AS A CAPITAL ASSET OR AS FIXED CAPITAL, SUCH PROFIT OR LOSS WOULD B E OF CAPITAL NATURE. THE RATIO OF THE ABOVE DECISION IS WHETHER THE GAIN OR LOSS SHOULD BE BROUGHT TO TAX OR ALLOWED AS DEDUCTION DEPENDS UPON WHETHER THE FOREIGN CURRENCY TRANSACTIONS WERE CARRIED ON ACCOUNT OF CAPITAL OR REVENUE ITEMS. IF THE FOREIGN C URRENCY TRANSACTIONS ARE UNDERTAKEN ON CAPITAL ACCOUNT, THE GAIN MADE OUT OF SUCH TRANSACTION IS OUTSIDE AMBIT OF TAXATION, OF COURSE SUBJECT TO THE APPLICATION OF PROVISIONS OF SECTION 43A OF THE ACT. IF THE TRANSACTIONS UNDERTAKEN ARE ON ACCOUNT OF REVEN UE ITEMS , THE GAIN IS CLEARLY TAXABLE AND SO THE LOSS ALSO IS CLEARLY ALLOWABLE. THE ASSESSEE EXCEPT MAKING BALD ASSERTION THAT THE TRANSACTIONS WERE UNDERTAKEN ON ACCOUNT OF CAPITAL ITEMS NO EVIDENCE WAS BROUGHT ON RECORD TO ESTABLISH THAT THE FOREIGN CUR RENCY TRANSACTIONS WERE UNDERTAKEN ON CAPITAL ITEMS. THE LD. ASSESSING OFFICER ALSO HAD FAILED TO UNDERTAKE THIS EXERCISE. THE HON BLE SUPREME COURT IN THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA PVT. LTD. REPORTED IN [2009] 312 ITR 254 (SC) HAD CLEARLY H ELD THAT THE ACTUAL PAYMENT WAS NOT A CONDITION PRECEDENT FOR MAKING ADJUSTMENT IN RESPECT OF FOREIGN CURRENCY IT A NO S . 4247&4 9 49 /DEL /201 1 6 TRANSACTIONS AS THE END OF THE CLOSING YEAR. WE ARE THEREFORE, UNABLE TO CONCUR OR AGREE WITH THE VIEW OF THE LEARNED CIT(APPEALS), THAT LIABILIT Y COULD ARISE ONLY WHEN THE CONTRACT WOULD HAVE MATURED, AS SUCH A STAND IS TOTALLY DIVORCED FROM THE ACCOUNTING PRINCIPLES AND IS IN VARIANCE WITH THE PRINCIPLE UPHELD BY THE HON BLE APEX COURT IN THE CASE WOODWARD GOVERNOR INDIA (P.) LTD. (SUPRA). IT CAN ALSO BE SEEN THAT THE DECISION IN THE CASE OF WOODWARD GOVERNOR INDIA (P.) LTD. (SUPRA) HAS BEEN RENDERED WITH REGARD TO ITEMS IN THE REVENUE ACCOUNT AND CAPITAL ACCOUNT. 5 . IN THE LIGHT OF OUR ABOVE FINDINGS, WE RESTORE THE MATTER TO THE FILE OF AO WIT H THE DIRECTION THAT TO RE - DO THE ASSESSMENT KEEPING IN VIEW THE PRINCIPLES ENUNCIATED ABOVE AFTER AFFORDING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. ACCORDINGLY, THE APPEAL OF THE REVENUE IS DISPOSED OF. 6 . IN THE RESULT, APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 7 . WE SHALL NOW TAKE UP THE APPEAL FILED BY THE ASSESSEE IN ITA NO THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1.WHETHER UNDER THE FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) JU STIFIED IN UPHOLDING THE CONTENTION OF THE AO IN CONFIRMING THE ADDITION OF RS.78,226/ - ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION (CAPITAL NATURE) REALIZED AND CHARGEABLE TO TAX, THEREBY DENYING THE CLAIM OF DEDUCTION U/S 10A OF THE ACT. 2. WHETHER UNDER THE FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) WAS WITHIN THE AMBIT OF LAW IN IGNORING THE PROVISION OF SEC.43A OF THE ACT; THEREBY, CONFIRMING THE ADDITION OF RS.78,226/ - ON ACCOUNT OF CAPITAL GAIN DUE TO FOREIGN EXCHANGE FLUCT UATION. THE ARBITRARY, UNCALLED FOR AND UNJUSTIFIED ACTION OF THE LEARNED CIT(A) IS LIABLE AND URGED TO BE CANCELLED. IT A NO S . 4247&4 9 49 /DEL /201 1 7 8 . IN THIS APPEAL, ASSESSEE IS CHALLENGING THE FINDING OF LD. CIT(A) THAT THE GAINS OF RS.78,226/ - ARISING OUT OF FOREIGN EXCHANGE FLUC TUATIONS IN RESPECT OF ITEMS WHICH HAVE BEEN ACTUALLY PAID. SINCE IN THE REVENUE APPEAL, WE REMITTED THE MATTER TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE THE ISSUE IN DETAIL. THE GROUNDS OF APPEAL DO NOT SURVIVE. HENCE, THE APPEAL FILED BY THE ASSESS EE IS DISMISSED. 9 . IN THE RESULT, APPEAL FILED BY THE REVENUE IS PARTLY ALLOWED AND APPEAL OF THE ASSESSEE IS DISMISSED. TH E ORDER PRONOUNCED IN THE OPEN COURT ON 2 4 T H APRIL , 201 5 . SD/ - SD/ - ( G.C. GUPTA ) ( I NTURI RAMA RAO ) V ICE PRESIDENT ACCOUNTANT MEMBER DATED: 2 4 TH APRIL , 201 5 . AKS/ - DCOM COPY FORWARDED T O 1 . APPELLANT 2 . RESPONDENT 3 . CIT 4 . CIT(A) 5 . DR ASST . REGISTRAR, ITAT, NEW DELHI