M/s R. Systems International Ltd., New Delhi V. DCIT, New Delhi

ITA 6173/DEL/2015

• Counselvise Citation: [2021] 109 COUNSELVISE.COM (IT) 2759 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 3 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-02-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 13-02-2020
• Assessment Year: 2010-2011
• Appeal Filed On: 20-11-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ATIGU AHMED
• Assessee Lawyers: SATYEN SETHI ADV SH A T PANDA
• Keywords: Business income; Transfer pricing; Capital receipt

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH F: NEW DELHI (THROUGH VIDEO CONFERENCING) BEFORE, SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA NO.6173/DEL/2015 (ASSESSMENT YEAR 2010-11) R. SYSTEM INTERNATIONAL LTD., B-104 A, GREATER KAILASH-I, NEW DELHI. PANAAGBCR 9541B VS. DY. CIT, CIRCLE-15(1), NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY SH. SATYEN SETHI, ADV. SH. AT PANDA, ADV. RESPONDENT BY SH. ATIGU AHMED, SR. DR DATE OF HEARING 01.12.2020 DATE OF PRONOUNCEMENT 25.02.2021 ORDER PER SUDHANSHU SRIVASTAVA, JM: THIS APPEAL IS PREFERRED BY THE ASSESSEE AGAINST OR DER DATED 27.08.2015 PASSED BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-44, NEW DELHI {CIT(A)} FOR ASSESSMEN T YEAR 2010-11. 2 ITA NO.6173/DEL/2017 R. SYSTEMS INTERNATIONAL LTD., V S. DCIT 2.0 THE BRIEF FACTS OF THE CASE ARE THAT TH E ASSESSEE IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND INFORMATION TECHNOLOGY ENABLED SERVICES. THE RETURN FOR THE YEA R UNDER CONSIDERATION WAS FILED DECLARING INCOME AT RS.1,88, 91,468/-. THE RETURN WAS SUBSEQUENTLY REVISED DECLARING LOSS OF RS .2,39,69,400/-. THE ASSESSMENT WAS COMPLETED AT A LOSS RS.1,06,39,64 5/-. IN COMPUTING THE INCOME, THE ASSESSING OFFICER (AO) RE STRICTED THE ASSESSEES CLAIM OF DEDUCTION U/S 10A OF THE INCOME TAX ACT, 1961 (HEREIN AFTER CALLED THE ACT). THE DEDUCTION U/S 10A WAS ALLOWED AT INCOME OF RS.25,81,03,269/-, AS AGAINST THE CLAIM A T INCOME OF RS.26,02,89,625/-. WHILE ALLOWING THE DEDUCTION U/S 10A, NET FOREIGN EXCHANGE GAIN OF RS.4,80,613/- WAS REDUCED FROM THE NET PROFIT OF THE UNDERTAKING FOR THE REASON THAT THE S AME WAS CAPITAL IN NATURE. APART FROM THIS, ADJUSTMENT OF RS.1,11,43,4 36/- WAS ALSO MADE AS TRANSFER PRICING ADJUSTMENT WITH RESPECT TO INTEREST. AGGRIEVED, THE ASSESSEE APPROACHED THE LD. FIRST AP PELLATE AUTHORITY. THE LD. CIT (A) PARTLY ALLOWED THE ASSES SEES APPEAL BY DELETING THE ADJUSTMENT ON ACCOUNT OF TRANSFER PRIC ING BUT UPHELD 3 ITA NO.6173/DEL/2017 R. SYSTEMS INTERNATIONAL LTD., V S. DCIT THE NET EXCLUSION BY THE ASSESSING OFFICER OF RS.4, 80,613/- WHILE COMPUTING THE EXEMPTION U/S 10A. 2.1 AGGRIEVED, THE ASSESSEE HAS NOW APPROACHED THE TRIBUNAL AND HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. WHETHER UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A)-44, NEW DELHI W AS JUSTIFIED IN UPHOLDING THE FINDINGS OF THE AO AS BE LOW- DISALLOWING FOREIGN EXCHANGE FLUCTUATION (CR.) RS.4,80,613/- (NET) FOR THE PURPOSE OF CALCULATING DEDUCTION U/S. 10A IN VIEW OF THE RESTRICTIONS UNDER THE PROV ISIONS OF SEC.10A(4) OF THE ACT, CONSIDERING THE SAME AS OF C APITAL NATURE AND AT THE SAME TIME CHARGED TO TAX AS BUSIN ESS INCOME. 2. THE APPELLANT CRAVES TO BE ALLOWED TO ADD AN Y FRESH/ADDITIONAL GROUNDS OF APPEAL AND/OR WITHDRAW ANY OF THE GROUNDS OF APPEAL EITHER BEFORE OR AT THE TIME OF HEARING OF APPEAL 3.0 AT THE OUTSET, THE LD. AUTHORIZED REPRESENTAT IVE SUBMITTED THAT THE ASSESSEE HAD ALSO FILED AN APPLI CATION UNDER 4 ITA NO.6173/DEL/2017 R. SYSTEMS INTERNATIONAL LTD., V S. DCIT RULE-11 OF THE INCOME TAX TRIBUNAL RULES, 1963 FOR ADMISSION OF ADDITIONAL GROUND. THE ADDITIONAL GROUND READS AS U NDER: THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) OUGHT TO HAVE HELD THAT NET FOREIGN EXCHANGE GAIN OF RS.4,80,613/- WAS A CAPITAL RECEIPT AND AS SUCH WAS NOT LIABLE TO TAX AS BUSINESS INCOME. 3.1 THE LD. AUTHORIZED REPRESENTATIVE (AR) SUBMIT TED THAT THIS GROUND WAS ALSO RAISED BEFORE THE LD. CIT (A) AS GROUND NO.3 AND THAT THIS ADDITIONAL GROUND DESERVES TO BE ADMITTED. IT WAS SUBMITTED THAT THIS GROUND RELATES TO THE ISSUE OF TAXABILITY OF RS.4,80,613/- AND WAS DULY EXAMINED BY THE ASSESSIN G OFFICER AND WAS, THUS, NOT AN ALTOGETHER FRESH ISSUE. RELIA NCE WAS PLACED ON THE JUDGMENT OF HONBLE APEX COURT IN THE CASE O F NTPC LTD. VS. CIT [1998] 299 ITR 383, FOR THE PROPOSITION THA T THE PURPOSE OF ASSESSMENT PROCEEDINGS BEFORE THE TAXING AUTHORI TIES IS TO ASSESS CORRECTLY THE TAX LIABILITY OF AN ASSESSEE I N ACCORDANCE WITH LAW AND IF DURING THE PENDENCY, IT IS FOUND THAT A N ON-TAXABLE ITEM IS TAXED OR A PERMISSIBLE DEDUCTION IS DENIED, THE ASSESSEE IS NOT PREVENTED FROM RAISING THE GROUND BEFORE THE TR IBUNAL. THE 5 ITA NO.6173/DEL/2017 R. SYSTEMS INTERNATIONAL LTD., V S. DCIT LD. AUTHORIZED REPRESENTATIVE PRAYED THAT THE ADDIT IONAL GROUND SHOULD BE ALLOWED. 4.0 THE LD. SR. DEPARTMENTAL REPRESENTATIVE (DR ) HAD NO OBJECTION TO ADMITTING THE ADDITIONAL GROUND. 5.0 HAVING HEARD BOTH THE PARTIES WE ADMI T THE ADDITIONAL GROUND AS RAISED BY THE ASSESSEE AS THE GROUND RELA TES TO GROUND NO.1 OF THE ORIGINAL APPEAL MEMO AND NO FRESH ISSUE IS BEING RAISED IN THIS ADDITIONAL GROUND. 6.0 THE LD. AUTHORIZED REPRESENTATIVE SUBMITTED A CHART THAT DEPICTED THE WORKING OF FOREIGN EXCHANGE FLUCTU ATION LOSS/GAIN. THIS CHART IS REPRODUCED HEREIN UNDER FO R A READY REFERENCE: WORKING OF EXCHANGE FLUCTUATION LOSS/GAIN REALIZED REINSTATEME TOTAL REMARKS EC NET LOAN ACCOUNT - (2,30,380) (2,30,380) NOTIONAL DEBIT ENTRY ON ACCOUNT OF LOAN TO EC NET PAYABLE TO EC NET SHAREHOLDERS - 3,00,522 3,00,522 NOTIONAL CREDIT ENTRY PAYABLE TO ERSTWHILE SHAREHOLDERS. PAYABLE TO WEB CONVERSE SHAREHOLDERS (12,15,955) 16,26,426 4,10,471 RS.12,15,955/- WAS ACTUAL LOSS OF CAPITAL IN NATURE BEING THE LIABILITY PAYABLE TO ERSTWHILE SHAREHOLDERS. NOTIONAL CREDIT ENTRY PAYABLE TO ERSTWHILE SHAREHOLDERS. TOTAL (12,15,955) 16,96,568 4,80,613 6 ITA NO.6173/DEL/2017 R. SYSTEMS INTERNATIONAL LTD., V S. DCIT 5.1 THE AUTHORIZED REPRESENTATIVE SUBMITTED THAT NET CREDIT OF RS.16,96,568/- UNDER THE HEAD REINSTATE MENT WAS NOT REAL INCOME AND THAT THESE WERE NOTIONAL ENTRIES ON CAPITAL ACCOUNT. IT WAS FURTHER SUBMITTED THAT ACTUAL LOSS O F RS.12,15,955/- ON ACCOUNT OF PAYMENT TO SHAREHOLDER S OF WEB- CONVERSE WAS ALSO ON CAPITAL ACCOUNT. IT WAS FURTHER SUBMITTED THAT, THUS, THE NET FOREIGN EXCHANGE FLUCTUATION GA IN OF RS.4,80,613/- WAS ON ACCOUNT OF CAPITAL ACCOUNT AND NOT ON REVENUE ACCOUNT. THE LD. AUTHORIZED REPRESENTATIVE DREW OUR ATTENTION TO THE FINDING OF THE LD. CIT (A) ON THE ISSUE AS CONTAINED IN PAGES 8 AND 9 OF THE IMPUGNED ORDER WH EREIN THE LD. CIT (A) HAS GIVEN A CATEGORICAL FINDING THAT THIS F OREIGN EXCHANGE FLUCTUATION ADJUSTMENTS WERE NOT RELATED TO THE ACQ UISITION OF ASSETS AND, THEREFORE, SECTION 43A (1) OF THE ACT WA S NOT APPLICABLE. THE LD. AUTHORIZED REPRESENTATIVE SUBMI TTED THAT THE ASSESSING OFFICER HAD RELIED ON PROVISION OF SECTIO N 43A AND HAD CONCLUDED THAT THE NET AMOUNT OF RS.4,80,613/- BEIN G CAPITAL IN NATURE WAS NOT TO BE CONSIDERED FOR THE PURPOSES OF DEDUCTION U/S 10A OF THE ACT. THE LD. AUTHORIZED REPRESENTATI VE SUBMITTED 7 ITA NO.6173/DEL/2017 R. SYSTEMS INTERNATIONAL LTD., V S. DCIT THAT THE PROVISIONS OF SECTION 43A (1) OF THE ACT A RE APPLICABLE ONLY WHERE THERE IS AN INCREASE OR DECREASE IN THE LIABIL ITY OF THE ASSESSEE SPECIFICALLY FOR THE PURPOSES OF ACQUIRING THE ASSETS AND, THEREFORE, THIS SECTION HAD NO APPLICATION UNLESS T HE ASSETS ARE ACQUIRED AND LIABILITY EXISTS. IT WAS SUBMITTED THAT THE ENTRY PERTAINING TO REINSTATEMENT AMOUNTING TO RS.16,96,5 68/- WAS ONLY A NOTIONAL ENTRY WHICH WAS REVERSED IMMEDIATELY IN THE ENSUING FINANCIAL YEAR AND DID NOT ATTRACT THE MIS CHIEF OF SECTION 43A OF THE ACT. WITH RESPECT TO THE TRANSACTIONS OF RS.12,15,255/- IT WAS SUBMITTED THAT IT WAS ACTUAL LOSS SUFFERED BY THE ASSESSEE ON ACCOUNT OF CHANGE IN THE RATE OF FOREIGN CURRENC Y WHILE DISCHARGING THE PAYMENT OBLIGATION TOWARDS SHAREHOLD ERS OF WEB- CONVERSE. THUS, IT WAS VIRTUALLY IN THE NATURE OF PA YMENT OF INTEREST. THE LD. AUTHORIZED REPRESENTATIVE SUBMITT ED THAT, ACCORDINGLY, THE FOREIGN EXCHANGE FLUCTUATION GAIN OF RS.4,80,613/- (NET) SHOULD BE EXCLUDED FROM THE COM PUTATION OF BUSINESS INCOME AS ADMITTEDLY THE SAME WAS ON CAPITA L ACCOUNT. 6.0 PER CONTRA, THE LD. SR. DEPARTMENTAL REPRESENTATIVE (DR) PLACED HEAVY RELIANCE ON THE CO NCURRENT 8 ITA NO.6173/DEL/2017 R. SYSTEMS INTERNATIONAL LTD., V S. DCIT FINDINGS OF THE ASSESSING OFFICER AND THE LD. CIT ( A) AND SUBMITTED THAT THE ISSUE HAD ALREADY BEEN DULY CONS IDERED BY THE TWO LOWER AUTHORITIES AND THAT THEY HAD ARRIVED AT T HE RIGHT CONCLUSION IN THIS REGARD. 7.0 WE HAVE HEARD THE RIVAL CONTENTIONS AND HAVE ALSO PERUSED THE MATERIAL ON RECORD. THE ONLY GRIEVANCE OF THE ASSESSEE BEFORE US IS THAT THE ASSESSING OFFICER, WH ILE ALLOWING ASSESSEES CLAIM OF DEDUCTION U/S 10A OF THE ACT, H AS REDUCED AN AMOUNT OF RS.4,80,613/- FROM THE NET PROFIT OF THE UNDERTAKING, IT BEING THE NET FOREIGN EXCHANGE GAIN, FOR THE REASON THAT THE SAME WAS CAPITAL IN NATURE. THERE IS NO DISPUTE THAT THE SAID INCOME IS CAPITAL IN NATURE AS THE LD. CIT (A) HAS GIVEN A CA TEGORICAL FINDING ON THE SAME. THE DEPARTMENT HAS NOT DISPUTED IT AND NEITHER IS THE ASSESSEE CHALLENGING IT. THE ONLY PRAYER OF THE ASSESSEE IS THAT IF THE SAME IS NOT INCLUDED IN THE NET PROFIT OF TH E UNDERTAKING FOR THE PURPOSES OF COMPUTATION OF CLAIM OF DEDUCTION U /S 10A OF THE ACT, THE SAME SHOULD ALSO BE EXCLUDED FROM THE COMP UTATION OF BUSINESS INCOME. IN THIS REGARD, WE ARE IN COMPLETE AGREEMENT WITH THE SUBMISSIONS OF THE LD. AUTHORIZED REPRESENT ATIVE. IF THE 9 ITA NO.6173/DEL/2017 R. SYSTEMS INTERNATIONAL LTD., V S. DCIT NET FOREIGN EXCHANGE OF GAIN OF RS.4,80,613/- IS EX CLUDED FROM THE COMPUTATION OF CLAIM OF DEDUCTION U/S 10A OF THE AC T FOR THE REASON THAT IT IS ON CAPITAL ACCOUNT, THE SAME SHOU LD ALSO NOT BE INCLUDED WHILE COMPUTING THE NET PROFIT OF THE ASSES SEE. THE SAME IS DIRECTED TO BE EXCLUDED FROM THE COMPUTATIO N OF BUSINESS INCOME AS WELL. ACCORDINGLY, THE ADDITIONAL GROUND RAISED BY THE ASSESSEE STANDS ALLOWED. 10.1 IN THE FINAL RESULT, THE APPEAL OF THE ASSESSEE STANDS ALLOWED. ORDER PRONOUNCED ON 25 TH FEBRUARY, 2021. SD/- SD/- (N.K. BILLAIYA) (SUDHANSHU SRIVASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 25/02/2021 PK/PS COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI