Commissioner of Income Tax vs Gujarat Nre Coke Limited

The appeal is directed against the judgment and order dated 20.5.2013 by which the learned Income Tax Appellate Tribunal allowed the appeal of the assessee. Aggrieved by the order of the learned Tribunal the Revenue has come up in appeal.

The following questions have been proposed;-

a) Whether on the facts and in the circumstances of the case, the Learned Tribunal was justified in law in deleting the disallowance of loss on account of foreign exchange fluctuation as the loss on account of decrease in value of loan given to its sister concern due to foreign exchange fluctuation will not be allowed as business expenditure;

b) Whether on the facts and in the circumstances of the case, the Learned Tribunal was justified in disallowance on account of foreign exchange fluctuation following the judgment in case of Commissioner of Income Tax, Delhi Vs. Woodward Governor India P. Ltd., and directing that the Learned Assessing Officer should grant the Assessee the benefit of deduction on account of fluctuation in the rate of exchange;

c) Whether on the facts and in the circumstances of the case, the Learned Tribunal is justified is deleting the addition made by the Assessee stating that actual consideration received by the Assessee for the shares sold is to be taken as "the full value of consideration" for the purpose of computing capital gain and not the market value of those shares;

d) Whether on the facts and in the circumstances of the case, the order of Learned Tribunal is perverse, illegal and bad in the eye of law;

It would appear that the first two questions are with regard to the order of the assessing officer and the CIT disallowing the loss on account of foreign exchange fluctuation whereas the third question is with regard to the value of consideration in respect of the shares sold by the assessee. The fourth question is too general in nature and can safely be ignored.

With regard to the first two questions the assessing officer expressed the following view while disallowing the loss arising out of foreign exchange fluctuation;-

On going through the statement it is found that it has claimed foreign exchange loss of Rs. 31,10,124 on account of decrease in value of loan given to Gujarat NRE Australia PTY Ltd. and an amount of Rs. 22,32,924 on account of decrease in value of loan given to NRE Mining PTY Ltd., Australia. Since both these transactions are contingent in nature wherein a provision has been made in the amount of the loan as on 31.3.2005, the same is not allowable as a deduction while computing the income of the assessee. Moreover, this is merely a wrong statement of the loan account on the balance-sheet but as per the accounting standard being followed by the assessee company. Since the same is contingent in nature, the same is disallowed and added back in the total income of the assessee. The total disallowance on this account comes to Rs. 53,43,048.

Aggrieved by the order of the assessing officer the assessee approached the CIT Appeal. The CIT Appeal did not examine the findings of the assessing officer on merits. He on the contrary upheld the views of the assessing officer on the ground that increase or decrease in the value of loans on account of foreign exchange would result in capital appreciation or depreciation of the value of an asset, and can not be treated an income or an expenditure. He added that in the present case the assessee is not in the business of money lending. Therefore, decrease in the value of loans advanced by it cannot be treated as revenue loss.

Aggrieved by the order of the CIT the assessee preferred an appeal before the Learned Tribunal which reversed the order of the CIT based on the following reasons;-

We have considered the rival submissions. Admittedly, loan has been given by the assessee to its sister concerns for ensuring the supply of raw materials. This fact remains undisputed and the fact that 97% of the assessee''s raw materials are imported is also evident from the accounts of the assessee. The assessee is also offering the interest received on the said loans as its income and the same is also accepted. In view of these facts, a perusal of the decision of the Hon''ble Supreme Court in the case of Woodward Governor India (P) Ltd. clearly shows that the Hon''ble Supreme Court after taking into consideration the decision of the Hon''ble Supreme Court in the case of Sutlej Cotton Mills (supra) has held that the expression ''expenditure'' as used in section 37 may in circumstances of a particular case cover an amount, which is really a loss even though the said amount has not gone out of the pocket of the assessee. Further, the Hon''ble Supreme Court has held that the increase or decrease in liability in the repayment of foreign loan should be taken into account to modify the figure of actual cost in the year, in which the increase or decrease in the liability arises on account of the fluctuation in the rate of exchange. Applying the same principle, the increase or decrease in the value of the foreign loan would also be taken into account to modify the figure of actual loan in the year in which the increase or decrease in the loan arises on account of fluctuation in the rate of exchange. In these circumstances, we are of the view that respectfully following the principles laid down by the Hon''ble Supreme Court in the case of Woodward Governor India (P) Ltd. referred to supra, the assessee is entitled to the deduction of the foreign exchange loss as claimed by the assessee. The Assessing Officer is directed accordingly to grant the assessee the benefit of deduction of the same in computing its total income.

It was submitted by Ms. Bhargav, Learned Advocate appearing for the Revenue that the judgment in the case of Woodward Governor India (P) Ltd. would not apply to the facts and circumstances of the case because the judgment in that case pertained to liabilities and not to assets as pointed out by the CIT Appeal in paragraph 8.2. of his judgment. We have not been impressed by the submission advanced by Ms. Bhargav. The assessee has offered the income arising out of the money lent as its business profit. The case of the assessee is that the money was advanced to a sister concern which has in fact been supplying 97% of its raw material. It was as such an advance made for the purpose of running the business more profitably. This finding of the learned Tribunal was not challenged. The distinction sought to be made by the CIT as also by the learned Counsel before us that the judgment in the case of Woodward Governor India (P) Ltd. would be applicable to liabilities but not to assets has not impressed us. Closing stock is also an asset. Can it be said that the closing stock cannot be valued at the rate prevailing on the closing day of the year in case the rate is less than the cost price ? For the aforesaid reasons we find no merit in the submissions made by Ms. Bhargav. The first two questions are thus disposed of by answering them in the affirmative.

The third question relates to profit arising out of sale of the shares. The Assessing Officer while making additions made the following findings;-

On going through the complete details of these transactions it is found that the shares of M/s. Fast Project Ltd. was sold to the unrelated parties at the price of Rs. 30/- whereas the same was sold to an unrelated parties on the price of Rs. 14.98 therefore the assessee issued a show cause notice asking it to substantiate the sale price of share of M/s. Fast Project Ltd. to its related parties M/s. Marley Foods Pvt. Ltd. at the rate of Rs. 14.98 and it was also asked to show cause as to why not the rate of Rs. 30/- per share which has been taken for the transactions with unrelated parties should also not be taken without the related parties. The assessee despite repeated opportunities could not be given any reply. This clearly shows that the assessee company has nothing to say in this matter and hence the assessee''s capital gain is being calculated at M/s. Fast Project Ltd. share at Rs. 30/- which has been taken by the assessee for selling the same share to unlisted parties. In view of this the capital gains on the sale of shares of 3,61,100- comes to Rs. 1,08,33,000/- instead of 54,11,000/- as has been shown by the assessee hence an addition of Rs. 54,22,000 is being made as long term capital gain for the sale of this shares to M/s. Marley Foods Pvt. Ltd.

Aggrieved by the order of the Assessing Officer the assessee preferred an appeal. The CIT allowed the appeal holding as follows:-

3.3 In the present case, it is not the A.O.s case that the assessee had in fact received any consideration over and above the one declared. He has not brought any facts on record to show that the total consideration disclosed by the assessee was underreported or any part of the consideration was not disclosed by it. In the light of the above discussion and judicial pronouncements, in the present case, the actual consideration received by the assessee for the shares sold is to taken as the ''full value of consideration'' for the purpose of computing capital gains and not the market value of those shares, as has been done by the A.O. Therefore, the A.O. was not justified in making addition on account of capital gains by adopting the market value of the shares sold as full value of consideration. Accordingly, the addition of Rs. 91,81,916/- is directed to be deleted.

This ground of appeal is, accordingly, allowed.

Aggrieved by this order of CIT the Revenue unsuccessfully preferred an appeal before the learned Tribunal which was dismissed inter alia on the basis of the following reasons:-

In the absence of anything to show that the assessee has received anything more than what is disclosed in respect of the shares sold to its related concerns, no addition can be made to such value for the purpose of computing capital gains. In these circumstances, respectfully following the decisions of the Hon''ble Supreme Court in the case of K.P. Varghese referred to supra as also the case of George Henderson & Co. Ltd. referred to supra and Gillanders Arbuthnot & Co. referred to supra, the finding of ld. CIT (Appeals) on this issue stands confirmed.

The views taken by the learned Tribunal are backed by the judgments of the Supreme Court. We, however, need to say a few words to affirm the views of the Tribunal. In the case of Commissioner of Income Tax, West Bengal and Another Vs. George Henderson and Co. Ltd., Their Lordships held as follows:-

But it was contended on behalf of the appellants that the expression "full value of the consideration for which the sale, exchange or transfer of the capital asset is made" appearing in section 12B(2) meant the market value of the asset transferred and on this ground the Appellate Tribunal was justified in taking the market value of the shares to be the full value of the consideration. We are unable to accept this contention as correct. It is manifest that the consideration for the transfer of capital asset is what the transferor receives in lieu of the asset he parts with, namely, money or money''s worth and, therefore, the very asset transferred or parted with cannot be the consideration for the transfer. It follows that the expression "full consideration" in the main part of section 12B(2) cannot be construed as having a reference to the market value of the asset transferred but the expression only means the full value of the thing received by the transferor in exchange for the capital asset transferred by him.

Section 12B(2) considered by Their Lordships in the aforesaid judgment of the Act of 1922 is equivalent to Section 48 in the Act of 1961 which in so far as the same is material for our purpose reads as follows:-

The income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely;-

(i) expenditure incurred wholly and exclusively in connection with such transfer;

(ii) the cost of acquisition of the asset and the cost of any improvement thereto:

u/s 48 the income tax chargeable under the head "capital gains" has to be computed taking into consideration the full value either received or accrued. Any other valuation is not permissible u/s 48. When the legislature wanted to make a departure a specific provision was introduced. Reference in this regard can be made to Section 50C. We are as such of the opinion that the Assessing Officer was wrong in taking the view that the capital gain has to be assessed not on the basis of the consideration actually received but on the basis of the consideration receivable based on market rate. The third question proposed by the revenue for the aforesaid reasons is equally without any merit.

For the aforesaid reasons, we refuse to admit the appeal, which is accordingly dismissed.