Havells India Ltd vs ACIT (ITAT Delhi)
Facts of the case
- The appellant company is engaged in the business of manufacturing of switchgears, energy meters, cables & wires, electrical fans, compact fluorescent lamp and related components and trading luminaries, lighting fixtures and exhaust
- During the Financial Year (FY) 2007-08, corresponding to Assessment Year (AY) 2008-09, the taxpayer (amongst others) had invested in the shares of one its overseas subsidiary company. Some of the shares were redeemed at par in the same year e. FY 2007-08.
The taxpayer had realized foreign exchange gain on redemption of shares in the said foreign subsidiary. Since the gain was not on account of increase in value of the shares, as shares were redeemed at par value, but merely on account of repatriation of proceeds received on exchange fluctuation , the appellant company treated the gain as capital receipt, not eligible to tax in the income-tax return for the relevant AY 2008-09.
- During assessment proceedings, the Assessing Officer (AO) held that since the gain arose on sale or redemption of shares, the same was taxable as capital gains in terms of section 45 of the Income-tax Act, 1961 (ITA).
- In appeal before CIT(A), the CIT(A) confirmed the addition made by the Assessing Officer.
- In appeal proceedings, the matter reached the Delhi Bench of the Income-tax Appellate Tribunal (ITAT).
Decision of the ITAT:
The ITAT observed the following:
– It was an undisputed fact that investment made by the taxpayer in shares of its overseas subsidiary was made in Euro and redemption of such shares were also made in Euro. Thus, actual profit or loss on sale / redemption of such shares were to be computed in Euro only and thereafter, converted to INR for the purposes of Section 45 of the Income Tax Act.
– In other words, the cost of acquisition of shares and consideration received thereon was to be considered in Euro and the resultant gain / loss thereon was thereafter to be converted into INR at the prevailing market (refer Rule 115 of Income Tax Rules, 1962).
– In the present case, the net gain / loss on redemption of shares was Nil, since the shares were redeemed at par value and thereby there was no capital gains taxable under section 45 of the Income Tax Act, 1961.
– As per section 45 of the Income Tax Act, 1961 for taxation of any profits or gains arising from the transfer of a capital asset, only gains accruing as a result of transfer of the asset could be taxed. In the present case, there was no ‘gain’ on transfer / redemption of the shares in so far as the shares were redeemed at par
– The said contention was supported by Rule 115 of the Income Tax Rules, 1962 , as per which capital gain in rupee was determined as being equal to capital gain in foreign currency (which in the present case was Nil) x applicable rate of exchange = Nil. In the present case, since capital gains in Euro was Nil, the resultant gain in Indian Rupees was
– The exchange gain was only a consequence of repatriation of the consideration received in Euro to INR and could not be construed to be part of consideration received on redemption of
In view of the above, the ITAT held that section 45 of the Income Tax Act, 1961 did not apply in the facts stated above.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal is filed by the assessee against the order dated 03/07/2012 passed by the CIT(A)-LTU, New Delhi for Assessment Year 2008-09.
2. The grounds of appeal are as under:-
“1. That the Commissioner of Income-tax (Appeals) erred on facts and in law in affirming the disallowance of Rs.5,68,856 under section 40(a)(i) of the Income-tax Act, 1961 (‘the Act’) paid to a foreign entity as testing /certification fees outside India.
1.1 That the Commissioner of Income-tax (Appeals) failed to appreciate that testing/ certification fees paid outside India was not chargeable to tax under the provisions of the Act read with the overriding provisions of the applicable DTAA and therefore, there was no default in not deducting tax at source.
1.2 Without prejudice, that the Commissioner of Income-tax (Appeals) further failed to appreciate that disallowance under section 40(a)(ia) of the Act was, in any case, not warranted, since: (a) no amount was payable as on the last date of the previous year; and (b) non-deduction of tax was on account of bona fide view taken by the appellant.
2. That the Commissioner of Income-tax (Appeals) erred on facts and in law in not only confirming but also enhancing the disallowance of provision made for sales incentive in respect of “Shahenshah Sales Incentive Scheme”.
2.1 That the Commissioner of Income-tax (Appeals) erred on facts and in law in holding that the provision made by the appellant under the aforesaid scheme was not being made on a scientific or logical basis and therefore, the entire provision, is not allowable as deduction.
2.2 That the Commissioner of Income-tax (Appeals) erred on facts and in law in restricting the amount of provision allowable as deduction to the extent of 15% on an “ad-hoc” basis and in consequently, enhancing the amount of disallowance by Rs. 29,56,344.
2.3 That the Commissioner of Income-tax (Appeals) exceeded his jurisdiction in enhancing the disallowance of provision, that too, without issue notice of enhancement under section 251 of the Act.
2.4 That the Commissioner of Income-tax (Appeals) erred on facts and in law in not following the binding decisions of the CIT(A) in the appellant’s own case for the earlier assessment years 2006-07 and 2007-08, in gross violation of principles of judicial discipline.
2.5 Without prejudice, that the assessing officer may be directed to allow deduction under section 80IC of the Act on the amount disallowed and added to the taxable income of the appellant.
3. That the Commissioner of Income-tax (Appeals) erred on facts and in law in affirming the action of the assessing officer in reducing adjusted/ absorbed losses of the earlier » year(s) in respect of Baddi Unit-2 and Haridwar Unit against the eligible profits of those units, on a notional basis, while computing and allowing deduction under section 80IC of the Act.
3.1That the Commissioner of Income-tax (Appeals) erred on facts and in law in not appreciating that the losses of the earlier year(s) in respect of Baddi Unit-2 and Haridwar Unit had already been set off against profits/ income of the other unit(s)/ businesses and, therefore, no part of losses remained to be set off against the profits of the eligible units.
4. That the Commissioner of Income-tax (Appeals) erred on facts and in law in holding the foreign exchange gain of Rs. 2,55,82,186 realized on remittance of amount received on redemption of shares in a foreign subsidiary (i.e. M/s. Havells Holding Limited) as taxable “income” as against the appellants claim to treat the same as capital receipt not liable to tax.
4.1 That the Commissioner of Income-tax (Appeals) erred on facts and in law in not appreciating that the foreign exchange gain of Rs. 2,55,82,186 arose on account of remittance of a capital account transaction and consequently, the said gain was a capital receipt not liable to tax.
5. That the Commissioner of Income-tax (Appeals) erred on facts and in law in not directing the assessing officer to allow deduction of education cess and secondary higher education cess of Rs.54,21,514.
5.1. That the Commissioner of Income-tax (Appeals) erred on facts and in law in not adjudicating the claim of allowance of deduction of Rs.54,21,514 on the ground that the claim was not made by filing a revised return, without appreciating that the embargo/ prohibition contained in the case of Goetze India Limited: 284 ITR 323 (SC) do not apply to the powers of the appellate authority to entertain any fresh/ new claim.
6. That the Commissioner of Income-tax (Appeals) erred on facts and in law in not directing the assessing officer to allow deduction of excess provision of bad debts written back of Rs. 2,58,164.
6.1 That the Commissioner of Income-tax (Appeals) erred on facts and in law in not adjudicating the aforesaid claim on the ground that the claim was not made by filing a revised return, without appreciating that:
(a) the decision in the case of Goetze India Limited: 284 ITR 323 (SC) had no application in case of mere enhancement of a claim of deduction; and
(b)0 the embargo/ prohibition contained in the aforesaid case do not apply to the powers of the appellate authority to entertain any fresh/ new claim. “
3. The assessee company is engaged in the business of manufacturing of switchgears, energy meters, cables & wires, Electrical fans, compact fluorescent lamp and related components and trading luminaries lighting fixtures and exhaust fans. The assessee filed e-return declaring an income of Rs. 50,72,33,272/- on 28/08/2008. Subsequently, a revised return was also filed by the assessee company declaring an income of Rs. 43,97,77,650/- on 30/09/2009. After issuance of notice u/s 143(2) of the Income Tax Act dated 4/8/2009, the Assessing Officer assessed the assessee’s income at Rs. 55,84,6,968/- after making following additions/disallowance:
