Whether Fluctuations In Foreign Exchange Considered As Capital Receipt

INCOME TAX QUESTIONS & ANSWERS SERIES PART-XIX

Whether foreign exchange gain will be considered as Capital gain in case business of company has not commenced

Section involved - Charing Section 4, Section 28(i) and Section 263 of the Income Tax Act,1961

QUESTION:-  Assessee-company was constituted as a special purpose vehicle to carry out foundational tasks for setting up a coal based power plant. Assessee had not commenced any business activity during the relevant period to assessment year. Assessee had entered into contract for purchase of plant and machinery from abroad. In relation to such purchase, on account of cancellation of contracts and on account of notional adjustment, due to favourable fluctuation of foreign exchange rate, assessee had gained certain income. AO accepted the contention of the assessee. CIT revised the order and directed the AO to redo the assessment. Whether act of CIT to revise the Assessement Order is right ,please explain on the basis of pronounced judgement if any.

LET’S FIRST CONSIDER APPLICABLE PROVISIONS IT ACT,1961

SECTION 4- IS THE CHARGING SECTION ,PROVIDES THAT

1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and ¹ subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person:

Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly.

2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act.

SECTION 28 IN THE INCOME- TAX ACT, 1995 provides that -The following income shall be chargeable to income- tax under the head" Profits and gains of business or profession",-

i. the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year;

ii. any compensation or other payment due to or received by,-

• any person, by whatever name called, managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management or the modification of the terms and conditions relating thereto;
• any person by whatever name called, managing the whole or substantially the whole of the affairs in India of any other company, at or in connection with the termination of his office or the modification of the terms and conditions relating thereto;
• any person, by whatever name called, holding an agency in India for any part of the activities relating to the business of any other person, at or in connection with the termination of the agency or the modification of the terms and conditions relating thereto;
• any person, for or in connection with the vesting in the Government, or in any corporation owned or controlled by the Government, under any law for the time being in force, of the management of any property or business;
• income derived by a trade, professional or similar association from specific services performed for its members;

(iiia) profits on sale of a licence granted under the Imports (Control) Order, 1955 , made under the Imports and Exports (Control) Act, 1947 (18 of 1947 );

(iiib)cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India;

(iiic) any duty of customs or excise re- paid or re- payable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971 ;

iv. the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession;

v. any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm: Provided that where any interest, salary, bonus, commission or remuneration, by whatever name called, or any part thereof has not been allowed to be deducted under clause (b) of section 40, the income under this clause shall be adjusted to the extent of the amount not so allowed to be deducted.

Explanation 2.- Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as" speculation business") shall be deemed to be distinct and separate from any other business.

SECTION 263- gives power to CIT to  revised orders prejudicial to revenue

1. The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the  Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he, may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. 
2. No order shall be made under sub- section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.
3. Notwithstanding anything contained in sub- section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, the High Court or the Supreme Court.

Explanation 

In computing the period of limitation for the purposes of sub- section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded.

ANSWER  

The above mentioned case was same as PCIT v. Coastal Gujarat Power Ltd. (2019) 264 Taxman 244 (Bom.)(HC).

THE TRIBUNAL HELD THAT

The imports made by the assessee were part of the project of setting up power plant. It was recorded that, the business of the company had not commenced during period relevant to assessment year in question. The profit or loss which arose to an assessee on account of appreciation or depreciation in the value of foreign currency held as capital asset which was liable to be treated as capital in nature. Accordingly the order of AO is affirmed.

On appeal the High court also affirmed the order of the Tribunal.

CONCLUSION

From above judgment it is cleared that since business of the company has not commenced during the relevant previous year under consideration. Any profit /loss arose to the assessee due to fluctuation in foreign exchange will be treated as profit/loss of Capital Nature and not of Revenue Nature. The the order of CIT to revise AO order is not tenable.

DISCLAIMER: The above write up is an attempt to share information and knowledge with our readers. The view expressed here are the personal views of the author and same should not be considered as a professional advice. It is advisable to consult with your tax consultant before acting on any part of this article.