Treatment of the gain of foreign exchange fluctuation under the Income Tax Act

INCOME TAX APPELLATE TRIBUNAL, SURAT BENCH, SURAT

BEFORE SHRI PAWAN SINGH, JUDICIAL MEMBER AND
 Dr. ARJUN LAL SAINI, ACCOUNTANT MEMBER

ITA No.1209/AHD/2017 (AY 2012-13)
(Hearing in Virtual Court)

The Dy. CIT, Circle-1(1)(2),
Room No. 114, 1st Floor,
Aayakar Bhavan,
Majuragate,
Surat-395001.
Assessee/ Appellant

Vs

M/s Garden Silk Mills Ltd.
Tulsi Krupa Araade,
Near Aai Mata Chowk,
Surat – 395010.
PAN : AAACG8932C
Revenue/Respondent

Assessee by Sh. Manish J.Shah –Advocate
Revenue by Sh. O.P.Vaishnav – CIT-DR

Date of hearing 11.05.2021
Date of pronouncement 18.06.2021

Order under section 254(1) of Income Tax Act

PER PAWAN SINGH, JUDICIAL MEMBER:

1. This appeal by Revenue is directed against the order of learned Commissioner of Income Tax (Appeals)-1, hereinafter referred as “ld. CIT(A)” Surat dated 27.02.2017 for the assessment year (AY) 2012-13. The Revenue has raised the following grounds of appeal:

1. On the facts and circumstances of the case and in law, whether the Ld. CIT(A) was justified in deleting the addition made on account of gains from cancellation of forward contract without appreciating the fact that the so-called asset could not be created not any foreign exchange loan was taken by the assessee for such assets. Therefore, the Assessing Officer has correctly treated the same as revenue receipt. 

2. On the facts and circumstances of the facts and in law, whether the Ld. CIT(A) was justified in deleting the addition without appreciating the fact that reason/basis for which forward contract was undertaken remained unfulfilled; that rendered the whole transaction an adventure on the part of the assessee and therefore, gains from such transaction were treated rightly as revenue receipt by the Assessing Officer.

3. On the facts and circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the assessing officer.

2. Brief facts of the case as gathered from the order of lower authorities are that assessee is a company engaged in manufacturing of polyester chips, yarn, and other fabrics. The assessee filed its return of income declaring loss of Rs. 185 Crores. The assessee thereafter filed revised return declaring loss of Rs. 186 Crores on 31.03.2014. The case was selected for scrutiny. The Assessing Officer (AO) while passing the assessment order on 31.03.2015 under section 143(3) of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’], besides other additions treated the gain of foreign exchange fluctuation of Rs. 3.22 crore as ‘revenue receipt’ in place of ‘capital receipt’ as declared by the assessee. On appeal before the ld. CIT(A), the treatment of gain on foreign exchange fluctuation as ‘revenue receipt’ was reversed to ‘capital receipt’. The ld. CIT(A) while reversing the treatment relied upon the decision of Hon’ble jurisdictional High Court in assessee’s own case PCIT vs. Garden Silk Mills Ltd. reported vide 320 ITR 720. The ld. CIT(A) further held that the borrowing of the assessee on which the assessee made  hatching contract was for the purpose of importing capital asset and that surplus earned upon cancellation of such contract will partake the character of capital receipt. Thus, aggrieved by the order of ld. CIT(A), the Revenue has filed the present appeal before this Tribunal. 

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