R Systems International Ltd., New Delhi vs Assessee

DCIT, Circle- 15(1), Vs. R Systems International Ltd. C.R. Building, I.P. Estate, B-104A, Greater Kailash-I, New Delhi. New Delhi-48

(PAN AABCR 9541B) (Appellant) (Respondent)

Date of hearing : 07.04.2015 Date of Pronouncement : 24.04.2015

Appellant by : Sri Satyen Sethi, Advocate And Sri A.T. Panda, Advocate Respondent by : Shri Vikram Sahay, Sr. DR

ORDER

PER SHRI INTURI RAMA RAO, AM:

1. These are cross appeals filed by the assessee and Revenue against the order

of the Commissioner of Income Tax(Appeals)-XVIII, New Delhi dated 27.07.2011

for the Assessment Years 2007-08 & 2008-09. The appeal bearing ITA No.

4247/Del/2011 by the assessee and the appeal bearing ITA No.4949/Del/2011 by

the Revenue.

ITA Nos.4247&4949/Del /2011 2

2. First we shall take up ITA No.4949/Del/2011 appeal filed by the Revenue.

The assessee is a company incorporated the provisions of Companies Act.

The assessee company is engaged in the business of software development and IT

enabled services for the AY 2007-08. The assessee company filed the return of

income on 30.10.2007, declaring a total income of Rs.4,96,43,190/-. After

processing the return of income u/s 143(1) of the Act, the case was selected for

scrutiny assessment and finally the assessment was completed u/s 143(3) of the

Act, vide order dated 16.12.2010 at a total income of Rs.5,65,96,889/-. The

disparity between the returned income and assessed income is on account of

making addition of Rs.66,23,602/- on account of foreign exchange fluctuation in

respect of the foreign currency transactions at the end of the accounting year. The

assessee furnished working of the difference arising out of foreign exchange

fluctuations as follows:-

Capital Nature Realised Reinstatement Total

Rsystems Singapore Loan 3,99,806 3,99,806 Schedule-4 Account (Page 7) EC Net Loan Account 1,27,440 23,22,704 24,50,144 Schedule-II (page 12) Deferred Compensation to (49,214) 48,84,182 48,34,968 Schedule-12 R Systems Solutions (Page 12 r/w 29 Inc(Web Converse) & 30) Shareholders Deferred Compensation to - (10,61,316) (10,61,316) Schedule-12 EC Net Shareholders (page 12 r/w 29 & 30) Total 78,226 65,45,376 66,23,602 ITA Nos.4247&4949/Del /2011 3

REVENUE NATURE Realised Reinstatement Total

Exchange Fluctuation on 10,50,897 (46,988) 10,03,909 Debtors and other Trade Assets/Liabilities Bank Accounts (15,94,111) (3,39,694) (19,33,805)

Exchange Fluctuation on (25,82,304) (1,789,455) (43,71,759) Debtors and other Trade Assets/Liabilities Bank Accounts 42,53,700 (2,026,152) 22,27,548

Total 11,28,182 (4,202,289) (30,74,107)

Net foreign exchange 12,06,408 23,43,087 35,49,495 fluctuation as per profit & Loss A/c

The Assessing Officer had not accepted the contention of the assessee that

net amount of Rs.35,49,495/- should not be added back in as much as foreign

exchange fluctuation had arisen on capital items. However, the Assessing Officer

held that the gross amount of Rs.66,23,602/- should be brought to tax. The

Assessing Officer had also disagreed with the contention of the assessee that the

foreign exchange gains made on account of restatement of the foreign currency

transaction as at end of accounting year should not be taxed. The Ld. Assessing

Officer held that there was no first degree nexus between the income of foreign

exchange fluctuation gain on reinstatement/realization of ECB loans etc. and profit

from export of computer software. Being aggrieved the assessee preferred an

appeal before the CIT(A)-XVIII, New Delhi who vide order dated 27.07.2011 had

partly allowed the claim by holding that the gains made out of restatement of

foreign currency transaction (without actual payment) should not be brought to tax ITA Nos.4247&4949/Del /2011 4

as it represents only notional profit. However, he further held that the gains made

out of foreign exchange fluctuation in the case of actual repayment should alone be

brought to tax. Aggrieved by this order, the Revenue come up with the present

appeal before us raising the following grounds of appeal:

"1. The ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.65,45,376/- made by the AO on account of business income.

2. The ld. CIT(A) has erred in law and on facts in not appreciating the fact that the amount of Rs.65,45,376/- is business income of the assessee other than income eligible for claim of deduction u/s 10A of the Act.

3. That the appellant craves to be allowed to add any fresh grounds of appeal and/or deleted or amend any of the ground of appeal."

3. The Ld. DR had vehemently argued that the amount of Rs.65,45,376/-

should be brought to tax since it is nothing but business income of the assessee and

he further argued the CIT(A) without examining the matter in detail wrongly held

that the amount should not be brought to tax on notional basis. On the other hand,

ld. AR had relied on the orders of the CIT(A) and contended that no profits can be

taxed as notional basis and also submitted that the foreign exchange fluctuations

had arisen only on capital items.

4. We heard the rival parties and perused the material available on record. The

issue involved in the appeal is whether the difference amount arising out of

restatement of foreign currency transactions taking into account the prevailing

exchange rate as on the end of accounting year is liable to tax or not. The Hon'ble ITA Nos.4247&4949/Del /2011 5

Supreme Court in the case of Sutlej Cotton Mills Ltd. Vs. CIT reported in [1979]

116 ITR 1 has held as under:- (Page 13)

"The law may, therefore, now be taken to be well settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be a trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as a part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature."

The ratio of the above decision is whether the gain or loss should be brought to tax

or allowed as deduction depends upon whether the foreign currency transactions

were carried on account of capital or revenue items. If the foreign currency

transactions are undertaken on capital account, the gain made out of such

transaction is outside ambit of taxation, of course subject to the application of

provisions of Section 43A of the Act. If the transactions undertaken are on account

of revenue items, the gain is clearly taxable and so the loss also is clearly

allowable. The assessee except making bald assertion that the transactions were

undertaken on account of capital items no evidence was brought on record to

establish that the foreign currency transactions were undertaken on capital items.

The Ld. Assessing Officer also had failed to undertake this exercise. The Hon'ble

Supreme Court in the case of CIT Vs. Woodward Governor India Pvt. Ltd.

reported in [2009] 312 ITR 254 (SC) had clearly held that the actual payment was

not a condition precedent for making adjustment in respect of foreign currency ITA Nos.4247&4949/Del /2011 6

transactions as the end of the closing year. We are therefore, unable to concur or

agree with the view of the learned CIT(Appeals), that liability could arise only

when the contract would have matured, as such a stand is totally divorced from the

accounting principles and is in variance with the principle upheld by the Hon'ble

Apex Court in the case Woodward Governor India (P.) Ltd. (Supra). It can also be

seen that the decision in the case of Woodward Governor India (P.) Ltd. (Supra)

has been rendered with regard to items in the revenue account and capital account.

5. In the light of our above findings, we restore the matter to the file of AO

with the direction that to re-do the assessment keeping in view the principles

enunciated above after affording a reasonable opportunity of being heard to the

assessee. Accordingly, the appeal of the Revenue is disposed of.

6. In the result, appeal is partly allowed for statistical purposes.

7. We shall now take up the appeal filed by the assessee in ITA No.........The

assessee has raised the following grounds of appeal:-

"1.Whether under the facts and in circumstances of the case and in law, the learned CIT(A) justified in upholding the contention of the AO in confirming the addition of Rs.78,226/- on account of Foreign Exchange Fluctuation (capital nature) Realized and chargeable to tax, thereby denying the claim of deduction u/s 10A of the Act.

2. Whether under the facts and in circumstances of the case and in law, the learned CIT(A) was within the ambit of law in ignoring the provision of Sec.43A of the Act; thereby, confirming the addition of Rs.78,226/- on account of Capital Gain due to foreign exchange fluctuation.

The arbitrary, uncalled for and unjustified action of the learned CIT(A) is liable and urged to be cancelled."

ITA Nos.4247&4949/Del /2011 7 8. In this appeal, assessee is challenging the finding of Ld. CIT(A) that the

gains of Rs.78,226/- arising out of foreign exchange fluctuations in respect of

items which have been actually paid. Since in the Revenue appeal, we remitted the

matter to the file of the Assessing Officer to examine the issue in detail. The

grounds of appeal do not survive. Hence, the appeal filed by the assessee is

dismissed.

9. In the result, appeal filed by the Revenue is partly allowed and appeal of the

assessee is dismissed.

The Order pronounced in the open Court on 24th April, 2015.

Sd/- Sd/- (G.C. GUPTA) (INTURI RAMA RAO) Vice President Accountant Member

Dated: 24th April, 2015. Aks/- DCOM

Copy forwarded to 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi