The only grievance projected in this appeal by the assessee is that the learned Commissioner (Appeals) is not justified in holding that the Exchange Gain of Rs. 2,29,042 was chargeable to tax as casual and non-recurring income under section 10(3) of the Income Tax Act, 1961.
The assessee-company was incorporated on 6-5-1992. During the previous year, the company allotted 51,00,000 shares of Rs. 10 each aggregating to Rs. 5,10 crores to M/s. Lavrids Knudsen Maskinfabrik, Denmark (hereinafter referred to as LKM). The Reserve Bank of India granted the company permission to open Foreign Currency Account (FCA) in Denmark subject to certain conditions mentioned below: (a) Credits to the accounts shall be subscriptions received from the above-mentioned shareholders and interest, if any, paid by the bank on the balance held in the account.
(b) Debits to the account shall be payments for import of capital goods subject to compliance of import regulations.
In accordance with the RBI approval, the assessee received equity contribution from LKM Denmark out of which payments to the suppliers were made for machinery purchased and because of the foreign exchange fluctuation, ultimately, the assessee received a gain of Rs. 2,29,042.
The assessee submitted before the assessing officer that it was a capital receipt, while the assessing officer held it to be a revenue receipt.
The assessee appealed to the Commissioner (Appeals) and referred to the decision in the case of E.I.D. Parry Ltd. v. CIT (1988) 174 ITR 11 (Mad.) and the decision of the Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT (1979) 116 ITR 1 (SC) for the proposition that such a gain obtained, if any, constitutes capital receipt in the hands of the assessee. The learned Commissioner (Appeals) accepted the contention of the assessee that the issue is covered by the decision in the case of E.I.D. Parry Ltd. (supra). However, on the basis of the Special Bench of Income Tax Appellate Tribunal decision in the case of Cadell Weaving Mill Co. (P) Ltd. v. Assistant Commissioner (1995) 55 ITD 137 (Bom)(SB) he held that the above capital receipt is not resulting into chargeable capital gains in the hands of the assessee and, therefore, it can be considered as casual income. Accordingly, he directed the assessing officer to tax the above receipt as casual income in the hands of the assessee. Aggrieved by the order of the Commissioner (Appeals), the assessee is in appeal before this Tribunal.
Dr. Sunil Pathak, the learned counsel for the assessee, submitted that there is no doubt that as the foreign exchange was obtained not in the course of trading but for the purposes of allotment of equity, the receipt was on capital account. Accordingly the fluctuation gain was also on capital account as per the decisions cited above. The learned Commissioner (Appeals) has also accepted the above contention. This view is also upheld by the Delhi High Court in the case of Triveni Engg. Works Ltd. v. CIT (1985) 156 ITR 202 (Del), but he submitted that the Commissioner (Appeals) was not justified in holding that the assessee had earned casual and non-recurring income taxable under section 10(3) of the Act. He relied upon the decision of the Delhi Bench in the case of J.C. Chandiok v. Dy. CIT (1999) 69 ITD 75 (Del) (SB) in which reference has been made to the decision in Cadell Weaving Mill Co. (P.) Ltd.s case (supra). He submitted that from the above decision, it is clear that the Special Bench has endorsed the view that section 10(3) is not a charging section, but it is an exemption section with the result that if a particular receipt is not constituting income, it cannot be brought to tax under this section. In the case of the assessee, according to the learned counsel, as the receipt is a capital receipt, it does not form an income in the hands of the assessee, and, therefore, it cannot be brought to tax under section 10(3) of the Act.
Shri Adhir Jha, the learned Departmental Representative strongly supported the orders of the authorities below. He submitted that the assessee deliberately kept the funds abroad. Had it brought the funds immediately to India, there would not have been any such gain and, therefore, such gain should not escape tax. Relying upon the decision of the Supreme Court in the case of Universal Radiators v. CIT (1993) 201 ITR 800, the learned Departmental Representative submitted that the definition of income is to be interpreted in a very wide manner and hence, such receipt can be brought to tax.
I have considered the rival submissions and perused the facts on record. There is no doubt that as the foreign exchange was obtained not in the course of trading, but for the purposes of allotment of equity, the receipt was on capital account. Accordingly, the fluctuation gain was also on capital account, as per the decisions in the cases of E.L.D. Parry Ltd. (supra) and Sutlej Cotton Mills Ltd. (supra). The learned Commissioner (Appeals) has also accepted the above view. This view is also upheld by the Delhi High Court in the case of Triveni Engg. Works Ltd. (supra).
Now, the next issue is as to whether in view of the Special Bench decision in the case of Cadell Weaving Mill Co. (P.) Ltd. (supra), this was a casual income or not. The above Special Bench decision was referred to in the case of J.C. Chandiok (supra) wherein it was observed as under: "Now the question is that whether the amount received on surrender of tenancy right can be made exigible to tax under section 10(3) of the Act, as casual income. Section 10 does not tax an item which is capital per se.
Income is an ordinary word in the English language and, unless the context otherwise requires, it should be given its ordinary and natural meaning. Income-tax is tax on income but the word income is a dark cat in the bag of the income-tax code. There is no exhaustive definition, of the word income. The word income in the Act is formidably wide and vague in its scope. It is a word of classic import. All receipts by an assessee cannot necessarily be deemed to be income of the assessee for the purpose of income-tax. The question whether a particular receipt is income or not depends on the nature of the receipt and the true scope and effect of the relevant taxing provision. Assessing Officer cannot assess any receipts by using the panoply of section 10(3). He can assess only those receipts that amount to income. The taxability of an amount would depend on the nature and character of the receipt.
We have taken into consideration the entire conspectus of the case.
From the aforesaid discussion it is apparent that the amount received in question was of the nature of a capital receipt. It could have been charged to tax only under the head capital gains. But the chargeability failed, because of the Apex Court decision in the case of B.C.Srinivasa Setty (supra). The amendment made to section 55(2) of the Act was only, prospective in operation. It was not made retrospective, section 10 does not tax an item which is capital per se. Therefore, the receipt in question cannot be put within the ken of section 10(3)." From the above decision, it is clear that the Special Bench has endorsed the view that section 10(3) is not a charging section, but it is an exemption section with the result that if a particular receipt is not constituting income, it cannot be brought to tax under this section. In the case of the assessee, as the receipt is a capital receipt, it does not form an income in the hands of the assessee and, therefore, it cannot be brought to tax under section 10(3). The learned Commissioner (Appeals) has proceeded on the footing that the above receipt is not chargeable to tax as capital gains under section 45 and hence, it can be taxed under section 10(3) as casual income. In holding this view, in my opinion, he has committed two mistakes. First of all, as already discussed above, relying upon the decision in the case of J.C. Chandiok (supra), section 10(3) is not a charging section, but an exemption provision and, accordingly, if some receipt is not chargeable under any other section, it cannot be brought to tax under this section. Secondly, the proviso to section 10(3) is on the point that the exemption provision of section 10(3) will not apply to capital gains chargeable under section 45. That does not mean that what is not chargeable will automatically become casual income. In order to constitute casual income, the receipt must be first, in the nature of income. In this case, the receipt being a capital receipt in nature, the same cannot be taxed as an income. Thirdly, without prejudice to the above finding, in view of the above proviso capital gain may constitute an income. But in the case of the assessee, there is no capital gain at all. All that the assessee has done is to bring its own money from its foreign account to the account in India and hence, there is no transfer of an asset from one person to other, which is the sine qua non for constituting a transfer resulting into a capital gain.
Exactly, the same issue was discussed in the case of E.I.D. Parry Ltd. (supra) also and therein, the court observed on the same lines that there is no transfer of an asset which can lead to any capital gain.
The relevant portion of the Head Notes appearing on page 13 is reproduced hereunder: "That there could be no cost of acquisition for the pound sterling received by the company on issue of shares. The conversion of foreign currency into Indian rupee did not involve a transfer by one person to another. The surplus amount obtained by the assessee on account of devaluation of the Indian rupee was not a capital gain within the meaning of section 45." Coming to the argument of the learned Departmental Representative that the assessee had deliberately kept the funds abroad and had it brought the funds immediately to India there would not have been any such gain, I find that first of all, the assessee did not keep these funds deliberately abroad. It was permitted to use these funds for purchasing machinery abroad and hence till such time the purchase deal was completed, the funds were required to be kept in foreign bank. Further, this aspect has no material effect on the issue at all. Further, the Supreme Court decision in the case of CIT v. G.R. Karthikeyan (1993) 201 ITR 866 (SC) relied upon by the learned Departmental Representative can be applied only in a case where the receipt is basically in the nature of income. The principle that the concept of income is very wide is to be applied to a receipt which can be an income but in the present case wherein it is a capital receipt, the above principle cannot be stretched to rope in such a receipt in the ambit of income.
In the light of above discussion, I hold that that the Commissioner (Appeals) is not justified in holding that the exchange gain of Rs. 2,29,042 is chargeable to tax as casual and non-recurring income under section 10(3) of the Act. The finding of the Commissioner (Appeals) is accordingly reversed.