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Tax Publishers Havells India Ltd. v. ACIT [ITA No. 4695/Del/2012, dt. 10-11-2020] : 2020 TaxPub(DT) 4686 (Del-Trib) Chargeability of Capital gains on Exchange differences under section 45 on Investment made in Forex *Facts:* Assessee had to invest strategically in one of its overseas entities in EUR in redeemable preference shares. The said preference shares were redeemed at par in EUR and the amounts were received. Due to timing issue there was an exchange gain of Rs. 2.55 crores. It was the revenue who alleged that this exchange gain be subject to tax as capital gains. Aggrieved assessee went in appeal -- Held in favour of the assessee that the mode of computation of assets invested in Fx for a resident is the gain has to be worked out first in the same Fx and then be converted into Rupee applying rate as per rule 115. Since this in case the redemption in EUR was also at par no Capital gains arose for taxability in the hands of the assessee. The accounting aspect of the realized gain of 2.55 crores has nothing to do with the method of computation prescribed under the Income Tax Act. From the perusal of section 45 of the Act it can be seen that 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 can 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 value. Thus, there was no gain which accrued to the assessee as a result of redemption of such shares, since the shares were redeemed at par value. The said contention is supported by Rule 115 of the Income Tax Rules, which provides the rate of exchange for conversion of income expressed in foreign currency. Clause (f) of Explanation (2) to Rule 115(1) clearly provides that "in respect of the income chargeable under the head "capital gains.." rate of exchanges is to be applied. To put it simply, capital gain in rupee is determined as = Capital gain in $/ GBP X applicable rate of exchange as per Rule 115 = NIL (in present case) X Rate = NIL. In the present case, since capital gains in GBP/Euro was NIL, the resultant gain in Indian Rupees is NIL. The learned AR submitted that gain arose to the assessee on account of repatriation of foreign currency to India, which is an event separate and distinct from the event of transfer of shares of the subsidiary company. The exchange gain of Rs. 2,55,82,186 was only a consequence of repatriation of the consideration received in Euro to INR and cannot be construed to be part of consideration received on redemption of shares. Thus, the applicability of section 45 does not come in picture in the present case. Therefore, the assessing officer was not right in applying section 45 for making the addition.

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Havells India Ltd. v. ACIT [ITA No. 4695/Del/2012, dt. 10-11-2020] : 2020 TaxPub(DT) 4686 (Del-Trib)

Chargeability of Capital gains on Exchange differences under section 45 on Investment made in Forex

Facts:

Assessee had to invest strategically in one of its overseas entities in EUR in redeemable preference shares. The said preference shares were redeemed at par in EUR and the amounts were received. Due to timing issue there was an exchange gain of Rs. 2.55 crores. It was the revenue who alleged that this exchange gain be subject to tax as capital gains. Aggrieved assessee went in appeal --

Held in favour of the assessee that the mode of computation of assets invested in Fx for a resident is the gain has to be worked out first in the same Fx and then be converted into Rupee applying rate as per rule 115. Since this in case the redemption in EUR was also at par no Capital gains arose for taxability in the hands of the assessee. The accounting aspect of the realized gain of 2.55 crores has nothing to do with the method of computation prescribed under the Income Tax Act.

From the perusal of section 45 of the Act it can be seen that 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 can 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 value. Thus, there was no gain which accrued to the assessee as a result of redemption of such shares, since the shares were redeemed at par value. The said contention is supported by Rule 115 of the Income Tax Rules, which provides the rate of exchange for conversion of income expressed in foreign currency. Clause (f) of Explanation (2) to Rule 115(1) clearly provides that "in respect of the income chargeable under the head "capital gains.." rate of exchanges is to be applied. To put it simply, capital gain in rupee is determined as = Capital gain in $/ GBP X applicable rate of exchange as per Rule 115 = NIL (in present case) X Rate = NIL. In the present case, since capital gains in GBP/Euro was NIL, the resultant gain in Indian Rupees is NIL. The learned AR submitted that gain arose to the assessee on account of repatriation of foreign currency to India, which is an event separate and distinct from the event of transfer of shares of the subsidiary company. The exchange gain of Rs. 2,55,82,186 was only a consequence of repatriation of the consideration received in Euro to INR and cannot be construed to be part of consideration received on redemption of shares. Thus, the applicability of section 45 does not come in picture in the present case. Therefore, the assessing officer was not right in applying section 45 for making the addition.