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Tax Publishers ACIT v. KEI Industries Ltd. [ITA No. 1433/Del/2014, C.O. No. 200/Del/2017 (Arising out of ITA No. 1433/Del/2014), C.O. No. 34/Del/2019 (Arising out of ITA No. 3564/Del/2015), ITA No. 528/Del/2016, dt. 3-12-2020] : 2020 TaxPub(DT) 5141 (Del.-Trib.) Redemption discount on Foreign currency convertible bonds -- Whether taxable Year-end unrealized exchange fluctuations on currency measurement on assets purchased in India in Forex -- Allowability for depreciation on fixed assets. *Facts:* Assessee had issued Foreign Currency Convertible Bonds (FCCB) under RBI regulations to acquire fixed assets. Making use of the favourable conditions some of these FCCB were bought back at a lower price to what is payable prior to their maturity/conversion under FEMA guidelines. It was the revenue's plea that the difference on the buy back is taxable as an income while the case of the assessee was that it was for a capital transaction i.e. acquisition of fixed assets and thus when they were bought back at a lower price the gain was only a capital receipt outside the scope of tax as neither section 41(1) nor section 28(iv) can be invoked to tax the same. On appeal Commissioner (Appeals) accepted the views of the assessee. On higher appeal -- Assessee had purchased Forex assets in India and due to AS-11 had to translate these at closing Fx rates and thus added the same to the fixed assets and claimed depreciation on the same under the Act. Revenue pleaded that this was hit by section 43A and it is only on actual payment these exchange differences be adjusted to fixed assets and not on mere year end unrealized exchange values. Assessee's contention was section 43A covered only assets purchased in Fx from outside India and not purchase of Fx assets in India as in the case of the assessee. Consistently with accounting requirements section 43A was not applicable and they were entitled to the claim of depreciation on the enhanced Fixed asset balances which arose due to unrealized exchange fluctuations. On appeal Commissioner (Appeals) agreed with the views of the assessee. On further appeal by the revenue - Held in favour of the assessee that the discount on buy back of FCCB cannot be taxed and was a capital receipt. The assessee was entitled to depreciation on the unrealized exchange losses which arose on account of Fx differences on the assets purchased in India. *Applied:* Logitronics (P) Ltd. v. CIT (2011) 333 ITR 386 (Del.) : 2011 TaxPub(DT) 0932 (Del-HC) Iskraemeo Regent Ltd v. CIT (2011) 331 ITR 317 (Mad) : 2011 TaxPub(DT) 0649 (Mad-HC) CIT v. Arvind Mills (1992) 193 ITR 255 (SC) : 1992 TaxPub(DT) 0926 (SC) CIT v. Woodward Governor India (P) Ltd. (2009) 312 ITR 254 (SC) : 2009 TaxPub(DT) 1628 (SC)

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ACIT v. KEI Industries Ltd. [ITA No. 1433/Del/2014, C.O. No. 200/Del/2017 (Arising out of ITA No. 1433/Del/2014), C.O. No. 34/Del/2019 (Arising out of ITA No. 3564/Del/2015), ITA No. 528/Del/2016, dt. 3-12-2020] : 2020 TaxPub(DT) 5141 (Del.-Trib.)

Redemption discount on Foreign currency convertible bonds -- Whether taxable

Year-end unrealized exchange fluctuations on currency measurement on assets purchased in India in Forex -- Allowability for depreciation on fixed assets.

Facts:

Assessee had issued Foreign Currency Convertible Bonds (FCCB) under RBI regulations to acquire fixed assets. Making use of the favourable conditions some of these FCCB were bought back at a lower price to what is payable prior to their maturity/conversion under FEMA guidelines. It was the revenue's plea that the difference on the buy back is taxable as an income while the case of the assessee was that it was for a capital transaction i.e. acquisition of fixed assets and thus when they were bought back at a lower price the gain was only a capital receipt outside the scope of tax as neither section 41(1) nor section 28(iv) can be invoked to tax the same. On appeal Commissioner (Appeals) accepted the views of the assessee. On higher appeal --

Assessee had purchased Forex assets in India and due to AS-11 had to translate these at closing Fx rates and thus added the same to the fixed assets and claimed depreciation on the same under the Act. Revenue pleaded that this was hit by section 43A and it is only on actual payment these exchange differences be adjusted to fixed assets and not on mere year end unrealized exchange values. Assessee's contention was section 43A covered only assets purchased in Fx from outside India and not purchase of Fx assets in India as in the case of the assessee. Consistently with accounting requirements section 43A was not applicable and they were entitled to the claim of depreciation on the enhanced Fixed asset balances which arose due to unrealized exchange fluctuations. On appeal Commissioner (Appeals) agreed with the views of the assessee. On further appeal by the revenue -

Held in favour of the assessee that the discount on buy back of FCCB cannot be taxed and was a capital receipt. The assessee was entitled to depreciation on the unrealized exchange losses which arose on account of Fx differences on the assets purchased in India.

Applied:

Logitronics (P) Ltd. v. CIT (2011) 333 ITR 386 (Del.) : 2011 TaxPub(DT) 0932 (Del-HC)

Iskraemeo Regent Ltd v. CIT (2011) 331 ITR 317 (Mad) : 2011 TaxPub(DT) 0649 (Mad-HC)

CIT v. Arvind Mills (1992) 193 ITR 255 (SC) : 1992 TaxPub(DT) 0926 (SC)

CIT v. Woodward Governor India (P) Ltd. (2009) 312 ITR 254 (SC) : 2009 TaxPub(DT) 1628 (SC)