D.T. Case Law

DIRECT TAX CASE LAW

BASIC CONCEPTS 1. In case the share capital is raised in a foreign country and repatriated to India on need basis from time to time for approved uses, can the gain arising on the balance sheet date due to fluctuation in foreign exchange, in respect of that part of share capital which is to be used as working capital, be treated as a revenue receipt? CIT v. Jagatjit Industries Ltd. (2011) 337 ITR 21 (Delhi) On this issue, the assessee contended that the entire gain arising from the fluctuation in foreign exchange on the balance sheet date, in respect of the share capital raised in foreign country, should be treated as capital receipt as the source of funds was capital in nature. However, as per the Tribunal’s decision, gain due to fluctuation in foreign exchange arising on that part of share capital which is used for acquiring fixed assets should be treated as capital receipt and the remaining gain that arises on that part of share capital which is used as working capital will be treated as revenue receipt and accordingly, would be chargeable to tax. The Delhi High Court observed that in this case, the manner of utilization of such fund partly for acquiring fixed asset and partly as working capital was approved by the Ministry of Finance. The High Court held that the capital raised, whether in India or outside, can be utilized both for the purpose of acquiring fixed assets and to meet other expenses of the organization i.e. as working capital. For determining the nature of receipts, due consideration should be given to the source of funds and not to the ultimate use of the funds. Therefore, the entire gain has to be treated as capital receipt as the source of fund in this case is capital in nature. 2. In case there is no possibility of recovery of loan given by a NBFC, which is an NPA as per RBI guidelines, can the interest on such loan be treated as income of the NBFC, following mercantile sytem of accounting? DIT v. Brahamputra Capital Financial Services Ltd. (2011) 335 ITR 182 (Delhi) In the present case, the assessee, a non-banking financial company (NBFC), gave interest bearing loans to group concerns. The NBFC is bound by the NBFC Prudential 2 Norms (RBI) Directions, 1998 which states, inter alia, that the interest/discount or any other charges on non-performing assets (NPA) shall be recognised only when it is actually realized. Accordingly, the assessee did not credit the interest income in the profit and loss account relating to said loan amount which had become NPA as per the said norms. Even the recovery of principal amount of the said loan was doubtful. The department did not dispute that the recovery of the said loan was doubtful but contended that since the assessee is following mercantile system of accounting, it is required to declare interest income on the above loan on accrual basis in the relevant assessment year, irrespective of the date of actual receipt of interest and hence the interest income should be treated as income of the assessee as per the provisions of section 5 and taxed accordingly. On the said issue, the Delhi High Court held that it was prudent decision on the part of the assessee, that the interest income on the non-performing asset, whose recovery was doubtful, was not accounted for in the books of account. Also, the assessee was bound by the RBI guidelines, which required the said treatment of the interest income. Therefore, in this case, the High Court held that there was no real accrual of interest income in the hands of assessee and, hence, it would not be chargeable to tax under section 5. 3. Would refund of excise duty and grant of interest subsidy under the incentive scheme formulated by Central Government for public interest, namely, to accelerate industrial development, generate employment and create opportunities for self-employment in state of Jammu and Kashmir be treated as a revenue receipt or a capital receipt? Shree Balaji Alloys v. CIT (2011) 333 ITR 335 (J&K) In the present case, the Tribunal contended that excise duty refund and grant of interest subsidy received by the assessee in pursuance of the New Industrial Policy introduced in Jammu and Kashmir were revenue receipt and not capital receipt on the following grounds that:- (i) the aforesaid incentives were not given to establish industrial units because the industry was already established. (ii) the incentives were available only on commencement of commercial production. (iii) the incentives were recurring in nature. (iv) the incentives were not given for acquisition of capital assets. (v) the incentives were given for easy market accessibility and to run the business more profitably. The High Court observed that the incentives would become available to the industrial units entitled thereto from the date of commencement of commercial production and the