Section 45, Rule 115 – Foreign exchange gain realised on remittance of amount received on redemption of shares, at par, in foreign subsidiary is a capital receipt not liable to tax

11. TS-580-ITAT-2020-(Del.) Havells India Ltd. vs. ACIT, LTU A.Y.: 2008-09 Date of order: 10^th November,
2020

Section
45, Rule 115 – Foreign exchange gain realised on remittance of amount received
on redemption of shares, at par, in foreign subsidiary is a capital receipt not
liable to tax

FACTS

During the previous year
relevant to assessment year 2008-09, the assessee invested in 3,55,22,067
shares of one of its subsidiary companies, M/s Havells Holdings Ltd., out of
which 1,54,23,053 shares were redeemed at par value in the same year. Upon remittance
of the consideration of shares redeemed the assessee realised foreign exchange
gain of Rs. 2,55,82,186.

Since this gain was not on
account of increase in value of the shares, as the shares were redeemed at par
value but merely on account of repatriation of proceeds received on exchange
fluctuation, the gain was treated as a capital receipt in the return of income.

The A.O. held that the
assessee had purchased shares in a foreign company for which purchase
consideration was remitted from India and further, on redemption, the sale /
redemption proceeds so received in foreign currency were remitted back to India
which resulted in gain which is taxable as capital gains in terms of section
45.

Aggrieved, the assessee
preferred an appeal to the CIT(A) which upheld the action of the A.O. The
assessee then preferred an appeal to the Tribunal.

HELD

The
Tribunal noted the undisputed fact that investment made by the assessee in the
shares of Havells Holdings Ltd. was made in Euros and redemption of such shares
was also made in Euros. It held that the actual profit or loss on sale /
redemption of such shares therefore has to necessarily be computed in Euros
and, thereafter, converted to INR for the purposes of section 45. In other
words, the cost of acquisition of shares and consideration received thereon
should necessarily be converted into Euros and the resultant gain / loss
thereon should thereafter be converted into INR at the prevailing rate. In the
present case, the net gain / loss on redemption of shares was Nil since the
shares were redeemed at par value and thereby there was no capital gain taxable u/s 45.

From a perusal of section
45 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 insofar 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, 1962 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
exchange is to be applied. In the present case, since capital gain in GBP /
Euro was Nil, the resultant gain in Indian rupees is Nil. The exchange gain of
Rs. 2,55,82,186 was only a consequence of repatriation of the consideration
received (in Euros) in Indian rupees and cannot be construed to be part of
consideration received on redemption of shares. Thus, the applicability of
section 45 does not come into the picture in the present case.

The Tribunal held that the
A.O. was not right in applying section 45 for making the addition. This ground
of appeal filed by the assessee was allowed.