Income Tax Act, 1961

--Income --Capital or revenue receipt Assessee raised money through GDS issue--While completing the assessment, assessing officer treated the receipts on account of exchange fluctuation as a capital receipt. Commissioner pointed out that there was no dispute with regard to the fact that the exchange fluctuation income related to the deposit of money raised by assessee from the GDS issue. Pointing out the printed prospectus to the issue of GDS, Commissioner viewed that the aggregate net proceeds received were used principally to fund the establishment of offshore software development and the balance was used for working capital and for other general corporate purposes. Commissioner was of the view that profits on account of exchange fluctuation would ordinarily be trading profits if the foreign currency was held by assessee on a revenue account or as a trading asset or as part of circulating capital embarked in the business. Thus, he treated the entire amount as revenue receipt. Assessee submitted that the enquiry as to the character of the receipt on account of exchange fluctuation was to be seen with reference to the purpose of money received in foreign exchange and the circumstances in which fluctuation arose. Thus, considering the character of the receipt, and the purpose for raising the same, it was totally unnecessary for one to embark on the purpose for which the amount was spent. Held: Even if money was raised by issuance of equity shares domestically, the money thus collected as share capital was to be treated as capital receipt. Merely because part of the share capital was used as a working capital, the character of the receipt would not become a revenue receipt. Thus, once this aspect becomes clear and the entire money raised through issue of equity shares was to be treated as share capital, the gains on account of foreign exchange fluctuations, in the event such share capital collected in foreign exchange, hence was only capital receipts and the determination as to whether it was to be treated as capital receipt or revenue receipt could not depend upon the end use of the share capital.

Income Tax Act, 1961, Section 4

Income Tax Act, 1961

--Business expenditure--Staff welfare expenses Expenditure on issue of shares under the employees stock option--assessing officer allowed the staff welfare expenditure incurred on issue of shares under the employees stock option in terms of accounting policies prescribed in SEBI Guidelines. As per SEBI guidelines, the difference between the market value of the shares and the value at which the shares were allotted to the employee is allowable as an expenditure. Commissioner was of the view that the accounting treatment prescribed by SEBI, nowhere suggests that it was a revenue expenditure to be debited to the Profit and Loss Account as it was only a notional and contingent expenditure. Ultimately, Commissioner passed an order directing assessing officer to revise the assessment. Tribunal held that once the option was given and exercised by the employee, the liability in this behalf got ascertained. This was recognised by SEBI and the entire Employees Stock Option Plan was governed by guidelines issued by SEBI. Thus, it was not a case of contingent liability depending on the various factors on which the assessee had no control. Held: Assessee had to follow SEBI direction and by following such direction, assessee claimed the ascertained amount as liability for deduction. Therefore, Tribunal was right in holding that the expenditure on issue of shares under the Employees Stock Option could be allowed as staff welfare expenditure.