Income Tax Appellate Tribunal
Case BriefsTribunals/Commissions/Regulatory Bodies

Income Tax Appellate Tribunal, Bangalore Benches (ITAT): The Bench of Chandra Poojari, AM and George George K, JM while partly allowing an appeal held that the lessee not being the exclusive owner of a property is eligible to claim actual rental expenses in the return of income.

Factual Matrix

The assessee in the present matter was stated to be registered as a 100% Export Oriented Unit and also registered under the Software Technology Park of India (STPI).

After the scrutiny and assessment under Section 143(3) read with Section 92CA of the Income Tax Act, the total income was determined at Rs 35,44,70,726. One of the additions made by the A.O. was Rs 79,27,497 on account of foreign exchange loss.

The A.O. held that the restatement of Export Earners Foreign Currency (EEFC) account is in the nature of capital item and hence cannot be allowed. He further held that the amount of Rs.79,27,497 is a notional loss.

On being aggrieved with the above, the assessee filed an appeal before the first appellate authority, which confirmed the additions made by the A.O. and held that the loss on account of fluctuation in foreign exchange can be adjusted at the time of making payment but not on notional basis.

Aggrieved with the order of CIT(A), the assessee approached this tribunal.

Analysis, Discussion and Decision

Tribunal expressed that, as per the mercantile system of accounting followed by the assessee, the foreign exchange loss arising on account of restatement of EEFC account cannot by any stretch of imagination be termed as notional or contingent in nature.

It was noted that the EEFC account was maintained by the assessee to facilitate regular business operation and not for acquiring any asset.

Noting that, the transaction in EEFC account undertaken during the year were trading nature in order to facilitate the regular business operation of the assessee-company, Tribunal held that the AO erred in making an addition of Rs 79,27,497 to the income returned and the CIT(A) was not justified in sustaining the same.

In view of the above reasoning, the addition by A.O. was deleted.

Ground 2


The assessee had paid a sum of Rs 2,36,70,370 to First Lease Company India Limited towards equipment leasing. Out of Rs 2,36,70,317, the principal repayment of Rs 1,77,95,992, the interest and VAT aggregated to Rs 58,74,325. The assessee had claimed Rs 2,36,70,317 as a deduction. The A.O. in the impugned order held that the sum of Rs 1,77,95,992 (i.e. Rs 2,36,70,317 – Rs 58,74,325), which was paid towards principal as an expenditure of capital in nature and accordingly added back to the returned income.

The above was preferred for an appeal before CIT(A), and it was directed to the A.O. to verify whether there was a violation of TDS provisions under Section 194-I of the I.T. Act and to make necessary disallowance under Section 40(a)(ia) of the I.T. Act. Further, the CIT(A) directed the A.O. to verify whether the assessee had claimed depreciation on the leased asset and if so, add back the same to the total income.

Aggrieved with the above, the present appeal was filed.

It was noted that as per clause 4 of the agreement between the assessee and the First Leasing (lessor) the asset shall remain the exclusive property of the lessor at all times and the lessee during the lease time cannot capitalize the assets in its books of account since the ownership of the asset was with the lessor.

As per clause 19 of the said agreement, the assessee company (lessee) shall surrender the leased assets to First Leasing in good condition and working order on the expiration of the agreement.

It was clear that the actual owner of the leased asset was the lessor and was entitled to claim depreciation.

The assessee-company has merely taken the assets on lease from the owner, and it is accordingly eligible to claim actual rental expenses in the return of income.

Tribunal upheld the direction of CIT(A) on verifying whether there was TDS made by the assessee while making payment for lease rentals and adding back the depreciation claim.

In view of the above discussion, the appeal was partly allowed. [ThoughtWorks Technologies (India)(P) Ltd. v. Deputy Commr. Of Income Tax, 2022 SCC OnLine ITAT 33, decided on 4-1-2022]

Legislation UpdatesRules & Regulations

On September 08, 2021, the Reserve Bank of India has notified the Foreign Exchange Management (Export of Goods and Services) (Amendment) Regulations, 2021 to amend the Foreign Exchange Management (Export of Goods and Services) Regulations, 2015.

The Foreign Exchange Management (Export of Goods and Services) (Amendment) Regulations, 2021 amend regulation 15 of Foreign Exchange Management (Export of Goods and Services) Regulations, 2015 which deals with advance payment against exports in the following manner:

In cases where an exporter receives advance payment, the exporter shall be under an obligation to ensure that the rate of interest, if any, payable on the advance payment shall not exceed 100 basis points above the London Inter-Bank Offered Rate (LIBOR) or other applicable benchmark as may be directed by the Reserve Bank, as the case may be.

*Tanvi Singh, Editorial Assistant has reported this brief.

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of AM Khanwilkar*, Indi Malhotra and Ajay Rastogi has held that the condition predicated in Section 31 of the Foreign Exchange Regulation Act, 1973 of obtaining “previous” general or special permission of the RBI for transfer or disposal of immovable property situated in India by sale or mortgage by a person, who is not a citizen of India, is mandatory.

“Until such permission is accorded, in law, the transfer cannot be given effect to; and for contravening with that requirement, the concerned person may be visited with penalty under Section 50 and other consequences provided for in the 1973 Act.”

The important question to be decided before the Court was whether transaction specified in Section 31 of the 1973 Act entered into in contravention of that provision is void or is only voidable and it can be voided at whose instance.

Object of the Statute

1973 Act was brought into force to consolidate and amend the law relating to certain payments, dealings in foreign exchange and securities, transactions indirectly affecting foreign exchange and the import and export of currency, for the conservation of the foreign exchange resources of the country and the proper utilisation thereof in the interests of the economic development of the country.

Object of Section 31

While introducing the Bill in the Lok Sabha and explaining the object of Section 31 of the 1973 Act,  Mr. Y.B. Chavan, the then Minister of Finance stated:

“As a matter of general policy it has been felt that we should not allow foreign investment in  landed property/buildings constructed by foreigners and foreign controlled companies as such investments offer scope for considerable amount of capital liability by way of capital repatriation. While we may still require foreign investments in certain sophisticated branches of industry, there is no reason why we should allow foreigners and foreign companies to enter real estate business.”

The object of Section 31 of the 1973 Act was thus to minimise the drainage of foreign exchange by way of repatriation of income from immovable property and sale proceeds in case of 16 disposal of property by a person, who is not a citizen of India.  Section 31, hence, puts restriction on acquisition, holding and disposal of immovable property in India by foreigners – non citizens.

Absence of explicit mention of failure to seek previous permission

It is true that the consequences of failure to seek such previous permission has not been explicitly specified in the same provision or elsewhere in the Act, but then the purport of Section 31 must be understood in the context of intent with which it has been enacted, the general policy not to allow foreign investment in landed property/buildings constructed by foreigners or to allow them to enter into real estate business to eschew capital repatriation, including the purport of other provisions of the Act, such as Sections 47, 50 and 63.

Section 47

Sub-Section (1) clearly envisages that no person shall enter into any contract or agreement which would directly or indirectly evade or avoid in any way the operation of any provision of the 1973 Act or of any rule, direction or order made thereunder.  What is significant to notice is that sub¬Section (2) declares that the agreement shall not be invalid if it provides that thing shall not be done without the permission of the Central Government or the RBI.  That would be the implied requirement of the agreement in terms of this provision.

In other words, though ostensibly the agreement would be a conditional one made subject to permission of the Central Government or the RBI, as the case may be and if such term is not expressly mentioned in the agreement, it shall be an implied term of every contract governed by the law — of obtaining permission of the Central Government or the RBI before doing the thing provided for in the agreement.

In that sense, such a term partakes the colour of a statutory contract. Notably, Section 47 of the 1973 Act applies to all the contracts or agreements covered under the 1973 Act, which require previous permission of the RBI.

Section 50

Section 50 reinforces the position that transfer of land situated in India by a person, who is not a citizen of India, would visit with penalty. Indeed, inserting such a provision does not mean that the 1973 Act is a penal statute, but is to provide for penal consequence for contravention of provisions, such as Section 31 of the 1973 Act.

Section 63

Section 63 of the 1973 Act empowers the court trying a contravention under Section 56 which includes one under Section 51 of the 1973 Act, to confiscate the currency, security or any other money or property in respect of which the contravention has taken place. The expression “property” in Section 63, takes within its sweep immovable property referred to in Section 31 of the 1973 Act.

Effect of reading Section 31 with Sections 47, 50 and 63 

“The requirement specified in Section 31 is mandatory and, therefore, contract or agreement including the gift pertaining to transfer of immovable property of a foreign national without previous general or special permission of the RBI, would be unenforceable in law.”

From the analysis of Section 31 of the 1973 Act and upon conjoint reading with Sections 47, 50 and 63 of the same Act, we must hold that the requirement of taking “previous” permission of the RBI   before executing the sale deed or gift deed is the quintessence; and failure to do so must render the transfer unenforceable in law.

“The dispensation under Section 31 mandates “previous” or “prior” permission of the RBI before the transfer takes effect.  For, the RBI is competent to refuse to grant permission in a given case. The sale or gift could be given effect and taken forward only after such permission is accorded by the RBI. There is no possibility of ex post facto permission being granted by the RBI under Section 31 of the 1973 Act.”

Before grant of such permission, if the sale deed or gift deed is challenged by a person affected by the same directly or indirectly and the court declares it to be invalid, despite the document being registered, no clear title would pass on to the recipient or beneficiary under such deed. The clear title would pass on and the deed can be given effect to only if permission is accorded by the RBI under Section 31 of the 1973 Act to such transaction.

“Merely because no provision in the Act makes the transaction void or says that no title in the property passes to the purchaser in case there is contravention of the provisions of Section 31, will be of no avail. That does not validate the transfer referred to in Section 31, which is not backed by “previous” permission of the RBI.”

In light of the general policy that foreigners should not be permitted/allowed to deal with real estate in India; the peremptory condition of seeking previous permission of the RBI before engaging in transactions specified in Section 31 of the 1973 Act and the consequences of penalty in case of contravention, the transfer of immovable property situated in India by a person, who is not a citizen of India, without previous permission of the RBI must be regarded as unenforceable and by implication a prohibited act. That can be avoided by the RBI and also by anyone who is affected directly or indirectly by such a transaction. There is no reason to deny remedy to a person, who is directly or indirectly affected by such a transaction.  He can set up challenge thereto by direct action or even by way of collateral or indirect challenge.

“In other words, until permission is accorded by the RBI, it would not be a lawful contract or agreement within the meaning of Section 10 read with Section 23 of the Contract Act. For, it remains a forbidden transaction unless permission is obtained from the RBI. The fact that the transaction can be taken forward after grant of permission by the RBI does not make the transaction any less forbidden at the time it is entered into. It would nevertheless be a case of transaction opposed to public policy and, thus, unlawful.”

[Asha John Divianathan v. Vikram Malhotra, 2021 SCC OnLine SC 147, decided on 26.02.2021]

*Judgment by: Justice AM Khanwilkar

Know Thy Judge| Justice AM Khanwilkar

Appearances before the Court by:

For appellant: Advocate Navkesh Batra

For respondent: Senior Advocate C.A. Sundram

Legislation UpdatesNotifications

Risk Management and Inter-bank Dealings- Permitting AD Cat-I banks to voluntarily undertake user and Inter-Bank transactions beyond onshore market hours

As announced in the Statement of Developmental and Regulatory Policies dated October 04, 2019, it has been decided to accept the recommendation of the Task Force on Offshore Rupee Market to permit AD Cat-I banks to offer foreign exchange prices to users at all times, out of their Indian books, either by a domestic sales team or through their overseas branches.

Accordingly, the following section is being added in Part C (Inter-Bank Foreign Exchange Dealings) of the Master Direction- Risk Management and Inter-Bank Dealings:

“6. Customer and inter-bank transactions beyond onshore market hours

Authorised dealers may undertake customers (person resident in India and persons resident outside India) and inter-bank transactions beyond onshore market hours. Transactions with person resident outside India, through their foreign branches and subsidiaries, may also be undertaken beyond onshore market hours.”

Reserve Bank of India

[Circular dt. 06-01-2020]

NewsTreaties/Conventions/International Agreements

The Union Cabinet has approved the renewal of Long Term Agreements (LTAs) for supply of iron ore (lumps and fines) of grade +64% Fe content to Japanese Steel Mills (JSMs) and POSCO, South Korea for another 5 years (i.e. 1.4.2018 up to 31.3.2023) through MMTC Limited.

Benefits: Export of iron ore under the LTAs would help to strengthen India’s bilateral ties with longstanding partner countries, Japan and South Korea secure an export market and result in inflow of foreign exchange. The agreement will enable India to secure international market for its ores and ensure stable economic ecosystem which provides direct and indirect employment in mining, logistics and related sectors.

[Press Release no. 1530134]

Ministry of Commerce & Industry