Court affirms gain on contract cancellation as capital receipt. Assessing Officer's order not erroneous.

The Pr. Commissioner of Income Tax-6 Versus M/s. Coastal Gujarat Power Ltd.,

The Pr. Commissioner of Income Tax-6 Versus M/s. Coastal Gujarat Power Ltd., - TMI Issues Involved:

1. Whether the gain on cancellation of forwarding contract is a capital receipt.
2. Whether the Tribunal was right in relying on the decisions of the Apex Court in the cases of M/s. Challapalli Sugars Ltd. and M/s. Sutlej Cotton Mills Limited.
3. Whether the assessment order was erroneous and prejudicial to the interest of revenue due to the Assessing Officer's failure to call for information as per the CBDT Instruction regarding foreign exchange connections.

Detailed Analysis:

Issue 1: Gain on Cancellation of Forwarding Contract as Capital Receipt

The Tribunal held that the gain on cancellation of forwarding contracts was a capital receipt. The assessee, a special purpose vehicle for setting up a power project, had entered into forward contracts for the procurement of plant and machinery in foreign currency. The gain was due to favorable fluctuation of foreign exchange rates. The Tribunal noted that the business had not commenced during the relevant period, and the gain was on capital account, reducing the cost of acquiring capital assets. The Tribunal relied on the Supreme Court's decision in Challapalli Sugars Ltd., which stated that expenses incurred in connection with the acquisition of plant during the pre-commencement period should be capitalized. The Tribunal concluded that the Commissioner was not justified in exercising revisional powers under Section 263 of the Income Tax Act, 1961.

Issue 2: Reliance on Apex Court Decisions

The Tribunal relied on the Supreme Court's decisions in Challapalli Sugars Ltd. and Sutlej Cotton Mills Ltd. In Challapalli Sugars Ltd., it was held that expenses incurred in connection with the acquisition of plant during the pre-commencement period should be capitalized. In Sutlej Cotton Mills Ltd., it was held that profit or loss arising from the appreciation or depreciation in the value of foreign currency held as a capital asset is capital in nature. The Tribunal found these decisions applicable to the present case, as the assessee's gain from forward contracts was related to the capital account and not revenue in nature. The Tribunal held that the Commissioner erred in distinguishing the facts of the present case from these decisions.

Issue 3: Erroneous and Prejudicial Assessment Order

The Commissioner of Income Tax exercised revisional power under Section 263, arguing that the Assessing Officer had not carried out proper enquiries regarding the assessee's claim of gain being a capital receipt. The Commissioner noted that the Assessing Officer failed to follow the CBDT Circular No. 3 of 2010, which required detailed examination of foreign exchange transactions. The Commissioner directed the Assessing Officer to redo the assessment de novo. However, the Tribunal found that the Assessing Officer had conducted detailed enquiries and concluded that the gain was capital in nature. The Tribunal held that the order of the Assessing Officer was not erroneous or prejudicial to the interest of the revenue, as the gain was correctly not offered to tax. The Tribunal emphasized that the power of revision under Section 263 can only be exercised if the assessment order is both erroneous and prejudicial to the revenue, which was not the case here.

Conclusion:

The High Court upheld the Tribunal's decision, dismissing the appeal by the Revenue. The Court agreed that the gain on cancellation of forwarding contracts was a capital receipt, relying on the Supreme Court's decisions in Challapalli Sugars Ltd. and Sutlej Cotton Mills Ltd. The Court found that the Assessing Officer's order was not erroneous or prejudicial to the interest of the revenue, as the gain was correctly treated as capital in nature. The Court concluded that no question of law arose, and the appeal was dismissed.