TaxTMI 
TaxTMI 
2009 (2) TMI 95
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....urse of assessment proceedings u/s. 143(3) of the Income Tax Act, 1961 (the Act), the Assessing Officer having noted the fact of assessee having received sum of Rs.68,66,673/- on cancellation of forward foreign exchange contract (hereinafter referred to as "the contract") called upon the assessee to explain as to why the said amount should not be brought to tax. The explanation tendered by the assessee has been summarized in the assessment order in paragraph Nos. 4.4(a) to 4.4(c). The Assessing Officer has thereafter treated the surplus realised on cancellation of the contract as not liable to tax by observing as under : "5. I have carefully considered the submissions made by the Assessee co. and have gone through the decisions relied upon by the Assessee co. It is undisputed that the Assessee co. is not a banking company, not is it engaged in the business of purchasing foreign exchange or dealing in the same by entering into forward contracts for the same. The surplus realised on cancellation of the forwarded contract would, therefore, ordinarily have formed part of the surplus on transfer of a capital asset and liable to tax as capital gain. However, I see merit in the argumen....
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....gainst the fluctuations in the rate of foreign currency. It has further been recorded by the Tribunal that Reserve Bank of India has formulated a policy which permits companies to enter into forward contracts for foreign exchange to be drawn by the companies with a view to limit or regulate exposure of the Indian Companies. The Tribunal has further found that the assessee company is not engaged in the business of financing or dealing in foreign exchange and as such, the exchange acquired by the assessee, does not partake the character of a trading asset. It is further found that the foreign exchange acquired under the contract is for the purpose of discharging an obligation on capital account i.e. towards borrowing made for the purpose of importing capital assets by entering into the contract. By such an act, the assessee was merely freezing its capital liability which arose on debts/borrowings in foreign exchange. After recording the aforesaid findings, the Tribunal has placed reliance on the ratio of decisions of the Apex Court in the case of CIT Vs. Tata Locomotive And Engineering Co. Ltd., 1966(60) ITR 405 as well as in the case of Universal Radiators Vs. CIT, 1993(201) ITR 800....
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....e not to be exercised lightly and orders of subordinate authorities should not be cancelled or set aside on mere whims and fancies. That for exercising such jurisdiction, there must be compelling reasons permitting CIT to interfere by exercising powers u/s. 263 of the Act. It is this order of the Tribunal which is under challenge in the present Tax Appeal. 9. Mr.B.B.Naik, learned Standing Counsel appearing for Appellant-Revenue submitted that the Tribunal had committed an error in interfering with the order made by CIT because the surplus in question was liable to be taxed on revenue account, the same having been received on cancellation of contract, which had nothing to do with the original transactions of import of capital goods. Referring to the observations made by CIT in paragraph No.5 of the order u/s. 263 of the Act, Mr. Naik submitted that such surplus could be utilised by the assessee the way assessee wanted to, including payment towards capital asset, raw material, or even just for making a profit by cancelling the contract. It was further submitted that instead of making payment towards acquisition of capital asset, the contract had been cancelled and the surplus cred....
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....Chemicals Works P. Ltd., (2009) 309 ITR 67, to submit that where the view taken by the Assessing Officer was one of the two views possible, CIT may not exercise jurisdiction under section 263 of the Act. That the Tribunal's order was required to be sustained even on this count also. 11. The facts reveal that, as noted by the CIT, for this very purpose the Assessing Officer, after framing original assessment, had issued notice u/s. 148 of the Act on 3.2.1995, for Assessment Years 1992-93 and 1993-94 for this very issue. The said notices were challenged by way of Writ Petition before this Hon'ble High Court and in the judgment rendered in assessee's own case (1996)222 ITR 68 this Court took note of the fact that out of amount received on the cancellation of the forward foreign exchange contract a sum came to be credited to plant and machinery account, to roll over premium expense account, and to the profit and loss account. The Court while recording facts has taken note of the policy framed by Reserve Bank of India permitting the companies to enter into forward contracts for the foreign exchange to be drawn by the companies with a view to limit or regulate exposure of the Indian C....
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....the contract is for the purpose of discharging an obligation on capital account, i.e. for borrowing for the purpose of importing capital asset by entering into the foreign exchange forward contract, the assessee-company was merely wishing to freeze its capital liability to discharge debts/borrowing in foreign exchange". Hence, undue emphasis on behalf of the Revenue by picking up one sentence out of the entire order and trying to build a case thereon to submit that at least some portion of the surplus was relatable to interest and thus on revenue account does not merit acceptance. It is necessary to note that the very same sentence appears in judgment rendered by this Court in assessee's own case in the judgment reported in (1996) 222 ITR 68 (at page No.70) of the reports. 14. Thus, the finding by the Tribunal is that the foreign exchange was acquired under the contract for the purpose of discharging an obligation on capital account viz. towards borrowing for the purpose of import of capital assets, which would indicate that the surplus realised on cancellation of such contract would bear the same characteristic. As held by the Apex Court, the principle that is to be applied for....