TaxTMI 
TaxTMI 
2005 (9) TMI 217
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....the same was prejudicial to the interests of the revenue in respect of certain items. The Commissioner of Income-tax, therefore, gave a notice to the assessee under section 263 and set aside the assessment on various issues with certain directions. The appeal in ITA No. 949/Ahd./1998, is against the revision order of the Commissioner of Income-tax, Central-II, Chennai. The appeal filed by the assessee against the assessment order was disposed of by the CIT(A) on 24-3-1999. Two cross appeals (ITA Nos. 780 & 991/AHD./99) are against this order of the CIT(A). Assessing Officer made fresh order in compliance with direction of CIT, and the appeal in ITA No. 1056/AHD./99 is against the order of CIT(A) disposing of an appeal against this consequential order of the Assessing Officer. 3. According to the Commissioner of Income-tax, the Assessing Officer has not made complete enquiry with reference to certain issues and his failure to make such enquiry has made the order of the Assessing Officer erroneous and has caused prejudice to the interests of the revenue. According to him, the Assessing Officer is not only art adjudicator but also an investigator and he cannot remain passive in the....
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.... we therefore, need not deal with this issue in isolation and the issue will be discussed along with and while dealing with each item individually. 5. Ground No. 2 is against treatment of the gains on cancellation of forward exchange contract as revenue receipts. The facts are that the assessee had shown net receipt of Rs. 71,93,24,207 from cancellation of Forward Exchange Contract as revenue income in the printed accounts but claimed the said receipt as not taxable being capital receipt in the income-tax proceedings. The Assessing Officer discussed this issue and reduced the amount from the WDV of the depreciable assets for computing the depreciation by considering the assessee's submission that the contracts in question were entered into in order to insulate itself against adverse fluctuation of exchange rates of foreign currency which were to hedge against any rise in future liability in respect of loans taken for purchase of plant and machinery from abroad. 6. According to the Commissioner of Income-tax, the gains on cancellation of forward exchange contract is revenue receipt and failure on the part of the Assessing Officer to treat the entire receipt as revenue rece....
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....could be capital receipt only. Reliance in this connection was placed on the opinion of C.C. Chokshi and Co., Chartered Accountants, Bombay suggesting that gains from cancellation of foreign exchange contract was capital receipt which was not liable to be taxed as capital gain, as there was no transfer of capital asset; that the gain could not be assessed as speculative profit as foreign exchange is not a commodity as understood in the sense as a commodity as mentioned in section 43(5) of the Act. 6.2 The Commissioner of Income-tax referred to the printed balance sheet for the year ended March, 1993 and for the earlier period ended on May, 1992 demonstrating that profit and loss is arising out of cancellation of Forward Exchange Contract has been treated as revenue item and accordingly, included in the profit and loss account and on perusal of certain contracts, the copies of which have been furnished by the assessee, he concluded that the gain which has arisen to the assessee on cancellation of foreign exchange contract had no connection whatsoever with the purchase of any assets; that the gain was not utilised for repayment of loan obtained in connection with purchase of asset....
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.... were utilised for reducing the foreign exchange liability. In the case of the assessee, he observed that the purpose for which the contract was entered into was given a go-by when it was cancelled with an eye to earn profit. Instead of receipt of foreign exchange, the money was accepted in Indian rupee. In these circumstances, he found it difficult to agree with the contention of the assessee that it had any nexus or connection with foreign exchange liability, be it a loan or acquisition of assets from abroad or any other payment in foreign currency. As the contracts were entered into in the normal course of business transaction, any gain on cancellation of such contract, according to him, would be a business profit and not capital receipt as claimed by the assessee. 6.3 He also rejected the contention of the assessee that the receipt was of casual and non-recurring nature by referring to the decision of Supreme Court in the case of Raghuvanshi Mills Ltd. v. CIT [1952] 22 ITR 484, Barendra Prosad Ray v. ITO [1981] 129 ITR 295, S.G. Mercantile Corpn. (P.) Ltd. v. CIT [1972] 83 ITR 700 (SC), CIT v. Calcutta National Bank Ltd. [1959] 37 ITR 171 (SC) and Gillanders Arbuthnot & Co. ....
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.... 22.00 For sale of product and interest III. NRI-OCB-Right Issue of HRC Plant 0.72 IV. Mode-III 2.04 62.35 9.39 52.95 B. Existing Plant Steel-I Mode III 23.27 5.29 18.98 85.62 13.69 71.93 7.1 The assessee had been manufacturing sponge Iron. In connection with that it had to import certain machinery. It had also planned extension and for that it had to import machinery worth 163 Million US $ and know-how of 153 Million US $. The total cost of the project estimated was 1,465 crores. IDBI financed to the extent of 125 crores to the assessee. The purchase price of equipments etc. was to be paid in foreign currency. The new plant is called HRC (Hot Rolled Coil) Project which was expected to go into operation in the last quarter of 1993. This machinery however had not come in to existence during the year under consideration. 7.2 As per guidelines of the RBI, the foreign exchange can be allowed to be bought on the basis of existing liabilities. The assessee initially booked contract varying from one to three ....
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.... of CIT v. Anglo India Jute Mills Co. Ltd. [1981] 129 ITR 352, the decisions of the Gujarat High Court in the cases of Ambica Milk Ltd. v. CIT [1999] 235 ITR 264 and Garden Slik Mills Ltd v. Dy. CIT [1996] 222 ITR 68 (Guj.), wherein the reopening on similar ground was quashed, and the decision of ITAT in ITA No. 2032/Ahd./1997. He also referred to the decision of the Punjab and Haryana High Court in the case of Groz-Beckert Saboo Ltd, v. CIT [1981] 127 ITR 608 (Punj. & Har.), wherein the loan taken but utilised for payment of purchased price of goods was held to be on capital account. The learned counsel for the assessee also submitted that the assessee has not been dealing in foreign exchange and, therefore, the question of assessment of the gain under the head "business" does not arise. It was further submitted that the foreign exchange being not a commodity, the provisions of section 43A(5) treating the gain to be speculative in nature would not arise and also in view of the fact that there Was no transfer. 7A. The learned CIT-DR Sh. Girish Dave, on the other hand, submitted that the fact that the assessee has received gain on cancellation of forward contracts is proved and c....
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.... India. The assessee thus made a gain because by that time devaluation has taken place and this gain was held to be of capital account. This is a case of the foreign currency receivable by the assessee earmarked for the payment for purchase of capital goods. The gain on devaluation of rupee repatriated was held to be on capital account even though originally the foreign currency was its income from commission. 8.1 In the case of Universal Radiators, the assessee manufacturer of Radiators for Automobiles, booked copper ingots from a Corporation in USA for being brought to Bombay where they were to be rolled into strips and sheets and then dispatched to the assessee for being used for manufacture. While the ingots were at sea, hostilities broke out between India and Pakistan, and the vessel carrying the goods was seized by the authorities in Pakistan. The assessee's claim for the price of the goods was ultimately settled in its favour by the insurer in USA. The Indian rupee was devalued and, therefore, in terms of rupee, the assessee got Rs. 3,43,556 as against its payment of Rs. 2,00,164 at the pre-devaluation rate. The assessee claimed that the difference was not taxable. Th....
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....ng or continuing its business which was to be carried on from day-to-day. 8.3 In the case of Anglo India Jute Mills Co. Ltd. the assessee who engaged in the manufacture of jute goods wanted to import certain machinery and in that connection obtained the license and placed the order for the machinery. In order to safeguard the financial deal it entered into the contract like the assessee, with the State Bank of India for the purchase of sterling. The assessee did not advance anything to the bank against this contract. In the meantime the Indian rupee was devalued and as a result the cost of the machinery increased by more than fifty per cent. The RBI also raised objections to the booking of foreign exchange. By the time these difficulties were resolved, the import license expired and in 1968 the bank cancelled the outstanding balances of the contracts and credited the assessee's account with a sum of Rs. 3,13,651 being the difference in exchange rate less charges. The Assessing Officer taxed this amount as revenue receipt arising from the assessee's business. The AAC however held that the amount was not taxable as income from the business but was assessable as capital gai....
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....ed from the actual cost of the asset, as defined in section 43(1) of the Act and, therefore, it cannot be allowed as a revenue expenditure. 8.6 In the case of India Cement Ltd. their Lordships of the Supreme Court considered the liabilities of stamp charges, registration fees and Lawyer's fees etc. for obtaining the loans which were secured on fixed assets. The said loan was utilised to pay prior debt of Rs. 25 lakhs due to M/s. A.F. Harvey Limited and Madurai Mills Ltd. and the balance Rs. 15 lakhs as stated by the Directors in their report was utilised towards working funds. The High Court held that the first amount of Rs. 25 lakhs was expenditure for the purpose of capital nature and the balance Rs. 15 lakhs was for working capital and in that connection after considering number of decisions, their Lordships summarised the decision at page 63 by stating: "To summarise this part of the case, we are of the opinion that: (a) the loan obtained is not an asset or advantage of an enduring nature; (b) that the expenditure was made for securing the use of money for a certain period; and (c) that it is irrelevant to consider the object with which the loan was obtained. Consequentl....
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.... 148 and in that context their Lordships of the Gujarat High Court held that there was no new information but only a change of opinion. The assessee had disclosed the material to the Assessing Officer who was satisfied about the factual and legal aspect and following the judgments at the Apex Court, the High Court quashed the opening of the proceedings. 8.8 In the case of Groz-Beckert Saboo Ltd. a case before the Punjab and Haryana High Court, the assessee under a collaboration agreement, imported certain hosiery and knitting machinery against which the foreign company granted loan of Rs. 5.5 lakhs to the assessee to meet increased cost. There was devaluation of Indian rupee and the assessee was required to pay increased amount in rupee towards the loan and interest. The Tribunal held that the loan was received from the supplier of the machinery and, it was received towards the beginning of the career of the company, that though the trading operations had begun prior to the receipt of the loan, yet the loan had to be treated as part of capital structure, and that it was immaterial to consider whether the loan was utilized for acquiring any capital asset or used as circulating ca....
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....profit or loss to the assessee. 8.10 In the aforesaid case the assessee-company borrowed a sum of $ 7,00,000 from its selling agent for iron ore, in Tokyo. The method of extracting iron ore from its mines by the said company had become outdated and it was felt necessary to import from Germany the machinery for mechanisation. Accordingly, the assessee-company advanced the sum of $ 7,00,000 which it had obtained as a loan from E to the said company D for the import of machinery and the loan given by him was utilised by D for the import of mining machinery. The amount so advanced was agreed to be adjusted against the price of iron ore supplied by the said company D to the assessee. On devaluation of Indian Rupee the assessee's liability in respect of above loan was increased by Rs. 19,07,217 which the assessee has claimed as a deduction in computing its income. It was disallowed and in that connection, their Lordships of the Bombay High Court held that the entire amount of loan which had been advanced to D company for the purchase of machinery had been repaid by that company D to the assessee by way of adjustment against the price of iron ore supplied to it which was its stock-....
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....and the erection of that power station was completed during the previous years relevant to the assessment years 1958-59 and 1959-60, respectively. For the purpose of purchase of the machinery required for the setting up of the said thermal power station, the assessee raised loans from the World Bank. According to the terms of the loan agreements under which the said loans were given, they were repayable in foreign currencies and in instalments agreed to between the World Bank and the said assessee-companies. The foreign currencies in which these loans were to be repaid were Deutsche Marks (referred to hereinafter as "Marks") and Netherland Guilders (referred to hereinafter as "Guilders"). There was a revaluation of Marks and Guilders on March 7/8, 1961, respectively. As a result of this revaluation, there was an increase in the liability to repay these loans in terms of rupee and this increase in liability to repay these loans came to Rs. 41,82,062 in March 8/9, 1961. In the assessment for the assessment years 1970-71 and 1971-72 the assessee-companies claimed depreciation on account of increased liability for development as aforesaid on the sum of Rs. 18,46,023. The said amount of....
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....d was "forest land" covered with the natural and wild growths. After that, at any rate, the accountable person has to prove change of its character. 8.14 In the case of Sutna Stone & Lime Co. Ltd. in a case before their Lordships of Hon'ble Calcutta High Court, the question was with regard to exemption under section 80-I and in that connection it was held that it is well settled that in order to be entitled to exemption an assessee must strictly come within the terms of the provisions under which such exemption is being claimed but the provisions must be construed reasonably in the context of the purpose for which the section has been introduced. 8.15 In the case of Raghuvanshi Mills Ltd. the assessee-company had insured its mills with certain insurance companies and also had taken out certain policies of the type known as "consequential loss policy" which insured against loss of profit, standing charges and agency commission. The mills were completely destroyed as a result of fire and a certain amount was paid to the assessee by the insurance companies. The question was whether this amount which was treated as paid on account of loss of profits was assessable to income-t....
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....hold, improve, lease or otherwise dispose of land, houses and other real and personal property and to deal with the same commercially. The assessee within less than 2 weeks of its incorporation took on lease a market place for an initial term of 50 years, undertaking to spend Rs. 5 lakhs for the purpose of remodelling and repairing the structure on the site and also gave the right to sublet the different portions. 8.19 In the case of Scindia Workshop Ltd. it was held by their Lordships of the Bombay High Court that whenever there is a receipt of an amount by an assessee, it is not the nature of the receipt under the general law that determines its nature for the purpose of the IT Act but the receipt would have to be considered under the provisions of the IT Act from the commercial point of view. In this case when the Zamindari system in UP was abolished, compensation was paid in the form of bond by which the UP Government was to pay a fixed sum of money every year on a specified date and for a specified number of years. The Zamindars sold these bonds against cash in the open market to several investors. The assessee purchased interest bearing bonds of the face value of Rs. 10 la....
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....ome filed along with the return, the assessee claimed this amount as a deduction from the net profit computed on the ground that this is a capital receipt not liable to tax. The assessee-company is a manufacturer of textile fabrics. It imports various machineries and equipments, inter alia, against loans in foreign currency. Against the instalment of loan payable and interest payable on such loans, the assessee-company has entered into contracts covering the foreign exchange components to guard against the fluctuation in the rate of the foreign currency. In respect of foreign currency, the policy of the RBI permits the companies to enter into forward contracts for the foreign exchange to be drawn by the companies with a view to limit or regulate the exposure of the Indian Companies. The Foreign Exchange Contracts are entered into by the company with a view to limiting the Company's obligation for future payments in foreign exchange. The assessee-company is not engaged in the financing business or dealing in foreign exchange and as such, the exchange acquired by the assessee-company, does not partake the character of a trading asset. The foreign exchange acquired under the contr....
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....ion of the contract was in cash, the same cannot be taxed as a perquisite within the meaning of section 28(iv) in view of the decision of the of the Gujarat High Court in the case of CIT v. Alembic (P.) Ltd [1981] 130 ITR 168. 10.1 In the instant case, the ld. CIT had not given valid reasons to show as to how the profit earned on cancellation of the forward foreign exchange contract was assessable as a revenue profit. The ld. CIT has not also indicated the facts to which the Assessing Officer has not applied his mind and he has also not stated in what respect the Assessing Officer was required to make any further enquiries relating to the subject-matter of dispute. In any case, whether in the set of facts which are available in the instant case, profit on cancellation of a forward foreign exchange contract is on capital account or on revenue account is definitely a highly debatable issue. The view taken by the Assessing Officer that the surplus realised by the assessee on cancellation of forward foreign exchange contract is a capital receipt appears to be a much more reasonable view than the view adopted by the ld. CIT that it is a revenue receipt. A reference to para 16 o....
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....ntract. The only exception is in respect of forward exchange contracts related to liabilities in foreign currency incurred for acquisition of fixed assets. 15. Any profit or loss arising on cancellation or renewal of a forward exchange contract should be recognised as income or as expense for the period, except in case of a forward exchange contract relating to liabilities incurred for acquiring fixed assets, in which case, such profit or loss should be adjusted in the carrying amount of the respective fixed assets." 8.23 From the above we conclude that the gain or loss which relates to circulating capital is revenue and that relates to fixed capital it is capital. If the capital/fixed asset is acquired in India or from abroad, the liability for payment to seller would be on capital account. Similarly if a loan taken to pay the seller that liability would also be on capital account. An arrangement for meeting such liability would also be on capital account and the expenditure by way of interest or exchange fluctuation would increase the capital expenditure; conversely any concession in discharge of liability or gain on account of exchange fluctuation would decrease the ....
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....d to make profit. Profit motive otherwise also is not decisive of the question whether a particular receipt is capital income-see A.K.T.K.M. Vishnudatta Antharjanam v. CAIT [1970] 78 ITR 58 (SC). The forward contracts were cancelled before the due date because, it was no more necessary to have a cover continued in view of greater stability of Indian rupee pursuant to the announcement by the Government, of the partial stability of Indian rupee and allowing cancellation of such contracts by RBI. Cancellation before the due date also, in our opinion, is not very relevant to hold that it was a business venture or an adventure in nature of trade because the contracts themselves were for one to three years and were not covering the entire period of payment. It cannot even be called a casual income. The fact that they were allowed by the RBI to be cancelled on the contrary gives the impression of the stability of Indian rupee vis-a-vis US Dollar. 8.26 As regards speculation nature of the gain we observe that section 43(5) applies to transactions of commodities and currency is not a commodity. A commodity ordinarily means processed or processed goods i.e., grain, fruits, vegetable, prec....
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....as a part of the circulating capital. The liability cannot be said to be for making the payment in foreign exchange nor on account of purchase of capital goods. It was in the nature of a circulating capital and in view of the decision of the Supreme Court in the case of Sutlej Cotton Mills Ltd. and the discussion aforesaid the gain arising on cancellation of forward contract relating thereto has to be on revenue account. The order of the CIT to this extent i.e., the gains of Rs. 22 crores arising on cancellation of forward contract stated to be relating to repayment of the liability of Reddington is upheld. 9. Ground No. 3 against revision order is for not allowing expenditure on premium paid for taking forward contracts. It is connected with cancellation of foreign exchange contracts of Rs. 13,68,58,878 which according to the Commissioner of Income-tax was capital in nature. On examination of Schedule XI to the printed accounts, the CIT noticed that the aforesaid sum of Rs. 71,93,24,207 was the net amount after reducing therefrom the expenditure of Rs. 13,68,58,878 being the expenditure which the assessee had to pay as premium and other incidental charges in connection with ent....
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....ice to show that the amount in fact had been included therein. In the net result of the three issues, he directed the Assessing Officer to treat the aggregate as business profit and to increase the cost/WDV of the assets by Rs. 89,29,83,055 (Rs. 71,93,24,207 plus Rs. 13,68,58,878 plus Rs. 3,68,00,000) and directed him to allow depreciation thereof. This gain pertains to the Energy Division for the period from April to May, 1992 and is actually included in the Misc. income of Rs. 5,41,08,225 of this Division and which formed part of total Misc. income of Rs. 10,48,38,254 shown in the final accounts for the year ended 31-3-1993. The Assessing Officer may verify this and give necessary relief to the assessee. 11. The next issue on which the Commissioner of Income-tax found the order of the Assessing Officer to be erroneous and prejudicial to the interests of revenue is in not taxing the gain amounting to Rs. 53,73,04,137 on transfer of business units. The facts are that in the year under consideration, the assessee-company sold three of its units/divisions to its wholly owned subsidiary - the first two being energy division and offshore division to M/s. Essar Oil Ltd., and the thir....
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....rriving at capital gains." 12. According to the Commissioner of Income-tax, the value of assets transferred to are known from the books of its divisions which were maintained separately. The assessee also furnished details of assets as accounted for in the books of transferee-company and he reproduced the figures in the following table in this behalf:- S. No. Particulars of the assessee- Value in the books of the purchaser(Rs.) Value in the books company (Rs. ) Difference company (Rs. Sale of undertaking to M/s. Essar Oil Ltd. Energy Division 1 Plant and Machinery 79,77,48,280 130,07,45,544 50,29,97,264 2 Office equipment 34,78,995 34,78,995 Nil 3 Furniture and Fixtures 12,77,339 12,77,339 Nil 4 Vehicles 6,69,876 6,69,876 Nil 80,31,74,490 130,61,71,754 50,29,97,264 Offshore Division 5 Plant and Machinery 6,11,832 66,11,832 Nil 6 Office equipment 3,46.257 3,46257 NIL 7 Furniture and Fixtures 47,119 47,119 Nil 8 Vehicles 3,14,899 3,14,899 Nil 73,20,107 ....
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....emicals (P.) Ltd. [1980] 126 ITR 1 and the Boards Circular No. 23D (LXXVIII-6 of 1966) explaining the decision of the Supreme Court in the case of Mugneeram Bangur & Co. as considered in the case of CIT v. Narkeshari Prakasham Ltd. [1992] 196 ITR 438 (Bom.). In view of the aforesaid decisions, he concluded that transfer of business as a whole would constitute capital asset and the profit on sale of the undertaking as taxable profit. However, in view of the specific provisions of section 50 in respect of depreciable assets he held that surplus would be assessed as short-term capital gain and in doing so, the Assessing Officer is directed to take into account only the value as recorded in the books of the transferee as indicated in the table aforesaid. He however directed that this would result in increase of WDV as the Assessing Officer has reduced the WDV by the amount of the surplus. 12.2 He gave the following reasons to arrive at the gain from sale of each division:- (1) The assessee-company itself accounted for the sale consideration separately for each unit/division; (2) Books of account for each unit/division are separately maintained and block of assets i....
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....fit on sale of undertaking is shown at Rs. 15,31,93,662. It was actually worked out to Rs. 15,16,48,504 i.e., after adjusting the loss of Rs. 9,655 on sale of assets and profit and loss on sale of depreciable assets of Rs. 18,57,425 and 3,21,922 in the computation of income. 13.1 The division-wise working is given as under:- 1. Sale to Essar Oil Ltd. Energy (Rs.) Off-shore (Rs.) Net block of fixed assets : 80,55,94,816 73,20,107 Current assets 48,38,19,445 71,79,58,685 Misc. expenses 2,40,66,648 86,625 131,34,80,909 72,53,65,417 (Rs. 131,34,80,909 + Rs. 72,53,65,417) = 203,88,46,326 Less : Consideration = 215,00,00,000 11,11,53,674 2. Sale of Essar Projects Ltd. (Construction division) Net block of fixed assets : 1,98,87,938 Current assets : 14,35,83,685 16,34,71,623 Less : Liabilities : 5, 39,66,453 10,95,05,170 Less : Consideration : 15,00,00,000 4,04,94,830 Grant Total (1 + 2). 15,16,48,504 13.2 Ini....
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....s licensee or tenant or owner or otherwise; all plant and machinery, rigs, barges, pontoons, dredgers used and occupied by EGL whether as a licensee or tenant or owner or otherwise, all plant and machinery, patents, trademark and designs, vehicles, etc.; the amount of advances (including loans and other debts whether secured or unsecured bills of exchange, advances recoverable in cash or in kind or for value to be received, e.g., rates, taxes, insurance, etc.; current assets including interest accrued on investments, the securities shares, debentures, bonds and other investments; any other asset appearing in the books; technical collaboration and operating agreements, human resources, technical expertise and supporting designs and drawings, warranties, inventions, power of attorneys, assignments, deed of confirmations, mortgages, goodwill, permits, licences, quotas and other intangible benefits, ongoing contracts, tenancies, pending claims, lease of various premises, right and other easements, technical and engineering data, design data, etc. and the claim and receipts under arbitrations, negotiations disputes, court proceedings, etc. 13.5 It is submitted that the CIT had no bas....
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....purchase consideration. The written down value of the plant and machinery as dead stock as per books was Rs. 4,36,896. The difference between Rs. 15,87,296, the value of plant, machinery and dead stock was revalued, and Rs. 4,36,896, the written down value of plant, machinery and dead stock as per the assessee's books came to Rs. 11,50,400. The written down value as per income-tax record however, was Rs. 3,32,276. After deducting the same from the amount of Rs. 15,87,296 the Assessing Officer brought the balance Rs. 12,56,020 to tax under section 41(2) of the Act and it was upheld by Their Lordships of the Supreme Court. In this connection, Their Lordships of the Supreme Court observed, "that in the agreement of sale, there was no reference to the value of the plant, machinery and dead stock. But on the basis of the information that was furnished by the assessee before the Income-tax Officer it became evident that the amount of Rs. 11,50,400 had been arrived at by taking into consideration the value of the plant, machinery and dead stock as assessed by the value at Rs. 15,87,296. Section 41(2) was applicable." It was further observed, "that the liability under section 41(2) was....
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....for any itemised value or item by item price fixed for each assets of the firm. The entire business of the undertaking together with its assets and liabilities was sold was for a slump price and, therefore, it was held that provisions of section 41(2) were not applicable. This decision was reversed by Their Lordships of the Supreme Court in Artex Mfg. Co.'s case wherein it was held that though in the agreement of sale there was no reference to value of the plant, machinery and dead stock, but on the basis of information that was furnished by the assessee before the Income-tax Officer it became evident that the amount of consideration had been arrived at by taking into consideration the value of the plant, machineries and dead stock as assessed by the valuer. 15.4 In the case of Hindustan Co-operative Insurance Society a case before Their Lordships of the Calcutta High Court, the assessee was carrying on life insurance business which was taken Over by the Life Insurance Corporation of India and compensation was paid for such taking over. It was held that the capital asset in the present case was the running business itself and the value of compensation was based on the calcul....
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....ifferent and definite items having regard to their valuation on the date of sale, the agreed price cannot be apportioned on capital assets in specie. What is sold in such a case is not the new item of property forming part of the aggregate, but the capital asset consisting of business of the whole concern or undertaking. What arises for consideration from the point of view of taxation is only the gain in respect of that transaction and nothing else. In this case, the decision of the Gujarat High Court in the case of Sarabhai Chemicals Artex Mfg. Co. the Supreme Court decision in the case of Mugneeram Bangur & Co. and the decision of the Bombay High Court in the case of Killick Nixon & Co. v. CIT [1963] 49 ITR 244 (Bom.) and also the decision of CIT v. West Cost Chemicals & Industries Ltd. [1962] 46 ITR 135 (SC) were referred to. 15.7 In the case of F.X. Periera & Sons (P.) Ltd. a case before Their Lordships of the Kerala High Court, the business of the assessee in extraction and sale of mineral and mineral sands as an agent of the Government, consequent to a dispute, was sold to the Government by an agreement dated 12th January, 1954. One of the questions for consideration befor....
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.... plant, machinery and dead stock. But on the basis of the information that was furnished by the assessee before the Income-tax Officer, it became evident that the amount of Rs. 11,50,400 had been arrived at by taking into consideration at Rs. 15,87,296. This is not a case in which it cannot be said that the price attributed to the items transferred is not indicated and, hence section 41(2) of the 1961 Act cannot be applied. We are, therefore, unable to agree with the view of the High Court that section 41(2) of the 1961 Act is not applicable." 15.9 In the case of Kishorechand K. Bansal the Tribunal found that in the assessee's own computation, the current assets and current liabilities reflected in the books of the unit as on 31-8-1982 were Rs. 2,81,63,224 and Rs. 2,71,95,415 respectively. Thus, the excess current assets over the current liabilities worked out to Rs. 9,61,809 and this excess has been deducted from the sale consideration of Rs. 86,21,000 and the balance Rs. 76,53,191 represented the sale realisation of the block of assets held by the assessee. The total WDV of the block of assets aggregated to Rs. 28,17,418. The assessee has deducted therefrom the sale consid....
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....e agreement was approved by the company in any general meeting and, therefore, the provisions of section 12B of the 1922 Act were held not applicable. In this case, following the decision in the case of B.C. Srinivasa Shetty it was observed that the charging section and the computation provision in the Income-tax Act, 1961 together constitute an integrated code and in a case to which computation provision cannot apply, the charging section shall also not apply. 15.12 In the case of CIT v. S. Natarajan [1999] 236 ITR 472 before Their Lordships of the Madras High Court the assessee, an individual, sold a proprietary business as a going concern for a consideration of Rs. 36,900. The Assessing Officer computed under section 41(2) profit at Rs. 2,08,595 on the ground that it has arisen by reason of sale of the business and the other question was whether the assessee was liable to long-term capital gain of Rs. 1,58,800 on transfer of this business. Their Lordships of the Madras High Court referring to the subsequent decision in the case of Artex Mfg. Co. explaining its earlier decision of Mugneeram Bangur & Co. holding that even in the case of realisation sale, the excess amount reali....
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....n the written down value and the actual cost, then the surplus to the extent of such excess was liable to be treated as capital gains for the purpose of levy under section 45 of the Act." 15.14 On the analysis of the aforesaid decisions, the following principles can be culled out: (i) The business undertaking as a whole in itself is a property and a capital asset as such; (ii) That when the business as a whole is transferred it would be a transfer of property within the meaning of Section 41(2) (since deleted) and section 45 of the Act. (iii) Even if a slump price is paid for the transfer of the business as a whole, the liability under section 45 could arise:- (a) where the consideration is fixed in the deed of sale/transfer; (b) where it can be determined on the basis of the details furnished by the parties; or (c) the value put by the parties in their respective books; or (d) where the assets are valued by the valuer, etc. (iv) As the transfer of the business undertaking as a whole by itself is a property within the meaning of section 2(47) of the Act it may be subjected to capital gain by virtue of the pr....
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.... we find that there is no difference in various items of depreciable assets except in the valuation of plant and machinery in Energy Division and in Construction Division where the difference is also in the valuation of Tugs And Barges. Therefore, the entire excess would be relatable to the depreciable assets, and, therefore, the said bifurcation of the consideration has to be taken as price attributable to these assets sold and accordingly, the assessee would be liable to capital gain tax on this excess. 15.17 Section 50 as it stood at the relevant time and applicable to the year under consideration provides that where the capital asset is an asset forming part of the block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income-tax Act, 1922, the provisions of sections 48 and 49 shall be subject to the following modification: "(1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, e....
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....n is to be charged to tax under the head "short-term capital gain". The action of the Commissioner of Income-tax in revising the assessment to this extent, in our opinion, is justified. However, as aforesaid the amount of gain which the Commissioner of Income-tax has determined at Rs. 53,73,94,137 based on the values put by the transferee-company cannot be upheld as that amount is much more than the full value of the consideration and was never received nor receivable by the assessee. The capital gain is to worked out on the basis of the consideration received or accruing to the assessee on account of transfer and as recorded in the sale deeds. The gain of the amount of Rs. 15,16,48,504 as computed by the assessee which is based on the actual consideration received alone would be the chargeable amount. We, therefore, direct the Assessing Officer to substitute this figure as against the direction of the CIT to assess Rs. 53,73,94,137 to capital gain. 16. In ITA No. 780/Mds./1999 of the assessee the first four grounds are seeking allowance of consequential depreciation which was not allowed by the CIT(A) though directed to be allowed by the CIT in 263 order. This is on account of ....
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....expansion of the business and no new business was set up, the business was completely integrated and, therefore, the expenditure on trial production was a revenue expenditure. The expenditure was on consumption of gas, power and other related items. The CIT, however, held that it was a case of setting up a new unit and the contention of the assessee that there is only an expansion of the existing unit is not borne out by any evidence on record. The details of the expenditure incurred also indicated according to him, that the expenditure was on trial run in respect of new Module-III and the capitalisation whereof was approved by the company's auditor and, therefore, there was no basis for treating the expenditure as revenue expenditure. He also referred to in this connection the decision of Bombay High Court in the case of CIT v. G.T, Industries [1993] 203 ITR 538 and directed the Assessing Officer to capitalise expenditure and allow depreciation as was done by the assessee in its books of account at the prescribed rate. 19. The assessee's submission is that the CIT erred in holding that all expenses incurred till commencement of commercial production of the third unit of....
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.... of CIT v. Prithvi Insurance Co. Ltd. [1967] 63 ITR 632. It is submitted that the assessee has already commenced the business and, therefore, the expenditure has to be allowed in view of the decision of the Gujarat High Court in the case of Asstt. CIT v. Ashima Syntex Ltd. [2001] 251 ITR 133. He also referred to the decision of the Tribunal in the case of United Phosphorous Ltd. v. Jt. CIT [2002] 81 ITD 553 (Ahd.) at page 670. Reference is also invited to the decision in the case of CIT v. Kanoria General Dealers (P.) Ltd. [1986] 159 ITR 524 (Cal.) wherein it was held that once business is set up the assessee would be entitled to depreciation even if it were not employed any commercial production. 20. The learned DR, on the other hand, submitted that the CIT was justified in disallowing the claim of the assessee and in this connection he relied upon the decisions of the Gujarat High Court in the cases of Shree Vallabh Glass Works Ltd. v. CIT [l98l] 127 ITR 37 at page 42 and CIT v. McGaw Ravindra Laboratories Ltd. [1981] 132 ITR 401 wherein the expenditure before regular production was disallowed. He also relied upon the decision of the Madras High Court in the case of Madras fer....
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....High Court further held that the Tribunal was justified in holding that the new factory at Bangalore did not constitute a new business but was only an establishment of a new unit of the existing business at Baroda and that the interest incurred by the assessee on the borrowing utilised for the purpose of establishing the Bangalore unit is for the purposes of the assessee's business and as such allowable as revenue expenditure. 21.3 In the case of Shree Vallabh Glass Works Ltd., before the Gujarat High Court, the assessee which manufactured safety glasses, wired glasses, etc. started construction of its factory in the year 1961-62 and imported machinery from West Germany for the erection thereof. The plant was commissioned in October, 1963. The assessee incurred expenditure before commencement of production in assessment year 1964-65 was of Rs. 4,80,873 which had been capitalised and the assessee claimed depreciation thereon. Here also, following the decision of the Supreme Court in the case of Chellapalli Sugars Ltd the Court held that the expenses incurred prior to the plant of the assessee coming into production were incurred by the assessee for putting its plant into prod....
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....rt held that the new business could not be ready to discharge the functions for which it was established, namely, the manufacture of scientific instruments and communication equipment until the machinery necessary for the purpose of manufacture was installed. It was further observed that the business could not be set up until July, 1966 when the machinery had been installed and the factory was ready to commence business. Revenue expenditure incurred I before that date would not be a permissible deduction in the assessment for the assessment year 1966-67. It is a case where even machinery was not installed and obviously the expenditure cannot be on revenue account. 21.7 In the case of Prem Conductors (P.) Ltd. a case before the Gujarat High Court, the question was as to when a business can be said to have started, it was held that a company can be said to have set up its business from the date when one of the categories of its business is started and it is not necessary that all the categories of its business activities must start either simultaneously or that the last stage must start before it can be said that the business was set up. The test to be applied is as to when a busi....
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....xpenses incurred in relation to new units of existing business cannot be allowed as revenue expenditure as unlike provisions of section 36(1)(iii), the provisions of section 37 clearly and unmistakably deny any deduction of expenditure in the capital field. The Tribunal had relied on the judgment of the Gujarat High Court in the case of Shree Vallabh Glass Works Ltd. The learned counsel contended that the said decision has been impliedly overruled by the Supreme Court in Akkamamba Textiles Ltd's case and Swakami Mills Ltd s case is not correct as that was another judgment in the case of CIT v. Vallabh Glass Works Ltd. [1982] 137 ITR 389 which relate to the allowability of guarantee commission. In the judgment in Shree Vallabh Glass Works Ltd.'s case, the High Court held that all expenditure necessary to bring assets into existence and to put those assets in working condition is part of the actual cost of assets to the assessee and depreciation thereon has to be allowed by the Income-tax authorities. The assessment year under consideration was 1964-65. The construction of factory at Anand was started in the accounting year 1961-62 and the plant was commissioned and put into ....
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..... which is the test laid down for determining whether two lines of business constitute "same business". The aforesaid judgment, therefore, also instead of supporting the case of the revenue, support the decision rendered by the learned Commissioner (Appeals) on this point. Likewise the facts and all other judgments relied upon by the CIT-DR are clearly distinguishable, as all these cases relate to expenditure incurred in connection with setting up of an altogether new business and those are not cases of expansion of existing business. XXI(6). The allowability of such expenditure incurred by the assessee in relation to new units/projects constituting part of the same existing business of the assessee, is supported by various judgments relied upon by the learned counsel. On a careful consideration of the entire relevant facts and the judgments cited supra, we are of the opinion that the view taken by the learned Commissioner (Appeals) in relation to the allowability of travelling expenses and salary and wages expenses relating to setting up of new units forming part of the existing business of the assessee, is perfectly valid and justified. We do not find any justification t....
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.... different point of time, viz., purchase and sale of cloth, manufacture of machinery etc. The assessee could not recover the outstanding dues and claimed deductions under section 37 of a sum of Rs. 9,603 paid as retrenchment compensation and also claimed deduction under section 36(1)(vii) of an amount of Rs. 34,617 by way of bad debts. The ITO as well as AAC rejected both the claims. The Tribunal held that since retrenchment compensation was paid and bad debts were incurred in business totally distinct from the business carried on by the assessee, the deductions could not be allowed in the assessment of the assessee because several businesses were widely different in nature. The High Court held that the Board of Directors of the assessee, which was a private company, was in overall control of all the five business activities which were owned and carried on by the assessee. There was a common fund from which the necessary capital and working funds were supplied to the various business activities. The ultimate gain or loss of the businesses was also worked out by a consolidated profit and loss account and balance sheet. The source of finance for running the various businesses was thu....
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....mon funds etc. 21.14 In the case of L.M. Chhabru, the Supreme Court observed that the question whether different ventures carried on by the assessee are parts of the same business must depend on the facts and circumstances of the case. In a later decision of the Supreme Court in Waterfall Estates Ltd. v. CIT [1996] 219 ITR 563, it was observed: "We do not think it necessary to deal with the facts of each of the decisions for the aforesaid reason and also because the said question is essentially a question of fact. No single test can be devised as universal and conclusive. The question has to be decided on a consideration of all the relevant facts and circumstances. Some facts may tend one way and some other the other way. An overall view has to be taken and a conclusion arrived at." 21.15 There is no doubt about the proposition as canvassed by the learned CIT-DR that the liability of an expenditure cannot be allowed if a business is not yet started and carried on by the assessee during the year under consideration in the light of the decisions. But there are several decisions of the Supreme Court and various High Courts and also of the Tribunal wherein the expenditur....
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....es are distinct and separate, but no decisive inference can be drawn from that; (iii) The decisive test is the unity or control which is indicated by inter-lacing inter-dependence and inter-connections between the businesses and that should be shown to exist by reason of the common management, common administration, common fund and common place of business. 21.17 The assessee's argument is that the assessee is engaged in the business of manufacture and sale of Hot Briquetted sponge with 8,80,000 MT capacity, it expended its capacity to 13,20,000 MT with the introduction of the 3rd module having capacity of 4,44,000 MT. The assessee who in the present case, has already been in the business and in view of the Supreme decisions referred to above, was engaged in a same and integrated business with a complete inter-connection and inter-lacing between the different lines of activities carried on by the assessee and that the fact that nature of two lines of business is not relevant and the decisive test is the unity of control which is indicated by inter-lacing, interdependence and inter-connection between the businesses by reason of the common management, common administr....
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....nbsp; 15,66,000 The above expenditure has been capitalized to the cost of Steel Plant Module-III 11,41,33,843 II. Interest on working capital shown under : 'Deferred revenue expenses" (i) Interest on CC/OD 2,01,73,734 (ii) Interest on security deposit 15,000 (iii) Interest on documents retired 1,10,87,836 (iv) Interest on bills discounted 37,89,375 (v) Bank charges 75,402 3,51,41,347 14,92,74,847 21.20 From these details we find that the expenses actually incurred on trial run are only those shown in the aforesaid chart as "start-up" expenses as reduced by the element of interest i.e., Rs. 6,77,43,836 (9,73,02,843-2,96,59,007). The other expenses are allocated from out of establishment and folio maintenance including interest are not the direct expenses on trial run are even otherwise allowable as revenue expenditure, the assessee bei....
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....rd 1,20,000 25,20,000 24,00,000 Twin Tower flat 18,000 60,000 42,000 Parimal building 48,000 2,02,344 1,54,344 Flat in Navrang Basant Co-op. Housing Society Flat in Versova Janak 15,000 2,25,000 2,10,000 Deep Housing Society 9,000 30,000 21,000 Jolly Makers Chambers in para 20.6 of this order 1,20,000 Already considered 28,27,344 Less : l/5th for repairs 5,65,468 Property income further to be assessed 22,61,875 23.1 The learned counsel of the assessee submitted that the rent payable has been actually settled in the next year and, therefore, the assessee offered the full amount in the next year, which has been assessed in assessment year 1994-95. Therefore, that amount was offered and had already been assessed in the subsequent year, the same is not required to be added again. 24. Income from house property is assessed under section 22 of the Act and it is the annual value of the property which is chargeable to tax from year to year. Section 23 deals with the ascertainment of the ann....
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....ay be directed to allow 1/10th of the finally determined amount incurred in the initial year. We accordingly uphold the order of the CIT and direct, however that the deduction of 1/10th expenditure of the amount as is finally determined for the purpose be allowed to the assessee. 27. The next dispute is against the disallowance of the payment on account of loyalty coupon amounting to Rs. 10,24,30,110 which was disallowed by the CIT being the amount paid to shareholders who were allotted shares on conversion of fully convertible debenture. The assessee's contention is that the expenditure was akin to premium paid on debentures and, therefore, wholly and exclusively allowable as business expenditure. The facts are that the assessee has reduced from the share premium account the said sum of Rs. 10,24,30,110 from the reserves and surplus account but claimed the same as revenue expenditure in the computation of income filed along with the return. The assessee issued fully convertible debentures in the year 1989 which were converted (into shares partly on allotment in 1990 and fully by 1992. While issuing fully convertible debentures the assessee announced that debenture holders a....
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....ed by the assessee that the expenditure on issue of convertible debentures is an allowable deduction in view of the decision of the ITAT in ITA No. 538/Ahd./89, the decisions in the case of Tungabhadra Industries Ltd. and the decisions in Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802 (SC) and Universal Cables Ltd. v. CIT [2000] 243 ITR 371 (Cal). It is further submitted that the expenditure was to save the administration cost of transfer. It is further submitted that it was in the nature of cost of raising the finance and, therefore, in view of the decision of the Supreme Court in the case of India Cement Ltd. it is an allowable expenditure. 29. The learned DR referred to the provisions of section 78 of the Companies Act and submitted that the payment was related to shares and not the debentures because it was to be paid only when the debenture holders became shareholders and retain the shares for three years period. He, therefore, supported the order of the CIT in view of the decisions in Punjab State Industrial Development Corpn. Ltd.'s case and Brooke Bond India Ltd. case. 30. We have heard the parties and considered the rival submissions. In parag....
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....fit-making, it still detains the character of capital expenditure since the expenditure is directly related to the capital expansion of the capital base of the company. 31.1 The case of Brooke Bond India Ltd., the Supreme Court held that the expenditure incurred by a company in connection with the issue of shares, with a view to increase its share capital, is directly related to the expansion of the capital base of the company, and is capital expenditure, even though it may incidentally help in the business of the company and in the profit-making. In this case, the assessee issued ordinary shares of Rs. 16,75,000 of Rs. 10 at a premium with a view to increase its share capital and in that connection it incurred an expenditure of Rs. 13,99,305. 31.2 In the case of Thungabhadra Industries Ltd. the fees paid to the Registrar of Companies in connection with the increase of the authorised capital of a company was held to be capital expenditure and, therefore, the expenditure was not allowable under section 37. In this case, a clear distinction was made by the High Court that a share is clearly distinct and different from a debenture. It is well settled that taking of a loan does n....
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....refore, in view of the Supreme Court decision in Madras Industrial Investment Corpn.'s case the expenditure is to be bifurcated in three years period from October 1989 to September 1992 and three months period which falls in this year for holding debenture i.e., from 1-4-1992 to 30-6-1992 could not be disallowed. In other words 1/12th (3/36) of Rs. 10,24,30,110 being Rs. 85,35,843 is to be allowed to the assessee. We direct accordingly. The order of the CIT on this ground is modified to this extent. 34. The next dispute is with regard to disallowance of bad debt of Rs. 53,28,909 written off during the year under consideration. The claim of the assessee was that the CIT failed to appreciate that the bad debt written off pertained to the Offshore Division and they were written off before the transfer to Offshore Division of Essar Oil Ltd. The contention of the assessee that the amount was written off was not found to be correct as according to the CIT, there was no write off in the books of account and instead this amount was deducted from the contract receipts details whereof have also not been furnished, He further observed that in the total consideration received from M/s. ....
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....mount. The two cases of the Gujarat High Court referred to above were before the insertion of the Explanation below section 36(1)(vii) and, therefore, would not be of any help to the assessee. Accordingly, the CIT, in our opinion, was justified in disallowing the same. 37. The next ground in the assessee's appeal against the order of assessment is for the disallowance of expenditure of Rs. 6,51,95,614 relating to issue of debenture claimed as revenue expenditure. This expenditure has been capitalised by the assessee being expenditure incurred in connection with right issue of debentures during the relevant accounting year. However, in the computation of total income it was claimed as revenue expenditure. The Assessing Officer noted the objects of the issue to be- (i) to part finance the steel project and related investment; (ii) to meet the expenses of the issue; (iii) to repay the bridge loan, if any, taken against the loan issue; and (iv) to meet normal capital expenditure working capital needs. He also referred to paragraph 5 of the prospectus stating "the proceeds of this issue will be used for purposes mentioned in the objects of the issue and for incurring the expendit....
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....as in the case of Telco [In IT Appeal No. 1154 (Bom.) of 1985] wherein it was held that the question of convertibility arrives at the time of repayment which is a mode of repayment only. The expenditure was incurred for raising the loan and, therefore, it was an allowable deduction. In the present case, right share of debentures were issued which were to be converted into shares within a period of 15 months. The expenditure when it was incurred was for raising loan and as held by the Tribunal in the case of VXL India Ltd. and decisions referred to therein, the conversion was only a mode of repayment of loan raised by issue of debentures. The expenditure was thus for raising the loan and, therefore, in view of the Supreme Court decision in the case of Madras Industrial Investment Corpn., the proportionate expenditure has to be allowed during the period of 15 months of the debenture. The proportionate expenditure pertaining to the year under consideration may thus be allowed to the assessee in the light of the aforesaid Supreme Court decision. The observation of the revenue authorities that it was in the nature of expenditure under section 35D is not warranted because at the time whe....
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....o the plant and machinery and claiming depreciation thereon. This issue is also covered in favour of the assessee by the decision of the Supreme Court in the case of Scientific Engg. House (P.) Ltd. v. CIT [1986] 157 ITR 86 and the decision in the case of CIT v. Elecon Engg. Co. Ltd. [1987] 166 ITR 66 (SC) wherein assessee was held entitled to depreciation incurred on technical know-how in the form of drawings and designs. We, accordingly, allow the claim of the assessee and direct the Assessing Officer to allow depreciation to the assessee in place of deduction under section 35AB. 43. The next ground is against the order of the CIT(A) in confirming the disallowance of the expenditure relating to earlier year. The assessee submitted that it is a big company and the expenditure should not have been disallowed as according to the system of accounting consistently and regularly followed by the assessee the expenditure relating to the earlier year are being claimed and allowed. The assessee has claimed a sum of Rs. 63,52,274 which have been debited under the head "prior period expenses". As the assessee was following mercantile system of accounting, the Assessing Officer disallowed ....
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....r and that should be allowed as a deduction because it becomes an ascertained liability only when the expenditure has crystallized in the year under consideration. We, accordingly, direct the Assessing Officer to allow the claim of the assessee of such an expenditure as relating to the year under consideration and in respect of which the liability has crystallized during the previous year under consideration. 46. In the revenue's appeal against the original order of the CIT (A), the first dispute is with regard to the income of Hot Rolled Coil (Steel-II Division). A sum of Rs. 7,47,46,923 was the income from interest received and other miscellaneous income of Steel-II Division which has not started production. The assessee has credited the same to the capital work in progress. According to the Assessing Officer, the income received during the pre-production stage is assessable under the head "other sources" and the expenditure incurred in the pre-production stage only is to be capitalised and added to the capital work in progress. He has referred to the decision of Karnataka High Court in the case of CIT v. Cap Steel Ltd. [1986] 162 ITR 533, the decision of the Madras High C....
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....s in short-term deposits in order to earn interest. Such interests will be chargeable under section 56. In other words, if the capital of a company is fruitfully utilised, instead of being kept idle, the income thus generated will be of a revenue nature and not an accretion to capital. Whether the company raised the capital by issue of shares or debentures or by borrowing, will not make any difference to this principle. If borrowed capital is used for the purpose of earning income, that income will have to be taxed in accordance with law. Income is something which flows from the property. Something received in place of the property will be a capital receipt. The amount of interest received by the company flows from its investments and is its income and is clearly taxable even though the interest amount is earned by utilising borrowed capital. It is true that the company will have to pay interest on the money borrowed by it. But that cannot be a ground for exemption of interest earned by the company by utilising the borrowed funds as its income. Any set-off or deduction of any expenditure can only be made in accordance with the provisions of the Act." 48. In this case "The assess....
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....ioner of Income-tax (Appeals). The company's further appeal to the Income-tax Appellate Tribunal was dismissed." 49. On these facts it was "Held, that the company had surplus funds in its hands. In order to earn income out of the surplus funds, it had invested the amount for the purpose of earning interest. The interest thus earned was clearly of revenue nature and would have to be taxed accordingly. The accountants might have taken some other view but accountancy practice was not necessarily good law. This was not a case of diversion of income by overriding title. The assessee was entirely at liberty to deal with the interest amount as it liked. The application of the income for payment of interest would not affect its taxability in any way. The company could not claim any relief under section 70 or section 71 since its business had not started and there could not be any computation of business income or loss incurred by the assessee in the relevant accounting years, in such a situation, the expenditure incurred by the assessee for the purpose of setting up its business could not be allowed as deduction, nor could it be adjusted against any other income under any other head....
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.... charge of the work, but the staff was to be appointed by the assessee. Pursuant to the agreement, the assessee advanced a sum of Rs. 21,000 but due to partition of the country, the business could not be started. The assessee filed a suit of recovery and nothing could be recovered on its claims and a sum of Rs. 15,700 remained due to the assessee which was written off and the question was whether it is allowable. The Delhi High Court held that the assessee venturing on a new business and the sum of Rs. 21,000 was put in as a capital investment in the new business and, therefore, the loss of Rs. 15,700 was not in connection with the business carried on by the assessee. It was thus a capital loss and not a loss incidental to the business. 53. In a subsequent decision of the Delhi High Court in the case of Triveni Engg. Works Ltd. v. CIT [1998] 232 ITR 639 the assessee incurred a sum of Rs. 5,000 for preparing a project report for manufacturing insecticide formulations, an item to be used for improving the quality of the cane produced in the area by the individual agriculturists and societies and since the manufacture of insecticide formulation was not carried out by the assessee a....
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....,222 by observing that the assessee had advanced certain interest-free deposits to its sister concern out of interest-bearing loan. Such deposits were to the tune of Rs. 4,85,00,000 to a sister concern and an another advance of Rs. 25 lakhs to Essar Consultants Ltd. The CIT(A) on a perusal of the balance sheet as on 31-3-1993 found that interest-free funds being shareholders' contribution less miscellaneous expenditure amounting to Rs. 82,90,50,000 were available whereas the loan funds amounted to Rs. 11,21,09,00,000. According to him the Assessing Officer was not able to correlate the borrowed funds with interest-free advances. He, however, held that nonetheless a part of the advances had been met out of the borrowed funds. Considering this position, he was of the opinion that interest proportionate to the loan funds should be disallowed. In other words, he held that the assessee should be given the benefit of using its own funds for advancing interest-free loans and on such basis a sum of Rs. 16,23,010 was found to be disallowable which was pertaining to the loan funds. 57. We have heard the parties and considered the rival submissions. In the absence of any nexus establis....
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....o be deducted. Double Taxation Agreement between India and Singapore was also brought to the focus before the CIT(A). A copy of the agreement was also filed wherein it was stated that work was to start on 16-3-1992 and was to be completed by 30-4-1992. The CIT(A), therefore, held that the present case was covered by the Double Taxation Agreement between India and Singapore. The CIT(A) has decided the issue by taking the new evidence on record without affording an opportunity of being heard to the Assessing Officer. 59. The parties have agreed that the order of the CIT(A) is after taking into consideration the new evidence. We, therefore, vacate his order and restore the matter back to the file of the Assessing Officer to decide this issue afresh after taking into consideration the material placed by the assessee before the CIT(A) or any other material to be produced in the fresh proceedings. We direct accordingly. 60. In the revenue's appeal in ITA No. 1056/Mds./1999 the issues raised are against acceptance of assessee's claim with regard to deduction under sections 80HH and 80-I which was raised before him for the first time and the claim of the revenue is that these....
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....g and securing relief. The officer is required to do not more than to advise the assessee. It does not place any mandatory duty on the officer to allow depreciation if the assessee does not want to claim that. The provisions for claim of depreciation is certainly for the benefit of the assessee and if he does not wish to avail of that benefit for some reason the benefit cannot be forced upon him. Their Lordships further held that it is for the assessee to see if the claim of depreciation is to his advantage. Rather the Assessing Officer should advise him not to claim depreciation if that course is beneficial. That was considered to be the spirit of the circular issued by the Board. It was further held that if section 34 is not satisfied and the particulars arc not furnished by the assessee, his claim under section 32 cannot be allowed. Section 29 was thus held to be read with reference to other provisions of the Act as it was not in itself a complete code. The ld. DR also relied upon the decision of the Gujarat High Court in the case of Chokshi Metal Refinery v. CIT [1977] 107 ITR 63 wherein the relief under section 84 or 80J not asked for or given at the original assessment was no....
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.... or not and whether this was a fact that the assessee was not allowed the claim because there was no positive income. If the assessee has failed to make a claim in the original assessment, the same cannot be claimed in subsequent proceedings while giving effect to the appellate or revision order of the CIT(A) or CIT as the case may be. We, therefore, set aside the order of the CIT(A) and remit the matter back to the file of the Assessing Officer on this issue as well to find out whether the necessary details for allowing the claim of the assessee were there at the time of original assessment and whether any such claim was made by the assessee but restricted to Nil because there was no positive income. If the necessary material is there and the assessee satisfied all other conditions the claim of the assessee for deduction can be allowed. We direct accordingly. We may, however, observe at this stage that in view of the Gujarat High Court decision in the case of CIT v. Gujarat Oil & Allied Industries [1993] 201 ITR 325, the requirement that audit report should be filed along with the return is not a mandatory condition and the audit report filed after the return was submitted but bef....
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....efore passing the final order the CIT has make an enquiry after giving an opportunity of being here and then only to pass on necessary instructions to the Act. These requirements have nothing to do with the jurisdiction of the Commissioner. This pertains to the question of natural justice [CIT v. Electro House [1971] 82 ITR 82 (SC)]. It was also brought to the notice of the assessee that the Assessing Officer has not made complete inquiry with reference to certain issues and it will be clear from following discussion that failure to make such inquiries has made the order of the Assessing Officer erroneous and has caused prejudice to the interest of the revenue. The Assessing Officer is not only an adjudicator but also an investigator. He cannot remain passive in face of return which may apparently be in order but cause for further inquiry. It is the duty of the Assessing Officer to find out the fact stated in the return and whether circumstances of the case are such as to provoke inquiry. The order becomes erroneous because such an enquiry has not been made and not because there is any wrong with the order, if all facts in return are assumed to be correct. The word prejudicial to t....
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....goods and the gains on cancellation of foreign exchange contract should go to reduce the cost/W.D.V. of fixed assets. According to the Assessing Officer the only capital goods purchased from abroad were the plant and machinery which are depreciable assets. Invoking the provisions of section 43A he deducted the gains arising out of cancellation of forward exchange contract from the block of the assets. The depreciation was accordingly reduced. 66.2 According to the CIT the order of Assessing Officer is erroneous and prejudicial to the interest of revenue for the following reasons:- (i) There is no nexus between the gain arising on cancellation of exchange forward contract, and assets acquired from abroad by the assessee. Therefore, there was no justification to reduce the cost/WDV of capital asset by the amount of gains on cancellation of forward exchange contract. (ii) Assessee had entered into foreign exchange contract in India. On cancellation of forward exchange contract, the amount was paid in India in Indian rupee. The amount received by the assessee in Indian rupee will not in any way reduce the foreign exchange liability of the assessee, as regards the p....
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....e cover which has been reproduced as under: 3C.4-authorised dealer should satisfy themselves that the underlying commitments are firm and should ensure that forward cover is not provided for anticipated transactions. Cancellation of forward contract: Para 3C.9(a) Authorised dealer may cancel forward contracts booked if so desired by their customers. The exposure can be covered again by the customer with same or another authorised dealer. Authorised dealer will have to ensure that the genuine exposure to the extent of amount of forward contract in respect of a permissible transaction continues to exist. (b) full particulars of cancellation of forward contract of the equivalent US dollars five lakhs and above should be kept on record for verification by Reserve Bank. (iv) As regards the contention as to why the gain should not be treated as profit in nature of speculative transaction, in view of provisions of section 43(5), it was submitted that these provisions are applicable to purchase or sale of any commodity (including stock in share) which is periodically or ultimately settled otherwise than by actual delivery or transfer of commodit....
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....on cancellation of foreign exchange contract have no connection whatsoever with purchase of any assets. The gains were not utilised for the repayment of loans obtained in connection with the purchase of assets from abroad. The gains from cancellation of foreign exchange contract was in rupee and, therefore, could not have been utilised to liquidate any of the foreign exchange liability, including those incurred in connection with acquisition of capital from aboard. Therefore, it is not possible to accept the contention of the assessee that gain on cancellation of foreign exchange contract has in any way gone to reduce the foreign exchange liability in respect of loans obtained for purchase of capital goods; the Assessing Officer was, therefore, not justified in reducing the cost of "block of assets" by the amount of gain on foreign exchange contract. 67.5 As regards the opinion given by C.C. Chokshi and Company referred to above, following observation from the opinion is reproduced for the convenience: "In case company decided to cancel the contract, its liability towards capital expenditure would remain uncovered and would keep changing from time to time." The compa....
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.... not reduced. Instead of receipt of foreign exchange the money was accepted in Indian rupee. In this situation CIT found it difficult to agree with the contention of assessee that it had any nexus or connection with foreign exchange liability, be it loan or acquisition of assets from abroad or any other payment in foreign currency. 67.8 Further the assessee claimed that receipt is a "capital receipt" not liable to tax. This contention was also not accepted by CIT. The contract was entered into the normal course of business transaction. Any gain on cancellation of such contract will be business profit, it cannot be capital receipt. The plea that it was connected with contract for repayment of loan obtained for acquisition of capital asset was not accepted by CIT. It is also not possible that receipt was of casual or non-recurring nature. In case of Raghuvanshi Mills Ltd, the Hon'ble Supreme Court has held that receipt even if it was casual or non-recurring in nature would be liable to tax, if it arose from business. In Barendra Prasad Ray's case the Apex Court has held that expression business is of very wide import and it means an activity carried on continuously and sys....
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....ion of forward exchange can be considered namely, there is an element of adventure in nature of trade in whole process of cancellation of contract. The assessee entered into cancellation for as many as fifty-two contracts and received gain in Indian rupee. The purpose for which contract was entered into was not allowed to be fulfilled. The adventure was thus in the nature of trade and receipt or gain therefrom will be taxable as normal business profit. Keeping all these things in view the CIT directed the Assessing Officer to treat the entire gain on cancellation of foreign exchange contract as revenue receipt. A sum of Rs. 71,93,24,207 was directed to be treated as revenue receipt subject to direction in paras 16.7 and 17.5 of his order. Assessing Officer was directed to include this amount in the total income. The CIT further directed that the depreciation will be reworked as the Assessing Officer had wrongly reduced the block of assets by the amount of gain on foreign exchange contract as indicated above. 68. The details of gross and net gain on cancellation of forward contracts are as under:- Corporate Division Gross Premium Net A. HRC Plant  ....
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....ngapore who is claimed to be its prospective buyer of production of 1.5 lakhs tone of HRC in three years from the date of commencement of production, who gave advance of 100 million US $ in four instalments of 25 million US $ over a period of 18 months. This advance was to be liquidated by the assessee to the extent of 1/3rd in each of the three years from the commencement of commercial production. As stated earlier a forward contract of 100 million US $ was sought from RBI commencing from 1994. US $ 35 lakhs is the interest worked out thereon. 68.4 According to the learned counsel of the assessee Shri S.N. Soparkar, the Commissioner of Income-tax has failed to appreciate that Forward Exchange Contract entered into by the assessee related to reduce the foreign exchange liability for purchase of capital equipment and was, therefore capital receipt and that foreign exchange contracts were undertaken to cover the liability on capital account namely, the repayment of loan taken in foreign currency which were granted for the purchase of capital equipment. He referred in this connection to the decisions of the Supreme Court in the case of Tata Locomotive & Engg. Co. Ltd.; Universal Ra....
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.... the decisions of the Bombay High Court in the case of CIT v. Scindia Workshop Ltd. at pages 531 and 533 and the decision of the Supreme Court in the case of Barendra Prasad Ray at page 306. He also referred to the decision of the Supreme Court in the case of India Cement Ltd., wherein it was held that the loan is not a capital asset and, therefore, the interest pertaining thereto is an allowable revenue deduction. He further referred to the decision of the Supreme Court in the case of Tata Iron & Steel Co. Ltd. wherein it was held that the manner of payment does not affect the cost. 70. Hon'ble V.P./A.M. has discussed various aspects of the case including case laws relied by both the parties and held as under: "Commissioner of Income-tax is not justified in holding that the gain on cancellation of forward contract in all cases were revenue receipt of assessee and, therefore, liable to tax because (1) reliability towards the loan taken for repayment to the seller and, therefore, it was of the capital account and is relatable to acquisition of capital goods and assets which had not by then reached destination and/installed in factory premises of the assessee and unit....
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.... E. It is abundantly clear from the record that gain which has arisen to the assessee on these cancellation of foreign exchange contracts have no connection whatsoever with the purchase of any assets. The gains were not utilised for the repayment of loan obtained in connection with purchase of assets from abroad. The gains from cancellation of foreign exchange contracts was in rupee and, therefore, could not have been utilised to liquidate any foreign exchange liability including those incurred in connection with acquisition of capital assets from abroad. Thus it is not acceptable that gains on cancellation of foreign exchange contracts has in any way gone to reduce the foreign exchange liability in respect of loans obtained for the purchase of capital goods. Accordingly, Assessing Officer was not justified in reducing the cost of block of assets by the amount of gains on foreign exchange contracts. The treatment in books accepted by directors and approved by concerned auditors, is extremely piece of evidence to the fact that receipt is revenue in nature. Each fact has to be decided in its own facts and circumstances. F. Company opted to cancel the contract whereby the lia....
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....essee shows that with an eye to earn profit, the contract was cancelled and the liability towards foreign exchange was not reduced. It is further clear from the conduct of assessee that instead of receipt of foreign exchange, the profit was accepted in Indian rupee. I. The contracts were entered in normal course of business transactions. Any gain on cancellation of such contracts would be business profit, it cannot be treated as capital receipt. This view gets strength from finding of Hon'ble Supreme Court in case of CIT v. Rajaram Maize Products [2001] 251 ITR 427 wherein power subsidy to new industries, based on consumption per unit for small scale industry and percentage of electricity charges, for medium and large industries, subject to specified limit, is revenue receipt and is benefit arising out of business, inasmuch as it went towards reduction in electricity bills, was held as revenue receipt. So CIT has rightly rejected the plea that it was connected with contract for repayment of loans obtained for acquisition of capital assets. J. In the facts and circumstances of the case it justified to accept that receipt was of casual and recurring nature. As h....
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....y. The commodity in the instant case is foreign exchange. Foreign exchange is traded. It is quoted in foreign exchange market. Therefore, for the purpose of section 43(5) foreign exchange can be treated as commodity. In case there is profit on cancellation of contract for the purchase of foreign exchange, same can be added as speculative profit as the contract was settled by nondelivery. Accordingly the contention of the assessee in this regard, is not acceptable. M. It is further interesting to observe that assessee entered into cancellation for as many as 52 contracts and received gains in rupee. The purpose for which the contracts were entered into was not allowed to be fulfilled. The adventure was thus in the nature of trade and the receipt of gains therefore, will be taxable as normal business profit. N. Before concluding it is pertinent to mention here that all cases relied on by the parties have been taken into consideration though the same have not been specifically mentioned. 72. In view of above discussion, CIT was justified in directing the Assessing Officer to treat the entire gains of Rs. 71,93,24,207 on cancellation of foreign exchange contracts, ....
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....amounting to Rs. 22 crores, as had arisen on cancellation of only those foreign exchange forward contracts as were relating to liability towards repayment of advance taken from Reddington Pte. Ltd., alone is the revenue receipt and not the entire gain of Rs. 71,93,24,207 as related to the cancellation of all the foreign exchange forward contracts? 3. Whether on the facts and in the circumstances of the case, the CIT was right in holding that the entire amount of Rs. 71,93,24,207 as related to the cancellation of all the contracts of foreign exchange forward cover is the revenue receipt chargeable to tax as income from business/as adventure in the nature of trade/as casual income and/ or profit arising on speculative transactions under section 43(5) of the Act?" 74. Facts of the case briefly stated are that the assessee has been manufacturing sponges for the past several years. In order to expand its production capacity, the assessee decided to set up another division of hot salted drain for which it needed imported machine of value of more than Rs. 450 crores. For financing above project the assessee borrowed funds, which were interest bearing. In order to safeguard its....
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....ccording to the learned Accountant Member (Hon'ble Vice President) out of receipt of Rs. 71.93 crores from cancellation of forward foreign exchange of Rs 49.93 crores was a capital receipt and could not be charged to tax. 79. For reaching above conclusion, the learned Vice President examined the following decisions:- (1) Tata Locomotive & Engg. Co. Ltd.'s case; (2) Universal Radiators's case; (3) Swadeshi Cotton Mills Co. Ltd.'s case; (4) Sutlej Cotton Mills Ltd's case; (5) Anglo India Jute Mills Co. Ltd.'s case; (6) Ambica Mills Ltd.'s case; (7) India Cement Ltd.'s case; (8) Garden Silk Mills Ltd.'s case; (9) Groz-Beckert Saboo Ltd.'s case; (10) V.S. Dempo & Co. (P.) Ltd.'s case. Most of above cases related to gain earned on contracts involving foreign exchange or on account of devaluation of rupee. Question involved was whether such gain was a revenue receipt or a capital account. The learned Accountant Member (Vice President) after appraisal and detailed consideration of above decisions, held that gain arising to the assessee to the ex....
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.... the assessee company upon cancellation of the foreign exchange forward contracts will partake the character of a capital receipt, as per the ratio of decisions of the Supreme Court in the case of CIT v. TELCO (60 ITR 405) as well as in the case of Universal Radiators v. CIT (201 ITR 800). It is also pertinent to note that the gain arising on the cancellation of the contracts in the forward cover of foreign exchange does not involve any transfer or assignment of any asset within the meaning of section 2(47) of the Income-tax Act, 1961. In the instant case, there is no transfer or Assignment of the right or entitlement under the forward Exchange Contract, but the cancellation of contract with the other party to the contract, viz., the Bank, and, as such the receipt flowing to the assessee-company on cancellation of the forward foreign exchange contract is on capital account and since there is no transfer within the meaning of section 2(47), the surplus arising to the assessee-company is not liable to tax in view of the decision of the Supreme Court in the case of Vania Silk Mills Ltd v. CIT (191 ITR 647)." "10. The attempt of the ld. CIT to hold that the profit arising to t....
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.... interference by the CIT under section 263 of the Income-tax Act. Thus keeping in view the totality of the facts and circumstances of the case discussed above, we are of the considered opinion that the ld. CIT was not justified in setting aside the order of the Assessing Officer with regard to the issue relating to taxability of the amount of Rs. 68,66,673 which was treated by the Assessing Officer as a capital receipt not liable to tax." 81. The learned Vice President also dealt with the effect of change made in Accountancy Principle AS-11 and after taking note of relevant paras 13,14 and 15 of above AS-11, concluded as under:- "8.23 From the above we conclude that the gain or loss which relates to circulating capital is revenue and that relates to fixed capital, it is capital. If the capital/fixed asset is acquired in India or from abroad, the liability for payment to seller would be on capital account. Similarly if a loan taken to pay the seller that liability would also be on capital account. An arrangement for meeting such liability would also be on capital account and the expenditure by way of interest or exchange fluctuation would increase the capital expenditure....
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....ities thereafter has to continue but that by itself does not establish that the contracts were taken and/or cancelled to make profit. Profit motive otherwise also is not decisive of the question whether a particular receipt is capital or income-see Vishnudatta Antharjanam 78 ITR 58 (SC). The forward contracts were cancelled before the due date because, it was no more necessary to have a cover continued in view of grater stability of Indian rupee pursuant to the announcement by the Government of the partial stability of Indian rupee and allowing cancellation of such contracts by RBI. Cancellation before the due date also, in our opinion, is not very relevant to hold that it was a business venture or an adventure in nature of trade because the contracts themselves were for one to three years and were not covering the entire period of payment. It cannot even be called a casual income. The fact that they were allowed by the RBI to be cancelled on the contrary give the impression of the stability of Indian rupee vis-a-vis US Dollar. 8.26 As regards speculation nature of the gain we observe that section 43(5) applied to transactions of commodities and currency is not a commodity....
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....t was thereafter assessee's liability to supply goods against those advance taken which subsisted and that was a part of the circulating capital. The liability cannot be said to be for making the payment in foreign exchange nor on account of purchase of capital goods. It was in the nature of a circulating capital and in view of the decision of the Supreme Court in the case of Sutlej Cotton Mills Ltd. and the discussion aforesaid the gain arising on cancellation of forward contract relating thereto has to be on revenue account. The order of the CIT to this extent i.e., the gains of Rs. 22 crores arising on cancellation of forward contract stated to be relating to repayment of the liability of Reddington is upheld." 82. The learned Judicial Member did not agree with the conclusion of the learned Vice President (Accountant Member). He held that gain was a revenue receipt. For above conclusion he gave the following reasons:- "A. The accounts reveal that assessee has earned profit on cancellation of forward exchange contracts which is evident from printed balance-sheet wherein same has been shown as revenue receipts as under:- Printed balance sheet for period en....
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....ability towards capital expenditure was left uncovered. Basically the Foreign Exchange contracts were entered for hedging the fluctuations in foreign exchange. The purpose for which contract was entered was not fulfilled. Several such contracts were cancelled time and again and gains in Indian rupee was earned. In case foreign exchange contract is allowed to mature and gains realized is used for the purpose of repayment of foreign loans obtained for acquiring assets from abroad but this was not the situation in the present case. The contract is cancelled with an eye on profit on judgment taken by the management. The foreign exchange liability has been left uncovered. The contract is not allowed to mature. The gains are not utilized for the purpose of repayment of loans. The foreign exchange liability is not reduced. In this situation gains are purely revenue receipts unconnected with the purpose for which the contracts were originally entered. Therefore, the CIT has rightly not agreed with the opinion of Chartered Accountant of Bombay mentioned above. G. The facts on record indicate that foreign exchange contracts were undertaken to cover the liability on capital account w....
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....casual and non-recurring nature. As held by Hon'ble Supreme Court in Raghuvanshi Mills Ltd. v. CIT [1952] 22 ITR 484. Further Hon'ble Supreme Court in the case of Barendra Prasad Ray v. ITO [1981] 129 ITR 295 has held that expression business is of very wide import. It means an activity carried on continuously and systematically by a person by the application of his labour and skill with a view to earn income. Further wide definition has been recognized by Hon'ble Supreme Court in case of S.G. Mercantile Corpn. (P.) Ltd v. CIT [1972] 83 ITR 700 and CIT v. Calcutta National Bank [1959] 37 ITR 171 (SC). Even a single venture has been held to amount to business and profit arising out of such a venture has been held to be taxable as income arising from business. In case of Gillander Arbuthnot and Co. Ltd. v. CIT [1964] 53 ITR 283, Hon'ble Supreme Court has held that there is no immutable principle that compensation received on cancellation of an agency must always be regarded as capital. From these facts it is evident that entire receipt was of revenue nature so it should be treated as revenue receipt which is also evident from treatment given by the assessee in printed....
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....nsion of its manufacturing division. Accordingly the assessee entered into large number of contracts but merely because several contracts were entered into, it cannot be said the character of the receipt accruing to the assessee on cancellation of contracts changed from capital to revenue. He further submitted that the Assessing Officer during the course of original assessment proceedings, accepted assessee's claim that amount received on cancellation of contract was a capital receipt. However, these gains were reduced while working out the value in the block of assets for purposes of depreciation. On certain other points, appeal of the assessee was (pending before the CIT(A) when action under section 263 was taken by the Commissioner. Accordingly gain of Rs. 71 crores was held to be revenue receipt. On fresh assessment the Assessing Officer added above receipt of Rs. 71 crores as assessable income. 84. While supporting the order of the learned Vice President (A.M.), Shri Soparkar emphasized that the assessee admittedly had entered into a genuine forward contract relating to purchase of machinery. The assessee had satisfied all the conditions under which Reserve Bank of Indi....
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....(SB). In this connection, he referred to page 11 of the decision wherein it has been specifically held that risk of foreign exchange fluctuation was kept open. However, learned Judicial Member held to the contrary. Shri Soparkar stated that factual presumption of the learned Judicial Member were contrary to his own findings. Reliance of Judicial Member on example of power subsidy is not comparable. Every gain made in the course of business is income, is not correct proposition of law. It may be a capital receipt or capital gains. Capital gain can be casual and not taxable as held by the Hon'ble Supreme Court in the case of CIT v. D.P. Sandu Bros. Chembur (P.) Ltd. [2005] 273 ITR 1. 86. Shri Soparkar further said that Special Bench had also dealt with question of speculative income in para 9 of the order but speculative gain is a business gain. Definition of "speculative transactions" operates in field of "business" and not in field of "capital gains". It only helps in deciding whether business is speculative or otherwise. It has nothing to do whether capital gains has accrued to the assessee or not. 87. Shri Soparkar further submitted that the mere fact that the assessee ....
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....iness operation. The intention, motive and purpose with which contract was entered and cancelled, were also relevant for determining character of receipt. In the case before the Special Bench after taking into consideration number of transactions and intention, motive and purpose of the assessee, the Special Bench held that amount received on cancellation of forward contract was a capital receipt. In that case there were only 13 contracts and out of which six related to interest liability, which admittedly was on revenue account. Only seven contracts were claimed to relate to the capital field. However, facts in the present case were quite different. The assessee had entered into 52 contracts and an equal numbers were cancelled in the course of its business from May, 1992 to March, 1993. The cancellation had no connection with acquisition of any capital asset (machinery & plant). Thus activity of entering and cancelling of a contract was a business activity. The gain thus accrued to the assessee was liable to be taxed as a business/revenue receipt. It was not received on capital account. Thus decision of Special Bench was distinguishable. 90. Shri Dave further drew my attention ....
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....ords cannot be added to or subtracted from the statutory provision. The situation relating to cancellation or revocation of contract is clearly not covered by the Explanation and, therefore, there is no question of adding or deducting gain or loss by using above Explanation. On account of liberalization policies entrepreneurs could easily do business of entering into and cancellation of contracts to make profit. The circumstances clearly showed that motive of the assessee was to make gain with no intention to discharge any liability. As the gain had accrued in the course of business, it was business gain and not a capital receipt. 94. Shri Dave also stated that learned Vice President (A.M.) has recorded factually incorrect finding in paras 8.25 and 8.26 of his proposed order. In this connection, he drew my attention to the finding that there was no connection between cancellation of contract and acquisition of capital asset as recorded by the learned CIT(A). Further, the learned Vice President (A.M.) was wrong in saying that cancellation of contract was a one-time affair. It is evident from record that the assessee had been entering and cancelling forward foreign exchange contra....
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....e had cancelled 52 forward contracts as against lesser number in the case involved before Special Bench, did not make any difference. Nature and character of the receipt was to be determined on the basis of legal principle and when so considered, the matter in issue was fully covered by the Special Bench decision. Even if it is accepted that decision of Special Bench was given on facts involved in that case, the facts in the case of this assessee were identical and, therefore, same conclusion should follow. Likewise the question cannot rest on the entries made by the assessee in the books of account. The manner of making entries was totally irrelevant as held by several decisions of the Hon'ble Supreme Court duly noted by the Special Bench in its decision. Legal implications of an activity/transaction are to be seen for purposes of taxation and not what treatment has been given to the transaction by the assessee in the books of account. Shri Soparkar once again emphasized that no single Bank was prepared to take risk of thousand crores and, therefore, the assessee had to enter into several contracts to cover volume of foreign exchange involved for purchase of plant and machiner....
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....ish decision given on consideration of peculiar provision of English Statutes and the facts involved are not parallel to the facts in the case before us. He further argued that payment made for know-how was on capital account and duly added to the cost of machinery and plant. Therefore, contracts relating to know-how could not be treated as relating to revenue receipts. At any rate no such issue was raised by the revenue earlier even when the matter was considered by the regular Bench. This argument cannot be permitted to be taken for the first time before the Third Member who has a limited jurisdiction. He emphasized that matter be decided and order of the learned Vice President (A.M.) be upheld in line with the decision of the Special Bench. 101. I have given careful thought to the rival submissions of the parties. The assessee, as noted earlier, in order to expand its business wanted to export plant and machinery from abroad of value of approximately Rs. 450 crores. The assessee needed foreign exchange to acquire machinery and in order to safeguard its interest against fluctuation in exchange rates of foreign currency, the assessee entered into forward contracts with differen....
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....stions: (i) Whether the gains earned on cancellation of the foreign exchange forward contracts are capital receipt or revenue receipt; and (ii) If gains are capital receipt, whether the same should reduce the actual cost of plant and machinery by virtue of Explanation 3 to section 43A." In the case before the special bench, the assessee had borrowed foreign currency to acquire capital assets and had entered into forward contracts. The assessee had explained that foreign exchange contracts were entered into with Indian Banks with a view to guard against losses on account of foreign exchange rate fluctuations. Such contracts could not be cancelled in view of the Reserve Bank regulation. The Reserve Bank of India had authorized entering into such contracts in respect of genuine transactions in the capital field. These contracts were cancelled when the Reserve Bank changed its policy when assessee felt that Dollar rate of exchange would remain stable and rupee would not depreciate. It was explained that forward foreign exchange contracts were entered mainly to acquire machinery and plant. The assessee never dealt in such contracts nor entering into such contracts a....
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....to be capital in nature, then section 43A would be applicable as gain arising on cancellation is inseparably linked to foreign loan amounts. Thus gain was liable to be capitalized towards the cost of plant and machinery. Shri Salil Gupta, another D.R. had also emphasized before the Special Bench that subsequent action of the assessee in canceling the contracts and in entering into new forward contracts was a trading activity and, therefore, gain arising from such activity was a revenue receipt. In this connection, change in pattern of taking forward contracts for a long duration in the past to short-term durations after Reserve Bank of India changed its policy by issuing notification dated 27-3-1992 was significant. It was no longer intention of the assessee to hedge the loss but was clearly to make profit by carrying adventure in the nature of trade. Prof it from cancellation of contract was a revenue receipt. 106. The Special Bench before analyzing rival contentions of parties noted in brief facts relating to forward contracts in foreign currency which had a crucial bearing on the controversy before them in para 14 of its order. It found that after purchase of machinery abroad....
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....relied upon by the learned counsel for the assessee. In this case, the assessee, which was a limited company carrying on business of locomotive boilers and locomotives had for the purpose of its manufacturing activity to make purchases of plant and machinery in the United States. The assessee remitted a sum of $ 33,850 to the United States with the sanction of the Exchange Control Authorities for the aforesaid purpose of purchasing capital goods. The assessee also earned a commission of $ 36,123 as selling agent in the United States and the amount was retained in the United States for capital purposes after obtaining the sanction of the Reserve Bank of India. The court held that even though the amount of $ 36,123 was a revenue receipt in the assessee's business of commission agency, retention of this amount in the United States with the sanction of the Reserve Bank of India for buying capital goods fall in the capital field and any profit accruing on subsequent repatriation of this amount on account of exchange variation was a capital profit." The aforesaid view was supported by referring to decision of Supreme Court in the case of CIT v. Canara Bank Ltd. [1967] 63 ITR 328, ....
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....by the Reserve Bank of India. The fact that contracts were not rolled over beyond 30-4-1992 and the assessee consciously decided not to extend the security cover on maturity of the contracts would not by itself take these contracts out of the purview of Explanation 3. Admitted facts are that these contracts have been entered into for providing the assessee with foreign currency on or after a stipulated future date at the fixed exchange rate. The contracts are thus fully in conformity with the letter and spirit of Explanation 3. If the assessee has not opted for roll over of the contracts, this would not ipso facto make Explanation 3 inapplicable. The language of Explanation 3 does not contain any such qualification. The interpretation suggested by ld. counsel would require the addition of the words "and the contract has been rolled over to the date of actual payment of instalment for foreign liability" after the words "to enable him to meet the whole or any part of the liability aforesaid" in the Explanation. There is nothing in the present language of the Explanation which makes it inapplicable to a case where the contracts have not been rolled over to the date of actual repayment....
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....hich Should be reduced from the cost of plant and machinery in connection with which foreign loans were raised by the assessee.'" 110. The aforesaid conclusions of the Special Bench are fully applicable to the facts of case before me. Shri Dave's submissions that Special Bench was given on account of peculiar facts and did not lay down any legal principles, do not carry any weight. The dominant intention, motive and purpose of entering into forward foreign exchange contract and cancellation thereof in this case and in the case before the Special Bench are similar. It is true that assessee had entered into and cancelled 52 contracts in this case as against 6 or 7 contracts in the case before the Special Bench. But that in my opinion would not make any difference, having in mind the magnitude of foreign exchange involved in this case, the learned counsel for the assessee has rightly contended that a single or few parties were not prepared to take risk involved in the deal and, therefore, assessee had to enter into a large number of forward contracts. Application of Accounting Standard 11 (AS 11) has also been thoroughly considered by the Special Bench as also application o....