TaxTMI 
TaxTMI 
TaxTMI 
2005 (9) TMI 217
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.... 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 face of the return which may apparently be in....
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....ach 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 receipt and his order to exclude the said amount from the WDV of the block of assets by invoking the provisions of section 43A was er....
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.... 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 assets from abroad; that the gain from cancellation of foreign exchange contract was in rupee which, therefore, could not have been utilised to liquidate any of the foreign ....
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....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. Ltd. v. CIT [1964] 53 ITR 283 (SC). He further observed that the assessee had entered into the contract with certain banks in India for foreign exchange cover and to hedg....
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.... 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 months to cover against possible future exchange losses in repayment of foreign currency loans, equipment purchases and technical services. However, as reported in the Director's report for 1992-93 these contracts were cancelled as no longer required due to greater stability of rup....
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....sion 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 consequently the onus on the assessee to prove that it was exempt in view of the decision of the Supreme Court in the case of CED v. V. Venugopala Varma Rajah [1976] 105 ITR 593; decision of the Calcutta High Court in the case of CIT v. Sutna Stone & Lime Co. Ltd. [1982] 138 ITR 37 (Cal.) and....
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....patriated 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. The matter reached the Supreme Court, wherein it was held that the payment made for loss of the ingots did not bear any nexus with the assessee's business and that so long as the ingots did not reach Bombay and were converted into strips and sheets, the connection with the assessee's busin....
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....ery. 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 gains. But the Tribunal found on material on record that there had been no case of acquisition and, therefore, it was not assessable to capital gain. The revenue carried the matter to the High Court and the Court held that there was no profit or gain as contemplated under section 45. The assessee did n....
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.... 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. Consequently, in the circumstances of the case, the expenditure was revenue expenditure within section 10(2)(xv)." This is a case on which the revenue heavily rely upon and submits that it is irrelevant to consider the object for which the loans were obtained. If the expenditure for raising the loans, could be reven....
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....h 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 capital. The Court held that the person from whom the loan was taken or the time of the loan cannot be considered for determining whether the loan was towards the trading account or capital account. The crucial thing was as to how the loan was utilized. By relying upon the two decisions of the Supreme Court in ....
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.... 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-in-trade. That being so, it could not be disputed that whatever might have been the original object of the loan, at the time of devaluation, the amount of loan was utilised by the assessee as circulating capital. That being so, the loss which occurred due to devaluation of the Indian rupee, it was held was clearly a revenue loss and allowable as a deduction in ....
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....d 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 Rs. 18,46,023 was arrived at by deducting from the increased liability on March 7/8, 1961, a sum of Rs. 3,36,039 being loss written off during the period 7-3-1961 to 6-6-1966. The assessee further reduced the sum by deducting the notional amount of depreciation which would have been allowed for the assessment years 1967-68, 1968-69 and 1969-70, respectively and cl....
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....t 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-tax. It was held that the amount received by the assessee was income and so was taxable and that the receipt was inseparably connected with the ownership and conduct of the business and arose from it and, therefore, it was not exempt. 8.16 In the case of Calcutta National Bank Ltd. the question was of the business and by majority it was held that the business is a word o....
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....ight 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 lakhs for Rs. 4,87,500. The question was whether in respect of the UP Zamindari Abolition Compensation Bonds any income in excess of the interest at the stipulated rate was realised by the assessee and whether any income arose to the assessee in respect of UP Zamindari Abolition Rehabilitation Grant Bonds. Their Lordships held that this was not a case analogus to an asset being so....
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....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 contract is for the purpose of discharging an obligation on capital account, i.e., for borrowing for the purpose of importing capital asset by entering into the foreign exchange forward contract, the assessee-company was merely wishing to freeze its capital liability to discharge debts/borrowing in foreign exchange. In this view of the matter, any gain to the assessee-company upon cancellatio....
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....ble 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 of the CIT's order indicates that even he himself is not sure whether the profit earned on cancellation of foreign exchange forward contract was a revenue receipt or as capital gain, because he directed the Assessing Officer to being to tax the profit either as revenue profit or as capital gain. In our view, setting aside an assessment is not ordinary matter. In fact, in tax laws as in other laws, ce....
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....h 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 capital cost. These would all be items of fixed capital. The expenditure or loss would increase the cost and concession or gain would decrease cost as per accountancy provision and with regard to exchange fluctuation as provided in section 43A of the Act. Again if any foreign exchange is earmarked for purchase of capital assets the loss or gain on account of exchange fluctuation would be on capital account. Similarly if a forwa....
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....ndian 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, precious metal etc. It does not include currency. Even otherwise unless one deals in currency which is permitted only to a license holder under the RBI rules it cannot be covered by section 43(5). As aforesaid the assessee had taken forward contracts for meeting liabilities to be discharged in foreign currency and not to deal in the currency, the gain would not be speculative under section 43(5). 8.27 We, therefore, hold that the Commis....
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.... 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 entering into foreign contract. According to the CIT, the gain from cancellation of foreign exchange contracts is of a different nature and the expenditure incurred in connection with entering into contract for hedging against foreign exchange fluctuation is entirely of another nature. According to him, the cancellation of the contracts has no connection with acquisition of assets from abroad or repayment of loan taken in connection with the ....
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....ly 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 third being construction division to M/s. Essar Projects Ltd. A sum of Rs. 15.16 crores on the sale of the above three divisions was treated as profit in the printed accounts and the claim of the assessee has been that it was a sale of undertaking as a going concern as there was no itemized sale of assets of the undertaking and, therefore, gain was of capital nature not liable to tax. The Assessing Officer treated the receipt as capital and deduct....
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....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 73,20,107 Nil Sale of undertaking to M/s. Essar projects Ltd. Construction Division 1. (a) Plant and Machinery 1,30,60,582 4,55,08,799 (b) Tugs and Barges 55,81,344 79,30,000 1,90,41,926 5,34,38,799 3,43,96,873 2. Furniture and Fixtures 1,77,343 1,77,344 Nil 3. Office equipments 5,91,297 5,91,297 Nil 4. Vehicles 77,372 1,00,000 1,98,87,938 5,43,07,440 Total difference 53,73,94,137 12.1 He concluded that value of assets transferred was ascertainable and in r....
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.... 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 in respect of such unit/division are separately shown by the assessee itself; (3) Deduction under section 35D in respect of such units/division was separately claimed by the assessee-company itself; (4) The business in each unit is different and independent of other units; (5) It is also seen that severance of these units has not affected the profit earning capacity of the remaining units/main business. 12.3 Justifying the values to be adopted he observed that the subsidiary companies who have purchased the units would not have adopted the higher value arbitrarily and he observed that these values have been taken on the basis of some valuation report as on the first day. ....
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....ale 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 Initially, the businesses carried on in the three units were the main businesses of the assessee-company but, subsequently, it entered into steel business and its expansion was on very much large scale. It was thought fit that it will not be suitable for the company to carry on the construction and oil exploration business together with steel business as the turnover which will be generated from the steel business will not be comparable to the turnover of construction and oil businesses. It was submitted that the transfer of undertaking was not the transfer of capital asset within the meaning of section 2(14) of the Act and that the entire business of both the divisions have been transferred to the respective subsidiary company and no new assets or liabilities as shown in the balance sheet were individually tra....
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....ations, 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 basis for increasing the consideration for computing the capital gain at Rs. 53,73,04,107 as against Rs. 15,16,48,504. 13.6 In any case, he submitted that the Assessing Officer was justified in reducing the consideration from the block of assets and there was no reason for exercising the revisionary jurisdiction. 14. The ld. Departmental Representative submitted that certain liabilities to be transferred subject to consent of the third parties and, therefore, it could not be said to be a slump sale. He referred to in this connection, various details referred to in the agreement pointing out that certain assets were subject to hypothecation and mortgage already created in favour of the lenders. He also submitted that certain construction contracts and other operating agreements which are assignable only with the con....
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.... 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 limited to the amount of surplus to the extent of the difference between the written down value and the actual cost. If the amount of surplus exceeded the difference between the written down value and the actual cost, then the surplus amount to the extent of such excess would have to be treated as capital gains for the purpose of taxation." Since this issue was not discussed the matter was remanded. 15.1 In the case of B.M. Kharwar before Their Lordships of the Supreme Court, the machinery of a factory belonging to a firm was transferred to a private limited company and a surplus of Rs. 40,743 was realised over the written down value of the machinery. It was held to be a case of realisation sale and even under the realisation sale the excess over the written down value not exceeding the original cost and the written d....
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....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 calculation on the valuation date 1st January, 1954. The acquisition was on January 19, 1956 and the Tribunal held that there was improvement in the capital assets after 1st January, 1954 which could not have been estimated at a price less than Rs. 3,98,000 which was received by the assessee over and above the value in 1954 and, therefore, there was no surplus chargeable to tax. 15.5 In the case of Kar Valves Ltd. before Their Lordships of the Kerala High Court the electricity supply undertaking of the assessee was taken over. One of the questions was whether the compensation received by the assessee was subject to capital gain tax and in that context it was held that the word "property" in the definition of capital asset would include an undertaking acquired as a whole. When the whole business of the undertaking together with the a....
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....5.7 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 before Their Lordships was whether on the facts and circumstances of the case, the assessment of profit under section 41(2) of the Act was valid. In that context, it was held that the section applies only to four types of assets, namely, building, plant, machinery or furniture and since it was a transfer of the undertaking as a whole section 41(2) was not applicable. A question also arose as to the date on which the sale took place and in that connection, it was observed by referring to the decision of the Supreme Court in the case of Alapati Venkataramiah v. CIT [1965] 57 ITR 185 that, "this decision, in our view, gives the quietus to the dispute whether a business as a going concern would constitute a capital asset within the meaning of section 45. It is a capital asset, the Supreme Court observes. Applying this principle to the facts o....
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....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 consideration of Maruti car separately for an amount of Rs. 50,000 and thus, the total WDV of the block of assets excluding the consideration for Maruti car was Rs. 28,17,418. On the basis of this computation the assessee paid the surplus realisation on the sale of fixed assets at Rs. 48,3 7,773. This was held to be taxable in the light of decision of the Supreme Court in the case of Artex Mfg. Co. 15.10 In the case of B.C. Srinivasa Shetty Their Lordships of the Supreme Court held that the charging section and the computation provision together constitute an integrated code. When there is a case to which the computation provision cannot apply at all, it is evident that such a case was not intended to fall within the charging section. It was further held that all transactions encompassed by section 45 must fall under the governance of its com....
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.... 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 realised over the written down value over the sale of assets, would be liable to tax, where it is possible to attribute the sale price of the assets sold and where the value of the plant and machinery was evaluated and transferred. If had also referred to its earlier decision in the case of Addl. CIT v. Govindoss Purushottamdoss [1980] 124 ITR 319 (Mad.) holding that the parties showed a particular value for the assets in the books, the value arrived at by the parties cannot be taken as a notional figure but a real one. The Madras High Court, therefore, set aside the matter to the Tribunal as it had not undertaken any such exercise to find out whether the parties have evaluated the value of plant and machinery or stock or the liability taken over by the buyer and on what basis the sum of Rs. 36,000 was ultimately agreed to be paid by the buyer in f....
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.... 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 provisions of section 50 of the Act. In that case the capital gain is to be determined on the basis of the consideration received for the transfer of the undertaking as reduced by the book value or written down value as shown in the accounts maintained by the assessee. 15.15 The claim based on the decision of the Supreme Court in the case of B.C. Srinivasa Shetty that it would not be possible to find out the cost/sale consideration of individual items and, therefore, computation provision would not apply, would not be of any help to the assessee in this case because what is being considered is the transfer of the capital asset in the shape of the business undertaking as a whole and not the individual items. The provisions of section 50 would be applicable as if the business as a whole was an asset. The various component parts of the business being building, plant and machinery and furniture would be for....
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....he 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, exceeds the aggregate of the following amounts, namely- (i) expenditure incurred wholly and exclusively in connection with such transfer or transfers; (ii) the written down value of the block of assets at the beginning of the previous year; and (iii) the actual cost of any asset falling within the block of assets acquired during the previous year, such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets; (2) where any block of assets ceases to exist as such, for the reason that all the assets in that block of assets shall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gain aris....
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....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 the foreign exchange gain and the gain on transfer of three units of the assessee as a going concern which was reduced by the Assessing Officer from the amounts of the written down value of the block of assets but held to be revenue nature by the CIT. In the second round of appeal CIT(A) has given necessary directions to allow the depreciation on the enhanced WDV. However, these grounds are now consequential to our order in the appeal of the assessee against the order under section 263 aforesaid, the Assessing Officer will give consequential effect to our finding aforesaid while working out the written down value of the block of assets as aforesaid and rework the depreciation. 17. The next dispute is against the disallowance of trial production expenses of Rs. 14,92,74,847 which, according to the assessee related to third unit of 'Hot Breacketed Iron' (HBI) set up by the assessee. The first two units producing HBI were already working and produ....
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....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 HBI plant are capital expenditure even though it had commenced trial production in saleable quality and has also made sales during the year. According to the assessee, the CIT has erred in differentiating between trial production and commercial production which is immaterial for income-tax purposes and that he failed to appreciate the difference between setting up a new business and setting up a new unit forming part of the same business. The learned counsel of the assessee submitted that the expenses up to the trial production have been capitalized by the assessee and trial production to the date of commercial production have been treated as revenue expenses which include the expenses of start up [Rs.9,73,02,843]; establishment [Rs. 1,52,65,000] and Folio maintenance [Rs. 15,66,000] aggregating to Rs. 11,41,33,843 and an interest of Rs.3,51,41,347 on CCI/OD, Security Deposits, on documents retired, on bills discounted and bank charges were claimed under the....
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....7 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 fertilizers Ltd. v. CIT [1994] 209 ITR 174 at pages 181 and 202 wherein the pre-production expenditure have been disallowed. For explaining the concept of commencement of commercial production he referred to the decision of the Gujarat High Court in the case of CIT v. Sarabhai Sons (P.) Ltd. [1973] 90 ITR 318; the decision of the Bombay High Court in the case of G.T. Industries and the decision reported in 108 ITR 650 (sic). 21. We have heard the parties and considered their rival submissions on this issue. In the case of Food Specialities Ltd. a case before the Delhi High Court the assessee incurred an expenditure of Rs. 23,069 on purchasing milk used for testing the plant and machinery to be included in the actual cost of the machinery. The High Court following the decision of the Supreme Court in the case of Chellapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 held that the expenditure incurred was part of actual cost of the plant for the purpose of computing depr....
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....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 production and, therefore, to be treated as part of the actual cost of plant and machinery. 21.4 In the case of McGaw Ravindra Laboratories (India) Ltd. a case before the Gujarat High Court, the assessee manufacturing blood transfusion equipment had decided to manufacture testing chemicals which form part of it and the expenditure incurred in connection with manufacture of testing chemicals was held to be on revenue account by the Tribunal by observing that the assessee-company was already manufacturing blood transfusion equipment and, therefore, it could not be said that the expenditure incurred was capital in nature. The High Court however, found that the expenditure of Rs. 24,000 relating to testing formula accounted for the cost of preparing and providing additional specifications for analysis and testing the various indigenous raw materials and finished goods to conform with the special secret formula and for providing production methods for processes was not revenue....
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.... 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 businessman would regard a business as being commenced and the approach must be from a common sense point of view, in this case, the company which was incorporated on November 4, 1963 actually started production on 26th June, 1965. In this case, the company had commenced its business by securing orders first and gone into production later on and since the business activity of securing order had practically started from the very date of incorporation of the company, it was hel4 that the business activity of the company started from the day of incorporation and the expenditure incurred before the actual production was allowed as a revenue expenditure. 21.8 In the case of United Phosphorus Ltd. before the Ahmedabad Bench of the Tribunal "it was an uncontroverted fact that the new unit under construction at Jhagadia relate to caustic chloride project. That was a unit which was being set up for manufacture of one of the important input of existing product manufactured by the appellant....
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....ncome-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 service from October, 1963. The expenses incurred before commencement of production amounting to Rs. 4,80,873 had been capitalised and the assessee claimed depreciation thereon. On these facts the High Court held that the assessee is entitled to depreciation on such pre-production expenses. The facts of the present case are clearly distinguishable. It is a case where the assessee is carrying on its business for last several years. The expenses have been incurred in relation to setting up of new units which are part of the same existing business of the company. The other judgment relied upon by the Tribunal in this case is Peas Industrial Engineers (P.) Ltd This was also a case where the claim for such expenditure was made in respect of expenses incurred between 1963 to 1966. The assessee started manufacturing activity sometime in the year 1968-69. Thus in this case also the assessee was not carrying on any existing business and the expenditure related to setting up of an altogether new....
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....ses 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 to interfere with the view taken by the learned CIT(A). Hence, ground Nos. (3) to (6) of revenue's appeal are dismissed." 21.9 In the case of Core Healthcare Ltd. the assessee-company was principally engaged in the business of manufacturing intravenous injection of two types-large volume parenterals, i.e., LVP and sterile water for injection (small volume parenterals) i.e., SVP. The commercial production has commenced in February, 1988 and the manufacturing activity had been generally increased from time to time. During the financial year ended on 31st March, 1992, the company installed three more machines in addition to the existing three machines for the production of LVP and SVP resulting in substantial increase in the investment of the manufacturing products. The assessee claimed interest towards borrowings made for the purpose of acquiring the new machinery and the Gujarat High Court held that the deduction under section 36(1)(iii) was allowable even though pertaining to the period p....
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....e 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 thus one and the same and there was consolidation of accounts for the purpose of ascertaining the ultimate working result of the businesses carried on by the assessee. The High Court further held that there was complete inter-connection, interlacing, inter-dependence and dovetailing of the different business activities carried on by the assessee and all the activities constituted one and the same business and the deduction on account of retrenchment compensation paid by the assessee upon the closure of one of its businesses and the write off of its outstanding dues as bad debts in the other were allowable deductions under section 37 and section 36(1)(iii) respectively. 21.12 In the case of Ashima Syntax Ltd., the assessee was a manufacturer of fabrics. During the relevant period it imported air jet looms from Japan. It was stated that the assessee started trial production on March 26,1993 and some cotton fabrics were also produced which had been shown as closing stock and that the assessee was entitl....
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....er 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 expenditure related to expansion of business was held allowable against the business income of other business on the basis of the principle of 'same business'. On that basis if the business of the assessee of 3rd Module was part of the integrated business carried on by the assessee, we do not find any reason how the same could be disallowed on the ground that the trial run expenditure was pertaining lo the new unit which was nothing but an expansion of the same business of manufacturing sponge iron. It is a clear case of a same and integrated business with a complete inter-connection and inter-lacing between the different lines of activities carried on by the assessee in the light of the following decision wherein even different and various businesses carried on by the assessee considered to be same and integrated business:- (i) Life Insurance and General Insurance business irrespective of the different mode of computation of business income under the Income-tax Act in Prithvi Insurance Co. Ltd.'s case; (ii....
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....nter-connection between the businesses by reason of the common management, common administration, common fund, etc. and since the assessee already in the business and various units of the assessee amounts to same business, the expenditure of start up establishment and folio maintenance aggregating to Rs. 11,41,33,843 was an allowable deduction and so also the claim of interest of Rs. 3,51,41,347. It may also not be lost sight of that the assessee has started production from 1st January, 1993 and the product during trial production between September, 1992 to December, 1992 was sold and shown in the sales declared by the assessee and has been assessed as income of the assessee. Consequently, the expenditure incurred by the assessee in producing those items would also be an expenditure of revenue nature though incurred during the trial production which was before starting of the commercial production. 21.18 Though they started a new unit, it has a common management with a registered office. Common funds were being utilised in these ventures of activities and, therefore, it is a case of one and the same business. It was further submitted that thus there was a complete inter-connection....
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....ion of an existing business or establishing a new business altogether. 22. The next dispute is with regard to addition of annual letting value of house property amounting to Rs. 49,64,675 which according to the assessee, is over and above the amount actually received and offered for taxation by the assessee. The CIT observed that the assessee was owner of house property at Mumbai being a flat occupied by M/s. On A Way Engineering (P.) Ltd. for which an estimated income of Rs. 1,20,000 was shown in the computation of total income relevant to assessment year 1992-93 wherein an addition of Rs. 1 lakh was made in the absence of any details furnished. No such value according to him was estimated for the year under consideration. The CIT, therefore, was of the opinion that the order of the Assessing Officer was erroneous and prejudicial to the interests of the revenue. He also found from the details of prior period expenses/income as on 31-3-1994 that the assessee had received a sum of Rs. 27,88,800 in respect of property for the period 1-4-1992 to 31-3-1993 i.e., for the year under consideration. The assessee had submitted that a total sum of Rs. 55,77,600 was received during the finan....
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....from year to year, or (b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable. 25. The taxability is on the annual letting value which the assessee is entitled to receive or reasonably expect from year to year, whichever is higher. If the amount pertained to the year under consideration which has been settled in the subsequent year as per the provisions of sections 22 and 23 it has to be brought to tax in the relevant year under consideration irrespective of the fact that the assessee had received it and/or offered the same in the subsequent year. We, therefore, agree with the CIT on principle and uphold his order on this point. However, the amount is assessed in the year under consideration the same may be excluded from the next year's income offered and assessed on actual receipt basis. 26. The next dispute is with regard to disallowance of Rs. 98,01,013 claimed under section 35D of the Act. The Commissioner of Income-tax noticed that a sum of Rs. 2,49,97,769 was allowed to the assessee in some of the earlier ye....
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....e original debenture holders and the shareholders for three years after allotment of convertible debentures. According to the CIT, the payment On account of loyalty coupon has no nexus to the business of the assessee and the expenditure was not related to the issue of debentures because the debentures were issued in 1989 and the liability in respect of loyalty coupons arose in 1992. He further observed that payment on account of loyalty coupon was not an allowable deduction. It was an incentive if at all for conversion into shares and holding the same for three years. He, therefore, held that expenditure has no relevance to the issue of debentures and the expenditure was not incurred wholly and exclusively for the purposes of business. The assessee's reliance on Calcutta High Court decision in the case of CIT v. Tungabhadra Industries Ltd. [1994] 207 ITR 553 was found to be of no help as according to him, the debenture holder once he pats with the debenture became ineligible to the loyalty arising under the loyalty coupon which for him was contingent being on the happening of subsequent year. According to him, the loyalty coupon was in connection with allotment of shares and, t....
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....ation of such of those original debenture holders who have remained with the Company for a minimum of three years. A loyalty coupon was to be attached with each Convertible Debenture except those to be allotted to Promoters. An amount of Rs. 10 per debenture was to be paid to holders of each debenture if they do not sell the shares on account of the conversions for the first three years from the date of allotment, provided the coupon, holder is the original allottee or his successors; if he has not disposed of through sale or otherwise the shares issued on the first and second conversion. The conversion terms as aforesaid are-Part A debenture is to be converted into two fully equity shares at the premium of Rs. 30 per share on 1-6-1990 and Part B also into two equity snares of Rs. 10 each by premium to be decided by CCI at that time. Should the premium so determined be less than Rs. 40, the balance amount will be treated as a debenture and was to be redeemed at par at the end of 7th year from the date of allotment. It is true that when the debentures were issued, the assessee agreed to pay loyalty coupon to the debenture holders and it was an impetus to subscribe to the debenture i....
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....lised, namely whether the acquisition of a capital asset or for meeting revenue disbursements. The expenditure incurred on the loan would be an allowable revenue expenditure. In that case, the expenditure was incurred on non-convertible secured debentures of the total value of Rs. 80 lakhs in 1983 and the said debentures were redeemable after expiry of seven years from the date of allotment. 31.3 In the case of Universal Cables Ltd., the Calcutta High Court following the decision of the Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. held that there was a continuing benefit to the business of the assessee over the entire period and, therefore, the premium payable on redemption of non-convertible secured debenture issued during the year should be spread over the period of debentures. 32. The reliance on the decision of the Calcutta High Court in the case of Thungabhadra Industries Ltd. and the decision of the Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. is of no much help as the expenditure in that case was for raising loan by issue of non-convertible debentures and retaining the debentures for a certain period and that was a reason t....
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....me for the assessment year 1993-94 by disallowing the deduction which has been claimed from the contract receipts. 35. The learned assessee's counsel submitted that the assessee had made a provision for doubtful debts amounting to Rs. 53,28,909. The provision was reduced from the contract receipts and the Assessing Officer allowed the same. These bad debts are stated to be in connection with the transfer of Essar Oil division and the debts were written off at the time of transfer of undertaking and so the provision was also transferred to EOL who have written off the bad debts to the provision account transferred with the undertaking. The learned counsel of the assessee relied upon the decisions in CIT v. Girish Bhagwati Prasad [2002] 256 ITR 772 (Guj.) and in Sarangpur Cotton Mfg. Co. Ltd v. CIT [1983] 143 ITR 166 (Guj) and submitted that it was actually written off. The assessee's contention is that the CIT was not justified in stating that it was a loss of EOL because the assessee has written off the debts on 31-5-1992 in its books of account and before transfer EOL, in its turn written off the debts by debiting it to provision for doubtful debts and did not claim for a....
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....s loan". He, therefore, concluded that the project which is being financed by the issue represents an expenditure of the existing activities in the form of yet another steel division. He also observed that the entire issue went to increase the paid-up capital and share premium account because the entire debenture was fully convertible into shares within a period of 15 months. He, therefore, held that the expenditure was in the nature of expenditure mentioned in section 35D and allowed 10 per cent thereof in the year under consideration under that section. The CIT (A) upheld the disallowance by agreeing with the Assessing Officer that the expenditure was covered by section 35D and by observing that after a period of 15 months the same fund was available as equity funds and the amount raised, therefore, was available with the assessee on a permanent basis. In the Supreme Court decision in the case of India Cements Ltd relied upon by the assessee the expenditure on issue of debentures was held to be revenue expenditure taking into consideration the object that the funds were in the nature of loan and were available temporarily. 38. In the grounds of appeal the claim of the assessee i....
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....inery from the cost of machinery though it should have been held towards cost of plant and machinery. The assessee incurred a sum of Rs. 40,39,98,000 towards acquisition of know-how and consulting in engineering services for the installation of the plant. This amount was capitalised towards the cost of the plant. The assessee claimed depreciation thereon at the rate of 25 per cent. The Assessing Officer, however, held that it being cost of acquisition of the know-how, it was covered by the provisions of section 35AB of the Act. He, therefore, disallowed the depreciation claimed and allowed 1/6th of the aforesaid expenditure being Rs. 6,73,33,000. The assessee's appeal Was dismissed by the CIT(A). 41. The learned counsel of the assessee submitted that know-how was obtained for setting up the plant and not for the purpose of manufacture or processing of goods which is covered by section 35AB. This argument and interpretation of the counsel of assessee, it is submitted by the learned DR to as in nature of hair-splitting. 42. Section 35AB provides that where an assessee has paid any lump sum consideration for acquiring any know-how for use and for the purposes of his business, on....
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....y do not crystallize till finalisation of the transaction, receipt of final sale bills, etc. Referring to the earlier order, the CIT(A) however, directed the Assessing Officer to disallow net amount i.e., after setting off the prior period income though he found some force in the contention of the assessee that certain expenses might not have been debited in the earlier year due to the fact that it had not crystallised in that year. 44. The learned counsel of the assessee relied upon the decision of the Tribunal in the case of United Phosphorus Ltd. [IT Appeal No. 35 (Ahd.) of 2000 dated 22-5-2001] wherein the Tribunal set aside the matter to the file of the Assessing Officer to determine the allowability of the expenditure as per the decision of the Gujarat High Court in the case of Saurashtra Cement & Chemical Industries Ltd. v. CIT [1995] 213 ITR 523. 45. We have heard the parties and considered the rival submissions. The assessee is following mercantile system of accounting and, therefore, its income and expenditure are to be considered based on such system of accounting. If the assessee has been following a wrong system in the earlier year that cannot be a ground for allowin....
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....td. v. CIT [1992] 198 ITR 386. The CIT(A) following his decision in the appeal for assessment year 1994-95, directed the Assessing Officer to treat the interest as income from business. Revenue is against this finding of the CIT(A). 47. We have heard the parties and considered the rival submissions. In the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172 the Supreme Court observed that: "interest income is always of a revenue nature, unless it is received by way of damages or compensation. If a person borrows money for business purposes but utilises that money to earn interest, however, temporarily, the interest so generated will be his income. This income can be utilised by the assessee whichever way he likes. He may or may not discharge his liability to pay interest with this income. Merely because it was utilised to repay the interest on the loan taken by the assessee, it did not cease to be his income. When the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountanc....
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....ose of setting up of the factories, the company had taken term loans from various banks and financial institutions. That part of the borrowed funds which was not immediately required by the company was kept invested in short-term deposits with banks. Such investments were specifically permitted by the memorandum and articles of association of the company. The company had also deposited certain sums with the Tamil Nadu Electricity Board. It had also given interest-bearing loans to its employees to purchase vehicles. Up to the assessment year 1980-81, interest earned by the company from the various loans given by the company and also from the bank deposits was shown as income and was taxed accordingly. For the accounting year-ending on June 30, 1981 (assessment year 1982-83), the assessee received a total amount of interest of Rs. 2,92,440. In its return of income filed on June 22, 1982, the company disclosed the said sum of Rs. 2,92,440 as "income from other sources". It also disclosed business loss of Rs. 3,21,802. After setting off the interest income against the business loss, the company claimed the benefit of carry forward of net loss of Rs. 29,360. The company later on realise....
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.... In view of the aforesaid decision of the Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. the interest received during the pre-production period is to be assessed under the head "income from other sources". We, accordingly, uphold the order of the Assessing Officer to this extent and reverse that of the CIT(A). 51. The next dispute in the revenue's appeal is against the finding of the CIT(A) that the loss incurred in surrendering back the industrial land to Government of Andhra Pradesh was a capital loss in t6rms of section 45 of the Act. In the computation of income, the assessee claimed that a sum of Rs. 1,70,87,944 represented capital loss incurred by the assessee which was in connection with surrender of industrial land to the Government of Andhra Pradesh which it required in Kakinada to set up Pellatisation Plant and as it did not materialise and the land which has been acquired by the Government from public who opposed it, the assessee surrendered the land back to the Government. It was contended by the assessee that it had neither acquired any capital asset on account of this expenditure nor any benefit of enduring nature has accrued to the ....
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....o existence and merely because the project did not materialise the nature of expenditure would not change to revenue. 54. In the case of Century Ginning & Mfg. Co., the question was whether the business trip abroad for setting up a new plant could be claimed as a revenue expenditure and the Court held that it was an expenditure of capital nature. The CIT(A) has also given a finding that the assessee-company wanted to start a new plant and the loss was incurred at the time of acquiring the plant. 55. In the present case also, the expenditure on acquisition of land was a capital expenditure and, therefore, its surrender to the Andhra Pradesh Government would be an expenditure of capital nature. Both the CIT(A) as well as the Assessing Officer agreed on this point. The CIT(A), however, qualified this loss to be in the nature of section 45 meaning thereby that it was a loss on transfer of capital asset. Section 45 provides for the charge of any profit or gain arising from the transfer of capital asset effected during the previous year. Therefore, there should be a [transfer in relation to a capital asset. The term "transfer" is defined in section 2(47) of the Act and it includes (i) ....
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....he proportionate amount after taking into consideration the assessee's own funds and the borrowed funds. He has proceeded on a just and proper method and no fault therein could be alleged. The reliance by the revenue on the decision of Karnataka High Court in the case of CIT v. V.M. Salgaocar & Bros. (P.) Ltd. [1992] 198 ITR 738 is of no help because in that case the question was whether non-charging of interest in debit balance in running account by the directors constituted perquisite or not. There is no such question in the present case as to whether the non-charging of interest from the sister concern would constitute any such income to the assessee or not. It is a case of mere disallowance by the Assessing Officer on the assumption that borrowed funds alone have been utilised in advancing interest-free loan to the sister concern. The order of the CIT(A) is, therefore, upheld. 58. The next ground in the revenue's appeal is against deletion of disallowance made under section 40(1)(a)(i) of the Act in respect of payments made to Scandia Essar (Pte.) Ltd., Singapore. The assessee paid a sum of Rs. 15,54,17,620 to this non-resident concern towards contract charges which ha....
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....im nor the Assessing Officer could have admitted any such claim. With regard to the claim of section 80HHC, the assessee was required to file an audit report which was also not submitted and the direction of the CIT(A) to the Assessing Officer to obtain such a report from the assessee is also challenged before us. 61. Admittedly, these claims were not made by the assessee before the Assessing Officer and the reason is stated to be that as the Assessing Officer had computed the income of the assessee at a loss in the original order of assessment at Rs. 2,65,51,990 and, therefore, the question of claiming deduction under these two sections did not arise at the stage of the assessment. Consequent to the revision under section 263 a positive income is worked out and, therefore, the assessee has made the claim under these two sections for the first time in these proceedings. The CIT(A) observed that as the Assessing Officer has to work out the taxable income in accordance with the provisions of the Income-tax Act, he has to necessarily allow the deduction to which the assessee is entitled to, so as to compute the correct taxable income, without which the exercise would be incomplete. ....
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....t have been allowed at the time of original assessment proceedings, no question of rectifying the mistake ever arose and it was for the assessee to satisfy the Income-tax Officer that each of the conditions of section 84/80J was satisfied in this particular case and further that the material for granting the relief under section 84/80J was available on the record of the case before him. 63. We have heard the parties and considered the rival submissions. In our opinion, it is of course for the assessee to claim a particular deduction or not and in the light of the circular of the Board the departmental authorities may point out to the assessee that such a claim was admissible, but it is also for the assessee to claim the relief and comply with the requirement of the sections under which the deductions are claimed. In the original assessment, the claim was not made by the assessee. We are not aware as to why that was not made. It may be as contended by the ld. counsel of the assessee that the income was loss and, therefore, there was no occasion for claiming the same. But in that case also, the assessee is not absolved from furnishing the necessary particulars of the claim and if be....
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.... audit is a directory requirement and the proof can be furnished at the time when the special deduction under section 80J is being considered. The Assessing Officer shall take into consideration these two decisions in the fresh proceedings. 64. In the result, all the appeals are partly allowed. Per Shri S.K. Yadav, Judicial Member. 65. I am not able to persuade myself to agree with Hon'ble V.P./A.M. on issue i.e., cancellation of forward Exchange Contract. The assessment in this case was completed under section 41(3) on 29-3-1996. On scrutiny of assessment for assessment year 1993-94 CIT found that the order of Assessing Officer was erroneous insofar as same was prejudicial to the interest of revenue in respect of certain items which are discussed in detail. Accordingly the assessee was given an opportunity of being heard with a direction to make its submission as to why necessary direction should not be issued to the Assessing Officer in respect of issues under consideration and for the reason shown in show-cause notice, issued to the assessee. Assessee was also asked to furnish the details and evidence in support of its submission with reference to various issues. In res....
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....ries order of Assessing Officer resulted in prejudicial to the interest of revenue as observed by the Hon'ble Delhi High Court in the case of Gee Vee Enterprises Process. Hon'ble Rajasthan High Court in Emery Stone Mfg. Co.'s case has held that where deductions have been allowed without proving the claim and proper verification on the basis of which order was passed would also be prejudicial to interest of revenue and could be set right in revisionary jurisdiction by CIT. 66. After taking into consideration the details filed and submissions made in response to show-cause notice, under relevant provisions of section 263 of the IT Act, various issues arose. First issue was regarding cancellation of forward exchange contract. During the period relevant to assessment year 1993-94 the assessee has shown a receipt of Rs. 71,93,24,207 net towards gains from cancellation of forward exchange contract. This amount was shown as revenue income in the printed account of assessee-company. However, for the purpose of income-tax, assessee claimed the receipt as not taxable stating that it was only a capital receipt. 66.1. Assessing Officer has discussed the issue in para 6.1 of the a....
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....from abroad. (iv) The gains from cancellation of forward exchange contract was of revenue nature. The action of Assessing Officer in reducing the value of block of assets was erroneous and also prejudicial to the interest of revenue. The observation of Assessing Officer that the gains on cancellation of foreign exchange contract had any relation with the loan from abroad or acquisition of any asset from abroad was also erroneous. (v) The Assessing Officer failed to consider the amount received was in nature of revenue receipts being compensation received on cancellation of foreign exchange contract, which was entered during the course of assessee's business. Failure on the part of Assessing Officer to treat the entire receipt as revenue receipt was erroneous and prejudicial to the interest of revenue. 66.3 In this regard the submissions of assessee before the CIT are as under: (i) The foreign exchange contracts were undertaken to cover the liability on capital account, i.e., repayment of loans taken in foreign currency. These loans were term loans granted for purchase of capital equipment. Also certain loans were taken for payment of technical know-how and to make paymen....
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....efore, the extended definition cannot be applied to foreign exchange. In view of above, it was submitted that transaction under consideration which is in respect of foreign exchange cannot be treated as profit arising out of speculative transaction. 67. After taking into consideration various details and submissions C1T observed that assessee had earned profits on cancellation of forward exchange contract. In the printed balance sheet these have been shown as revenue receipts as under:- Printed balance sheet for period ended March, 1993 Schedule XVIII. Note to financial statement under the heading Principal accounting policies': item (xiii) forward contract- "Profit and Losses" arising out of cancellation of forward contract is treated as revenue item and accordingly including in Profit and Loss account. 67.1 Similarly in the printed balance sheet for period ended May 1992, it is shown as under: SCHEDULE XVIII Note to financial statement Note 3 - "The company has cancelled some of the forward exchange contracts and realised a net profit of Rs. 1,699.47 lakhs. This has been recognised as other income of the year. The entire amount has been transferred to genera....
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....in realised is utilised for the purpose of repayment of foreign loan obtained for acquiring assets from the aboard. This is the normal situation. Two: the contract is cancelled with an eye on profit on a judgment taken by the management. The foreign exchange liability is left uncovered. The contract is not allowed to mature. The gains are not utilised for the purpose of repayment of loan. Foreign exchange liability is not reduced. This is the present condition in the case of assessee. Both the situations are not similar. In the first situation assessee could claim benefit of reduction of cost/WDV by treating the receipt as connected with capital asset. In the second situation the gains arc purely revenue receipt, unconnected with purpose for which contracts were originally entered. Therefore, CIT did not agree with the opinion of learned chartered accountants referred above. 67.6 CIT observed that foreign exchange contracts were undertaken to cover the liability on capital account which was cancelled and liability was left uncovered. As indicated earlier the gain on such cancellation was earned in Indian rupee and, therefore, would not have in any circumstance reduce the f....
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....le principle that compensation received on cancellation of an agency must always be regarded as capital. 67.9 From the facts of the case CIT observed that the entire receipt was of revenue nature and this should have been treated as revenue receipt. The assessee has given the same treatment in the printed balance sheet the same was also certified by the Auditor. No basis has been given by the assessee to treat the said amount received as capital in nature. The treatment given by the assessee to the above sum in computation filed along with the return is incorrect. 67.10 The CIT further observed that assessee had-entered into contract with certain banks in India for foreign exchange cover and to hedge its foreign exchange liability and to avoid loss of any future profit. In case contract had matured and profit/loss utilised for liquidating the foreign exchange liability the action of Assessing Officer would have been justified. The gain arose due to cancellation of contracts which were entered in connection with the business of the assessee. The gains are incidental to business and, therefore, cannot be treated as casual income. The gain will, therefore, be treated as business inc....
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....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 into existence during the year under consideration. 68.2 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 months to cover against possible future exchange losses in repayment of foreign currency loans, equipment purchases and technical services. However, as reported in the Director's report for 1992-93 these contracts were cancelled as no longer required due to greater stability of rupee against US $. It was probably because the Government announced partial convertibility of rupee and announcement by the RBI allowing cancellation o....
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....sessee 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. 69. The ld. CIT-DR, Shri Girish Dave, on the other hand, submitted that the fact that the assessee has received gain on cancellation of forward contracts is proved and consequently the onus on the assessee to prove that it was exempt in view of the decision of the Supreme Court in the case of V. Venugopala Varma Rajah; decision of the Calcutta High Court in the case of Sutna Stone & Lime Co. Ltd. and the decision of the Orissa High Court in the case of Orissa State Warehousing Corpn. He also referred to paras 13 to 15 of AS-11 of the guidelines issued by the Institute of Chartered Accountants of India. He further submitted that outstanding loan was circulating capital and consequently the gain would be of a revenue account in view of the decision of the Bombay High Court in the case of V.S. Dempo & Co. (P.) Ltd. and ....
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....egards the other gains of Rs. 0.7 crore. Accordingly order of the CIT was set aside on these issues and restored that of Assessing Officer." 71. I am not able to persuade myself to agree with the findings of Hon'ble Vice President on this issue for 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 in revenue receipts as under:- Printed balance sheet for period ended March, 1992 SCHEDULE XVIII Note to the financial statement under item "Principal accounting policies; item (xiii) 'forward contract' 'profits and losses' arising out of cancellation of forward contract is treated as revenue item and accordingly included in profit and loss account." B. Similarly in the printed balance sheet for the period ended May, 1992, it is shown as under:- SCHEDULE XVIII Note to financial statement Note-3 - "The company has cancelled some of the forward exchange contracts and realised a net profit of Rs. 1699.47 lakhs. This has been recognised as other income of the year. The entire amount has been transferred to general....
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....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 Accountants of Bombay mentioned above. G. The facts on record indicate that foreign exchange contracts were undertaken to cover the liability on capital account which were cancelled and the liability was left uncovered. The gains on such cancellation was in Indian rupee and, therefore, would not have in any way reduced the foreign exchange liability. The ratio laid down by Hon'ble Supreme Court in Tata Locomotive & Engg. Co. Ltd.'s case does not help the assessee, because in the said case the commission earned abroad in foreign currency was retained for purchase of capital goods. Later the unutilised amount was remitted into India resulting in a surplus in terms of post-devaluation exchange rate, which was held as capital receipt. But in the instant case the profit on cancellation of forward contract was not retained for purpose of capital goods. But same was remitted to India in Indian rupee and same had no....
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....ency 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 balance sheet and same was also certified by the auditors. As earlier observed by me, the treatment in books of account of the assessee, accepted by the directors and approved by the competent auditors, is extremely important evidence to the fact that receipt is in the nature of revenue. It is settled position of law that each case has to be decided in its facts and circumstances. Moreover, assessee has not come out with any cogent explanation that the amount so received was of capital in nature. Thus the treatment given by the assessee to sum in computation filed along with the return of income is incorrect. K. The assessee had entered into contracts with certain banks in India for foreign exchange cover and to hedge its foreign exchange liability and to avoid loss of any future profits. In case the contract had matured and profit/loss utilised for liquidating the foreign exchange liability the action of Assessing Officer would have been justified. The gai....
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....d in the circumstances of the case, it is the only gain amounting to Rs. 22 crores, as had arisen on cancellation of only those foreign exchange forward contracts as were relating to liability towards repayment 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/an adventure in the nature of trade/as causal income and/or profit arising on speculative transaction under section 43(5) of the Act?" THIRD MEMBER ORDER Shri Vimal Gandhi, President. 73. On account of difference between the Hon'ble Members of Income-tax Appellate Tribunal, Ahmedabad Bench 'B', Ahmedabad the following questions have been referred to me under section 255(4) of the Income-tax Act, 1961, for consideration:- "1. Whether, on the facts and in the circumstances of the case the CIT was right in holding that the order of Assessing Officer was erron....
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....fficer accepted above claim of the assessee as per assessment order dated 29-3-1996. 76. Subsequently, the Commissioner of Income-tax called for record of assessment of the assessee and held that above assessment was erroneous and insofar prejudicial to the interests of the revenue as gains arising to the assessee on cancellation of contracts were taxable receipts. Various reasons for taking action under section 263 are also enumerated and these are reproduced by the learned Vice President in his proposed order. The learned Commissioner accordingly cancelled the assessment and asked the Assessing Officer to make fresh assessment in the light of directions issued by him. The assessee challenged above action of the Commissioner in appeal ITA No. 949/MDS/1998 before the Appellate Tribunal. 77. Meanwhile, the Assessing Officer made fresh assessment in accordance with directions of the learned Commissioner and treated above amount of Rs. 71.93 crores as taxable receipts. On appeal against the above fresh assessment, some relief was allowed by the CIT(A) and accordingly revenue filed further appeal ITA No. 1056/MDS/1999 before I.T.A.T. The original assessment of ITO was also subject-ma....
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....und 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 contract is for the purpose of discharging an obligation on capital account, i.e., for borrowing for the purpose of importing....
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....e 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 realized 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 of the CIT's order indicates that even he himself is not sure whether the profit earned on cancellation of foreign exchange forward contract was a revenue receipt or as capital gain, because he directed the Assessing Officer to being to tax the profit either as revenue profit or as capital gain. In our view, setting aside an assessment is not ordinary matter. In fact, in tax laws as in other laws, certainty and fin....
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....ken otherwise without there being an existing liability as is evident from the guidelines issued by the RBI. The liabilities for the repayments of loans against the purchase of equipments, or machinery, or acquisition of know-how for installing the plant, therefore, the conclusion of the CIT that there was no nexus between gain arising on cancellation of forward contracts and acquisition of capital assets cannot be accepted. As the contracts were taken against the capital liability, their cancellation cannot be de hors that liability. 8.25 Cancellation of the contracts in this was one time cancellation and not one after the other. Even otherwise, as held by Supreme Court in Dalhousie Investment's case 66 ITR 473 (SC) "The mere fact that an investment company varies its investment does not necessarily mean that the profit resulting from such variation is taxable under the Income-tax Act. Variation of its investments must amount to dealing in investment before such profit can be taxed as income under the Income-tax Act." The assessee has not dealing in foreign exchange which is permitted only to a license holder. When the forward contracts were taken, they were to guard against....
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.... yet not set up. It would reduce the assessee's liability to purchase capital goods; (ii) because the liability towards sponge iron is for existing plant and the liability for capital goods not being capital assets by itself gain or loss arising therefrom could have been on revenue account, the same way as the interest payment of such liability. The said interest liability prior to installation of the plant has to be capitalized under the Accountancy Principles as also on the analogy of the statutory Explanation 8 to section 43(6), it cannot be treated as a receipt on revenue account; and because the facts are not on record to determine the exact nature as regards the other gain of Rs. 0.72 crore we, therefore, set aside the order of the CIT on these issues and restore that of the Assessing Officer. 8.28 However, the liability towards advance taken from Reddington, on a consideration of the totality of the facts and circumstances of the case, in our opinion, was against supplies of assessee's product to be made by the assessee to them. Though the advance so received was utilized for payments for capital goods directly to the suppliers, the liabilities towards Reddington h....
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....tion of foreign exchange contract (net of premium paid) Rs. 71,93,44,207. 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 utilized 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 utilized 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 circ....
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....h it was entered into was not on assessee's agenda. The conduct of the assessee 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 (SC) 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 is j....
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.... income. Accordingly, the gains have rightly been treated as business income by the CIT. L. The significant aspect of the whole transaction is that the entire contracts was settled without delivery of commodity. 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 non delivery. Accordingly the contention of the assessee in this regard, is not acceptable." 83. On account of above difference between the Hon'ble Members the matter has been referred to me in the shape of three questions reproduced in the early part of this order. The case was fixed for hearing of parties at Mumbai. Shri S.N. Soparkar, learned Senior Advocate argued on behalf of the assessee. He highlighted that forward foreign exchange contracts were entered into for purposes of acquiring capital assets like machinery and know-how. For large number of contracts, the assessee needed approximately ....
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....lowing decisions of Hon'ble Supreme Court in the cases of (1) Tuticorin Alkali Chemicals & Fertilizers Ltd's case, (2) Sutlej Cotton Mills (116 ITR 1); and Hon'ble Gujarat High Court in the case of Core Healthcare Ltd. It was not correct on the part of the learned Judicial Member to hold that gains were not linked to purchase of machinery or had nothing to do with liability to be discharged by the assessee relating to purchase of machinery. Findings of the learned Judicial Member were not only against facts, but even had no legal basis, the learned counsel further submitted. 85. Finding 'E' was contrary to the earlier finding recorded in paras 'A' to 'D'. It was erroneous to hold that payment was made in domestic currency. The conclusion in para 'E' was inconsistent on facts recorded by the Judicial Member in earlier paras of the proposed order. The finding recorded is also contrary to circular and guidelines of Reserve Bank of India permitting entrepreneurs to enter into forward contract. Findings recorded by the Judicial Member were also contrary to decision of the Special Bench in the case of Appollo Tyres Ltd. v. Asstt. CIT [2004] 89....
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.... gain arising on cancellation of forward contract would be capital or revenue receipt, would depend upon large number of factors. He referred to the observations of the Special Bench, "The essential characteristic which stamp the character of a revenue nature on any transaction, namely, multiplicity of transactions, a prior association of business and the existence of a scheme, system and business operations are totally conspicuous by their absence in the present case before us. In our considered opinion, the dominant intention, motive and purpose of entering into forward foreign exchange contracts and cancellation thereof were clearly to provide a hedging mechanism against enhancement of liabilities for repayment of foreign loans raised for the purpose of acquisition of capital asset by the assessee. The conduct of the assessee, as manifested in the facts and features of the case enumerated hereinabove, does not reflect profit motive in entering into forward contracts and cancelling the same thereafter." 89. The above, Shri Dave submitted, clearly showed' that character of receipt depended on multiplicity of transaction, association of business and existence of a scheme and n....
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....hat Special Bench did not correctly appreciate import of Explanation 3to section 43A of the Act. He submitted that foreign exchange contracts were of executory nature. No inference whether these contracts could operate in capital or in revenue field was possible unless contracts are actually performed. No foreign currency would be involved in case the contracts are not executed or performed. Therefore, existence or cancellation of contract has to be treated different from gain accruing or arising to the assessee in foreign exchange. Such a view was taken by the Court of Appeal in the case of Whittles (Inspector of Taxes) v. Uniholdings Ltd. [1996] STC 914 (sic). Borrowing of a loan and foreign exchange were held to be two separate contracts. The learned D.R. submitted that gain on cancellation of contract was rightly held to be a revenue receipt. 93. Shri Dave further emphasized that Explanation 3 to section 43A did not talk of revocation or cancellation of a forwarding contract. The aforesaid Explanation was twisted and moulded to reach the conclusion that gain arising from forward contract was a capital gain. However, it was settled law that while interpreting a fiscal statute, ....
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....was made by the assessee in the course of business and that cancellation of contracts was not related to acquisition of capital assets. 96. Shri Dave also drew my attention to the detail of the transactions entered into by the assessee. He argued that several forward contract related to supply of know-how, which clearly was a revenue receipt. In this connection, he relied upon decision of Bombay High Court in the case of Addl. CIT v. Buckau Wolf New India Engg. Works Ltd. [1986] 157 ITR 751. This principle was also given statutory recognition under section 35AB of the Income-tax Act. Thus even if whole case of the assessee was accepted, gain accruing on contract for supply of know-how was required to be treated as revenue receipt. These receipts should be bifurcated and subjected to tax. The learned DR. this way supported the proposed order of the learned Judicial Member. 97. Shri Soparkar, learned counsel for the assessee refuted arguments of the learned DR in rebuttal. He submitted that Full Bench decision laid legal principles, which are fully applicable to the case before us. The decision of the Special Bench was not distinguishable on facts. Merely because the assessee had c....
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....311 to 320 of the Paper Book where copies of three contracts are available. In each of the contract, purpose that contract was being entered into to acquire machinery and plant was duly disclosed. Thus forward contract was entered into for purposes of acquiring a capital asset. Shri Soparkar further stated that revised Accounting Standard-11 did not make any difference. Likewise it is inconsequential that hedging is permitted as per provisions of FERA or FEMA. He also read out relevant portion of proposed order of the learned Vice President to show that there was no material error in the order as principles applicable are to be seen whether contract is one in question or there are many. Likewise whether foreign money was a commodity or not, is irrelevant for determining matter in issue. The question whether it was speculative transaction or not, is not material because even speculative transaction fall under the head "business". Shri Soparkar also placed on record the definition of "commodity" as per legal dictionary by William P. Statsky and William C. Burton. 100. With reference to the English decision relied upon by the learned DR, Shri Soparkar submitted that English decision ....
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.... portion of the above Notification is as under: "Customers may be permitted to cancel forward contracts and keep their exposures open or book fresh contracts, at later dates, if they so desire. It will also not be necessary to report these cancellations to the Reserve Bank of India. Full particulars of cancellations of forward cover for the equivalent of US $ 500,000 and above should be kept on record with the authorized dealers for verification by the Exchange Control authorities if necessary. A contract booked with an authorized dealer and subsequent cancelled, may be booked again with another authorized dealer, if the customer so wishes. The authorized dealer booking the subsequent contract will have to verify suitable documentary, evidence to ensure that a genuine transaction, permitted under the extant regulations, exist and that the customer continues to be exposed to exchange risk." 103. Before the Special Bench, in the light of above circular, the assessee had claimed that gain of Rs 11,06,00,000 arising on cancellation of forward contracts was a capital receipt. The Special Bench for consideration of issue before it framed the following two questions: (i) Whether the ....
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....ere cancelled on 26-2-1993 resulting in profit to the assessee. Thus conduct of the assessee amply demonstrated that entire activity of cancellation and execution of fresh contracts followed by cancellation was motivated by business consideration. The contracts might have been entered into to cover against exchange rate fluctuation without any motive of profit, but subsequent conduct of the assessee clearly showed that cancellation was done for business consideration. The Departmental Representative had relied upon the decisions noted by the Bench in paras 7 and 8 of its order. The learned D.R. also referred to provision of section 43(5) of Income-tax Act and submitted that once these transactions were held to be speculative transaction, provisions of Explanation 2 of section 28 of I.T. Act will automatically come to play and such transaction would be treated as business transactions. It was also submitted on behalf of the revenue that forward contracts could not be said to be capital assets. Without prejudice to the submissions that revenue (income) was generated on cancellation of contract, it was submitted that if contracts are held to be capital in nature, then section 43A woul....
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....the following view: "17. Viewed in the backdrop of the aforesaid facts and circumstances, we are inclined to accept the contention of learned counsel for the assessee that the entire activity of entering into and cancellation of forward contracts, which are directly connected with the repayment of foreign currency loans fall in the capital field and gains arising therefrom would, therefore, be capital receipts. 18. It is now well-settled that where profit and loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be treated as profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But, on the other hand, if the foreign currency is held as a capital asset or as a fixed asset, such profit or loss would be of capital nature. The first decision of the Supreme Court on the issue in chronological order is that reported in CIT v. Tata Locomotive and Engineering Company Ltd. 60 ITR 405 relied upon by the learned counsel for the assessee. In this c....
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....e exchange rate of the foreign currency into the Indian currency as specified in the contract. Any increase or reduction in the liability being the difference in the Rupee equivalent of original liability as well as the liability on the basis of the forward contract would be capitalized towards the actual cost of the assessee in consonance with the provisions of section 43A. Thus, gains arising on cancelling of the forward contracts in the case of the assessee represent the reduction of the liability for repayment of the foreign loan which is liable to be adjusted in the cost of the asset as per section 43A(1). We are not persuaded to accept the argument of the learned counsel for the assessee that the forward contracts have been cancelled by the assessee and are not covered under Explanation 3 to section 43A. As we have already mentioned above, forward contracts have been initially entered into by the assessee against repayment of foreign loan in Sterling as well as US Dollars and have been rolled over up to 30-4-1992 when the same were cancelled in pursuance of relaxation of restriction against cancellation by the Reserve Bank of India. The fact that contracts were not rolled ove....
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....the Special Bench held as under: "27. From the aforesaid rules as laid down in the Accounting Standard 11, it clearly emerges that in case of a foreign exchange contract relating to foreign liability incurred for acquiring fixed assets, any profit or loss on cancellation or renewal of a foreign exchange contract should be adjusted in the cost of the respective fixed assets. Since, in the case of the present assessee, forward contracts relating to foreign loan liabilities incurred for acquiring plant and machinery from abroad have been cancelled, profits arising therefrom are required to be adjusted in the cost of the plant and machinery purchased by the assessee. It is to be noted that entries passed in the books of account by the assessee are in conformity with the aforesaid accounting standard as well as the statutory provisions enacted in the Income-tax Act, 1961 and the Companies Act. We have, therefore, no hesitation in answering the question referred to us as under: 'The gains earned on cancellation of the foreign Exchange forward contracts by the assessee are capital receipts which Should be reduced from the cost of plant and machinery in connection with which foreig....
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....iven by the learned Judicial Member in the proposed order. It is settled law that taxability of receipt has to be judged on the basis of legal principles and not in the manner entries are made by the assessee in the books of account. Therefore, gain in dispute on cancellation of contract could not be treated as a revenue receipt. However, the manners in which entries are made influenced learned Judicial Member as per reasons 'A' to 'D' of his proposed order. I am unable to agree with the above approach. I am further unable to accept that gains in question had no connection with purchase of capital assets from abroad. It is further difficult to agree with learned Judicial Member that cancellation of foreign exchange agreements had nothing to do with the liabilities of the assessee relating to purchase of machinery. In my opinion the act of cancellation of contract cannot be treated as independent act unconnected with purchase of machinery. There was a proximate connection between entering and cancellation of contracts and acquisition of machinery. Finding recorded to the contrary cannot be accepted on facts of the case and in view of decision of Special Bench. It is ....