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2005 (10) TMI 436 - AT - Income TaxIncome arising from the forward cover contracts - Actual cost - Foreign currency - rate of exchange - Gain realised is in the nature of capital receipt or revenue receipt - Whether the sum should be adjusted against the cost of the project for the purposes of determining the actual cost - HELD THAT - Nature of the gain is concerned, we are of the view that the ITAT Special Bench decision in the case of Apollo Tyres Ltd. 2004 (3) TMI 345 - ITAT DELHI-E concludes the issue. In the present case, the loan in US dollars was taken by the assessee for investment in the new project. Thus, the loan was clearly intended to be utilized for acquiring capital assets. The loan was swapped with rupee equivalent received by the assessee from Exim Bank for the same purpose of investing it in the new project for acquiring capital assets. The forward cover contracts with the Banks were entered into by the assessee for the purpose of safeguarding against fluctuations in the rate of foreign exchange in respect of the loan in US dollars. Merelybecause eventually the assessee did not directly utilize the US dollars for acquiring the capital assets, but its rupee equivalent on swapping was utilized for such purpose, in our view, the character and nature of the gain arising from cancellation of the forward cover contracts do not alter. Such gain or loss is clearly in connection with the acquisition of capital assets. Therefore, in our view, the Special Bench decision in the case of Apollo Tyres Ltd. ( supra ) would squarely apply and respectfully following the said decision, we hold that the net gain of Rs. 520.68 lakhs is in the nature of capital receipt. As per section 43(1), actual cost means the actual cost of the assets to the assessee reduced by that portion of the cost thereon, if any, as has been made directly or indirectly by any other person or authority. The crucial words are that for the purposes of sections 28 to 41, the phrase actual cost means actual cost of the assets to the assessee. The words actual cost of the assets to the assessee are nowhere defined in the IT Act except that in various Explanations, there are certain adjustments, which have to be made. The Supreme Court, in the case of Challapalli Sugars Ltd . 1974 (10) TMI 3 - SUPREME COURT also observed that the expression actual cost has not been defined in the Indian Income-tax Act, 1922. The Supreme Court laid down a very important principle that such expenditure which is referable to acquisition of capital assets has to be added to the cost of such assets to arrive at the actual cost for the purposes of allowing depreciation. In our view, in the present case, net loss or income arising from the forward cover contracts taken by the assessee is directly connected with setting up of the new project and, therefore, the principle laid down by the Supreme Court must be followed and such loss or income must be adjusted against the actual cost of the project for the purpose of allowing depreciation. Here, it may be mentioned that the ld. CIT(A) had drawn a rather adverse inference from the fact that the loss or gain arising from cancellation of the forward cover contracts have been treated in the books of account of the assessee as of revenue nature and the same have been either debited or credited to the profit and loss account. In our view, the accounting entries passed in the books of account of the assessee, though relevant, are not determinative of the correct nature of the transaction. The nature of the transaction has to be decided in consonance with the provisions of law and the legal position as emerging from the judicial pronouncements. Thus, we hold that any loss or gain arising to the assessee as a result of cancellation of forward cover contracts is required to be added or reduced from the actual cost of the project for the purposes of allowing deprecation. The Assessing Officer is, therefore, directed to re-compute the actual cost of the project accordingly and the written down value for the purpose of allowing depreciation may be revised for all the relevant subsequent assessment years. In the result, the assessee s appeal stands partly allowed.
Issues Involved:
1. Disallowance of travelling expenses u/r 6D. 2. Expenditure from welfare fund of Tractors division. 3. Deduction for premium on redemption of debentures. 4. Disallowance of provision for warranties. 5. Disallowance of depreciation on guesthouse. 6. Disallowance of canteen expenses as entertainment expenses. 7. Disallowance of incremental liability for special pension. 8. Inclusion of sales tax reimbursement in total turnover for deduction u/s 80HHC. 9. Taxability of receipt from cancellation of foreign exchange forward cover contracts. Summary: 1. Disallowance of travelling expenses u/r 6D: The assessee's appeal against the disallowance of travelling expenses u/r 6D was dismissed as the issue was already decided against the assessee in previous assessment years (1991-92 and 1992-93). The order of the CIT(A) was confirmed. 2. Expenditure from welfare fund of Tractors division: The assessee did not press this ground regarding the expenditure of Rs. 4,42,307 from the welfare fund of the Tractors division. Consequently, the order of the CIT(A) was confirmed. 3. Deduction for premium on redemption of debentures: The issue of deduction for Rs. 18,45,905 representing 1/7th premium on redemption of debentures was restored back to the file of the CIT(A) to be decided de novo in light of the Tribunal's directions, as the merits were not examined in the right perspective. 4. Disallowance of provision for warranties: The disallowance of Rs. 55,06,533 for provision for warranties was deleted, following the precedent set by ITAT's orders for previous assessment years (1989-90, 1990-91, and 1991-92). 5. Disallowance of depreciation on guesthouse: The disallowance of depreciation on the guesthouse was confirmed as the issue was already decided against the assessee in previous ITAT orders. 6. Disallowance of canteen expenses as entertainment expenses: The disallowance of 2.5% of canteen expenses as entertainment expenses was deleted, following the ITAT's orders for previous assessment years (1991-92 and 1992-93). 7. Disallowance of incremental liability for special pension: The disallowance of incremental liability for special pension was reversed, and the Assessing Officer was directed to allow the deduction, consistent with the Tribunal's view in the assessee's case for the assessment year 1989-90. 8. Inclusion of sales tax reimbursement in total turnover for deduction u/s 80HHC: The issue of including sales tax reimbursement in the total turnover for the purpose of deduction u/s 80HHC was decided in favor of the assessee, following the Bombay High Court decision in CIT v. Sudarshan Chemicals Industries Ltd. The Assessing Officer was directed to exclude sales tax reimbursement from the total turnover. 9. Taxability of receipt from cancellation of foreign exchange forward cover contracts: The net gain of Rs. 520.68 lakhs from the cancellation of foreign exchange forward cover contracts was held to be a capital receipt. The Tribunal followed the ITAT Delhi Special Bench decision in Apollo Tyres Ltd. and held that such gain should be adjusted against the actual cost of the project for the purposes of allowing depreciation. The Assessing Officer was directed to re-compute the actual cost of the project and revise the written down value for subsequent assessment years accordingly. Conclusion: The assessee's appeal was partly allowed, with some disallowances confirmed, some deleted, and some issues remanded for fresh consideration.
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