1993 (3) TMI 40 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Tribunal was justified in reducing the cost of plant and machinery by Rs. 24.92 lakhs.
2. Whether the receipt of Rs. 24.92 lakhs from the Bank of India was in the nature of capital gains.
3. Whether the provisions of section 33 read with section 43(1) alone would apply in determining the cost of plant and machinery for the purpose of development rebate, and not section 43A(1) and (2).

Summary:

Issue 1: Reduction of Cost of Plant and Machinery by Rs. 24.92 Lakhs
The Tribunal directed to reduce the cost of plant and machinery by Rs. 24.92 lakhs on the ground that the Bank of India had reimbursed the assessee's cost of plant and machinery. The High Court held that the Tribunal was not right in directing such a reduction. The payment of Rs. 24.92 lakhs was considered as compensation for the breach of contract by the Bank of India and not as a payment towards the cost of the assets. The High Court referenced the case of CIT v. Cochin Co. (P.) Ltd., where it was held that the relinquishment of debt does not fall under the provisions of section 43(1). Therefore, the question was answered in the negative and in favor of the assessee.

Issue 2: Nature of Rs. 24.92 Lakhs as Capital Gains
The Department contended that the receipt of Rs. 24.92 lakhs from the Bank of India was in the nature of capital gains, arguing that the assessee had transferred its rights under the contract for consideration. The High Court, however, found that the settlement did not constitute a transfer of rights as defined u/s 2(47) of the Income-tax Act, 1961. The Court referenced the Supreme Court judgment in Vania Silk Mills P. Ltd. v. CIT, which held that extinguishment of rights must be on account of transfer to attract section 45. The High Court concluded that the payment was compensation for the loss suffered due to the Bank's failure to honor the contract, not capital gains. The question was answered in the affirmative and in favor of the assessee.

Issue 3: Applicability of Section 33 and Section 43(1) vs. Section 43A(1) and (2)
The High Court did not elaborate on the facts for this issue as it was accepted that, in view of the Supreme Court decision in CIT v. Arvind Mills Ltd., the question must be answered in the negative and in favor of the Revenue. Therefore, the provisions of section 33 read with section 43(1) alone would apply, and not section 43A(1) and (2).

Conclusion:
The High Court ruled in favor of the assessee on both the primary issues, holding that the receipt of Rs. 24.92 lakhs was not capital gains and that the cost of plant and machinery should not be reduced by this amount. The third issue was resolved in favor of the Revenue based on a Supreme Court precedent.