2013 (5) TMI 760 - HC - Income Tax

Interest relatable to diversion of interest bearing funds to interest free advances - ITAT deleted the disallowance - Held that - When no interest bearing funds have been diverted to the sister concern by way of interest free advances, the question of going into the commercial expediency of such loans would not arise. In fact, in the light of the findings recorded by the Tribunal, the question as formulated while admitting the appeals would not arise as on facts there is no diversion of interest bearing funds to interest free advances. In the circumstances, the Tribunal was justified in deleting disallowance made under section 36(1)(iii). Once the revenue has accepted the decision of the Tribunal on the issue in relation to assessment year 1995-96, on the same facts and issue it would not be appropriate to allow the position to be changed in relation to other assessment years. Receipt by way of gain on cancellation of foreign exchange contracts - revenue v/s capital - Held that - As decided in DCIT(Assessment) vs. Garden Silk Mills Ltd. ( 2009 (2) TMI 95 - GUJARAT HIGH COURT) the surplus received on cancellation of forward foreign exchange contract was a capital receipt not liable to tax and that it did not fall under section 28(iv). Thus ITAT was right in holding that the receipt by way of gain on cancellation of foreign exchange contracts is a capital receipt not liable to tax and was accordingly justified in directing the Assessing Officer to make necessary adjustment to the cost of the acquisition/WDV of the plant and machinery to which the receipt pertains and to make consequential adjustment to the depreciation granted. Depreciation in respect of Butachlor Plant - Held that - The question as formulated partly does not appear to arise out of the impugned order of the Tribunal, inasmuch as the order of assessment itself indicates that the assessee had claimed depreciation at the assessment stage. Insofar as the merits of the controversy is concerned, it is an accepted position that identical controversy between the same parties has been concluded in favour of assessee by an order passed in 2013 (5) TMI 759 - GUJARAT HIGH COURT .

Summary

Issues Involved:
1. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act, 1961.
2. Taxability of gain on cancellation of foreign exchange contracts.
3. Allowance of depreciation for Butachlor Plant.

Detailed Analysis:

1. Disallowance of Interest under Section 36(1)(iii):
The first issue pertains to the disallowance of interest-free advances amounting to Rs.9,39,10,192/-, Rs.10,49,64,986/-, and Rs.8,48,22,775/- respectively under Section 36(1)(iii) of the Income Tax Act, 1961. The Tribunal noted that similar disallowances were made in the assessment year 1995-96, which were deleted on appeal. The Tribunal observed that the assessee had sufficient funds of its own, and there was no occasion to divert borrowed funds for granting advances. The Tribunal's decision was based on the fact that the share capital, reserves, and surplus, along with accumulated depreciation, far exceeded the loans and advances made to three concerns (GNAL, GNF & IC, and NF & SRS). It was held that no direct nexus was proven between interest-bearing loans taken and interest-free advances given. The Tribunal directed the Assessing Officer to delete the addition, consistent with its order for the assessment year 1995-96. The High Court upheld the Tribunal's decision, noting that the Supreme Court's decision in S.A. Builders Ltd. v. Commissioner of Income-tax (Appeals) Chandigarh and Another was not applicable as there was no diversion of interest-bearing funds to interest-free advances. The revenue had accepted the Tribunal's decision for the assessment year 1995-96, making it final for subsequent years.

2. Taxability of Gain on Cancellation of Foreign Exchange Contracts:
The second issue concerns whether the gain on cancellation of foreign exchange contracts is a capital receipt not liable to tax. The High Court referred to its decision in Deputy Commissioner of Income Tax (Assessment) vs. Garden Silk Mills Ltd., which held that the surplus received on cancellation of forward foreign exchange contracts was a capital receipt not liable to tax and did not fall under Section 28(iv) of the Act. Following this precedent, the High Court affirmed that the Income Tax Appellate Tribunal was correct in directing the Assessing Officer to adjust the cost of acquisition/WDV of the plant and machinery and make consequential adjustments to the depreciation granted.

3. Allowance of Depreciation for Butachlor Plant:
The third issue in Tax Appeal No.400 of 2000 relates to the allowance of depreciation for Butachlor Plant. The Tribunal's order indicated that the assessee had claimed depreciation at the assessment stage. The High Court noted that the identical controversy had been concluded by an order in Tax Appeal No.770 of 1999 between the same parties. The High Court affirmed the Tribunal's decision, stating that the question was answered in the affirmative, in favor of the assessee and against the revenue.

Conclusion:
The High Court dismissed the appeals, finding no infirmity in the Tribunal's order. The Tribunal was justified in deleting the disallowance made under Section 36(1)(iii) of the Act, holding the gain on cancellation of foreign exchange contracts as a capital receipt not liable to tax, and allowing depreciation for the Butachlor Plant.