2015 (11) TMI 1759 - AT - Income Tax

Revision u/s 263 - amount earned on cancellation of forward contracts entered in foreign exchange was not taxed by the AO - amount received on account of gain on cancellation of forwarding contracts was liable to be taxed as income of the assessee during the year under consideration - Held that - The gain arose on forwarding contracts was on account of cancellation for forwarding contracts entered into in connection with the offshore equipment, byepass valve system etc. Since the commercial production had not begun during the year under consideration, the assessee company correctly capitalized all the expenses incurred in relation to setting up of plant and machinery and the gains reduced from the expenses to be capitalized resulting in lesser capitalization to that extent. Our view is further supported by the decision of Hon ble Supreme Court in the case of Challapally Sugar Ltd. (1974 (10) TMI 3 - SUPREME COURT). No infirmity in assessee s claim for setting of gains on such forward contracts from the cost of plant and machinery during pre-commencement stage. With regard to unrecognized gain in forwarding contracts, we find that gain arising on forward contract is an unrealized gain on account of restatement of the liability at the year end. The said forward contracts were entered into in connection with the purchase of Turbines. The nature of gain on account of forward contract is in connection with the acquisition of fixed assets and in view of our above discussion, the same is to be adjusted from the cost of the fixed assets. The Hon ble Supreme Court in the case of Sutlej Cotton Mills Ltd. (1978 (9) TMI 1 - SUPREME COURT) held that profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held as capital asset or as fixed assets is liable to be treated as capital in nature, therefore, profit or loss would be of capital nature. No merit in the order of the ld. CIT passed u/s 263 of the Act and we set aside the same. - decided in favour of assessee

Summary

Issues:
- Condonation of delay in filing appeal
- Taxability of gains from forward exchange contracts
- Correctness of CIT's order under section 263 of the Income Tax Act

Condonation of Delay in Filing Appeal:
The appeal filed by the assessee against the order passed by CIT was barred by 314 days. The delay was attributed to the belief that the issue of taxability of gains from forward exchange contracts could be challenged in an appeal against a different order. The application for condonation of delay was filed, citing material amounts involved and the recurrence of similar issues in subsequent assessment years. The Tribunal, after considering the cause mentioned for the delay, condoned the delay and proceeded to hear the appeal on merits.

Taxability of Gains from Forward Exchange Contracts:
The assessee, a company engaged in a power project, had its return of income filed at 'Nil'. The CIT found the assessment order by the AO as erroneous and prejudicial to the revenue's interest due to untaxed gains on cancellation of forward contracts in foreign exchange. The CIT set aside the AO's order, directing a reassessment. The assessee argued that the gains on forward contracts were capital in nature and should not be taxed as income. They relied on legal precedents to support their contention. The Revenue, on the other hand, argued that the gains should be taxed as income during the relevant year. The Tribunal analyzed the nature of the gains, the business activities of the assessee, and the relevant legal principles. It concluded that the gains arising from the cancellation of forward contracts were to be adjusted from the cost of fixed assets and treated as capital in nature. Therefore, the Tribunal found no merit in the CIT's order under section 263 and allowed the appeal of the assessee.

Correctness of CIT's Order under Section 263:
The CIT's order under section 263 observed that the gains on cancellation of forward contracts should be taxed as income and criticized the AO for not examining the contracts' details. The CIT also referred to a CBDT instruction and deemed the AO's order as erroneous and prejudicial to revenue. However, the Tribunal found that the gains were related to the acquisition of fixed assets and should be treated as capital in nature. The Tribunal also noted that the business had not commenced during the relevant year, supporting the assessee's capitalization of expenses and adjustment of gains from the cost of assets. Relying on legal precedents, the Tribunal set aside the CIT's order and allowed the appeal of the assessee.

In conclusion, the ITAT Mumbai, after thorough analysis, set aside the CIT's order under section 263 and allowed the appeal of the assessee concerning the taxability of gains from forward exchange contracts. The Tribunal found the gains to be capital in nature and adjusted them from the cost of fixed assets, in line with legal precedents.