2019 (3) TMI 398 - HC - Income Tax

Revision u/s 263 - Gain on cancellation of forwarding contract - characterization of income - income from other sources or capital receipt - HELD THAT - The Revenue may be correct in contending that, the Assessing Officer had not carried out detailed enquiries with respect to this claim of assessee. However, this by itself would not be sufficient to enable the Commissioner to exercise revisional power. In a given case, as in the present one, if the answer to the legal issue can be had on the basis of the material already on record, there would be no useful purpose in asking the Assessing Officer to carry out the same exercise and come to the same conclusion as the Tribunal in the present case has. In this context, we do not accept the contention of the Counsel for the Revenue that, answer in law had to come from the Assessing Officer and not the Tribunal. If the Tribunal has come to the correct conclusions in law and said conclusions are based on materials already on record, it would be futile to reinstate the order of the Commissioner, which in turn, would require the Assessing Officer to carry out the same exercise and axiomatically come to the same conclusion. This line, we are adopting, is within the fold of the requirement of the order of Assessing Officer being erroneous . Undisputed facts are that the assessee was constituted as a special purpose vehicle to carry out the foundational tasks for setting up a coal based power plant, during the period relevant to Assessment Year in question, the business of the assessee had not yet commenced and the assessee had entered into contract for purchase of plant and machinery from abroad. In relation to such purchase, either on account of cancellation of contracts or on account of notional adjustment, due to favouable fluctuation of foreign exchange rate. The assessee had gained certain income. This being the position, as per settled law, the profits or gains arising out of the fluctuation of the foreign exchange rate, would undoubtedly on the capital account In case of CIT v/s. Bokaro Steel Ltd. 1998 (12) TMI 4 - SUPREME COURT the facts were that, the assessee-company was set up to produce steel. During period relevant to Assessment Year in question, construction of the plant was not completed. The assessee earned interest on advance to the contractors and also by way of rent from quarters let out to employees of the contractors and such other related activities. The Court held that, the amounts were directly connected to and incidental to construction of plant by assessee and said amounts were, therefore, capital in nature and not income of the assessee from the other source. - Decided in favour of assessee.

Summary

Issues Involved:

1. Whether the gain on cancellation of forwarding contract is a capital receipt.
2. Whether the Tribunal was right in relying on the decisions of the Apex Court in the cases of M/s. Challapalli Sugars Ltd. and M/s. Sutlej Cotton Mills Limited.
3. Whether the assessment order was erroneous and prejudicial to the interest of revenue due to the Assessing Officer's failure to call for information as per the CBDT Instruction regarding foreign exchange connections.

Detailed Analysis:

Issue 1: Gain on Cancellation of Forwarding Contract as Capital Receipt

The Tribunal held that the gain on cancellation of forwarding contracts was a capital receipt. The assessee, a special purpose vehicle for setting up a power project, had entered into forward contracts for the procurement of plant and machinery in foreign currency. The gain was due to favorable fluctuation of foreign exchange rates. The Tribunal noted that the business had not commenced during the relevant period, and the gain was on capital account, reducing the cost of acquiring capital assets. The Tribunal relied on the Supreme Court's decision in Challapalli Sugars Ltd., which stated that expenses incurred in connection with the acquisition of plant during the pre-commencement period should be capitalized. The Tribunal concluded that the Commissioner was not justified in exercising revisional powers under Section 263 of the Income Tax Act, 1961.

Issue 2: Reliance on Apex Court Decisions

The Tribunal relied on the Supreme Court's decisions in Challapalli Sugars Ltd. and Sutlej Cotton Mills Ltd. In Challapalli Sugars Ltd., it was held that expenses incurred in connection with the acquisition of plant during the pre-commencement period should be capitalized. In Sutlej Cotton Mills Ltd., it was held that profit or loss arising from the appreciation or depreciation in the value of foreign currency held as a capital asset is capital in nature. The Tribunal found these decisions applicable to the present case, as the assessee's gain from forward contracts was related to the capital account and not revenue in nature. The Tribunal held that the Commissioner erred in distinguishing the facts of the present case from these decisions.

Issue 3: Erroneous and Prejudicial Assessment Order

The Commissioner of Income Tax exercised revisional power under Section 263, arguing that the Assessing Officer had not carried out proper enquiries regarding the assessee's claim of gain being a capital receipt. The Commissioner noted that the Assessing Officer failed to follow the CBDT Circular No. 3 of 2010, which required detailed examination of foreign exchange transactions. The Commissioner directed the Assessing Officer to redo the assessment de novo. However, the Tribunal found that the Assessing Officer had conducted detailed enquiries and concluded that the gain was capital in nature. The Tribunal held that the order of the Assessing Officer was not erroneous or prejudicial to the interest of the revenue, as the gain was correctly not offered to tax. The Tribunal emphasized that the power of revision under Section 263 can only be exercised if the assessment order is both erroneous and prejudicial to the revenue, which was not the case here.

Conclusion:

The High Court upheld the Tribunal's decision, dismissing the appeal by the Revenue. The Court agreed that the gain on cancellation of forwarding contracts was a capital receipt, relying on the Supreme Court's decisions in Challapalli Sugars Ltd. and Sutlej Cotton Mills Ltd. The Court found that the Assessing Officer's order was not erroneous or prejudicial to the interest of the revenue, as the gain was correctly treated as capital in nature. The Court concluded that no question of law arose, and the appeal was dismissed.