2019 (5) TMI 33 - HC - Income Tax

Nature of receipt - gains earned on cancellation of the foreign exchange forward contract - 'capital receipts' or 'revenue receipts' - if it is capital receipt, whether the same could be reduced from the cost of plant and machinery in connection with which forward contracts were entered into? - HELD THAT - The finding of the Tribunal that it is a capital receipt and not the revenue receipt has become final as there is no challenge at the instance of the Revenue. Necessity to have it reduced from the cost of plant and machinery in connection with which forward contracts were entered into as decided in OIL NATURAL GAS CORPORATION LTD. VERSUS COMMISSIONER OF INCOME TAX 2010 (3) TMI 81 - SUPREME COURT all the assessment years in question being prior to the amendment in section 43A of the Act with effect from April 1., 2003 the assessee would be entitled to adjust the actual cost of the imported capital assets acquired in foreign currency, on account of fluctuation in the rate of exchange at each of the relevant balance-sheet dates pending actual payment of the varied liability. Disallowance of royalty expenses - expenses not relating to the previous year ended on 31.03.1993 - prior period expenses - HELD THAT - Admittedly, the assessee, instead of claiming the said amount in the assessment year 1992 - '93 claimed it as well in the year 1993 - '94, which was not correct or sustainable and hence disallowed. We are of the view that there is nothing illegal or improper on the part of the Commissioner or the Tribunal in having disallowed the royalty expenses the said extent being attributable to the previous year 1992 - '93, which could not have been claimed during the assessment year 1993 - '94. As it stands so, the second question also stands answered against the assessee and in favour of the Revenue

Summary

Issues:
1. Classification of gains earned on cancellation of foreign exchange forward contract as 'capital receipts' or 'revenue receipts' and its impact on the cost of plant and machinery.
2. Disallowance of royalty expenses for technical know-how based on the timing of the expenses.

Analysis:
1. The appeal challenged the Income Tax Appellate Tribunal's verdict on whether gains from cancelling foreign exchange forward contracts are 'capital receipts' or 'revenue receipts' and if they can be reduced from the cost of plant and machinery. The Tribunal ruled in favor of the assessee, considering it a capital receipt but requiring the reduction from the cost of machinery. The Tribunal's decision was based on Explanation 3 of Section 43A, which links forward contracts with foreign loans and their impact on asset costs. The Tribunal's interpretation aligned with the law and was supported by the Supreme Court's ruling in Oil and Natural Gas Corporation Ltd. vs. Commissioner of Income Tax, emphasizing adjustments in asset costs due to exchange rate fluctuations.

2. Regarding the disallowance of royalty expenses, the case involved expenses related to technical know-how for a specific period. The Assessing Officer disallowed a portion of the expenses due to the timing of government approval for the royalty agreement. The Commissioner and Tribunal upheld the disallowance of ?49 lakhs, attributable to the previous year, as it was wrongly claimed in the subsequent assessment year. The Court found no issue with this decision, as the expenses were incorrectly claimed in the wrong assessment year, leading to the dismissal of the appeal. The ruling was in line with the law and did not warrant interference under Section 260A of the Income Tax Act.

In conclusion, the High Court upheld the Tribunal's decision on both issues, emphasizing the correct application of tax laws and precedents. The classification of gains from forward contracts as capital receipts and the disallowance of royalty expenses were deemed appropriate based on the legal framework and factual circumstances presented in the case.