2005 (9) TMI 217 - AT - Income Tax

Chargeable As Capital or Revenue - receipts from profit arising from cancellation of forward contracts - actual cost of plant and machinery by virtue of Explanation 3 to section 43A - Income from business/an adventure in the nature of trade/as causal income and/or profit arising on speculative transaction u/s 43(5) - difference of opinion between the undersigned Members - Third Member Order. Learned Accountant Member out of receipt of Rs. 71.93 crores from cancellation of forward foreign exchange of Rs 49.93 crores was a capital receipt and could not be charged to tax. The learned Judicial Member held that gain was a revenue receipt. HELD THAT - Third Member Order - The assessee, as noted earlier, in order to expand its business wanted to export plant and machinery from abroad of value of approximately Rs. 450 crores. The assessee needed foreign exchange to acquire machinery and in order to safeguard its interest against fluctuation in exchange rates of foreign currency, the assessee entered into forward contracts with different Banks. As foreign exchange needed was large, the assessee entered into 52 contracts for acquiring foreign exchange. In the light of liberalization policy adopted by Government of India and more particularly in the light of Circular dated 27-3-1992 issued by Reserve Bank of India authorizing the entrepreneurs to cancel forward contract and enter into new forward foreign exchange contracts for the purposes of acquiring capital asset, the assessee cancelled old contracts with 52 parties and entered into new contracts. In the process assessee gained Rs. 71 crores which it claimed to be a capital receipt and not chargeable to tax. Detailed background of the case has already been noted. Details of contracts is available in the proposed order of the learned Vice President. After considering submissions of both the parties, I am of the view that the matter in issue is fully covered in favour of the assessee as per Income-tax Appellate Tribunal Special Bench 'E', New Delhi in the case of Apollo Tyres Ltd. In the case before the Special Bench, there was gain to the assessee on cancellation of forward contracts after Reserve Bank of India had issued notification dated 27-3-1992. It is true that contracts were entered by the assessee in the course of business transactions but from the above it cannot follow that gain arising on cancellation of such contracts would be taxable income as held by the learned Judicial Member in paras 'I' and 'J' of his proposed order. A businessman in the course bf business can enter to contracts which operate in capital field only. Gains accruing to the assessee from such contracts are connected with business but are not a revenue receipt. The Judicial Member's observations that when forward contracts were cancelled the exposure risk was left uncovered are not correct as the assessee at a future date would pay larger amount as price of asset and there would be increase in cost but payment would be on capital account. Further the view of the learned J.M. that receipt could be taken as casual and non-recurring receipt is also not justified as receipt was clearly of capital nature. The same could not be casual and nonrecurring D.P. Sandu Bros. Chembur (P.) Ltd's case. Another alternative finding that the transactions were adventure in nature of trade can also not be accepted as the assessee was not a dealer in foreign exchange and had entered into foreign contracts to safeguard its interests relating to acquisition of plant and machinery. Therefore, I am unable to accept reasons given by the learned Judicial Member in the proposed order. The submissions of learned counsel for the assessee on the proposed order of the learned J.M. are well taken and are accepted. The matter in my view is fully covered by the decision of the Special Bench in the case of Appollo Tyres Ltd. v. Asstt. CIT 2004 (3) TMI 345 - ITAT DELHI-E . The gain earned on cancellation of foreign exchange forward contracts is capital receipt and the same should be reduced from cost of plant and machinery in connection with foreign loan raised by the assessee. In the light of above findings, I fully agree with the order proposed by the learned Vice President (A.M.). The matter should now be put before regular bench at Ahmedabad for disposal of appeal in accordance with law.

Issues Involved:
1. Jurisdiction of the Commissioner of Income-tax u/s 263.
2. Treatment of gains on cancellation of forward exchange contracts.
3. Allowance of expenditure on premium paid for forward contracts.
4. Difference in amount of receipt on cancellation of forward exchange contracts.
5. Taxability of gain on transfer of business units.
6. Disallowance of trial production expenses.
7. Annual letting value of house property.
8. Deduction u/s 35D.
9. Payment on account of loyalty coupon.
10. Claim for bad debts.
11. Incorrect computation of income from house property.

Summary:

1. Jurisdiction of the Commissioner of Income-tax u/s 263:
The Commissioner of Income-tax (CIT) invoked u/s 263, finding the assessment order erroneous and prejudicial to the interests of the revenue. The CIT noted the Assessing Officer (AO) failed to make complete inquiries on several issues, thus rendering the order erroneous.

2. Treatment of gains on cancellation of forward exchange contracts:
The CIT held that the gains from cancellation of forward exchange contracts were revenue receipts, not capital receipts, as they were not utilized for repayment of foreign loans or acquisition of capital assets. The AO's action to reduce the cost of block assets by these gains was erroneous. The Tribunal, considering the decision in Tata Locomotive & Engg. Co. Ltd. and other cases, held that the gains related to capital account and should reduce the cost of assets. However, gains related to the advance from Reddington were considered revenue receipts.

3. Allowance of expenditure on premium paid for forward contracts:
The CIT disallowed the expenditure on premium paid for forward contracts, treating it as capital expenditure. The Tribunal directed the AO to bifurcate the expenditure with reference to the treatment given to the gains on cancellation of contracts.

4. Difference in amount of receipt on cancellation of forward exchange contracts:
The CIT noted a discrepancy of Rs. 3.68 crores in the amount of receipt on cancellation of forward exchange contracts. The Tribunal directed the AO to verify and rectify this discrepancy.

5. Taxability of gain on transfer of business units:
The CIT treated the gain on the sale of business units as short-term capital gains u/s 50, as the units were sold as going concerns. The Tribunal upheld this view but directed the AO to compute the gain based on the actual consideration received, not the revalued amount.

6. Disallowance of trial production expenses:
The CIT disallowed trial production expenses, treating them as capital expenditure. The Tribunal allowed the expenses as revenue expenditure, noting that the new unit was part of the existing business, and the expenses were incurred during trial production.

7. Annual letting value of house property:
The CIT directed the AO to include the actual rent received in the annual letting value, noting that the income should be assessed in the relevant year. The Tribunal upheld this view, directing the AO to exclude the amount from the next year's income.

8. Deduction u/s 35D:
The CIT corrected the over-allowance of deduction u/s 35D, directing the AO to allow 1/10th of the finally determined amount. The Tribunal upheld this correction.

9. Payment on account of loyalty coupon:
The CIT disallowed the payment on account of loyalty coupons, treating it as capital expenditure related to share capital. The Tribunal upheld this view, allowing only a proportionate deduction for the period the debentures were held.

10. Claim for bad debts:
The CIT disallowed the claim for bad debts, noting that the provision was transferred to the buyer of the division. The Tribunal upheld this disallowance, as the debts were not written off in the assessee's books.

11. Incorrect computation of income from house property:
The CIT corrected the computation of income from house property, including the actual rent received. The Tribunal upheld this correction, directing the AO to verify and rectify the discrepancy.

Conclusion:
The Tribunal's decision addressed multiple issues, balancing the CIT's revisions and the AO's original assessments, ensuring compliance with legal standards and precedents.

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