2003 (11) TMI 297 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of expenditure on gifts and presents.
2. Disallowance of depreciation on account of foreign exchange fluctuation for plant and machinery.
3. Addition of income on cancellation of foreign exchange forward contracts.
4. Non-admission of additional ground relating to investment allowance on foreign exchange fluctuation.

Detailed Analysis:

1. Disallowance of expenditure on gifts and presents:
- The assessee did not press Ground No. 1 and Ground No. 1.2, which related to the confirmation of disallowance of expenditure on gifts and presents. Consequently, these grounds were dismissed.

2. Disallowance of depreciation on account of foreign exchange fluctuation for plant and machinery:
- Ground Nos. 2 and 2.1 pertained to the disallowance of depreciation due to foreign exchange fluctuation on foreign currency loans used for acquiring fixed assets under Section 43A.
- The Tribunal had previously decided this issue in favor of the assessee for the assessment years 1990-91 to 1992-93, following the decisions of the Madras High Court in Soma Finance & Leasing Co. Ltd. vs. CIT and the Bombay High Court in Padamjee Pulp & Paper Mills Ltd. vs. CIT.
- The Tribunal reiterated that there was no change in facts or law and maintained consistency by allowing the ground in favor of the assessee.

3. Addition of income on cancellation of foreign exchange forward contracts:
- Ground Nos. 3 to 3.3 related to the addition of Rs. 2,40,57,000 by the AO, treating the income from the cancellation of foreign exchange forward contracts as revenue.
- The assessee had taken foreign currency loans for purchasing fixed assets and entered into forward contracts to hedge against exchange losses. Upon cancellation of these contracts, the assessee realized a net gain, which was initially included in taxable income but later revised as a capital receipt.
- The AO and CIT(A) treated the gain as revenue, alleging speculation in foreign currency.
- The Tribunal, however, noted that the forward contracts were linked to the purchase of machinery and were not speculative. It relied on various case laws, including the Supreme Court's decision in Sutlej Cotton Co. Ltd. vs. CIT, which held that gains or losses from foreign currency held as capital assets are capital in nature.
- The Tribunal concluded that the gain from the cancellation of forward contracts was a capital receipt and not taxable, thus allowing the assessee's grounds.

4. Non-admission of additional ground relating to investment allowance on foreign exchange fluctuation:
- Ground Nos. 4 and 4.1 concerned the non-admission of an additional ground by the CIT(A) regarding the claim of investment allowance on foreign exchange fluctuation for loans used to purchase plant and machinery.
- The Tribunal held that the CIT(A) should have admitted the legal ground, citing the Supreme Court's decision in National Thermal Power Co. Ltd. vs. CIT, which allows raising legal grounds at any appellate stage.
- The Tribunal also referred to its previous decision in the assessee's case for earlier years, which allowed investment allowance on foreign exchange fluctuation.
- Consequently, the Tribunal directed the AO to allow the investment allowance as claimed by the assessee.

Conclusion:
- The appeal was partly allowed, with the Tribunal ruling in favor of the assessee on the issues of disallowance of depreciation, addition of income on forward contract cancellation, and investment allowance on foreign exchange fluctuation. The grounds related to gifts and presents were dismissed as they were not pressed.