2021 (6) TMI 894 - AT - Income Tax

Addition made on account of gains from cancellation of forward contract - AO observed that the so-called asset could not be created not any foreign exchange loan was taken by the assessee for such assets - Assessing Officer treated the same as revenue receipt - CIT-A deleted the addition - HELD THAT - CIT(A) after considering the facts on the issue held that the assessee company is engaged in manufacturing of polyester chips yarn and other fabrics and is not in a banking business. The assessee also not engaged in the business of foreign exchange nor trading in machineries sought to be imported. The assessee intended to expend its capital expansion and panned to purchase certain machineries and accordingly decided to import such machineries from abroad against foreign currency loan - in order to safe guard its interest against the fluctuation in foreign currency entered into forward contract. CIT(A) after relying on the decision of Sutlej Cotton Mills 1978 (9) TMI 1 - SUPREME COURT held that if the amount in foreign currency was a trading asset then foreign exchange fluctuation would be a revenue expenses but if held as capital account the loss would be a capital loss. The Ld. CIT(A) also held that the decision in assessee s own case for AY 1993-94 is also squarely applicable on this issue for the year under consideration. Hon ble Jurisdictional High Court in assessee s own case for AY 1993-94 2009 (2) TMI 95 - GUJARAT HIGH COURT while considering the merit of the case clearly held that if the foreign exchange was acquired under the contract for the purpose of discharging an obligation on capital account viz toward borrowing for the purpose of import of capital asset which would indicate that the surplus realised on cancellation of such contract would bear the same character. Thus we are of the view that intended loan have been raised for the purpose of acquisition of plant machinery and gain so earned on fluctuation of foreign exchange rate was on capital account. Thus the gain so earned would partake the character of capital asset. We do not find any infirmity in the order of ld. CIT(A) which we affirm - Decided against revenue.

Summary

Issues:
1. Treatment of gains from cancellation of forward contract as revenue or capital receipt.
2. Justification for deleting the addition made by the Assessing Officer.
3. Applicability of previous legal decisions and the order of the assessing officer.

Issue 1: Treatment of gains from cancellation of forward contract
The case involved a dispute regarding the treatment of gains from the cancellation of a forward contract as either revenue or capital receipt. The Revenue contended that the gains should be treated as revenue receipt since the forward contract was not related to any foreign exchange loan for acquiring assets. On the other hand, the assessee argued that the gains were capital receipts as the forward contract was entered into for the purpose of acquiring capital assets. The ld. CIT(A) reversed the treatment of gains as revenue receipt to capital receipt, citing a previous decision of the jurisdictional High Court. The Tribunal examined the nature of the forward contract and the purpose behind it to determine the character of the gains.

Issue 2: Justification for deleting the addition made by the Assessing Officer
The Assessing Officer treated the gains from foreign exchange fluctuation as revenue receipt instead of capital receipt, resulting in an addition to the assessee's income. However, the ld. CIT(A) reversed this decision, emphasizing that the borrowing by the assessee for the forward contract was for acquiring capital assets, thereby making the gains capital receipts. The Tribunal analyzed the explanations provided by both parties, the purpose of the forward contract, and the nature of the gains to ascertain the correctness of the ld. CIT(A)'s order.

Issue 3: Applicability of previous legal decisions and the order of the assessing officer
The case involved a significant reliance on a previous decision of the jurisdictional High Court in the assessee's own case for the assessment year 1993-94. The Tribunal considered this precedent, along with the arguments presented by both parties and the order of the assessing officer. The ld. CIT(A) and the Tribunal found that the gains from the cancellation of the forward contract were on capital account due to the intended loan being raised for acquiring plant and machinery. The Tribunal affirmed the ld. CIT(A)'s order, stating that no contrary facts or laws were presented to warrant a different view.

In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the ld. CIT(A)'s decision to treat the gains from the cancellation of the forward contract as capital receipts. The judgment highlighted the importance of the purpose behind the forward contract in determining the nature of the gains and reiterated the applicability of previous legal decisions in similar contexts.