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TMI Blog2005 (10) TMI 436X X X X Extracts X X X X X X X X Extracts X X X X ..... rding against fluctuations in the rate of foreign exchange in respect of the loan in US dollars. Merelybecause eventually the assessee did not directly utilize the US dollars for acquiring the capital assets, but its rupee equivalent on swapping was utilized for such purpose, in our view, the character and nature of the gain arising from cancellation of the forward cover contracts do not alter. Such gain or loss is clearly in connection with the acquisition of capital assets. Therefore, in our view, the Special Bench decision in the case of Apollo Tyres Ltd. ( supra ) would squarely apply and respectfully following the said decision, we hold that the net gain of Rs. 520.68 lakhs is in the nature of capital receipt. As per section 43(1), actual cost means the actual cost of the assets to the assessee reduced by that portion of the cost thereon, if any, as has been made directly or indirectly by any other person or authority. The crucial words are that for the purposes of sections 28 to 41, the phrase actual cost means actual cost of the assets to the assessee. The words actual cost of the assets to the assessee are nowhere defined in the IT Act except that in various Explanations, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g expenses under rule 6D and sustained by the ld. CIT(A). 2. The ld. counsel, Shri B.K. Khare, appearing for the assessee was fair enough to point out that this issue is covered against the assessee by virtue of ITAT s orders in assessee s own case for the assessment years 1991-92 and 1992-93 in ITA Nos. 3325/Mum./97 and 3270/Mum./97, respectively. Copies of the relevant orders are complied in the Paper Book. Accordingly, on this issue, the order of the ld. CIT(A) is confirmed. 3. The ground No. 2 regarding the expenditure of Rs. 4,42,307 incurred by the assessee from out of welfare fund of Tractors division is not pressed by the ld. counsel for the assessee and, accordingly, on this issue also, the order of the ld. CIT(A) stands confirmed. 4. The ground No. 3 pertains to denial by the revenue authorities to allow deduction in respect of a sum of Rs. 18,45,905 representing 1/7th premium on redemption of debentures. The ld. counsel submitted that this issue is covered in assessee s own case by virtue of the ITAT s order referred to above and also the ITAT order for the assessment year 1990-91 in ITA No. 3101/Mum./95. We find that similar issue has been decided by the Tribunal for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 pertains to confirmation by the ld. CIT(A) of disallowance made by the Assessing Officer on account of incremental liability for special pension. Both the sides agreed that this issue is covered in assessee s favour by the ITAT s order for the assessment year 1989-90 referred to above. We find that similar issue has been decided in assessee s favour vide para 18( b ) of the Tribunal s order referred to above. Accordingly and consistent with the view adopted by the Tribunal in the assessee s case, the order of the ld. CIT(A) on this issue is reversed and the Assessing Officer is directed to allow deduction in respect of incremental liability. 9. The ground No. 8 is as under : "The CIT(A) erred in confirming the view of the Assessing Officer in including sales tax reimbursement by the customers as part of the total turnover for the purpose of computation of deduction under section 80HHC." 10. Both the sides agreed that this issue is covered in assessee s favour by the Bombay High Court decision in the case of CIT v. Sudarshan Chemicals Industries Ltd. [2000] 245 ITR 769 1 . Accordingly, the Assessing Officer is directed to exclude sales tax reimbursement from the total turnover for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd cover contracts with American Express Bank, Bank of Baroda, Bank of America and ANZ Grindlays Bank. At the same time, the assessee-company suffered a loss of Rs. 211.33 lakhs in respect of covers taken with Hong Kong Shanghai Bank and SBI. The assessee also incurred roll over charges of Rs. 164.80 lakhs and after all these amounts are adjusted against each other, the assessee-company benefited to the extent of Rs. 520.68 lakhs being the net gain from cancellation of the covers. Sometimes in the financial year 1993-94 relevant to the assessment year 1994-95, the assessee-company entered into an agreement on 26-10-1993 with Export Import Bank of India (Exim Bank). It was stipulated in this agreement that the assessee-company would swap the loan of US $ 10 millions available to it as per the agreement with IFC for equivalent Indian rupee with Exim Bank. The assessee-company agreed to deliver to Exim Bank a total sum of US $ 10 millions and obtain from Exim Bank equivalent amount in Indian rupee on the same day at the prevailing spot selling exchange rate of US dollars. This factual position stands con- firmed from the audited accounts for the financial year 1993-94. There is a note ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s claim that the amount of Rs. 520.68 lakhs was in the nature of capital receipt. 15. The ld. CIT(A) observed that the aforesaid sum was credited to the profit loss account of the assessee which proves that the assessee-company treated the amount as revenue receipt. The ld. CIT(A) was of the view that even though the accounting entries are not determinative of the nature of the expenditure, the same cannot be regarded as irrelevant. He observed that in the present case, no foreign currency loan from IFC was taken till the previous year under consideration. As a matter of fact, there was no scope of utilizing of such a loan for the purposes for which it was negotiated. The foreign currency loan was, in the subsequent year, swapped with rupee equivalent loan from the Exim Bank. The ld. CIT(A) held that the amount was chargeable to tax as revenue receipts/earnings to the assessee during the course of its business. 16. Aggrieved by the order of the ld. CIT(A), the assessee-company is in appeal before us. Shri B.K. Khare, the ld. counsel appearing for the assessee, forcefully argued before us that by no stretch of imagination the gain from cancellation of foreign exchange covers can be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 520.68 lakhs by cancelling foreign exchange contracts arose out of cancellation of hedging which was resorted to cover the foreign exchange liability towards repayment of loan. The concept of cost is enshrined in section 43 and it cannot go beyond the statutory definition by invoking the Accounting Standard (AS) in the context of deciding the issue on the anvil of the IT Act in which dimunition of the cost and WDV is defined in terms of section 43 supplemented by the provisions of section 43A. In other words, the superior Court s decision has not touched the area of dimunition in the concept of cost with reference to the cost or WDV of the depreciable asset. Yet stated differently, it could be increased. It is submitted that the superior Court s dictum, as said in the case of CHELLAPALLI that interest cost prior to the commencement of business incurred on account of capitalization could be considered as a cost and depreciation extended to this cost accordingly. However, there is not a single occasion which invite the decision of any superior Court where the cost of the asset is to be diminished beyond the scope of section 43, which defines cost, read with section 43A in appropr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our careful consideration to the rival arguments so effectively put before us by both the sides. We have also carefully gone through the factual position, provisions of law and the legal position emerging from the various cases cited before us. The question posed before us is as to whether the gain realised by the assessee is in the nature of capital receipt or revenue receipt. The next question which flows from the main question is that in case the gain is in the nature of capital receipt, whether such gain is required to be reduced from the cost of the project. The facts which have been stated ( supra ) show that the assessee-company negotiated for a foreign exchange (US $) loan from IFC with the avowed object of investing it in the new project. For the same purpose, the assessee-company drew the loan in one single settlement from IFC and having regard to the actual requirement of the assessee, the aforesaid loan comprising of US $ 10 million was swapped with rupee equivalent loan from Exim Bank. It is important to note that the assessee-company did not walk out of the agreement entered into by it with IFC. As mentioned above, the assessee-company actually availed the loan and al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nto on May 13, 1992 and the other on June 29, 1992 were again cancelled on February 26, 1993. The remaining four contracts were rolled over and continued to remain effective till the end of the year, i.e., on March 31, 1993. The assessee-company credited the gain arising on cancellation of forward contracts relating to amount of interest liability in foreign currency to the profit and loss account but the gains arising on the cancellation of contracts relating to the principal amount were adjusted against the cost of plant and machinery. The questions were whether the gains earned on cancellation of the foreign exchange forward contract were capital receipts or revenue receipts? If they were capital receipts, whether the same should be reduced from the cost of plant and machinery in connection with which the forward contract was entered into ?" The ITAT, Special Bench elaborately considered the above facts which are in pari materia with the facts of the assessee s case on the question whether the gain resulting from cancellation of forward contracts is in the nature of capital or revenue receipt. The finding of the ITAT Special Bench is as under (reproduced from the headnote) : "He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween the forward rate and the exchange rate at date of the transaction should be recognized as income or expense over the life of the contract, except in respect of liabilities incurred for acquiring fixed assets in which case, such difference should be adjusted in the carrying amount of the respective fixed assets. 14. The difference between the forward rate and the exchange rate at the inception of a forward exchange contract is recognized as income or expense over the life of the contract. The only exception is in respect of forward exchange contracts relating to liabilities in foreign currency incurred for acquisition of fixed assets. 15. Any profit or loss arising on cancellation or renewal of a forward exchange contract should be recognized as income or as expense for the period, except in case of a forward exchange contract relating to liabilities incurred for acquiring fixed assets, in which case, such profit or loss should be adjusted in the carrying amount of the respective fixed assets." 20. Insofar as the nature of the gain is concerned, we are of the view that the ITAT Special Bench decision in the case of Apollo Tyres Ltd. ( supra ) concludes the issue. In the presen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the assessee has acquired any assets in any previous year from a country outside India for the purpose of his business or profession. Therefore, we agree with the proposition of the ld. counsel for the assessee that, on strict interpretation, section 43A would not apply in the present case because the assessee has not acquired any assets from a country outside India. However, we are not inclined to accept the arguments of the ld. counsel for the assessee that the net gain arising to the assessee on cancellation of the forward cover contracts should not be and cannot be adjusted against the actual cost of the project. The reasons are stated hereunder : 22. It is true that strictly speaking the provisions of section 43A may not be applicable to the case as the dollar loan has not been utilized for purchase of plant and machinery from abroad, but the same has been swapped for rupee equivalent loan with Exim Bank and the rupee loan so obtained has been admittedly utilized for acquiring plant and machinery or other capital assets for the new project. Thus, the purpose of the rupee loan obtained by the assessee from Exim Bank in exchange for the dollar loan is identical as stated in se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orms part of actual cost of such plant and machinery. In the present case, the forward cover contracts entered into by the assessee with several banks are inextricably connected with the acquisition of capital assets or with setting up of the new project. It is notable that during the immediately preceding assessment year, the assessee incurred expenditure of Rs. 70.41 lakhs by way of roll over charges of such forward cover contracts and the same has been added by the assessee to the cost of work-in-progress of the new project. On the same analogy, if the assessee receives any gain on such cancellation, it is logical that the same must be reduced from the cost of the new project. As per section 43(1), actual cost means the actual cost of the assets to the assessee reduced by that portion of the cost thereon, if any, as has been made directly or indirectly by any other person or authority. The crucial words are that for the purposes of sections 28 to 41, the phrase actual cost means actual cost of the assets to the assessee. The words actual cost of the assets to the assessee are nowhere defined in the IT Act except that in various Explanations, there are certain adjustments, which ..... X X X X Extracts X X X X X X X X Extracts X X X X
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