9911796707
TMI Blog2005 (9) TMI 217X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent : Girish Dave and A.K. Khandelwal, Advs. ORDER R.P. Garg, Vice President. 1. These are four appeals, two by the assessee and two by the revenue. One appeal by the assessee is against the order of the Commissioner of Income-tax and the others including two by the revenue are against the orders of the Commissioner of Income-tax (Appeals). They all relate to assessment year 1993-94 and are being disposed of by this common order for the sake of convenience. 2. The assessment was completed on 29-3-1996. The assessee filed appeal against the assessment order. When the appeal was pending the Commissioner of Income-tax on perusal of the record, felt that the order of assessment was erroneous insofar as the same was prejudicial to the interests of the revenue in respect of certain items. The Commissioner of Income-tax, therefore, gave a notice to the assessee under section 263 and set aside the assessment on various issues with certain directions. The appeal in ITA No. 949/Ahd./1998, is against the revision order of the Commissioner of Income-tax, Central-II, Chennai. The appeal filed by the assessee against the assessment order was disposed of by the CIT(A) on 24-3-1999. Two cros ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer was erroneous insofar as it is prejudicial to the interests of the revenue. Reliance in this connection was placed on the Calcutta High Court decision in the case of Jeewanlal (1929) Ltd. v. Addl. CIT [1977] 108 ITR 407 wherein it was held that the revision jurisdiction cannot be based on audit objection and the Supreme Court decision in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 832 wherein it was held that merely because one view is preferable to the other the jurisdiction under section 263 cannot be exercised. Challenge of the revision order on various ground is discussed in subsequent paragraphs, we therefore, need not deal with this issue in isolation and the issue will be discussed along with and while dealing with each item individually. 5. Ground No. 2 is against treatment of the gains on cancellation of forward exchange contract as revenue receipts. The facts are that the assessee had shown net receipt of Rs. 71,93,24,207 from cancellation of Forward Exchange Contract as revenue income in the printed accounts but claimed the said receipt as not taxable being capital receipt in the income-tax proceedings. The Assessing Officer discussed this issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d during the course of assessee's business. 6.1 In response to show-cause notices, the assessee contended before the Commissioner of Income-tax that the foreign exchange contracts were undertaken to cover the liability on capital account i.e., repayment of loan taken in foreign currency; that these loans were term loans granted for purchase of capital equipments including certain loans which were taken for payment of technical know-how and payment of cost of plant and machinery and such other items which were of capital nature, and therefore, the profit and loss arising therefrom could be capital receipt only. Reliance in this connection was placed on the opinion of C.C. Chokshi and Co., Chartered Accountants, Bombay suggesting that gains from cancellation of foreign exchange contract was capital receipt which was not liable to be taxed as capital gain, as there was no transfer of capital asset; that the gain could not be assessed as speculative profit as foreign exchange is not a commodity as understood in the sense as a commodity as mentioned in section 43(5) of the Act. 6.2 The Commissioner of Income-tax referred to the printed balance sheet for the year ended March, 1993 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase for which contracts were originally entered. According to him, the facts on record clearly indicate that the foreign exchange contracts were undertaken to cover the liability on capital account which was cancelled and the liability was left uncovered and the gain on such cancellation was in Indian rupee would not have in any way reduced the foreign exchange liability of the assessee. He further observed that had the contract matured in the normal course and had the assessee made some gains on maturity, the gains could have been reduced from the cost of capital asset provided they were utilised for reducing the foreign exchange liability. In the case of the assessee, he observed that the purpose for which the contract was entered into was given a go-by when it was cancelled with an eye to earn profit. Instead of receipt of foreign exchange, the money was accepted in Indian rupee. In these circumstances, he found it difficult to agree with the contention of the assessee that it had any nexus or connection with foreign exchange liability, be it a loan or acquisition of assets from abroad or any other payment in foreign currency. As the contracts were entered into in the normal cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipt subject to the allowance of expenditure incurred in connection therewith and the treatment of difference in the amount of receipt on cancellation of foreign exchange contracts. 7. The details of gross and net gain on cancellation of forward contracts are as under: Corporate Division Gross Premium Net HRC Plant Machinery supply and know-how 24.25 Interest & Supervision Charges 3.95 28.20 II. Repayment to Reddington -- Advance 22.00 For sale of product and interest III. NRI-OCB-Right Issue of HRC Plant 0.72 IV. Mode-III 2.04 62.35 9.39 52.95 B. Existing Plant Steel-I Mode III 23.27 5.29 18.98 85.62 13.69 71.93 7.1 The assessee had been manufacturing sponge Iron. In connection with that it had to import certain machinery. It had also planned extension and for that it had to import machinery worth 163 Million US $ and know-how of 153 Million US $. The total cost of the project estimated was 1,465 crores. IDBI financed to the extent of 125 crores to the assessee. The purchase price of equipments etc. was to be paid in foreign currency. The new plant is called HRC (Hot Rolled Coil) Project which was expected to go into operation in the last quarter of 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the cases of CIT v. Tata Locomotive & Engg. Co. Ltd. [1966] 60 ITR 405; Universal Radiators v. CIT [1993] 201 ITR 800 Swadeshi Cotton Mills Co. Ltd. v. CIT [1967] 63 ITR 65 (SC); Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1; decision of Calcutta High Court in the case of CIT v. Anglo India Jute Mills Co. Ltd. [1981] 129 ITR 352, the decisions of the Gujarat High Court in the cases of Ambica Milk Ltd. v. CIT [1999] 235 ITR 264 and Garden Slik Mills Ltd v. Dy. CIT [1996] 222 ITR 68 (Guj.), wherein the reopening on similar ground was quashed, and the decision of ITAT in ITA No. 2032/Ahd./1997. He also referred to the decision of the Punjab and Haryana High Court in the case of Groz-Beckert Saboo Ltd, v. CIT [1981] 127 ITR 608 (Punj. & Har.), wherein the loan taken but utilised for payment of purchased price of goods was held to be on capital account. The learned counsel for the assessee also submitted that the assessee has not been dealing in foreign exchange and, therefore, the question of assessment of the gain under the head "business" does not arise. It was further submitted that the foreign exchange being not a commodity, the provisions of section 43A(5) treatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. the commission receivable by the assessee agent from abroad was allowed to be not actually repatriated and retained to be utilised for the purchase of capital goods. Consequent upon devaluation the assessee decided not to purchase the capital goods and the money was remitted to India. The assessee thus made a gain because by that time devaluation has taken place and this gain was held to be of capital account. This is a case of the foreign currency receivable by the assessee earmarked for the payment for purchase of capital goods. The gain on devaluation of rupee repatriated was held to be on capital account even though originally the foreign currency was its income from commission. 8.1 In the case of Universal Radiators, the assessee manufacturer of Radiators for Automobiles, booked copper ingots from a Corporation in USA for being brought to Bombay where they were to be rolled into strips and sheets and then dispatched to the assessee for being used for manufacture. While the ingots were at sea, hostilities broke out between India and Pakistan, and the vessel carrying the goods was seized by the authorities in Pakistan. The assessee's claim for the price of the goods was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure was held to be with the object of avoiding an unnecessary investment in capital asset and was in the nature of a capital expenditure. It was further held that the payment was neither made for the purpose of earning profits, nor for the purpose of furthering, protecting or continuing its business which was to be carried on from day-to-day. 8.3 In the case of Anglo India Jute Mills Co. Ltd. the assessee who engaged in the manufacture of jute goods wanted to import certain machinery and in that connection obtained the license and placed the order for the machinery. In order to safeguard the financial deal it entered into the contract like the assessee, with the State Bank of India for the purchase of sterling. The assessee did not advance anything to the bank against this contract. In the meantime the Indian rupee was devalued and as a result the cost of the machinery increased by more than fifty per cent. The RBI also raised objections to the booking of foreign exchange. By the time these difficulties were resolved, the import license expired and in 1968 the bank cancelled the outstanding balances of the contracts and credited the assessee's account with a sum of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 235 ITR 249 (Guj.) and held that there is a fluctuation in the exchange rate which increases or reduces the liability to pay the cost of the asset after it is acquired from a foreign country, liability increased or reduced during the previous year is to be added or deducted from the actual cost of the asset, as defined in section 43(1) of the Act and, therefore, it cannot be allowed as a revenue expenditure. 8.6 In the case of India Cement Ltd. their Lordships of the Supreme Court considered the liabilities of stamp charges, registration fees and Lawyer's fees etc. for obtaining the loans which were secured on fixed assets. The said loan was utilised to pay prior debt of Rs. 25 lakhs due to M/s. A.F. Harvey Limited and Madurai Mills Ltd. and the balance Rs. 15 lakhs as stated by the Directors in their report was utilised towards working funds. The High Court held that the first amount of Rs. 25 lakhs was expenditure for the purpose of capital nature and the balance Rs. 15 lakhs was for working capital and in that connection after considering number of decisions, their Lordships summarised the decision at page 63 by stating: "To summarise this part of the case, we are of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the Apex Court, the Assessing Officer in the original order of assessment held that there was no transfer of a capital asset on cancellation of the forward exchange contracts. The said assessment of the Assessing Officer was reopened by invoking the provisions of section 148 and in that context their Lordships of the Gujarat High Court held that there was no new information but only a change of opinion. The assessee had disclosed the material to the Assessing Officer who was satisfied about the factual and legal aspect and following the judgments at the Apex Court, the High Court quashed the opening of the proceedings. 8.8 In the case of Groz-Beckert Saboo Ltd. a case before the Punjab and Haryana High Court, the assessee under a collaboration agreement, imported certain hosiery and knitting machinery against which the foreign company granted loan of Rs. 5.5 lakhs to the assessee to meet increased cost. There was devaluation of Indian rupee and the assessee was required to pay increased amount in rupee towards the loan and interest. The Tribunal held that the loan was received from the supplier of the machinery and, it was received towards the beginning of the career of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee. 8.10 In the aforesaid case the assessee-company borrowed a sum of $ 7,00,000 from its selling agent for iron ore, in Tokyo. The method of extracting iron ore from its mines by the said company had become outdated and it was felt necessary to import from Germany the machinery for mechanisation. Accordingly, the assessee-company advanced the sum of $ 7,00,000 which it had obtained as a loan from E to the said company D for the import of machinery and the loan given by him was utilised by D for the import of mining machinery. The amount so advanced was agreed to be adjusted against the price of iron ore supplied by the said company D to the assessee. On devaluation of Indian Rupee the assessee's liability in respect of above loan was increased by Rs. 19,07,217 which the assessee has claimed as a deduction in computing its income. It was disallowed and in that connection, their Lordships of the Bombay High Court held that the en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are companies doing the business of generation and supply of electric power to consumes. They belong to the Tata Group of companies. The assessee-companies undertook the erection of a thermal power station at Trombay and the erection of that power station was completed during the previous years relevant to the assessment years 1958-59 and 1959-60, respectively. For the purpose of purchase of the machinery required for the setting up of the said thermal power station, the assessee raised loans from the World Bank. According to the terms of the loan agreements under which the said loans were given, they were repayable in foreign currencies and in instalments agreed to between the World Bank and the said assessee-companies. The foreign currencies in which these loans were to be repaid were Deutsche Marks (referred to hereinafter as "Marks") and Netherland Guilders (referred to hereinafter as "Guilders"). There was a revaluation of Marks and Guilders on March 7/8, 1961, respectively. As a result of this revaluation, there was an increase in the liability to repay these loans in terms of rupee and this increase in liability to repay these loans came to Rs. 41,82,06 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no burden can be placed on the department on the ground that the further question of immunity of the subject-matter from taxation by Parliament arises and even if there could be such an onus, it would be sufficiently discharged by the admission that the land was "forest land" covered with the natural and wild growths. After that, at any rate, the accountable person has to prove change of its character. 8.14 In the case of Sutna Stone & Lime Co. Ltd. in a case before their Lordships of Hon'ble Calcutta High Court, the question was with regard to exemption under section 80-I and in that connection it was held that it is well settled that in order to be entitled to exemption an assessee must strictly come within the terms of the provisions under which such exemption is being claimed but the provisions must be construed reasonably in the context of the purpose for which the section has been introduced. 8.15 In the case of Raghuvanshi Mills Ltd. the assessee-company had insured its mills with certain insurance companies and also had taken out certain policies of the type known as "consequential loss policy" which insured against loss of profit, standing charges ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brace within itself dealing in real property as also the activity of taking a property on lease, setting up a market thereon and letting out shops and stalls in the market. In this case one of the objects specified in its memorandum of association was to take on lease or otherwise acquire and to hold, improve, lease or otherwise dispose of land, houses and other real and personal property and to deal with the same commercially. The assessee within less than 2 weeks of its incorporation took on lease a market place for an initial term of 50 years, undertaking to spend Rs. 5 lakhs for the purpose of remodelling and repairing the structure on the site and also gave the right to sublet the different portions. 8.19 In the case of Scindia Workshop Ltd. it was held by their Lordships of the Bombay High Court that whenever there is a receipt of an amount by an assessee, it is not the nature of the receipt under the general law that determines its nature for the purpose of the IT Act but the receipt would have to be considered under the provisions of the IT Act from the commercial point of view. In this case when the Zamindari system in UP was abolished, compensation was paid in the form o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue No. 1 relating to the receipt of a sum of Rs. 68,66,673 on account of profit on cancellation of forward foreign exchange contract, the undisputed facts are amount to the profit and loss account under the head "Profit on Cancellation of Forward Exchange Contracts". In computation of income filed along with the return, the assessee claimed this amount as a deduction from the net profit computed on the ground that this is a capital receipt not liable to tax. The assessee-company is a manufacturer of textile fabrics. It imports various machineries and equipments, inter alia, against loans in foreign currency. Against the instalment of loan payable and interest payable on such loans, the assessee-company has entered into contracts covering the foreign exchange components to guard against the fluctuation in the rate of the foreign currency. In respect of foreign currency, the policy of the RBI permits the companies to enter into forward contracts for the foreign exchange to be drawn by the companies with a view to limit or regulate the exposure of the Indian Companies. The Foreign Exchange Contracts are entered into by the company with a view to limiting the Company's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entered into and the machineries and equipments intended to be imported were to be used by the assessee-company as a capital asset and as such, section 28(iv) will not be applicable. Even assuming though not conceding that section 28(iv) is applicable, even then since the surplus realised on cancellation of the contract was in cash, the same cannot be taxed as a perquisite within the meaning of section 28(iv) in view of the decision of the of the Gujarat High Court in the case of CIT v. Alembic (P.) Ltd [1981] 130 ITR 168. 10.1 In the instant case, the ld. CIT had not given valid reasons to show as to how the profit earned on cancellation of the forward foreign exchange contract was assessable as a revenue profit. The ld. CIT has not also indicated the facts to which the Assessing Officer has not applied his mind and he has also not stated in what respect the Assessing Officer was required to make any further enquiries relating to the subject-matter of dispute. In any case, whether in the set of facts which are available in the instant case, profit on cancellation of a forward foreign exchange contract is on capital account or on revenue account is definitely a highly debatable i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets, in which cases, 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 related 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 recognised 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." 8.23 From the above we conclude that the gain or loss which relates to circulating capital is revenue and that relates to fixed capital it is capital. If the capital/fixed asset is acquired in India or from abroad, the liability for payment to seller would be on capital account. Similarly if a loan taken to pay the seller that liability would also be on capital account. An arra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctuation in exchange rate in repayment of loan of foreign currency taken for the purchase of capital goods. But their cancellation has frustrated that object. Remaining liabilities thereafter has to continue but that by itself does not establish that the contracts were taken and/or cancelled to make profit. Profit motive otherwise also is not decisive of the question whether a particular receipt is capital income-see A.K.T.K.M. Vishnudatta Antharjanam v. CAIT [1970] 78 ITR 58 (SC). The forward contracts were cancelled before the due date because, it was no more necessary to have a cover continued in view of greater stability of Indian rupee pursuant to the announcement by the Government, of the partial stability of Indian rupee and allowing cancellation of such contracts by RBI. Cancellation before the due date also, in our opinion, is not very relevant to hold that it was a business venture or an adventure in nature of trade because the contracts themselves were for one to three years and were not covering the entire period of payment. It cannot even be called a casual income. The fact that they were allowed by the RBI to be cancelled on the contrary gives the impression of the st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has arisen not for acquisition of capital goods. The capital liability was discharged by making the payment out of the receipts of advance against supplies from Reddington. It was thereafter assessee's lability to supply goods against those advance taken which subsisted and that was a part of the circulating capital. The liability cannot be said to be for making the payment in foreign exchange nor on account of purchase of capital goods. It was in the nature of a circulating capital and in view of the decision of the Supreme Court in the case of Sutlej Cotton Mills Ltd. and the discussion aforesaid the gain arising on cancellation of forward contract relating thereto has to be on revenue account. The order of the CIT to this extent i.e., the gains of Rs. 22 crores arising on cancellation of forward contract stated to be relating to repayment of the liability of Reddington is upheld. 9. Ground No. 3 against revision order is for not allowing expenditure on premium paid for taking forward contracts. It is connected with cancellation of foreign exchange contracts of Rs. 13,68,58,878 which according to the Commissioner of Income-tax was capital in nature. On examination of Schedul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer and, accordingly, his order to that extent was erroneous and prejudicial to the interests of revenue. The assessee's contention that this amount was included in other income was not accepted in absence of any specific head of income was brought to his notice to show that the amount in fact had been included therein. In the net result of the three issues, he directed the Assessing Officer to treat the aggregate as business profit and to increase the cost/WDV of the assets by Rs. 89,29,83,055 (Rs. 71,93,24,207 plus Rs. 13,68,58,878 plus Rs. 3,68,00,000) and directed him to allow depreciation thereof. This gain pertains to the Energy Division for the period from April to May, 1992 and is actually included in the Misc. income of Rs. 5,41,08,225 of this Division and which formed part of total Misc. income of Rs. 10,48,38,254 shown in the final accounts for the year ended 31-3-1993. The Assessing Officer may verify this and give necessary relief to the assessee. 11. The next issue on which the Commissioner of Income-tax found the order of the Assessing Officer to be erroneous and prejudicial to the interests of revenue is in not taxing the gain amounting to Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer wrongly deducted the value of sale proceeds from WDV for the entire business which included the WDV of the above three units/ divisions which is not in accordance with law. The Assessing Officer should have treated each unit separately for the purpose of arriving at capital gains." 12. According to the Commissioner of Income-tax, the value of assets transferred to are known from the books of its divisions which were maintained separately. The assessee also furnished details of assets as accounted for in the books of transferee-company and he reproduced the figures in the following table in this behalf:- S. No. Particulars of the assessee- Value in the books of the purchaser(Rs.) Value in the books company (Rs. ) Difference company (Rs. Sale of undertaking to M/s. Essar Oil Ltd. Energy Division 1 Plant and Machinery 79,77,48,280 130,07,45,544 50,29,97,264 2 Office equipment 34,78,995 34,78,995 Nil 3 Furniture and Fixtures 12,77,339 12,77,339 Nil 4 Vehicles 6,69,876 6,69,876 Nil 80,31,74,490 130,61,71,754 50,29,97,264 Offshore Division 5 Plant and Machinery 6,11,832 66,11,832 Nil 6 Office equipment 3,46.257 3,46257 NIL 7 Furnitu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laining the decision of the Supreme Court in the case of Mugneeram Bangur & Co. as considered in the case of CIT v. Narkeshari Prakasham Ltd. [1992] 196 ITR 438 (Bom.). In view of the aforesaid decisions, he concluded that transfer of business as a whole would constitute capital asset and the profit on sale of the undertaking as taxable profit. However, in view of the specific provisions of section 50 in respect of depreciable assets he held that surplus would be assessed as short-term capital gain and in doing so, the Assessing Officer is directed to take into account only the value as recorded in the books of the transferee as indicated in the table aforesaid. He however directed that this would result in increase of WDV as the Assessing Officer has reduced the WDV by the amount of the surplus. 12.2 He gave the following reasons to arrive at the gain from sale of each division:- (1) The assessee-company itself accounted for the sale consideration separately for each unit/division; (2) Books of account for each unit/division are separately maintained and block of assets in respect of such unit/division are separately shown by the assessee itself; (3) Deduction under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of Rs. 9,655 on sale of assets and profit and loss on sale of depreciable assets of Rs. 18,57,425 and 3,21,922 in the computation of income. 13.1 The division-wise working is given as under:- 1. Sale to Essar Oil Ltd. Energy (Rs.) Off-shore (Rs.) Net block of fixed assets : 80,55,94,816 73,20,107 Current assets 48,38,19,445 71,79,58,685 Misc. expenses 2,40,66,648 86,625 131,34,80,909 72,53,65,417 (Rs. 131,34,80,909 + Rs. 72,53,65,417) = 203,88,46,326 Less : Consideration = 215,00,00,000 11,11,53,674 2. Sale of Essar Projects Ltd. (Construction division) Net block of fixed assets : 1,98,87,938 Current assets : 14,35,83,685 16,34,71,623 Less : Liabilities : 5, 39,66,453 10,95,05,170 Less : Consideration : 15,00,00,000 4,04,94,830 Grant Total (1 + 2). 15,16,48,504 13.2 Initially, the businesses carried on in the three units were the main businesses of the assessee-company but, subsequently, it entered into steel business and its expansion was on very much large scale. It was thought fit that it will not be suitable for the company to carry on the construction and oil exploration business together with steel business as the turnover which will be ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or in kind or for value to be received, e.g., rates, taxes, insurance, etc.; current assets including interest accrued on investments, the securities shares, debentures, bonds and other investments; any other asset appearing in the books; technical collaboration and operating agreements, human resources, technical expertise and supporting designs and drawings, warranties, inventions, power of attorneys, assignments, deed of confirmations, mortgages, goodwill, permits, licences, quotas and other intangible benefits, ongoing contracts, tenancies, pending claims, lease of various premises, right and other easements, technical and engineering data, design data, etc. and the claim and receipts under arbitrations, negotiations disputes, court proceedings, etc. 13.5 It is submitted that the CIT had no basis for increasing the consideration for computing the capital gain at Rs. 53,73,04,107 as against Rs. 15,16,48,504. 13.6 In any case, he submitted that the Assessing Officer was justified in reducing the consideration from the block of assets and there was no reason for exercising the revisionary jurisdiction. 14. The ld. Departmental Representative submitted that certain liabilities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... however, was Rs. 3,32,276. After deducting the same from the amount of Rs. 15,87,296 the Assessing Officer brought the balance Rs. 12,56,020 to tax under section 41(2) of the Act and it was upheld by Their Lordships of the Supreme Court. In this connection, Their Lordships of the Supreme Court observed, "that in the agreement of sale, there was no reference to the value of the plant, machinery and dead stock. But on the basis of the information that was furnished by the assessee before the Income-tax Officer it became evident that the amount of Rs. 11,50,400 had been arrived at by taking into consideration the value of the plant, machinery and dead stock as assessed by the value at Rs. 15,87,296. Section 41(2) was applicable." It was further observed, "that the liability under section 41(2) was limited to the amount of surplus to the extent of the difference between the written down value and the actual cost. If the amount of surplus exceeded the difference between the written down value and the actual cost, then the surplus amount to the extent of such excess would have to be treated as capital gains for the purpose of taxation." Since this issue was not discus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as held that though in the agreement of sale there was no reference to value of the plant, machinery and dead stock, but on the basis of information that was furnished by the assessee before the Income-tax Officer it became evident that the amount of consideration had been arrived at by taking into consideration the value of the plant, machineries and dead stock as assessed by the valuer. 15.4 In the case of Hindustan Co-operative Insurance Society a case before Their Lordships of the Calcutta High Court, the assessee was carrying on life insurance business which was taken Over by the Life Insurance Corporation of India and compensation was paid for such taking over. It was held that the capital asset in the present case was the running business itself and the value of compensation was based on the calculation on the valuation date 1st January, 1954. The acquisition was on January 19, 1956 and the Tribunal held that there was improvement in the capital assets after 1st January, 1954 which could not have been estimated at a price less than Rs. 3,98,000 which was received by the assessee over and above the value in 1954 and, therefore, there was no surplus chargeable to tax. 15.5 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of view of taxation is only the gain in respect of that transaction and nothing else. In this case, the decision of the Gujarat High Court in the case of Sarabhai Chemicals Artex Mfg. Co. the Supreme Court decision in the case of Mugneeram Bangur & Co. and the decision of the Bombay High Court in the case of Killick Nixon & Co. v. CIT [1963] 49 ITR 244 (Bom.) and also the decision of CIT v. West Cost Chemicals & Industries Ltd. [1962] 46 ITR 135 (SC) were referred to. 15.7 In the case of F.X. Periera & Sons (P.) Ltd. a case before Their Lordships of the Kerala High Court, the business of the assessee in extraction and sale of mineral and mineral sands as an agent of the Government, consequent to a dispute, was sold to the Government by an agreement dated 12th January, 1954. One of the questions for consideration before Their Lordships was whether on the facts and circumstances of the case, the assessment of profit under section 41(2) of the Act was valid. In that context, it was held that the section applies only to four types of assets, namely, building, plant, machinery or furniture and since it was a transfer of the undertaking as a whole section 41(2) was not applicable. A qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t indicated and, hence section 41(2) of the 1961 Act cannot be applied. We are, therefore, unable to agree with the view of the High Court that section 41(2) of the 1961 Act is not applicable." 15.9 In the case of Kishorechand K. Bansal the Tribunal found that in the assessee's own computation, the current assets and current liabilities reflected in the books of the unit as on 31-8-1982 were Rs. 2,81,63,224 and Rs. 2,71,95,415 respectively. Thus, the excess current assets over the current liabilities worked out to Rs. 9,61,809 and this excess has been deducted from the sale consideration of Rs. 86,21,000 and the balance Rs. 76,53,191 represented the sale realisation of the block of assets held by the assessee. The total WDV of the block of assets aggregated to Rs. 28,17,418. The assessee has deducted therefrom the sale consideration of Maruti car separately for an amount of Rs. 50,000 and thus, the total WDV of the block of assets excluding the consideration for Maruti car was Rs. 28,17,418. On the basis of this computation the assessee paid the surplus realisation on the sale of fixed assets at Rs. 48,3 7,773. This was held to be taxable in the light of decision of the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d code and in a case to which computation provision cannot apply, the charging section shall also not apply. 15.12 In the case of CIT v. S. Natarajan [1999] 236 ITR 472 before Their Lordships of the Madras High Court the assessee, an individual, sold a proprietary business as a going concern for a consideration of Rs. 36,900. The Assessing Officer computed under section 41(2) profit at Rs. 2,08,595 on the ground that it has arisen by reason of sale of the business and the other question was whether the assessee was liable to long-term capital gain of Rs. 1,58,800 on transfer of this business. Their Lordships of the Madras High Court referring to the subsequent decision in the case of Artex Mfg. Co. explaining its earlier decision of Mugneeram Bangur & Co. holding that even in the case of realisation sale, the excess amount realised over the written down value over the sale of assets, would be liable to tax, where it is possible to attribute the sale price of the assets sold and where the value of the plant and machinery was evaluated and transferred. If had also referred to its earlier decision in the case of Addl. CIT v. Govindoss Purushottamdoss [1980] 124 ITR 319 (Mad.) holding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ole in itself is a property and a capital asset as such; (ii) That when the business as a whole is transferred it would be a transfer of property within the meaning of Section 41(2) (since deleted) and section 45 of the Act. (iii) Even if a slump price is paid for the transfer of the business as a whole, the liability under section 45 could arise:- (a) where the consideration is fixed in the deed of sale/transfer; (b) where it can be determined on the basis of the details furnished by the parties; or (c) the value put by the parties in their respective books; or (d) where the assets are valued by the valuer, etc. (iv) As the transfer of the business undertaking as a whole by itself is a property within the meaning of section 2(47) of the Act it may be subjected to capital gain by virtue of the provisions of section 50 of the Act. In that case the capital gain is to be determined on the basis of the consideration received for the transfer of the undertaking as reduced by the book value or written down value as shown in the accounts maintained by the assessee. 15.15 The claim based on the decision of the Supreme Court in the case of B.C. Srinivasa Shetty that it would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be taken as price attributable to these assets sold and accordingly, the assessee would be liable to capital gain tax on this excess. 15.17 Section 50 as it stood at the relevant time and applicable to the year under consideration provides that where the capital asset is an asset forming part of the block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income-tax Act, 1922, the provisions of sections 48 and 49 shall be subject to the following modification: "(1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate of the following amounts, namely- (i) expenditure incurred wholly and exclusively in connection with such transfer or transfers; (ii) the written down value of the block of assets at the beginning of the previous year; and (iii) the actual cost of any asset falling within the block of assets acquired during the previous year, such excess shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the full value of the consideration and was never received nor receivable by the assessee. The capital gain is to worked out on the basis of the consideration received or accruing to the assessee on account of transfer and as recorded in the sale deeds. The gain of the amount of Rs. 15,16,48,504 as computed by the assessee which is based on the actual consideration received alone would be the chargeable amount. We, therefore, direct the Assessing Officer to substitute this figure as against the direction of the CIT to assess Rs. 53,73,94,137 to capital gain. 16. In ITA No. 780/Mds./1999 of the assessee the first four grounds are seeking allowance of consequential depreciation which was not allowed by the CIT(A) though directed to be allowed by the CIT in 263 order. This is on account of the foreign exchange gain and the gain on transfer of three units of the assessee as a going concern which was reduced by the Assessing Officer from the amounts of the written down value of the block of assets but held to be revenue nature by the CIT. In the second round of appeal CIT(A) has given necessary directions to allow the depreciation on the enhanced WDV. However, these grounds are now con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not borne out by any evidence on record. The details of the expenditure incurred also indicated according to him, that the expenditure was on trial run in respect of new Module-III and the capitalisation whereof was approved by the company's auditor and, therefore, there was no basis for treating the expenditure as revenue expenditure. He also referred to in this connection the decision of Bombay High Court in the case of CIT v. G.T, Industries [1993] 203 ITR 538 and directed the Assessing Officer to capitalise expenditure and allow depreciation as was done by the assessee in its books of account at the prescribed rate. 19. The assessee's submission is that the CIT erred in holding that all expenses incurred till commencement of commercial production of the third unit of HBI plant are capital expenditure even though it had commenced trial production in saleable quality and has also made sales during the year. According to the assessee, the CIT has erred in differentiating between trial production and commercial production which is immaterial for income-tax purposes and that he failed to appreciate the difference between setting up a new business and setting up a new uni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2] 81 ITD 553 (Ahd.) at page 670. Reference is also invited to the decision in the case of CIT v. Kanoria General Dealers (P.) Ltd. [1986] 159 ITR 524 (Cal.) wherein it was held that once business is set up the assessee would be entitled to depreciation even if it were not employed any commercial production. 20. The learned DR, on the other hand, submitted that the CIT was justified in disallowing the claim of the assessee and in this connection he relied upon the decisions of the Gujarat High Court in the cases of Shree Vallabh Glass Works Ltd. v. CIT [l98l] 127 ITR 37 at page 42 and CIT v. McGaw Ravindra Laboratories Ltd. [1981] 132 ITR 401 wherein the expenditure before regular production was disallowed. He also relied upon the decision of the Madras High Court in the case of Madras fertilizers Ltd. v. CIT [1994] 209 ITR 174 at pages 181 and 202 wherein the pre-production expenditure have been disallowed. For explaining the concept of commencement of commercial production he referred to the decision of the Gujarat High Court in the case of CIT v. Sarabhai Sons (P.) Ltd. [1973] 90 ITR 318; the decision of the Bombay High Court in the case of G.T. Industries and the decision repo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wable as revenue expenditure. 21.3 In the case of Shree Vallabh Glass Works Ltd., before the Gujarat High Court, the assessee which manufactured safety glasses, wired glasses, etc. started construction of its factory in the year 1961-62 and imported machinery from West Germany for the erection thereof. The plant was commissioned in October, 1963. The assessee incurred expenditure before commencement of production in assessment year 1964-65 was of Rs. 4,80,873 which had been capitalised and the assessee claimed depreciation thereon. Here also, following the decision of the Supreme Court in the case of Chellapalli Sugars Ltd the Court held that the expenses incurred prior to the plant of the assessee coming into production were incurred by the assessee for putting its plant into production and, therefore, to be treated as part of the actual cost of plant and machinery. 21.4 In the case of McGaw Ravindra Laboratories (India) Ltd. a case before the Gujarat High Court, the assessee manufacturing blood transfusion equipment had decided to manufacture testing chemicals which form part of it and the expenditure incurred in connection with manufacture of testing chemicals was held to be o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e business. Revenue expenditure incurred I before that date would not be a permissible deduction in the assessment for the assessment year 1966-67. It is a case where even machinery was not installed and obviously the expenditure cannot be on revenue account. 21.7 In the case of Prem Conductors (P.) Ltd. a case before the Gujarat High Court, the question was as to when a business can be said to have started, it was held that a company can be said to have set up its business from the date when one of the categories of its business is started and it is not necessary that all the categories of its business activities must start either simultaneously or that the last stage must start before it can be said that the business was set up. The test to be applied is as to when a businessman would regard a business as being commenced and the approach must be from a common sense point of view, in this case, the company which was incorporated on November 4, 1963 actually started production on 26th June, 1965. In this case, the company had commenced its business by securing orders first and gone into production later on and since the business activity of securing order had practically started f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said decision has been impliedly overruled by the Supreme Court in Akkamamba Textiles Ltd's case and Swakami Mills Ltd s case is not correct as that was another judgment in the case of CIT v. Vallabh Glass Works Ltd. [1982] 137 ITR 389 which relate to the allowability of guarantee commission. In the judgment in Shree Vallabh Glass Works Ltd.'s case, the High Court held that all expenditure necessary to bring assets into existence and to put those assets in working condition is part of the actual cost of assets to the assessee and depreciation thereon has to be allowed by the Income-tax authorities. The assessment year under consideration was 1964-65. The construction of factory at Anand was started in the accounting year 1961-62 and the plant was commissioned and put into service from October, 1963. The expenses incurred before commencement of production amounting to Rs. 4,80,873 had been capitalised and the assessee claimed depreciation thereon. On these facts the High Court held that the assessee is entitled to depreciation on such pre-production expenses. The facts of the present case are clearly distinguishable. It is a case where the assessee is carrying on its busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o expenditure incurred in connection with setting up of an altogether new business and those are not cases of expansion of existing business. XXI(6). The allowability of such expenditure incurred by the assessee in relation to new units/projects constituting part of the same existing business of the assessee, is supported by various judgments relied upon by the learned counsel. On a careful consideration of the entire relevant facts and the judgments cited supra, we are of the opinion that the view taken by the learned Commissioner (Appeals) in relation to the allowability of travelling expenses and salary and wages expenses relating to setting up of new units forming part of the existing business of the assessee, is perfectly valid and justified. We do not find any justification to interfere with the view taken by the learned CIT(A). Hence, ground Nos. (3) to (6) of revenue's appeal are dismissed." 21.9 In the case of Core Healthcare Ltd. the assessee-company was principally engaged in the business of manufacturing intravenous injection of two types-large volume parenterals, i.e., LVP and sterile water for injection (small volume parenterals) i.e., SVP. The commercial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at since retrenchment compensation was paid and bad debts were incurred in business totally distinct from the business carried on by the assessee, the deductions could not be allowed in the assessment of the assessee because several businesses were widely different in nature. The High Court held that the Board of Directors of the assessee, which was a private company, was in overall control of all the five business activities which were owned and carried on by the assessee. There was a common fund from which the necessary capital and working funds were supplied to the various business activities. The ultimate gain or loss of the businesses was also worked out by a consolidated profit and loss account and balance sheet. The source of finance for running the various businesses was thus one and the same and there was consolidation of accounts for the purpose of ascertaining the ultimate working result of the businesses carried on by the assessee. The High Court further held that there was complete inter-connection, interlacing, inter-dependence and dovetailing of the different business activities carried on by the assessee and all the activities constituted one and the same business a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... each of the decisions for the aforesaid reason and also because the said question is essentially a question of fact. No single test can be devised as universal and conclusive. The question has to be decided on a consideration of all the relevant facts and circumstances. Some facts may tend one way and some other the other way. An overall view has to be taken and a conclusion arrived at." 21.15 There is no doubt about the proposition as canvassed by the learned CIT-DR that the liability of an expenditure cannot be allowed if a business is not yet started and carried on by the assessee during the year under consideration in the light of the decisions. But there are several decisions of the Supreme Court and various High Courts and also of the Tribunal wherein the expenditure related to expansion of business was held allowable against the business income of other business on the basis of the principle of 'same business'. On that basis if the business of the assessee of 3rd Module was part of the integrated business carried on by the assessee, we do not find any reason how the same could be disallowed on the ground that the trial run expenditure was pertaining lo the new ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed sponge with 8,80,000 MT capacity, it expended its capacity to 13,20,000 MT with the introduction of the 3rd module having capacity of 4,44,000 MT. The assessee who in the present case, has already been in the business and in view of the Supreme decisions referred to above, was engaged in a same and integrated business with a complete inter-connection and inter-lacing between the different lines of activities carried on by the assessee and that the fact that nature of two lines of business is not relevant and the decisive test is the unity of control which is indicated by inter-lacing, interdependence and inter-connection between the businesses by reason of the common management, common administration, common fund, etc. and since the assessee already in the business and various units of the assessee amounts to same business, the expenditure of start up establishment and folio maintenance aggregating to Rs. 11,41,33,843 was an allowable deduction and so also the claim of interest of Rs. 3,51,41,347. It may also not be lost sight of that the assessee has started production from 1st January, 1993 and the product during trial production between September, 1992 to December, 1992 was s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (9,73,02,843-2,96,59,007). The other expenses are allocated from out of establishment and folio maintenance including interest are not the direct expenses on trial run are even otherwise allowable as revenue expenditure, the assessee being already in existence irrespective of the fact whether it is a case of expansion of an existing business or establishing a new business altogether. 22. The next dispute is with regard to addition of annual letting value of house property amounting to Rs. 49,64,675 which according to the assessee, is over and above the amount actually received and offered for taxation by the assessee. The CIT observed that the assessee was owner of house property at Mumbai being a flat occupied by M/s. On A Way Engineering (P.) Ltd. for which an estimated income of Rs. 1,20,000 was shown in the computation of total income relevant to assessment year 1992-93 wherein an addition of Rs. 1 lakh was made in the absence of any details furnished. No such value according to him was estimated for the year under consideration. The CIT, therefore, was of the opinion that the order of the Assessing Officer was erroneous and prejudicial to the interests of the revenue. He also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s with the ascertainment of the annual value. It provides that for the purpose of section 22, annual value of the house property shall be deemed to be - (a) the sum for which property might reasonably be expected to let from year to year, or (b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable. 25. The taxability is on the annual letting value which the assessee is entitled to receive or reasonably expect from year to year, whichever is higher. If the amount pertained to the year under consideration which has been settled in the subsequent year as per the provisions of sections 22 and 23 it has to be brought to tax in the relevant year under consideration irrespective of the fact that the assessee had received it and/or offered the same in the subsequent year. We, therefore, agree with the CIT on principle and uphold his order on this point. However, the amount is assessed in the year under consideration the same may be excluded from the next year's income offered and assessed on actual receipt basis. 26. The n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nced that debenture holders and shareholders upon conversion of debentures into shares would be entitled to loyalty coupon at Rs. 10 per convertible debenture provided the debentures and snares were not transferred by the original debenture holders and the shareholders for three years after allotment of convertible debentures. According to the CIT, the payment On account of loyalty coupon has no nexus to the business of the assessee and the expenditure was not related to the issue of debentures because the debentures were issued in 1989 and the liability in respect of loyalty coupons arose in 1992. He further observed that payment on account of loyalty coupon was not an allowable deduction. It was an incentive if at all for conversion into shares and holding the same for three years. He, therefore, held that expenditure has no relevance to the issue of debentures and the expenditure was not incurred wholly and exclusively for the purposes of business. The assessee's reliance on Calcutta High Court decision in the case of CIT v. Tungabhadra Industries Ltd. [1994] 207 ITR 553 was found to be of no help as according to him, the debenture holder once he pats with the debenture beca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l submissions. In paragraph 4 of the Terms and Conditions of the issue it is stated that the assessee intended to introduce the concept of one Loyalty Coupon for each debenture allotted as a gesture of reward and appreciation of such of those original debenture holders who have remained with the Company for a minimum of three years. A loyalty coupon was to be attached with each Convertible Debenture except those to be allotted to Promoters. An amount of Rs. 10 per debenture was to be paid to holders of each debenture if they do not sell the shares on account of the conversions for the first three years from the date of allotment, provided the coupon, holder is the original allottee or his successors; if he has not disposed of through sale or otherwise the shares issued on the first and second conversion. The conversion terms as aforesaid are-Part A debenture is to be converted into two fully equity shares at the premium of Rs. 30 per share on 1-6-1990 and Part B also into two equity snares of Rs. 10 each by premium to be decided by CCI at that time. Should the premium so determined be less than Rs. 40, the balance amount will be treated as a debenture and was to be redeemed at par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a loan does not lead to acquisition of any capital asset or any advantage of an enduring nature. The loan is a liability and cannot be considered as an advantage irrespective of the purposes for which the loan is utilised, namely whether the acquisition of a capital asset or for meeting revenue disbursements. The expenditure incurred on the loan would be an allowable revenue expenditure. In that case, the expenditure was incurred on non-convertible secured debentures of the total value of Rs. 80 lakhs in 1983 and the said debentures were redeemable after expiry of seven years from the date of allotment. 31.3 In the case of Universal Cables Ltd., the Calcutta High Court following the decision of the Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. held that there was a continuing benefit to the business of the assessee over the entire period and, therefore, the premium payable on redemption of non-convertible secured debenture issued during the year should be spread over the period of debentures. 32. The reliance on the decision of the Calcutta High Court in the case of Thungabhadra Industries Ltd. and the decision of the Supreme Court in the case of Madra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom M/s. Essar Oil Ltd. the above amount got merged and, therefore, there cannot be any separate deduction for this amount. He, accordingly, directed that the Assessing Officer to bring the amount to tax as business income for the assessment year 1993-94 by disallowing the deduction which has been claimed from the contract receipts. 35. The learned assessee's counsel submitted that the assessee had made a provision for doubtful debts amounting to Rs. 53,28,909. The provision was reduced from the contract receipts and the Assessing Officer allowed the same. These bad debts are stated to be in connection with the transfer of Essar Oil division and the debts were written off at the time of transfer of undertaking and so the provision was also transferred to EOL who have written off the bad debts to the provision account transferred with the undertaking. The learned counsel of the assessee relied upon the decisions in CIT v. Girish Bhagwati Prasad [2002] 256 ITR 772 (Guj.) and in Sarangpur Cotton Mfg. Co. Ltd v. CIT [1983] 143 ITR 166 (Guj) and submitted that it was actually written off. The assessee's contention is that the CIT was not justified in stating that it was a loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure on the benefits of the project listed under the head "cost of project". In case any project loan is taken to meet the project expenditure, the proceeds of this issue will be first utilised towards repayment of this loan". He, therefore, concluded that the project which is being financed by the issue represents an expenditure of the existing activities in the form of yet another steel division. He also observed that the entire issue went to increase the paid-up capital and share premium account because the entire debenture was fully convertible into shares within a period of 15 months. He, therefore, held that the expenditure was in the nature of expenditure mentioned in section 35D and allowed 10 per cent thereof in the year under consideration under that section. The CIT (A) upheld the disallowance by agreeing with the Assessing Officer that the expenditure was covered by section 35D and by observing that after a period of 15 months the same fund was available as equity funds and the amount raised, therefore, was available with the assessee on a permanent basis. In the Supreme Court decision in the case of India Cements Ltd relied upon by the assessee th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use at the time when the expenditure was incurred, it was for right issue of debentures and not capital. We direct accordingly. 40. The next ground is against the disallowance of entire expenditure incurred in acquisition of plant and machinery from the cost of machinery though it should have been held towards cost of plant and machinery. The assessee incurred a sum of Rs. 40,39,98,000 towards acquisition of know-how and consulting in engineering services for the installation of the plant. This amount was capitalised towards the cost of the plant. The assessee claimed depreciation thereon at the rate of 25 per cent. The Assessing Officer, however, held that it being cost of acquisition of the know-how, it was covered by the provisions of section 35AB of the Act. He, therefore, disallowed the depreciation claimed and allowed 1/6th of the aforesaid expenditure being Rs. 6,73,33,000. The assessee's appeal Was dismissed by the CIT(A). 41. The learned counsel of the assessee submitted that know-how was obtained for setting up the plant and not for the purpose of manufacture or processing of goods which is covered by section 35AB. This argument and interpretation of the counsel of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unting, the Assessing Officer disallowed the same. It was submitted before the CIT(A) that due to large size of the business with the turnover of more than 300 crores some of the expenses relating to an earlier year was pending to be debited in the next year because they do not crystallize till finalisation of the transaction, receipt of final sale bills, etc. Referring to the earlier order, the CIT(A) however, directed the Assessing Officer to disallow net amount i.e., after setting off the prior period income though he found some force in the contention of the assessee that certain expenses might not have been debited in the earlier year due to the fact that it had not crystallised in that year. 44. The learned counsel of the assessee relied upon the decision of the Tribunal in the case of United Phosphorus Ltd. [IT Appeal No. 35 (Ahd.) of 2000 dated 22-5-2001] wherein the Tribunal set aside the matter to the file of the Assessing Officer to determine the allowability of the expenditure as per the decision of the Gujarat High Court in the case of Saurashtra Cement & Chemical Industries Ltd. v. CIT [1995] 213 ITR 523. 45. We have heard the parties and considered the rival submis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 62 ITR 533, the decision of the Madras High Court in the ease of CIT v. Seshasayee Paper & Boards Ltd. [1985] 156 ITR 542, the decision of the Delhi High Court in the case of Modi Rubber Industries and decision of Andhra Pradesh High Court in the case of Andhra Pradesh Carbides Ltd. v. CIT [1992] 198 ITR 386. The CIT(A) following his decision in the appeal for assessment year 1994-95, directed the Assessing Officer to treat the interest as income from business. Revenue is against this finding of the CIT(A). 47. We have heard the parties and considered the rival submissions. In the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172 the Supreme Court observed that: "interest income is always of a revenue nature, unless it is received by way of damages or compensation. If a person borrows money for business purposes but utilises that money to earn interest, however, temporarily, the interest so generated will be his income. This income can be utilised by the assessee whichever way he likes. He may or may not discharge his liability to pay interest with this income. Merely because it was utilised to repay the interest on the loan taken by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of the Act." 48. In this case "The assessee was a company incorporated on December 3, 1971, for the purpose of, inter alia, manufacturing heavy chemicals such as ammonium chloride and soda ash. The trial production of the factories of the company commenced on June 30, 1982. For the purpose of setting up of the factories, the company had taken term loans from various banks and financial institutions. That part of the borrowed funds which was not immediately required by the company was kept invested in short-term deposits with banks. Such investments were specifically permitted by the memorandum and articles of association of the company. The company had also deposited certain sums with the Tamil Nadu Electricity Board. It had also given interest-bearing loans to its employees to purchase vehicles. Up to the assessment year 1980-81, interest earned by the company from the various loans given by the company and also from the bank deposits was shown as income and was taxed accordingly. For the accounting year-ending on June 30, 1981 (assessment year 1982-83), the assessee received a total amount of interest of Rs. 2,92,440. In its return of income filed on June 22, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction, nor could it be adjusted against any other income under any other head. Similarly any income from a non-business income source could not be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plant and machinery even before commencement of the business of the assessee." 50. In view of the aforesaid decision of the Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. the interest received during the pre-production period is to be assessed under the head "income from other sources". We, accordingly, uphold the order of the Assessing Officer to this extent and reverse that of the CIT(A). 51. The next dispute in the revenue's appeal is against the finding of the CIT(A) that the loss incurred in surrendering back the industrial land to Government of Andhra Pradesh was a capital loss in t6rms of section 45 of the Act. In the computation of income, the assessee claimed that a sum of Rs. 1,70,87,944 represented capital loss incurred by the assessee which was in connection with surrender of industrial land to the Government of Andhra Pradesh which it required in Kakinada to set up Pellatisation Pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce the manufacture of insecticide formulation was not carried out by the assessee and the amount paid was for project report only, the Assessing Officer disallowed the same as capital expenditure. The Delhi High Court held that the expenditure was attributable to capital having been incurred with a view to bring an asset or advantage into existence and merely because the project did not materialise the nature of expenditure would not change to revenue. 54. In the case of Century Ginning & Mfg. Co., the question was whether the business trip abroad for setting up a new plant could be claimed as a revenue expenditure and the Court held that it was an expenditure of capital nature. The CIT(A) has also given a finding that the assessee-company wanted to start a new plant and the loss was incurred at the time of acquiring the plant. 55. In the present case also, the expenditure on acquisition of land was a capital expenditure and, therefore, its surrender to the Andhra Pradesh Government would be an expenditure of capital nature. Both the CIT(A) as well as the Assessing Officer agreed on this point. The CIT(A), however, qualified this loss to be in the nature of section 45 meaning th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the parties and considered the rival submissions. In the absence of any nexus established that only borrowed funds have been utilised by the assessee in advancing interest-free loans to the sister concern there would not be any justification to disallow the interest on the entire advances. The CIT(A), in our opinion, was justified in resorting to the proportionate amount after taking into consideration the assessee's own funds and the borrowed funds. He has proceeded on a just and proper method and no fault therein could be alleged. The reliance by the revenue on the decision of Karnataka High Court in the case of CIT v. V.M. Salgaocar & Bros. (P.) Ltd. [1992] 198 ITR 738 is of no help because in that case the question was whether non-charging of interest in debit balance in running account by the directors constituted perquisite or not. There is no such question in the present case as to whether the non-charging of interest from the sister concern would constitute any such income to the assessee or not. It is a case of mere disallowance by the Assessing Officer on the assumption that borrowed funds alone have been utilised in advancing interest-free loan to the sister concern. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raised before him for the first time and the claim of the revenue is that these claims were not made before the Assessing Officer in the original assessment proceedings nor during the course of proceedings under section 263 and, therefore, while giving effect to the order of the CIT under section 263 the assessee could not have made this fresh claim nor the Assessing Officer could have admitted any such claim. With regard to the claim of section 80HHC, the assessee was required to file an audit report which was also not submitted and the direction of the CIT(A) to the Assessing Officer to obtain such a report from the assessee is also challenged before us. 61. Admittedly, these claims were not made by the assessee before the Assessing Officer and the reason is stated to be that as the Assessing Officer had computed the income of the assessee at a loss in the original order of assessment at Rs. 2,65,51,990 and, therefore, the question of claiming deduction under these two sections did not arise at the stage of the assessment. Consequent to the revision under section 263 a positive income is worked out and, therefore, the assessee has made the claim under these two sections for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 84 or 80J not asked for or given at the original assessment was not allowed on the ground that material which was necessary for the purpose of granting relief under section 84/80J could not be said to have been available with the Assessing Officer at the time of making the assessment. It was, therefore, held that since the relief could not have been allowed at the time of original assessment proceedings, no question of rectifying the mistake ever arose and it was for the assessee to satisfy the Income-tax Officer that each of the conditions of section 84/80J was satisfied in this particular case and further that the material for granting the relief under section 84/80J was available on the record of the case before him. 63. We have heard the parties and considered the rival submissions. In our opinion, it is of course for the assessee to claim a particular deduction or not and in the light of the circular of the Board the departmental authorities may point out to the assessee that such a claim was admissible, but it is also for the assessee to claim the relief and comply with the requirement of the sections under which the deductions are claimed. In the original assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ondition and the audit report filed after the return was submitted but before the assessment was framed would be sufficient compliance of the condition and the decision in the case of Zenith Processing Mills v. CIT [1996] 219 ITR 721 (Guj.) wherein also it was held that though audit of accounts is a mandatory requirement furnishing of proof of such audit is a directory requirement and the proof can be furnished at the time when the special deduction under section 80J is being considered. The Assessing Officer shall take into consideration these two decisions in the fresh proceedings. 64. In the result, all the appeals are partly allowed. Per Shri S.K. Yadav, Judicial Member. 65. I am not able to persuade myself to agree with Hon'ble V.P./A.M. on issue i.e., cancellation of forward Exchange Contract. The assessment in this case was completed under section 41(3) on 29-3-1996. On scrutiny of assessment for assessment year 1993-94 CIT found that the order of Assessing Officer was erroneous insofar as same was prejudicial to the interest of revenue in respect of certain items which are discussed in detail. Accordingly the assessee was given an opportunity of being heard with a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts in return are assumed to be correct. The word prejudicial to the interest of revenue in section 263 have not been defined but they must mean that impugned orders of assessment challenged are such as not in accordance with law in consequence whereof the lawful revenue to the state has not been realised. Due to want of proper and necessary enquiries order of Assessing Officer resulted in prejudicial to the interest of revenue as observed by the Hon'ble Delhi High Court in the case of Gee Vee Enterprises Process. Hon'ble Rajasthan High Court in Emery Stone Mfg. Co.'s case has held that where deductions have been allowed without proving the claim and proper verification on the basis of which order was passed would also be prejudicial to interest of revenue and could be set right in revisionary jurisdiction by CIT. 66. After taking into consideration the details filed and submissions made in response to show-cause notice, under relevant provisions of section 263 of the IT Act, various issues arose. First issue was regarding cancellation of forward exchange contract. During the period relevant to assessment year 1993-94 the assessee has shown a receipt of Rs. 71,93,24,2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nge liability of the assessee, as regards the payment of loans obtained in connection with the acquisition of capital goods from abroad. (iii) It is on record that gain from cancellation of forward exchange contract was not utilised for payment of foreign loan which was obtained for acquisition of capital goods or for acquiring any capital goods from abroad. (iv) The gains from cancellation of forward exchange contract was of revenue nature. The action of Assessing Officer in reducing the value of block of assets was erroneous and also prejudicial to the interest of revenue. The observation of Assessing Officer that the gains on cancellation of foreign exchange contract had any relation with the loan from abroad or acquisition of any asset from abroad was also erroneous. (v) The Assessing Officer failed to consider the amount received was in nature of revenue receipts being compensation received on cancellation of foreign exchange contract, which was entered during the course of assessee's business. Failure on the part of Assessing Officer to treat the entire receipt as revenue receipt was erroneous and prejudicial to the interest of revenue. 66.3 In this regard the subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at foreign exchange is not a commodity and is a currency of settlement. The definition given in the Act has extended the definition of commodity by including stock and shares which otherwise is not commodity. The fact that only stock and shares had been included in the extended definition goes to prove that foreign exchange is not a commodity. Therefore, the extended definition cannot be applied to foreign exchange. In view of above, it was submitted that transaction under consideration which is in respect of foreign exchange cannot be treated as profit arising out of speculative transaction. 67. After taking into consideration various details and submissions C1T observed that assessee had earned profits on cancellation of forward exchange contract. In the printed balance sheet these have been shown as revenue receipts as under:- Printed balance sheet for period ended March, 1993 Schedule XVIII. Note to financial statement under the heading Principal accounting policies': item (xiii) forward contract- "Profit and Losses" arising out of cancellation of forward contract is treated as revenue item and accordingly including in Profit and Loss account. 67.1 Sim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cel the contract and thereby liability towards capital expenditure was left uncovered. Basically the contracts were entered for hedging the fluctuation in foreign exchange. The purposes for which the contract was entered was not fulfilled. It was cancelled and gain in Indian rupee earned. Thus, there are two situations: One: the foreign exchange contract is allowed to mature and the gain realised is utilised for the purpose of repayment of foreign loan obtained for acquiring assets from the aboard. This is the normal situation. Two: the contract is cancelled with an eye on profit on a judgment taken by the management. The foreign exchange liability is left uncovered. The contract is not allowed to mature. The gains are not utilised for the purpose of repayment of loan. Foreign exchange liability is not reduced. This is the present condition in the case of assessee. Both the situations are not similar. In the first situation assessee could claim benefit of reduction of cost/WDV by treating the receipt as connected with capital asset. In the second situation the gains arc purely revenue receipt, unconnected with purpose for which contracts were originally entered. Therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been recognised by the Hon'ble Supreme Court in case of S.G. Mercantile Corpn. (P.) Ltd. and Calcutta National Bank Ltd. "Even a single venture has been held amount to business and profit arise out of such a venture has been held to be taxable as income arising from business". Further in case of Gillander Arbuthnot & Co. Ltd. the Hon'ble Supreme Court has held that there is no immutable principle that compensation received on cancellation of an agency must always be regarded as capital. 67.9 From the facts of the case CIT observed that the entire receipt was of revenue nature and this should have been treated as revenue receipt. The assessee has given the same treatment in the printed balance sheet the same was also certified by the Auditor. No basis has been given by the assessee to treat the said amount received as capital in nature. The treatment given by the assessee to the above sum in computation filed along with the return is incorrect. 67.10 The CIT further observed that assessee had-entered into contract with certain banks in India for foreign exchange cover and to hedge its foreign exchange liability and to avoid loss of any future profit. In case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest 22.00 III. NRI-OCB-Right Issue of HRC Plant 0.72 IV. Mode-III 2.04 62 9.39 52.95 B. Existing Plant Steel-I Mode III 23.27 5.29 18.98 85.62 13.69 71.93 68.1 The assessee had been manufacturing sponge iron. In connection with that it had to import certain machinery. It had also planned extension and for that it had to import machinery worth 163 Million US $ and know-how of 153 Million US $. The total cost of the project estimated was 1,465 crores. IDBI financed to the extent of 125 crores to the assessee. The purchase price of equipments etc. was to be paid in foreign currency. The new plant is called HRC (Hot Rolled Coil) Project which was expected to go into operation in the last quarter of 1993. This machinery, however, had not come into existence during the year under consideration. 68.2 As per guidelines of the RBI, the foreign exchange can be allowed to be bought on the basis of existing liabilities. The assessee initially booked contract varying from one to three months to cover against possible future exchange losses in repayment of foreign currency loans, equipment purchases and technical services. However, as reported in the Director's report for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Punjab and Haryana High Court in the case of Groz-Beckert Saboo Ltd. wherein the loan taken but utilised for payment of purchase price of goods was held to be on capital account. The learned counsel for the assessee also submitted that the assessee has not been dealing in foreign exchange and, therefore, the question of assessment of the gain under the head "business" does not arise. It was further submitted that the foreign exchange being not a commodity, the provisions of section 43A(5) treating the gain to be speculative in nature would not arise and also in view of the fact that there was no transfer. 69. The ld. CIT-DR, Shri Girish Dave, on the other hand, submitted that the fact that the assessee has received gain on cancellation of forward contracts is proved and consequently the onus on the assessee to prove that it was exempt in view of the decision of the Supreme Court in the case of V. Venugopala Varma Rajah; decision of the Calcutta High Court in the case of Sutna Stone & Lime Co. Ltd. and the decision of the Orissa High Court in the case of Orissa State Warehousing Corpn. He also referred to paras 13 to 15 of AS-11 of the guidelines issued by the Institute o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tallation of plant has to be capitalised under accountancy principles as also on analogy of statutory explanation to section 43(6), it cannot be treated as receipt on revenue account and because the facts are not on record to determine the exact nature as regards the other gains of Rs. 0.7 crore. Accordingly order of the CIT was set aside on these issues and restored that of Assessing Officer." 71. I am not able to persuade myself to agree with the findings of Hon'ble Vice President on this issue for following reasons:- A. The accounts reveal that assessee has earned profit on cancellation of forward exchange contracts which is evident from printed balance-sheet wherein same has been shown in revenue receipts as under:- Printed balance sheet for period ended March, 1992 SCHEDULE XVIII Note to the financial statement under item "Principal accounting policies; item (xiii) 'forward contract' 'profits and losses' arising out of cancellation of forward contract is treated as revenue item and accordingly included in profit and loss account." B. Similarly in the printed balance sheet for the period ended May, 1992, it is shown as under:- S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oad but this was not the situation in the present case. The contract is cancelled with an eye on profit on judgment taken by the management. The foreign exchange liability has been left uncovered. The contract is not allowed to mature. The gains are not utilised for the purpose of repayment of loans. The foreign exchange liability is not reduced. In this situation gains are purely revenue receipts unconnected with the purpose for which the contracts were originally entered. Therefore, the CIT has rightly not agreed with the opinion of Chartered Accountants of Bombay mentioned above. G. The facts on record indicate that foreign exchange contracts were undertaken to cover the liability on capital account which were cancelled and the liability was left uncovered. The gains on such cancellation was in Indian rupee and, therefore, would not have in any way reduced the foreign exchange liability. The ratio laid down by Hon'ble Supreme Court in Tata Locomotive & Engg. Co. Ltd.'s case does not help the assessee, because in the said case the commission earned abroad in foreign currency was retained for purchase of capital goods. Later the unutilised amount was remitted into India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount to business and profit arising out of such venture has been held to be taxable as income arising from business. In case of Gillender Arbuthnot & Co. Ltd. Hon'ble Supreme Court has held that there is no immutable principle that compensation received on cancellation of an agency must always be regarded as capital. From these facts it is evident that entire receipt was of revenue nature so it should be treated as revenue receipt which is also evident from treatment given by the assessee in printed balance sheet and same was also certified by the auditors. As earlier observed by me, the treatment in books of account of the assessee, accepted by the directors and approved by the competent auditors, is extremely important evidence to the fact that receipt is in the nature of revenue. It is settled position of law that each case has to be decided in its facts and circumstances. Moreover, assessee has not come out with any cogent explanation that the amount so received was of capital in nature. Thus the treatment given by the assessee to sum in computation filed along with the return of income is incorrect. K. The assessee had entered into contracts with certain banks in India f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erroneous insofar as prejudicial to the interest of revenue in treating the entire gain arising on cancellation of all the foreign exchange forward contracts as on capital account and thereby in reducing the same from the cost/W.D.V. of the block of assets? 2. Whether, on the facts and in the circumstances of the case, it is the only gain amounting to Rs. 22 crores, as had arisen on cancellation of only those foreign exchange forward contracts as were relating to liability towards repayment and not the entire gain of Rs. 71,93,24,207 as related to the cancellation of all the foreign exchange forward contracts? 3. Whether, on the facts and in the circumstances of the case, the CIT was right in holding that the entire amount of Rs. 71,93,24,207 as related to the cancellation of all the contracts of foreign exchange forward cover is the revenue receipt chargeable to tax as income from business/an adventure in the nature of trade/as causal income and/or profit arising on speculative transaction under section 43(5) of the Act?" THIRD MEMBER ORDER Shri Vimal Gandhi, President. 73. On account of difference between the Hon'ble Members of Income-tax Appellate Tribunal, Ahmed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n its return for the relevant assessment year, the assessee claimed that above amount was a capital receipt as forward contracts Were entered into, to acquire a capital asset i.e., machinery and plant and/therefore, any gain accruing therefrom was on capital account and not assessable. The Assessing Officer accepted above claim of the assessee as per assessment order dated 29-3-1996. 76. Subsequently, the Commissioner of Income-tax called for record of assessment of the assessee and held that above assessment was erroneous and insofar prejudicial to the interests of the revenue as gains arising to the assessee on cancellation of contracts were taxable receipts. Various reasons for taking action under section 263 are also enumerated and these are reproduced by the learned Vice President in his proposed order. The learned Commissioner accordingly cancelled the assessment and asked the Assessing Officer to make fresh assessment in the light of directions issued by him. The assessee challenged above action of the Commissioner in appeal ITA No. 949/MDS/1998 before the Appellate Tribunal. 77. Meanwhile, the Assessing Officer made fresh assessment in accordance with directions of the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ward foreign exchange contract, the undisputed facts are amount to the profit and loss account under the head "Profit on Cancellation of Forward Exchange Contracts". In computation of income filed along with the return, the assessee claimed this amount as a deduction from the net profit computed on the ground that this is a capital receipt not liable to tax. The assessee-company is a manufacturer of textile fabrics. It imports various machineries and equipments, inter alia, against loans in foreign currency. Against the instalment of loan payable and interest payable on such loans, the assessee company has entered into contracts covering the foreign exchange components to guard against the fluctuation in the rate of the foreign currency. In respect of foreign currency, the policy of the RBI permits the companies to enter into forward contracts for the foreign exchange to be drawn by the companies with a view to limit or regulate the exposure of the Indian Companies. The Foreign Exchange Contracts are entered into by the company with a view to limiting the Company's obligation for future payments in foreign exchange. The assessee-company is not engaged in the financing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e meaning of section 28(iv) in view of the decision of the Gujarat High Court in the case of CIT v. Alembic (P.) Ltd. [1981] 130 ITR 168." "10.1 In the instant case, the ld. CIT had not given valid reasons to show as to how the profit earned on cancellation of the forward foreign exchange contract was assessable as a revenue profit. The ld. CIT has not also indicated the facts to which the Assessing Officer has not applied his mind and he has also not stated in what respect the Assessing Officer was required to make any further enquiries relating to the subject-matter of dispute. In any case, whether in the set of facts which are available in the instant case, profit on cancellation of a forward foreign exchange contract is on capital account or on revenue account is definitely a highly debatable issue. The view taken by the Assessing Officer that the surplus realized by the assessee on cancellation of forward foreign exchange contract is a capital receipt appears to be a much more reasonable view than the view adopted by the ld. CIT that it is a revenue receipt. A reference to para 16 of the CIT's order indicates that even he himself is not sure whether the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain or loss on such transactions or on cancellation of such contracts would also be on capital account as all that is done is to bring the capital asset into existence. 8.24 We have perused the contracts of forward covers and found that they were taken against the existing liabilities in foreign currency. These contracts could not have been taken otherwise without there being an existing liability as is evident from the guidelines issued by the RBI. The liabilities for the repayments of loans against the purchase of equipments, or machinery, or acquisition of know-how for installing the plant, therefore, the conclusion of the CIT that there was no nexus between gain arising on cancellation of forward contracts and acquisition of capital assets cannot be accepted. As the contracts were taken against the capital liability, their cancellation cannot be de hors that liability. 8.25 Cancellation of the contracts in this was one time cancellation and not one after the other. Even otherwise, as held by Supreme Court in Dalhousie Investment's case 66 ITR 473 (SC) "The mere fact that an investment company varies its investment does not necessarily mean that the profit resulting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue receipts of the assessee and, therefore, liable to tax because - (i) The liability towards the loan taken for repayment to the seller and therefore it was of capital account and is relatable to the acquisition of capital goods and which assets had not by then reached destination and/or installed in the factory premises of the assessee and the unit was yet not set up. It would reduce the assessee's liability to purchase capital goods; (ii) because the liability towards sponge iron is for existing plant and the liability for capital goods not being capital assets by itself gain or loss arising therefrom could have been on revenue account, the same way as the interest payment of such liability. The said interest liability prior to installation of the plant has to be capitalized under the Accountancy Principles as also on the analogy of the statutory Explanation 8 to section 43(6), it cannot be treated as a receipt on revenue account; and because the facts are not on record to determine the exact nature as regards the other gain of Rs. 0.72 crore we, therefore, set aside the order of the CIT on these issues and restore that of the Assessing Officer. 8.28 However, the liabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to general reserve." C. However, in computation for filing the income-tax return the amount was treated as capital receipt and was excluded from commutation of total income. D. In schedule attached to accounts (Schedule XI), the gains from foreign exchange contracts was shown as other income under item -(f) as under:- SCHEDULE IX Other Income (f) of gains from cancellation of foreign exchange contract (net of premium paid) Rs. 71,93,44,207. E. It is abundantly clear from the record that gain which has arisen to the assessee on these cancellation of foreign exchange contracts have no connection whatsoever with the purchase of any assets. The gains were not utilized for the repayment of loan obtained in connection with purchase of assets from abroad. The gains from cancellation of foreign exchange contracts was in rupee and, therefore, could not have been utilized to liquidate any foreign exchange liability including those incurred in connection with acquisition of capital assets from abroad. Thus it is not acceptable that gains on cancellation of foreign exchange contracts has in any way gone to reduce the foreign exchange liability in respect of loans obtained for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to India in Indian rupee and same had no nexus with acquisition of capital assets. H. There is no nexus between gain on cancellation of these foreign exchange contracts and foreign exchange liability be it loan or acquisition of an asset from abroad or any other payment in foreign currency. It is evident from the fact that the moment the contract was cancelled, the purpose for which it was entered into was not on assessee's agenda. The conduct of the assessee shows that with an eye to earn profit, the contract was cancelled and the liability towards foreign exchange was not reduced. It is further clear from the conduct of assessee that instead of receipt of foreign exchange, the profit was accepted in Indian rupee. I. The contracts were entered in normal course of business transactions. Any gain on cancellation of such contracts would be business profit. It cannot be treated as capital receipt. This view gets strength from finding of Hon'ble Supreme Court in case of CIT v. Rajaram Maize Products [2001] 251 ITR 427 (SC) wherein power subsidy to new industries, based on consumption per unit for small scale industry and percentage of electricity charges, for medium and la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss of any future profits. In case the contract had matured and profit/loss utilized for liquidating the foreign exchange liability, the action of Assessing Officer would have been justified. The gains arose due to cancellation of contracts which were entered in connection with the business of assessee. The gains are incidental to business and, therefore, cannot be treated as casual income. Accordingly, the gains have rightly been treated as business income by the CIT. L. The significant aspect of the whole transaction is that the entire contracts was settled without delivery of commodity. The commodity in the instant case is foreign exchange. Foreign exchange is traded. It is quoted in foreign exchange market. Therefore, for the purpose of section 43(5) foreign exchange can be treated as commodity. In case there is profit on cancellation of contract for the purchase of foreign exchange, same can be added as speculative profit as the contract was settled by non delivery. Accordingly the contention of the assessee in this regard, is not acceptable." 83. On account of above difference between the Hon'ble Members the matter has been referred to me in the shape of three q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... involved due to fluctuation in the currency needed to purchase of plant and machinery. Referring further to reasons 'A' to 'D' of the learned J.M., he submitted that gain arising on cancellation of contracts relating to purchase of machinery was clearly on capital account and this was well settled. In this connection, the learned counsel for the assessee referred to the following decisions of Hon'ble Supreme Court in the cases of (1) Tuticorin Alkali Chemicals & Fertilizers Ltd's case, (2) Sutlej Cotton Mills (116 ITR 1); and Hon'ble Gujarat High Court in the case of Core Healthcare Ltd. It was not correct on the part of the learned Judicial Member to hold that gains were not linked to purchase of machinery or had nothing to do with liability to be discharged by the assessee relating to purchase of machinery. Findings of the learned Judicial Member were not only against facts, but even had no legal basis, the learned counsel further submitted. 85. Finding 'E' was contrary to the earlier finding recorded in paras 'A' to 'D'. It was erroneous to hold that payment was made in domestic currency. The conclusion in para 'E' was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 88. Shri Girish Dave, learned DR opposed above submissions. He argued that the matter was not covered by Special Bench's decision. He submitted that decision of Special Bench was given on account of peculiar facts before them and said decision laid down no legal principles, which were of universal application. In this connection, Shri Dave read out para 16 of the order of the Special Bench and argued that whether gain arising on cancellation of forward contract would be capital or revenue receipt, would depend upon large number of factors. He referred to the observations of the Special Bench, "The essential characteristic which stamp the character of a revenue nature on any transaction, namely, multiplicity of transactions, a prior association of business and the existence of a scheme, system and business operations are totally conspicuous by their absence in the present case before us. In our considered opinion, the dominant intention, motive and purpose of entering into forward foreign exchange contracts and cancellation thereof were clearly to provide a hedging mechanism against enhancement of liabilities for repayment of foreign loans raised for the purpose of acquis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nges made in Foreign Exchange Derivative Contract. 91. Shri Dave further submitted that foreign currency was an asset and this position as accepted by the Special Bench. He drew my attention to observations of the Bench in para 18 of its order. Thus when the assessee was dealing in above asset, the gain or loss accruing to the assessee was clearly an assessable receipt. It was a business gain. 92. Shri Dave further submitted that Special Bench did not correctly appreciate import of Explanation 3to section 43A of the Act. He submitted that foreign exchange contracts were of executory nature. No inference whether these contracts could operate in capital or in revenue field was possible unless contracts are actually performed. No foreign currency would be involved in case the contracts are not executed or performed. Therefore, existence or cancellation of contract has to be treated different from gain accruing or arising to the assessee in foreign exchange. Such a view was taken by the Court of Appeal in the case of Whittles (Inspector of Taxes) v. Uniholdings Ltd. [1996] STC 914 (sic). Borrowing of a loan and foreign exchange were held to be two separate contracts. The learned D.R. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned J.M in his proposed order. He argued that order should be read in the background that parties before the Bench had made alternative submissions and, therefore, findings were recorded on those alternative submissions. He submitted that there was no justification to argue that findings of the learned J.M. were haywire. There was no legal infirmity in the basic finding recorded by the learned J.M. and it was that the profit was made by the assessee in the course of business and that cancellation of contracts was not related to acquisition of capital assets. 96. Shri Dave also drew my attention to the detail of the transactions entered into by the assessee. He argued that several forward contract related to supply of know-how, which clearly was a revenue receipt. In this connection, he relied upon decision of Bombay High Court in the case of Addl. CIT v. Buckau Wolf New India Engg. Works Ltd. [1986] 157 ITR 751. This principle was also given statutory recognition under section 35AB of the Income-tax Act. Thus even if whole case of the assessee was accepted, gain accruing on contract for supply of know-how was required to be treated as revenue receipt. These receipts should be b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be acquired. The increase showed that cost had gone up in the same proportion when calculated in Indian rupee. So what assessee had received was merely encashment of incremental cost of a capital asset. In that view of the situation, there was no actual gain to the assessee. 99. Shri Soparkar further emphasized that the assessee had to disclose the purpose for which forward contract was to be entered into. He referred to pages 311 to 320 of the Paper Book where copies of three contracts are available. In each of the contract, purpose that contract was being entered into to acquire machinery and plant was duly disclosed. Thus forward contract was entered into for purposes of acquiring a capital asset. Shri Soparkar further stated that revised Accounting Standard-11 did not make any difference. Likewise it is inconsequential that hedging is permitted as per provisions of FERA or FEMA. He also read out relevant portion of proposed order of the learned Vice President to show that there was no material error in the order as principles applicable are to be seen whether contract is one in question or there are many. Likewise whether foreign money was a commodity or not, is irrelevant for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Vice President. 102. 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. The relevant portion of the above Notification is as under: "Customers may be permitted to cancel forward contracts and keep their exposures open or book fresh contracts, at later dates, if they so desire. It will also not be necessary to report these cancellations to the Reserve Bank of India. Full particulars of cancellations of forward cover for the equivalent of US $ 500,000 and above should be kept on record with the authorized dealers for verification by the Exchange Control authorities if necessary. A contract booked with an authorized dealer and subsequent cancelled, may be booked again with another authorized dealer, if the customer so wishes. The authorized dealer booking the subsequent contract will have to verify suitable documenta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 11.06 crores which was a revenue receipt. The learned Departmental Representative argued that foreign currency was not obtained under foreign contracts for remittances towards foreign loan during the year. All the forward foreign exchange contracts were cancelled on 30-4-1992 resulting in gain of Rs. 11.06 crores. Thereafter assessee again entered into fresh foreign contracts in May and June, 1992 for dollar loans. Without making remittance these contracts were cancelled on 26-2-1993 resulting in profit to the assessee. Thus conduct of the assessee amply demonstrated that entire activity of cancellation and execution of fresh contracts followed by cancellation was motivated by business consideration. The contracts might have been entered into to cover against exchange rate fluctuation without any motive of profit, but subsequent conduct of the assessee clearly showed that cancellation was done for business consideration. The Departmental Representative had relied upon the decisions noted by the Bench in paras 7 and 8 of its order. The learned D.R. also referred to provision of section 43(5) of Income-tax Act and submitted that once these transactions were held to be speculativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rris [1904] 5 TC 159. As far as decision of Supreme Court was concerned, the Special Bench took into account the case of G. Venkataswami Naidu & Co. v. CIT [1959] 35 ITR 594 (SC), CIT v. P.K.N. Co. Ltd. [1966] 60 ITR 65 (SC), CIT v. Sutlej Cotton Milk Supply Agency Ltd. [1975] 100 ITR 706 (SC). The Special Bench further considered observation of Lord Dunedin in Leeming v. Jones 15 TC 333 (HL). After considering facts and the case law, the Special Bench expressed the following view: "17. Viewed in the backdrop of the aforesaid facts and circumstances, we are inclined to accept the contention of learned counsel for the assessee that the entire activity of entering into and cancellation of forward contracts, which are directly connected with the repayment of foreign currency loans fall in the capital field and gains arising therefrom would, therefore, be capital receipts. 18. It is now well-settled that where profit and loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be treated as profit or loss if the foreign currency is held by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of the whole or part of the money borrowed by him from any person in any foreign currency. Since the assessee has entered into forward contracts, as per the provisions of Explanation 3, increase or reduction of the liability of the assessee in repayment of the loan are liable to be ascertained on the basis of the forward contracts. That part of the foreign liability for repayment of the loan which is covered under the forward contract would be determined on the basis of the exchange rate of the foreign currency into the Indian currency as specified in the contract. Any increase or reduction in the liability being the difference in the Rupee equivalent of original liability as well as the liability on the basis of the forward contract would be capitalized towards the actual cost of the assessee in consonance with the provisions of section 43A. Thus, gains arising on cancelling of the forward contracts in the case of the assessee represent the reduction of the liability for repayment of the foreign loan which is liable to be adjusted in the cost of the asset as per section 43A(1). We are not persuaded to accept the argument of the learned counsel for the assessee that the forwar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e machinery by virtue of section 43A(1) read with Explanation 3 thereto." 108. The Special Bench also referred to accounting principles formulated by the Institute of Chartered Accountants of India and held that said principles were quite in conformity with provision of Explanation 3 to section 43A of the Income-tax Act. In this connection; Special Bench referred to Paras 13, 14 and 15 of Accounting Standard 11 which are reproduced in its order. 109. After considering all the relevant material, the Special Bench held as under: "27. From the aforesaid rules as laid down in the Accounting Standard 11, it clearly emerges that in case of a foreign exchange contract relating to foreign liability incurred for acquiring fixed assets, any profit or loss on cancellation or renewal of a foreign exchange contract should be adjusted in the cost of the respective fixed assets. Since, in the case of the present assessee, forward contracts relating to foreign loan liabilities incurred for acquiring plant and machinery from abroad have been cancelled, profits arising therefrom are required to be adjusted in the cost of the plant and machinery purchased by the assessee. It is to be no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n with acquisition of plant and machinery, it is not possible to hold that transactions pertain to business. I also find force in arguments advanced on behalf of the assessee that even contracts relating to supply of know-how were in capital field and gain accruing on cancellation of such contracts was a capital receipt. I have also carefully considered reasons given by the learned Judicial Member for holding disputed receipt to be a revenue receipt. I am unable to agree with reasons 'A' to 'L' given by the learned Judicial Member in the proposed order. It is settled law that taxability of receipt has to be judged on the basis of legal principles and not in the manner entries are made by the assessee in the books of account. Therefore, gain in dispute on cancellation of contract could not be treated as a revenue receipt. However, the manners in which entries are made influenced learned Judicial Member as per reasons 'A' to 'D' of his proposed order. I am unable to agree with the above approach. I am further unable to accept that gains in question had no connection with purchase of capital assets from abroad. It is further difficult to agree with lear ..... X X X X Extracts X X X X X X X X Extracts X X X X
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