TMI Blog1998 (8) TMI 124X X X X Extracts X X X X X X X X Extracts X X X X ..... account the aggregate of the written down value of all assets falling within a block of assets at the beginning of the previous year ie., 1st April, 1993, and adjusting it by increasing the actual cost of the assets acquired during the year and reducing it by the moneys payable in respect of any assets which were sold, discarded, demolished or destroyed during the previous year. 1.3 That the Id. Commissioner of Income-tax (Appeals), Dehradun has wrongly construed the expressions "moneys payable" and "sold" as referred to in the Explanation below section 41(4) of the Income-tax Act, 1961." 1.1 The Appellant Oil and Natural Gas Commission (hereinafter referred to as 'ONGC') was a fully owned Government of India Undertaking established under the Oil Natural Gas Commission Act, 1959 with the main objectives of exploration, exploitation and extraction of Mineral Oils, Pursuant to the decision of the Government of India to convert ONGC into a Public Limited Company under the Companies Act, 1956, Oil Natural Gas Corporation Limited (hereinafter referred to as the "Corporation") was incorporated on 23-6-1993. The Oil Natural Gas Commission (Transfer of Undertaking and Repeal) Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the above query, Shri V. J. Mehmi, vide letter dated 16-9-1996, attempted to justify the claim for depreciation in the wake of legal opinion rendered by M/s. Arthur Anderson Associates as also by Shri Y. V. Chandrachud, former Chief Justice of India, as under : "Oil Natural Gas Commission has claimed depreciation for the period1-4-1993to31-1-1994during which it was functionally and fully operated. Its extinction was caused on the appointed day under Oil Natural Gas Commission (Transfer of Undertaking and Repeal) Act, 1993, that is on 1-2-1994". ONGC did not, by any interpretation of the law, sell its undertaking to Oil Natural Gas Corpn. Ltd., Oil Natural Gas Commission had no power to do so, since it was denuded of all its powers and obligations by Oil Natural Gas Commission (Transfer of Undertaking and Repeal) Act, 1993, which brought about its extinction. The vesting of the assets of the Oil Natural Gas Commission in the Oil Natural Gas Corp. Ltd. took place on 1 -2-1994, on which date Oil Natural Gas Commission was not in existence. An entity which had no existence in the eye of law on1-2-1994, could not transfer its assets and liabilities to another ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 93-94 as per the meaning of previous year given in Sec. 3 of the I.T. Act, 1961, with the result that the W.D.V. on which depreciation ought to be calculated for the Assessment year 1994-95 in the hands of the O.N.G.C. had become NIL. Steps for calculating depreciation are clearly given in Sec. 43(6)(c) which defines W.D.V. as the opening cost or opening W.D.V. plus additions during the year minus deductions by way of sold/discard etc. In this case as the entire assets has been transferred during the year, as per its meaning as given above, W.D.V. becomes NIL. So depreciation also becomes NIL. For the above reasons. I decline to allow any depreciation to the O.N.G.C. for the Assessment year 1994-95." 1.4 The C.I.T. (Appeals) has discussed this point in para 2 to 2.10 at pages 1 to 10 his order. In para 2 to 2.4 the brief facts and findings of the Assessing Officer have been discussed. In para 2.5, the gist of main submission submitted vide written submissions dated7-8-1997have been mentioned. The CIT (Appeals) forwarded the written submissions of the assessee to the Assessing Officer. The Assessing Officer submitted his comments thereon on10-10-1997through letter dated26-9-1997, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered it necessary to make a specific provision in the Act itself to save the transfer of the Undertaking from capital gains tax under the I.T. Act lends further support to the argument of the Assessing Officer that the transfer of the Undertaking was a deemed sale. I, therefore, do not find any merit in appellant's contention and the order of the Assessing Officer disallowing appellant's claim for depreciation is being upheld." 1.5(i) Shri S. E. Dastur, the Learned Senior Advocate briefly explained the facts and the relevant provisions of the Oil and Natural Gas Commission (Transfer of Undertaking Repeal) Act, 1993, as a result of which the entire undertaking of the ONGC statutorily stood transferred to, and vested in, the "Corporation" from the appointed date, namely, the 1st day of February, 1994. 1.5(ii) The Learned lawyer contended that the Appellant is clearly entitled to grant of depreciation at the full rate prescribed in the Income-tax Rules, 1962, as the assets have been owned and used by the assessee for more than 180 days in the year under consideration. The assessee fulfils all the conditions of Sections 32 and 34 of the I.T. Act, 1961 (For short, the 'Act'). He p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation, property in goods is transferred under a contract of sale. The learned counsel argued that in order to constitute "sale" the following factors should co-exist (i) there should be a contract between the parties for transfer of property from one person to another; (ii) such a transfer (sale) should be for a price, and (i) Price as defined in the Sale of Goods Act has to be in monetary consideration. The learned counsel invited our attention towards the following judgments to support this contention: - 1.5(vi) CIT v. Motors General Stores (P.) Ltd. [1967] 66 ITR 692 (SC). The relevant extracts from the said judgments are reproduced below : "Saleis a transfer of property in goods or of the ownership in immovable property for a money consideration. But in exchange there is a reciprocal transfer of interest in immovable property, a corresponding transfer of interest in movable property being denoted by the word "barter". The difference between a sale and an exchange is this, that in the former the price is paid in money, whilst in the latter it is paid in good by way of barter. The presence of money consideration is an essential element in a transaction of sale. If the consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the payment of compensation in the shape of transport stock did not constitute a sale and the analogy of compulsory acquisition of land did not apply, since the procedure there was entirely different. The word 'sale' in Section 17 of the Income-tax Act, 1945, it was held, imported a consensual relation and the meaning of the section being plain, it was not possible to go to later Acts to construe the section. I shall quote a few passages from the speeches to show how this conclusion was reached so as to be able to show how the same reasoning was used in connection with the building contracts." 1.5(viii)CalcuttaElectric Supply Corpn. Ltd. v. CIT [1951] 19 ITR 406 (Cal.). The relevant extract from the said judgment is reproduced hereunder :- "Held, that the transaction by which the Government acquired the plant could not be regarded as a sale within the meaning of Section 10(2)(vii) and, therefore, the sum of Rs. 3,27,840 was not taxable as profit under section 10(2)(vii). The ordinary meaning of the word "sale" is a transaction entered into voluntarily between two persons known as the buyer and the seller by which the buyer acquires property of the seller for an agreed conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... movable property being denoted by the word "barter", "the difference between a sale and exchange is this, that in the former the price is paid in money, whilst in the latter it is paid in goods by way of barter." 1.5(xi) The Learned counsel invited our attention towards Section 54 and Section 118 of the Transfer of Property Act to support his contention that in order to constitute a transfer by way of exchange, there has to be two contracting parties, who should mutually agree for the "reciprocal transfers". In the present case, the ONGC has ceased to exist from the appointed date of1-2-1994when the entire undertaking (including all assets and liabilities) of the Commission stood transferred to, and vested in the Corporation. The Corporation has not transferred anything in favour of the Commission. The shares issued in favour of the Central Govt. in terms of the provisions of the Oil Natural Gas Commission (Transfer of Undertaking and Repeal) Act, 1993 (hereinafter referred to as ONGC (T-U-R) Act cannot be treated as any asset transferred in favour of the Commission by way of exchange. Nothing could be transferred in favour of the Commission, as it had ceased to exist. Further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares, there is no transfer to the allottee of any property already possessed by the company as the company cannot be regarded as owner of its shares. Where two companies M and H orally agreed to allot some of their shares, fully paid-up, to such other otherwise than in cash, as per certain agreement between them and the substance of the agreement was embodied in resolutions recorded in the books of both the companies and a statement embodying the particulars of the above agreement was filed in the form presented before the Registrar under section 104, Companies Act, alongwith an agreement bearing a twelve anna stamp: Held: the contract of which the particulars were recorded in the prescribed form filed with the Registrar did not amount to a "conveyance" within the meaning of Section 2(10), Stamp Act and was a mere "agreement"." 1.5(xiv) The Learned counsel further relied upon the decision in the case of Oudh Sugar Mills Ltd. v. ITO[1990] 35 ITD 76 (Bom.). The relevant extracts are reproduced below : "If the scheme of assessment involves the transfer of a company's undertaking to another company usually the transfer is brought about by allotment of shares to the shareholder ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en paid for the assets transferred. There was only an arrangement for issue of shares to the shareholders which was again a legitimate arrangement sanctioned by the provisions of section 394 of the Companies Act, further in terms of clauses of the scheme, A agreed to allot in manner provided, preference shares. In the present case, the allotment of shares was probably made in terms of clause (ii) of section 394(1) of the Companies Act and the receipt of shares on allotment by the shareholders of the assessee could not take the form of the expression 'money payable'. Firstly, the difference between assets and liabilities was paid in the form of allotment of shares and, secondly, such allotment was made to the shareholders of the assessee and not to the company as such. In this process, the assessee could not be said to have received any consideration or price for the plant and machinery transferred and, in that case, what was received by the shareholders could not be said to be a consideration in the form of moneys payable being the price of the assets transferred, since it was not paid to or received by the assessee. Therefore, there was no sale or exchange between the assessee and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t-sharing proportion. The Income-tax Officer held that the depreciation allowed to the assessee-firm amounting to Rs. 3,32,863 in respect of the assets transferred by the firm to the said company, was chargeable to tax under the provisions of section 41(2) of the Income-tax Act, 1961. He also brought to tax capital gains of Rs. 8 lakhs, being the purchase consideration received by the assessee and after excluding the sum of Rs. 5,000 as basic exemption, included the sum of Rs. 7,95,000 in the computation of the total income of the assessee under the head "capital gains". Held, (i) that there was nothing to indicate the price attributable to the assets like machinery, plant or building out of the consideration amount of Rs. 8 lakhs. Merely because a sum of Rs. 3,32,863 had been allowed as depreciation to the assessee-firm, it could not be said that was the excess amount between the price and the written down value. The provisions of section 41(2) were not applicable." (b) CIT v. F. X. Periera Sons (Travancore) (P.) Ltd. [1990] 184 ITR 461 (Ker.). The relevant extracts from Head Note (if) is reproduced hereunder : "(ii) That the intention of the parties to the sale deed w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies below have erred in holding that the previous year of ONGC continued upto 31-3-1994 and not only upto 31-1-1994, as claimed by the assessee. Referring to section 3 of I.T. Act, 1961, the Ld. counsel argued that a "previous year" as defined in section 3 relate to the person whose income is assessable. If a person who does not survive, the previous year cannot be extended beyond the date of his death. In the present case, the ONGC ceased to exist after the close of31-1-1994. The accounts have been made up by the Commission from1-4-1993to31-1-1994. The previous year, therefore, ended on31-1-1994. The findings given by Assessing Officer and CIT(A) that the previous year continued upto31-3-1994is invalid and unjustified. 1.5(xxiii) The Learned counsel also referred to the judgment in the case of A. M. Ponnurangam Mudaliar v. CIT [1997] 228 ITR 454 / [1996] 88 Taxman 482 (Mad.). At page 456, theHon'ble Courthas inter alia observed as under: "Held, (i) that the term "transferred" is not used in section 34(2)(ii) of the Act and it has used only the words "sold, discarded, demolished, destroyed". It has not even used the expression "or otherwise transferred", "or disposed" as for ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... now provides that the aggregate deduction, in respect of depreciation on building, machinery, plant or furniture allowable to the predecessor and the successor in the case of succession, referred to in section 170 or in case of amalgamation, shall not exceed in any previous year, the deduction calculated at the prescribed rates, as if the succession or the amalgamation had not taken place, and such deduction shall be apportioned between the predecessor and the successor, in the ratio of the number of days for which the assets were used by them. The aforesaid amendment made with effect from1-4-1997cannot be applied with retrospective effect. The very fad that such an amendment has been made w.e.f.1-4-1997further supports the claim of the assessee for grant of depreciation at full prescribed rates. 1.5(xxv) Shri Dastur, the Learned Senior Advocate thus strongly urged that disallowance of appellant's claim of depreciation amounting to Rs. 12,50,48,50,000 confirmed by the CIT(A) should be deleted and the Assessing Officer may be directed to allow the same. 1.6 Shri S. C. Grover, the Learned Commissioner of Income-tax (hereinafter referred to as the Sr. D.R.) represented the case on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amija, the learned D.R. who assisted the Learned Sr. D.R. Shri S. C. Grover also addressed arguments on behalf of the Department in relation to Ground No. 1. 1.6(vi) Shri Dhamija submitted that Explanation to section 41(4) starts with the words "For the purposes of sub-section (3)" the meaning of "moneys payable" and "sold" defined in the said Explanation will apply. Therefore, the definition of these expressions given in the Explanation to section 41(4) applies only in relation to section 41(3) dealing with expenditure of a capital nature on scientific research and has nothing to do with the claim of depreciation governed by sections 32, 34 and 43(6)(c). 1.6(vii) Shri Dhamija, Ld. D.R. further contended that definition of "Transfer in relation to a Capital Asset" given in section 2(47) is not confined only to the determination of Capital Gains. It extends to all cases of transfer of Capital Assets, whether it relates to determination of capital gains or it pertains to transfer or sale of assets for the purposes of Depreciation or determination of W.D.V. u/s 43(6)(c) of the Act. In the present case, there is an extinguishment of rights in the asets owned by the Commission upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justified. The subsequent amendment by way of insertion of fourth proviso to section 32 w.e.f.1-4-1997cannot be applied in relation to A.Y. 1994-95. The meaning and scope has been explained by the Circular issued by C.B.D.T., which supports the aforesaid contention. The Learned counsel also invited our attention to the Board's Circular. He strongly urged that depreciation, as claimed by the assessee should be allowed. 1.7 We have considered the submissions made by the Learned representatives of the parties and have carefully gone through all the documents and decisions to which our attention was drawn during the course of hearing. 1.7(i) It may be imperative to reproduce the relevant provisions of the Act. "(a) Section 32(i) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall subject to the provisions of section 34, be allowed- (ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed. The following fourth proviso shall be inserted in sub-section (1) by the Finance (No. 2) Act, 1996, w.e.f.1- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payable" and "sold" shall have the same meanings as in the Explanation below sub-section (4) of section 41. (d) Explanation to section 41(4) - For the purposes of sub-section (3),- (1) "moneys payable" in respect of any building, machinery, plant or furniture includes- (a) any insurance, salvage or compensation moneys payable in respect thereof; (b) where the building, machinery, plant or furniture is sold, the price for which it is sold. (2) "sold" includes a transfer by way of exchange or a compulsory acquisition under any law for the time being in force but does not include a transfer, in a scheme of amalgamation, of any asset by the amalgamating company to the amalgamated company where the amalgamated company is an Indian company." 1.7(ii) The CIT (Appeals) has held that the expression "sold" used in section 43(6)(c) is wide enough to cover such a transfer by operation of law. The issue of 342853716 Equity Shares of Rs. 10 each as fully paid-up shares of the value of Rs. 342,85,37,160 in favour of the President of India represents "consideration for sale". The ONGC ceased to exist on1-2-1994simultaneously with the transfer of the undertaking and there remained n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T. P. Act and Sale of Goods Act. (b) transfer by way of exchange. (c) a compulsory acquisition under any law. TheHon'ble Apex Courtin the case of New India Sugar Mills Ltd. (supra) observed that under section 4 of the Sale of Goods Act, a transaction is called sale only where for money consideration property in goods is transferred under a contract of sale. A contract of sale between the parties is, therefore, a prerequisite to a sale. There should be a payment by way of monetary consideration. The statutory transfer and vesting of assets of the commission in favour of the Corporation as a result of an Act of Parliament cannot be treated as a transaction of sale. It cannot be validly contended that the assets of the Commission have been "sold" to the Corporation. This view is fully supported by the various judgments cited by the Learned Counsel appearing on behalf of the assessee. The statutory transfer and vesting of the undertaking including the entire assets and liabilities cannot also be regarded as "Transfer by way of Exchange". "Exchange" necessarily implies reciprocal transfers. The ONGC has ceased to exist simultaneously with the transfer of its undertaking in favou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 33 etc. The expression "otherwise transferred" used in these sections has not been used in section 43(6)(c). It is, therefore, clear that all kinds of "transfers" are not envisaged in relation to interpretation of section 43(6)(c) of the Act. 1.7(ix) The Learned Sr. D.R. did not point out any specific provision in I.T. Act requiring that in order to get depreciation the assessee should be the owner of the assets for the entire period of the previous year or he should be the owner on the last day of the previous year. There is no such stipulation in the Income-tax Act. The judgment in the case of A.M. Ponnurangam Mudaliar (supra) fully supports the assessee's contention. 1.7(x) The submission made by the Learned Sr. D.R. that the fourth proviso to section 32 inserted by the Finance (No. 2) Act, 1996 w.e.f. 1 -4-1997 is clarificatory in nature and is just, fair and equitable. He urged that the said Proviso shall be applied in the case of the Appellant. Such a contention, though fair and equitable, cannot be validly applied with retrospective effect in relation to a prior year, when the Legislature has specifically made it applicable from A.Y. 1997-98. It may be relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1-1994. The previous year in relation to an assessee cannot be extended beyond the date of its existence. On the last date of the relevant previous year of ONGC i.e. on 31-1-1994, the Written Down Value of the assets falling in the respective block of asset has to be computed as per section 43(6)(c) of the Act. The opening W.D.V. can be reduced only by the moneys payable in respect of any asset sold or discarded or demolished or destroyed in that previous year. We have already discussed in details that such statutory transfer and vesting of assets in consequence of the Act of Parliament cannot be brought within the ambit of expression "sold" used in section 43(6)(c)(i)(B). Hence W.D.V. cannot be treated as NIL. 1.7(xii) Depreciation allowance is granted because the Building, Plant Machinery, Furniture etc. depreciate through wear, tear and obsolescence. The provisions of section 32 of the Act read with rule 5 of I.T. Rules provide that depreciation shall be allowed at the prescribed rate if the asset has been used at any time during the year. Till A.Y. 1992-93, even if the asset was used for a single day in the relevant previous year, full depreciation at the prescribed rate wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Supreme Court and High Courts. 3. Foreign exchange fluctuations in respect of revenue expenses 3.1 That the Ld. Commissioner of Income-tax (Appeals), Dehradun has erred in law and on the facts and circumstances of the case in not allowing as business expenditure, the quantum of fluctuations in foreign exchange on accrual basis amounting to Rs. 115,56,31,950 which has been incurred by the appellant and which is deductible under section 28, section 37(1) of the Income-tax Act, 1961. 3.2 That the Ld. Commissioner of Income-tax (Appeals), Dehradun ought to have allowed the expenditure incurred by the appellant in light of the decision of the Income-tax Appellate Tribunal, Delhi Bench and several decisions of the High Courts and the accounting standards laid down by the Institute of Chartered Accountants of India as well as the Accounting Standard notified by the Central Government under section 145(2) of the Income-tax Act, 1961." 2.1 The Assessing Officer has discussed the facts relating to aforesaid grounds in para 3 on pages 4 and 5 of the Assessment Order, which are reproduced below : "3. Foreign exchange loss : As in the past, the assessee has allegedly incurre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above, has already been held to be NIL." B. Revenue Components: As per working given by ONGC; Rs. 139,48,03,857" 2.2 The CIT (Appeals) has briefly stated the facts and decision of the Assessing Officer in paras 3.1 and 3.2 of the order. In paras 3.3 to 3.5, the gist of written submissions dated7-8-1997and the oral submissions submitted on behalf of the assessee have been briefly stated. The CIT(A) invited comments of the Assessing Officer on the written submissions of the assessee. The comments of the Assessing Officer submitted vide letter dated26-9-1997have been reproduced in para 3.6 of the order. The CIT(A) has given his findings in paras 3.7 to 3.9 on pages 11 to 13 of the order passed by him, which are reproduced hereunder : "3.7 The submissions made by the appellant and the submissions made by the Assessing Officer have been considered. I find no merit in appellant's claim that the loss being claimed in the Profit Loss Account was based on liability that actually accrued in the assessment year 1994-95. There is no evidence on record to indicate that any business transaction in respect of this long-term liability took place in the accounting period relevant for as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t cannot be said that the liability as claimed by the appellant has accrued during the accounting year relevant for assessment year 1994-95. Admittedly the appellant has merely rewritten its books on the last date of the accounting year under the guidelines of accounting standard AS 11 of the ICAI. There is no evidence to indicate that these guidelines of ICAI conform to the law as stated in section 37(1) and section 43A of the I.T. Act. With the free float of Indian currency against foreign currency resulting in day to day fluctuation, the loss claimed on account of foreign exchange fluctuation must accrue within the accounting year as a result of a business transaction in that accounting year or on incurring of a liability to a particular sum during the same accounting year. There is no evidence on record to indicate that such a liability accrued during the year or was incurred during the year relevant for assessment year 1994-95. 3.9 The case law cited by the appellant does not apply directly to the facts of the present appeal because in the cases cited, relief was allowed either because the business transaction itself had taken place in that year or the repayment had been mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t all any such contingency arises the Assessing Officer can always resort to the provisions of section 41(1) to recoup the loss arising out of deduction in earlier years on notional basis. Moreover, the assessee being liable to tax at a flat rate of taxation, the year of admissibility of loss loses significance particularly for a regularly profit-earning enterprise." 2.3(i) The Learned counsel further pointed out that whenever income accrued on account of fluctuations in the foreign exchange rate, the appellant has shown income on accrual basis in similar manner. He invited our attention towards the "Computation of Total Income" for assessment year 1997-98 in which "Exchange Loss/Gain for separate treatment - Rs. 3,856,118,042 has been added in the Profit as per Profit Loss Account and Rs. 2,933,758,875 has been deducted on account of "Exchange Loss/Gain on Revenue Account". The details of Rs. 2,933,758,875 given in a separate Schedule has also been submitted. Such a contention and the details relating to assessment year 1997-98 were not submitted before the Assessing Officer or the CIT(A). 2.3(ii) The Learned counsel placed reliance on the following judgments. The relevant e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny benefit and the ultimate liability was reduced then the same would be brought to tax under section 41(1), and (ii) in case any part of the raw material purchased still remained with the assessee then a suitable adjustment would have to be made in the valuation of closing stock to be carried over to the subsequent period." (c) Bestobell (India) Ltd.v. CIT[1979]117 ITR 789 / 2 Taxman 62 ( Cal .). "Held, (i) that the contention of the revenue that notionally the expenditure if any, incurred by or any loss accruing to the assessee by reason of the devaluation did not arise in the year of assessment cannot be accepted. The assessee maintained its accounts on mercantile basis. On devaluation of the Indian currency, the liability of the assessee immediately increased to the extent the rupee was devalued and the assessee became liable to pay and/or spend an extra amount in rupees in order to pay its dues. The liability of the assessee arose during the assessment year and cannot be said to be a contingent liability or an anticipated future loss. However, the extra expenditure, deemed or otherwise, or the loss, was inextricably connected with the assessee's indebtedness and did no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therwise, that would be no justification to ignore or disregard the enacted provision on the ground that a specific statutory provision was not at all necessary. Once the provision is there and its terms apply, it would be applied. There is nothing in the language of subsection (1) of section 43A which makes it inapplicable to a case where the change in the magnitude of the liability consequent on a change in the rate of exchange occurs during the very previous year in which the asset has been acquired. Section 43A provides also for a case in which the assessee has completely paid for the plant or machinery in foreign currency prior to the date of devaluation but the variation of exchange rate affects the liability of the assessee (as expressed in Indian currency) for repayment of the whole or part of the monies borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purposes of acquiring the asset." (e) CIT v. Vitre Engg. Co. [1984] 150 ITR 183 / [1983] 15 Taxman 213 (Bom.). "The assessee carried on work inIndiaas consulting engineers. It was a branch of a company inAmerica. However, it was required to be considered a company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 933 (Guj.). "Held, that when the assessee purchased assets at a price, its liability to pay the same arose simultaneously. Merely because the said liability was to be discharged in installments it could not be said that the liability did not exist or accrue till the installments became due and payable. It was that liability which had increased on account of fluctuation in the rate of exchange. The case of the assessee fell squarely within the sweep of section 43A and it was thus entitled to claim the benefit of that section during the assessment year 1973-74." The Learned counsel strongly urged that Ground Nos. 2 and 3 should be allowed. 2.4 The Learned Senior D.R. strongly supported the order of the CIT(A) and relied upon the reasons mentioned in the Assessment Order. He contended that all the concerned loans are long-term loans. Repayment of some of the loans is not required to be made in the few initial years. Therefore, there is no justification for providing for the amount of difference due to fluctuations in the foreign exchange rate pertaining installments of repayments payable in future years. He gave an illustration. Suppose the assessee borrowed a long-term lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a deduction. Held that it cannot be disputed that as against the profits earned in the accounting year, only the actual loss incurred can be deducted and not any probable or possible loss. As there was no settlement of the outstanding contracts in the accounting year in question, the amount claimed could only be considered to be a notional or anticipated loss and such notional or anticipated loss could not be allowed as a deduction. The Tribunal was, therefore, in error and the amount claimed could not be allowed as a deduction." (b) CIT v. Ashok Iron Steel Rolling Mill [1993] 199 ITR 815 / [1992] 63 Taxman 489 (All.). "In the mercantile system, deduction can be made only in the year in which the liability to pay accrues. And it accrues only when the liability crystallises or becomes ascertained. Held, that it was only when the Assistant Labour Commissioner passed the order onDecember 31, 1973, determining the dispute as to the categories in which the various employees fitted and should be classified that the liability to pay salary and wages accrued. The assessee, therefore, rightly deducted the amount of Rs. 18,813 in the year in question which was the year in which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vind Mills Ltd. (supra) has held that section 43A was specifically introduced in the I.T. Act, 1961 to provide for the treatment of the situation created by the devaluation of the rupee. Where the terms of section 43(1) are fulfilled in any case, it is mandatory to take the actual cost of assets or the cost of acquisition at the higher or lower figure for the purposes of the provisions referred to in section 43A. The non-obstante clause with which the section begins, indeed makes it clear that, if the position had been different otherwise, it cannot prevail after introduction of this section. In the case of New India Industries Ltd. (supra), the Hon'ble Gujarat High Court, following the judgment of Hon'ble Supreme Court in the case of Arvind Mills Ltd. (supra) have held that merely became the said liability was to be discharged in installments, it could not be said that the liability did not exist or accrue till the installments because due and payable. The case of the assessee fall squarely within the sweep of section 43A in relation to the increase of liability on account of fluctuations in the rate of exchange on accrual basis. The I.T.A.T., Delhi in the case of Rajasthan Petro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n account of foreign exchange fluctuation must accrue within the accounting year as a result of a business transaction in that accounting year. There is no evidence on record to indicate that such a liability accrued during the year in relation to any business transaction of the year under consideration. 2. 6(ii) The additional liability arising due to fluctuations in foreign exchange rate relating to revenue items e.g., relating to import of raw-material may form part of the purchase price of the raw-material. But the main question will be as to which is the appropriate year for claiming such deduction. In a case where the increase in liability occurs in a subsequent accounting year, a question may conceivably arise as to whether the assessee is entitled to reopen its accounts for the earlier year when the raw-material was imported, consumed and was represented by the corresponding credit by way of sale or closing stock. According to the mercantile system of accounting, the additional cost of raw-material should ordinarily form part of the purchase price of raw-material of the year in which such raw-material was imported, consumed and represented by corresponding sales or closin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 5,10,96,27,090 was debited as an expenditure in the Profit Loss Account under the head "Adjustment of Exchange Difference" whether the claim of Rs. 1,15,56,31,950 in question is a part of this amount is also not known. No details in this regard have been shown to us. If the assessee has shown such amount in the assets side of the Balance Sheet as part of Deferred Revenue Expenditure, how deduction thereof is allowable as a Revenue Expenditure. 2.6(v) It is an admitted and undisputed fact that the Assessing Officer has allowed deduction of Rs. 1,39,48,03,857 in respect of loss due to fluctuations in the foreign exchange rate relating to liabilities discharged by the appellant in the previous year under consideration. The said deduction has been allowed on actual payment basis, then how the appellant can make a further claim on the basis of mercantile system of accounting in respect of Rs. 1,15,56,31,950 on accrual basis, being the liability which is to be discharged in future. On a careful consideration of the entire relevant facts and material existing on records, we are of the view that the assessee has failed to discharge the burden of proving the allowability of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s appeal being a stay granted appeal has been fixed out of turn. The disallowance of 10% was made on the basis of the presumption that expenses incurred under this head of account might consist of some amount spent for entertainment of foreign bidders. The Ld. counsel also pointed out that a separate head of account of Entertainment Expenses has been maintained. The Assessing Officer has not pointed out any instance of expenditure of disallowable nature debited in the said account. The expenses are supported by regular books of account and other records maintained by the Commission. The accounts have duly been audited by the statutory Auditors. We have gone through the Auditor's Report dated7-9-1994(pp. 134 and 136 of Paper Book). The Auditors in that Report have also certified that the company has an adequate Internal Audit System commensurate with the size and nature of its business. The Assessing Officer has added back a sum of Rs. 59,42,294 in respect of Entertainment Expenses for separate consideration and has allowed deduction on account of entertainment expenses to the tune of Rs. 29,76,147 as claimed by the Appellant, while computing the taxable income. On a careful conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a gift on by way of a settlement of account between joint partners on the completion of the project. I, therefore, find no force in appellant's argument and the addition is being confirmed." 4.3 The Learned Senior Advocate invited our attention towards an application dated 23-7-1998 submitted on behalf of the assessee for entertaining additional evidence under rule 29 of ITAT Rules in support of ground Nos. 5 and 6. The additional evidence sought to be adduced in support of Ground No. 5 are the following documents : "(a) Copy of transfer of title of non-expendable supplies and equipments from the United Nations Development Programme to the Government of India alongwith its Annexure giving therein the details of the supplies and equipments. (b) Letter dated31-1-1997of United Nations Department of Development Support and Management Services,New York,USA." It has been further stated in the said Application that : "The above documents could not be filed before the authorities below because they could not be located earlier in view of the fact that the offices of the appellant are situated at different and distant places such as Mumbai, Ahmedahad, Ankleshwar, Mehsana, Sibsaga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be the correct view in law. We are, therefore, of the opinion that the view taken by the Tribunal in the earlier year is still the correct view and we prefer to follow it. So long as there is clear and well recognised distinction between capital receipts and revenue receipts, the capital receipts cannot be converted into revenue receipts or vice versa merely because of the circumstance of repetition. In each case, the character of the receipt has to be judged from the surrounding circumstances. The machine received by purchase or the machine received free of cost would make no difference in so far as its character is concerned. In both the cases, it is an acquisition of a capital asset. In this case, it is an acquisition of a capital asset. In the case of the former, there was some capital outlay; in the case of the later there was no capital outlay. For the lack of capital outlay, the capital asset cannot become a revenue item unless it is shown that capital asset was received as part of the consideration on revenue account which again takes us to the starting point, namely, that there ought to be in the course of these export transactions some sort of under-invoicing or understan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-Expendable supplies and Equipment from the United Nations Development Programme to the Government of India dated (sic) confirming supplies and equipments representing assistance of the United Nations Development Programme to the Government of India in connection with the Petroleum Engineering Project aggregating to US $ 9,25,585.15. Annexures A/1 and A/2 gives the details of various equipments with full particulars inter alia giving dates of shipping and dale of receipt of various equipments under the said Development Programme of the United Nations. The various dates of receipt of equipments given in Annexures A-1 and A-2 shows that various equipments were received between1-12-1988to1-1-1991and, thereafter, the equipments were shipped on1-6-1994which were received on various dates in the months of August and September, 1994. No equipments were received under the United Nations Development Programme during the relevant period from1-4-1993to31-1-1994relating to the previous year of the Commission under consideration. It is beyond comprehension as to how these documents produced by way of additional evidence support the receipt of any equipments by way of gifts in the period under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure on Capital Assets : Rs. 1,62,29,398 : After scrutinising details filed by the assessee, it has been noticed that an amount of Rs. 1,62,29,398 has been debited to the P L Account on account of expenditure which is not represented by assets. During the discussion, it has been clarified by the representative of the assessee that the above expenditure is in relation to those capital assets which are not owned by the assessee but expenditure has been wholly and necessarily in connection with conduct of assessee's business. Nonetheless expenditure being capital in nature, same is not permissible as deduction and is, accordingly, disallowed. Assessee is also disentitled to depreciation in respect of above capital expenditure for the reason that it is devoid of ownership." 5.2 The CIT(Appeals) vide para 7.4 of his order has confirmed the said addition by observing as under : "7.4 The written submissions of the appellant and of the Assessing Officer and the arguments of the Ld. counsel for the appellant and the Assessing Officer have been considered. Since the expenditure was claimed by the appellant, the onus was on the appellant to prove that the expenditure was incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 10(2)(xv) of the Indian Income-tax Act, 1922, in computing the respondent's business profits." (b) Lakshmiji Sugar Mills Co. (P.) Ltd. v. CIT [1971] 82 ITR 376 (SC). "The assessee, a private company carrying on the business of manufacture and sale of sugar, paid to the Cane Development Council certain amounts by way of contribution for the construction and development of roads between the various sugarcane-producing centres and the sugar factories of the assessee. This expenditure was incurred under a statutory obligation for the development of roads which were originally the property of the Government and remained soon after the improvement had been done. There was no finding that the roads were to be altogether newly made or that the assessee would get an enduring benefit from those roads: Held, that the expenditure was not of a capital nature and had to be allowed as an admissible deduction in computing the profits of the assessee's business. The expenditure was incurred for the purpose of facilitating the running of its motor vehicles and other means employed for transportation of sugarcane to its factories and was, therefore, incurred for running the business or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M.S.E.B. vide aforesaid letter. The amount of Rs. 1,50,00,000 was paid by Cheque No. 466035 dated12-2-1988. The Assessing Officer had no opportunity to examine the relevance of the aforesaid documents in relation to the aggregate expenditure of Rs. 1,62,29,398 claimed as deduction in the year under consideration. The additional evidence produced on behalf of the assessee relates to the payments made in November, 1986 and February, 1988. How those documents relate to the expenditure of Rs. 1,62,29,398 claimed in the year under consideration covering the period from1-4-1993to31-1-1994could not be examined by the Assessing Officer as the relevantdetails and documents were not submitted before the Assessing Officer or the CIT(A). In view of the aforesaid facts, we consider it just and proper to set aside the order of the CIT(A) and the order of the Assessing Officer in relation to this point also and restore the matter back to the Assessing Officer for deciding the issue afresh after ascertaining the relevant facts by examining the relevant documents and evidence, as may be submitted on behalf of the assessee before him. The onus is on the assessee to support its claim for grant of d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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