TMI Blog2005 (10) TMI 436X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 4,42,307 incurred by the assessee from out of welfare fund of Tractors division is not pressed by the ld. counsel for the assessee and, accordingly, on this issue also, the order of the ld. CIT(A) stands confirmed. 4. The ground No. 3 pertains to denial by the revenue authorities to allow deduction in respect of a sum of Rs. 18,45,905 representing 1/7th premium on redemption of debentures. The ld. counsel submitted that this issue is covered in assessee s own case by virtue of the ITAT s order referred to above and also the ITAT order for the assessment year 1990-91 in ITA No. 3101/Mum./95. We find that similar issue has been decided by the Tribunal for the assessment year 1991-92 in assessee s own case in the order referred to above, vide para 9, which is reproduced below : "Before us a decision of Hon ble Bombay High Court in the case of CIT v. S.M. Holding Finance - 264 ITR 370 was cited wherein it was held that in the case of zero interest convertible debentures which are redeemable after 10 years had a premium of 100% which is spread over the years then the amount of premium attributable to accounting year is deductible as business expenditure. Examining the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee s case, the order of the ld. CIT(A) on this issue is reversed and the Assessing Officer is directed to allow deduction in respect of incremental liability. 9. The ground No. 8 is as under : "The CIT(A) erred in confirming the view of the Assessing Officer in including sales tax reimbursement by the customers as part of the total turnover for the purpose of computation of deduction under section 80HHC." 10. Both the sides agreed that this issue is covered in assessee s favour by the Bombay High Court decision in the case of CIT v. Sudarshan Chemicals Industries Ltd. [2000] 245 ITR 769 1 . Accordingly, the Assessing Officer is directed to exclude sales tax reimbursement from the total turnover for the purposes of deduction under section 80HHC. 11. The ground No. 9, which is the last ground of appeal is as under : "The ld. CIT(A) erred in not accepting company s contention that the receipt of Rs. 520.68 lakhs made on cancellation of foreign exchange forward cover contracts is not liable to tax being of a capital nature and at the highest the appropriate block of depreciable assets could have been scaled down." 12. The relevant facts with regard to this issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncellation of the covers. Sometimes in the financial year 1993-94 relevant to the assessment year 1994-95, the assessee-company entered into an agreement on 26-10-1993 with Export Import Bank of India (Exim Bank). It was stipulated in this agreement that the assessee-company would swap the loan of US $ 10 millions available to it as per the agreement with IFC for equivalent Indian rupee with Exim Bank. The assessee-company agreed to deliver to Exim Bank a total sum of US $ 10 millions and obtain from Exim Bank equivalent amount in Indian rupee on the same day at the prevailing spot selling exchange rate of US dollars. This factual position stands con- firmed from the audited accounts for the financial year 1993-94. There is a note to the accounts at page 37 of the accounts, which is as under : "During the year, the company had availed of a foreign currency loan of US $ 10 million (Rs. 3,155 lakhs at the year-end rate of exchange) from IFC. As per an agreement with the Exim Bank, the company handed over these dollars to Exim Bank under a back-to-back arrangement and obtained a rupee equivalent of Rs. 3,138.50 lakhs which is included under the head Foreign Currency Loans from Fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e observed that in the present case, no foreign currency loan from IFC was taken till the previous year under consideration. As a matter of fact, there was no scope of utilizing of such a loan for the purposes for which it was negotiated. The foreign currency loan was, in the subsequent year, swapped with rupee equivalent loan from the Exim Bank. The ld. CIT(A) held that the amount was chargeable to tax as revenue receipts/earnings to the assessee during the course of its business. 16. Aggrieved by the order of the ld. CIT(A), the assessee-company is in appeal before us. Shri B.K. Khare, the ld. counsel appearing for the assessee, forcefully argued before us that by no stretch of imagination the gain from cancellation of foreign exchange covers can be said to be in the nature of revenue receipts. The ld. counsel supplemented his arguments by filing written submission dated 9-9-2005. The gist of contentions raised by him may be reproduced below from pages 4 to 7 of this written submission : "It will also be realized that though foreign exchange cancellation surplus arose in the assessment year 1993-94 but the availment of loan and swapping with Exim Bank took place in the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in terms of section 43 supplemented by the provisions of section 43A. In other words, the superior Court s decision has not touched the area of dimunition in the concept of cost with reference to the cost or WDV of the depreciable asset. Yet stated differently, it could be increased. It is submitted that the superior Court s dictum, as said in the case of CHELLAPALLI that interest cost prior to the commencement of business incurred on account of capitalization could be considered as a cost and depreciation extended to this cost accordingly. However, there is not a single occasion which invite the decision of any superior Court where the cost of the asset is to be diminished beyond the scope of section 43, which defines cost, read with section 43A in appropriate cases." The ld. counsel relied on the ITAT Delhi Special Bench decision in the case of Apollo Tyres Ltd. v. Asstt. CIT [2004] 268 ITR (AT) 1. The ld. counsel pointed out that in the above case, it has been held that such gain arising to the assessee as a result of cancellation of foreign exchange covers is a capital receipt. It was also held that such gain is to be deducted from the cost of plant and machinery as sti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the main question is that in case the gain is in the nature of capital receipt, whether such gain is required to be reduced from the cost of the project. The facts which have been stated ( supra ) show that the assessee-company negotiated for a foreign exchange (US $) loan from IFC with the avowed object of investing it in the new project. For the same purpose, the assessee-company drew the loan in one single settlement from IFC and having regard to the actual requirement of the assessee, the aforesaid loan comprising of US $ 10 million was swapped with rupee equivalent loan from Exim Bank. It is important to note that the assessee-company did not walk out of the agreement entered into by it with IFC. As mentioned above, the assessee-company actually availed the loan and also undertook the obligation to repay the loan in US dollars as per the terms and conditions. As part of the swapping arrangement, Exim Bank guaranteed repayment of the loan to IFC in US dollars on the due dates on behalf of the assessee-company. From the above, it is obvious that for all practical purposes, Exim Bank was only acting as an agent of the assessee-company insofar as the repayment of loan to IFC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt but the gains arising on the cancellation of contracts relating to the principal amount were adjusted against the cost of plant and machinery. The questions were whether the gains earned on cancellation of the foreign exchange forward contract were capital receipts or revenue receipts? If they were capital receipts, whether the same should be reduced from the cost of plant and machinery in connection with which the forward contract was entered into ?" The ITAT, Special Bench elaborately considered the above facts which are in pari materia with the facts of the assessee s case on the question whether the gain resulting from cancellation of forward contracts is in the nature of capital or revenue receipt. The finding of the ITAT Special Bench is as under (reproduced from the headnote) : "Held, by the Special Bench of the Tribunal (i) that 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 assessee on revenue account or as a trad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the inception of a forward exchange contract is recognized as income or expense over the life of the contract. The only exception is in respect of forward exchange contracts relating to liabilities in foreign currency incurred for acquisition of fixed assets. 15. Any profit or loss arising on cancellation or renewal of a forward exchange contract should be recognized as income or as expense for the period, except in case of a forward exchange contract relating to liabilities incurred for acquiring fixed assets, in which case, such profit or loss should be adjusted in the carrying amount of the respective fixed assets." 20. Insofar as the nature of the gain is concerned, we are of the view that the ITAT Special Bench decision in the case of Apollo Tyres Ltd. ( supra ) concludes the issue. In the present case, the loan in US dollars was taken by the assessee for investment in the new project. Thus, the loan was clearly intended to be utilized for acquiring capital assets. The loan was swapped with rupee equivalent received by the assessee from Exim Bank for the same purpose of investing it in the new project for acquiring capital assets. The forward cover contracts with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia. However, we are not inclined to accept the arguments of the ld. counsel for the assessee that the net gain arising to the assessee on cancellation of the forward cover contracts should not be and cannot be adjusted against the actual cost of the project. The reasons are stated hereunder : 22. It is true that strictly speaking the provisions of section 43A may not be applicable to the case as the dollar loan has not been utilized for purchase of plant and machinery from abroad, but the same has been swapped for rupee equivalent loan with Exim Bank and the rupee loan so obtained has been admittedly utilized for acquiring plant and machinery or other capital assets for the new project. Thus, the purpose of the rupee loan obtained by the assessee from Exim Bank in exchange for the dollar loan is identical as stated in section 43A except that instead of purchasing the plant and machinery from abroad, these assets have been acquired from within the country by making payment in rupee. In our view, section 43A only authenticates the established principle of accounting that any expenditure, or for that matter, any income which is referable to the acquisition of capital assets befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure of Rs. 70.41 lakhs by way of roll over charges of such forward cover contracts and the same has been added by the assessee to the cost of work-in-progress of the new project. On the same analogy, if the assessee receives any gain on such cancellation, it is logical that the same must be reduced from the cost of the new project. As per section 43(1), actual cost means the actual cost of the assets to the assessee reduced by that portion of the cost thereon, if any, as has been made directly or indirectly by any other person or authority. The crucial words are that for the purposes of sections 28 to 41, the phrase actual cost means actual cost of the assets to the assessee. The words actual cost of the assets to the assessee are nowhere defined in the IT Act except that in various Explanations, there are certain adjustments, which have to be made. The Supreme Court, in the case of Challapalli Sugars Ltd. ( supra ) also observed that the expression actual cost has not been defined in the Indian Income-tax Act, 1922. The Supreme Court laid down a very important principle that such expenditure which is referable to acquisition of capital assets has to be added to t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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