TMI Blog1993 (3) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... cation : "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in directing to reduce the cost of plant and machinery by a sum of Rs. 24.92 lakhs on the ground that to that extent, the Bank of India had reimbursed the assessee's cost of plant and machinery ?" (B) Department's Reference Application : "(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the receipt of Rs. 24.92 lakhs from the Bank of India was not in the nature of capital gains ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in determining the cost of plant and machinery for the purpose of grant of development rebate, provision of section 33 read with section 43(1) alone would apply and not the provision of section 43A(1) and (2) " As far as question No. 2 at the instance of the Department is concerned, we are not setting out the facts because it is an accepted position that, in view of the decision of the Supreme Court in the case of CIT v. Arvind Mills Ltd. [1992] 193 ITR 255, the second question must be answered in the negative and in favour of the Revenue. The que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 355 1,12,355 1-6-1967 - 1,12,355 1,12,355 1-12-1967 2,17,110 1,12,355 3,29,465 1-6-1968 2,17,110 1,06,112 3,23,222 1-12-1968 2,17,110 99,871 3,16,981 -------------------------------------------------------------------------------------------------------------- 6,51,330 6,55,403 13,06,733 --------------------------------------------------------------------------------------------------------------------------------------------------- The repayment, therefore, required to be made from June, 1966, onwards. In early 1966, the assessee-company thought that there was possibility of devaluation of the rupee and it should hedge against such devaluation. The company instructed its bankers-Bank of India, Bombay, to make a forward purchase of U. S. dollars 13,06,733 under its letter dated February 18, 1966. The Bank of India agreed to sell U. S. dollars 13,06,733 at a forward rate of Rs. 484.25 per hundred dollars. Accordingly, the Bank of India sent a contract dated February 25, 1966, setting out the sale of U. S. dollars 13,06,733 for delivery on January 25/February 24, 1967, at the exchange rate of Rs. 484.25 amounting in all to Rs. 63,27,854.55. This was confirmed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of the gross loss of Rs. 24,92,000. This amount of Rs. 24,92,000 was paid by the bank to the assessee. Paragraph 4 of the letter is as follows : "The said payment of Rs. 24,92,000 to be made by us to you will be in full, final and complete discharge and satisfaction of all your claims against us for loss or damage or compensation whatsoever and howsoever arising (directly or indirectly) under or in respect of the said contract No. 127 dated February 25, 1966, for sale by us to you of U. S. $1,306,733 and you will have no further claims on us whatsoever in relation to the said contract and/or the rescission thereof." This letter has been confirmed by the assessee. The amount of Rs. 24,92,000 so received by the assessee was shown as a capital reserve in its balance-sheet. The Income-tax Officer, however, held that the sum of Rs. 24.92 lakhs was by way of short-term capital gains and he taxed the assessee accordingly. This finding was, in substance, upheld by the Appellate Assistant Commissioner. The Tribunal, however, has come to a conclusion that the receipt of Rs. 24.92 lakhs by the assessee was not in the nature of capital gains. From this finding of the Tribunal, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous negotiable instruments drawn in foreign currencies as also foreign currencies themselves. These foreign exchange assets were sold or encashed through the assessee's correspondent banks in the foreign countries concerned and the proceeds credited to its current account with those banks. Consequent on the devaluation of the rupee on June 6, 1966, the amounts credited to the assessee in the foreign banks registered an increase in value of Rs. 4,65,515. The court held that the excess realisation on devaluation represented revenue receipts in the hands of the assessee since foreign exchange was the stock-in-trade of the assessee and the increase in value of the foreign currency was incidental to the banking business carried on by the assessee. The ratio of this judgment also does not apply to the present case at all. The assessee is not carrying on any banking business nor has any foreign currency purchased by it increased in value in terms of rupees on account of devaluation which took place on June 6, 1966. The entire argument of the Department proceeds on a misunderstanding of the nature of the transaction and the nature of the settlement arrived at. We will assume that the rig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot attract the provisions of section 45 which related to transfer and not to mere extinguishment of a right. The Supreme Court considered the definition of "transfer" under section 2(47) and held that the rule of noscitur a sociis would have to be applied while construing the phrase "extinguishment of any rights" therein. This phrase takes colour from the associated words and expressions and will have to be restricted to the sense analogous to them. Hence the expression "extinguishment of any rights therein" will have to be confined to the extinguishment of rights on account of transfer and cannot be extended to mean any extinguishment of right independent of or otherwise than on account of transfer. In the light of this judgment of the Supreme Court, if we consider the facts of the present case, the settlement dated February 14, 1967, does not transfer the rights of the assessee to receive these dollars at contractual exchange rate in favour of the Bank of India, thereby extinguishing the assessee's rights. On the contrary, there is a serious dispute between the assessee and the Bank of India as to whether the contract is a valid contract or not. It was the contention of the Ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Bank of India to honour the contract which it had entered into. We fail to understand how this can be considered under any circumstances as capital gains. The Tribunal has set out its reasons for holding that the receipt of Rs. 24.92 lakhs by the assessee from the Bank of India under the settlement recorded on February 14, 1966, cannot be considered as capital gains. In our view the Tribunal was right in so holding. Question No. 1, on behalf of the Department is, therefore, answered in the affirmative and in favour of the assessee. That brings us to the question which is raised at the instance of the assessee. In this connection, the Tribunal has held that the assessee was required to pay an additional sum of Rs. 37,38,000 for purchase of dollars at the prevailing rate after devaluation. So the cost of assets was increased by the additional amount which the assessee was required to pay after devaluation. Under the settlement, the reimbursement was borne by the Bank of India to the extent of Rs. 24,22,000 towards the increased liability of the assessee. Hence, the amount of Rs. 24.92 lakhs was required to be deducted from the total cost of the asset as it stood in the im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h of this contract, the assessee has received as damages/compensation the sum of Rs. 24.92 lakhs. It is difficult to see how this receipt can be considered as payment towards meeting the cost of the assets of the assessee. The payment is basically to meet the liability of the bank to the assessee under the contract dated February 25, 1966. In this connection, Mr. Inamdar has drawn our attention to the judgment of the Kerala High Court in the case of CIT v. Cochin Co. (P.) Ltd. [1990] 184 ITR 230. In that case also, the assessee had purchased certain items of machinery by taking a loan. The assessee was not able to repay this loan in full. Hence the lender wrote off a portion of the debt due from the assessee including the balance payable on the purchase of machinery. The Income-tax Officer reduced the cost of machinery for purpose of computing depreciation by the amount of the loan so written off. The High Court has held that it was a far cry to state that though at the time of purchase of the machinery, no person met the cost either directly or indirectly, if, long thereafter a debt incurred in that connection was written off, it could be equated to a position that the financier ..... X X X X Extracts X X X X X X X X Extracts X X X X
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