TMI Blog1979 (9) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... ares worth Rs. 9 lakhs were to be allotted to them as against the price of the machinery. (2) that the Indian promoters were to make available the amount of Rs. 6 lakhs for building indigenous machinery and air conditioning plant, etc. The collaborators and the Indian promoters fulfilled their part of the obligation. The cost of the initial project was estimated at Rs. 15,00,000 and the capital was formed accordingly. Later, at the time of working out the details of the project, it was revealed that an amount of Rs. 23 lakhs would be required for the total project initially. To meet the additional cost of Rs. 8 lakhs, the assessee considered the possibility of raising a loan in India. It could, however, be raised from any finance institution by putting a charge on the machines. The collaborators were not agreeable to put the machines under a charge for reasons of trade secrecy of machines. They, however, agreed to grant a loan to the assessee to the extent of Rs. 5.5 lakhs at 71% per annum as interest. The assessee, vide letter dated April 20, 1961, informed the Govt. of India, Ministry of Finance (Dept. of Economic Affairs), of this position and sought their approval for the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal against the order of the ITO to the AAC which was dismissed. It went up in second appeal before the Tribunal and pleaded that Rs. 2,43,800 should be allowed as revenue loss. It was contended by the assessee that the loss occurred because the assessee was short of working capital, that the liability could be described only as liability for working-cum-circulating capital and that it was a case of revenue loss. On the other hand, it was contended on behalf of the revenue that the liability arose because of the assessee's intention to utilize the loan in the capital account and that the loss was inadmissible as it was not charge on the revenues of the year. The Tribunal observed that there were two significant factors for determining the issue, first, the loan was received from the supplier of the machinery and, secondly, it was received towards the beginning of the career of the company. It admitted that the trading operation had begun prior to the receipt of the loan, but said that, in view of the aforesaid material, the loan was to be treated as part of the capital structure. It further held that it was immaterial to consider whether the loan was utilized for the purpose of acq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is evident that out of about Rs. 23 lakhs some part was to be utilized towards fixed capital and some towards working capital. In the letter dated July 20, 1961, it was stated by the assessee to the Ministry of Finance that the additional finance to meet the increased cost would be only for the beginning years, that a loan had been considered the best solution as the company was expected to earn good profits in its manufacturing programme and that it would be possible for it to repay the loan by December 31, 1965. It would also be relevant to mention that the assessee submitted to the ITO the balance-sheet and statement of account showing the disbursement of the loan received by it from GrozBeckert, which is annex. D. In that it is shown that payments had been made to various parties between August 10, 1961, to September 5, 1961. The learned counsel for the revenue before the Tribunal had argued that the liability on account of devaluation arose on the amount which the assessee had intention to utilize in capital account and, therefore, the loss was in capital account. On the other hand, the counsel for the assessee had urged that the assessee sought a loan for working capital an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a capital asset, loss arising from depreciation would be a capital loss..." To buttress the aforesaid conclusion, the Supreme Court referred to its earlier decisions in CIT v. Tata Locomotive and Engineering Co. Ltd. [1966] 60 ITR 405 (SC) and CIT v. Canara Bank Ltd. [1967] 63 ITR 328 (SC). We shall make a reference to these decisions in some detail at later stage. The Tribunal, while coming to the conclusion that the loan was taken towards the capital account, took into consideration irrelevant matters, namely, the loan was received from the supplier of the machinery and that it was received towards the beginning of the career of the company. The person from whom the loan is received by an assessee cannot be a relevant consideration for determining as to whether the loan was towards the trading account or capital account. The time when the loan is received is also not of much significance. The crucial thing is regarding the utilization of the loan. The Tribunal, however, did not consider the matter from this point of view. It is also relevant to point out that the Tribunal felt some difficulty in deciding the question especially in view of the fact that trading operations had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit that would accrue would be revenue receipt; if it was not part of or a trading transaction then the profit made would be a capital profit and not taxable. There is no doubt that the amount of $36,123.02 was revenue receipt in the assessee's business of commission agency ; instead of repatriating it immediately, the assessee obtained the sanction of the Reserve Bank to utilize the commission in its business of manufacture of locomotive boilers and locomotives for buying capital goods. That was quite an independent transaction, and it is the nature of this transaction which has to be determined. In our view, it was not a trading transaction in the business of manufacture of locomotive boilers and locomotives; it was clearly a transaction of accumulating dollars to pay for capital goods, the first step to the acquisition of capital goods. If the assessee had repatriated $36,123.02 and then after obtaining the sanction of the Reserve Bank remitted $36,123.02 to the U.S.A., Mr. Sastri does not contest that any profit made on devaluation would have been a capital profit. But, in our opinion, the fact that the assessee kept the money there does not make any difference especially, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit of Rs. 1,73,817. The question arose as to whether that amount was revenue receipt. The Supreme Court held that the appreciation of the money did not arise in the course of any trading operation. Assuming that the amount of Rs. 3,97,221 was originally stock-in-trade, when it was blocked and sterilised and the bank was unable to deal with that amount, it ceased to be its stock-in-trade and the increase in its value owing to exchange fluctuation was a capital receipt. It was further held that if the profit by exchange operations comes in not by way of business of the assessee, the profit would be capital. From a perusal of the above two cases, it is evident that the assessees had been initially using the amounts repatriated on circulating capital but at the time of repatriation it was to be utilized on capital account. Therefore, it was held that the amount should be taken towards capital account. Similarly, the amounts taken for the purposes of fixed capital may be utilized as working capital and in that eventuality it will be treated as a working capital. The Tribunal while deciding the matter did not take these factors into consideration. The next question is as to at what p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal loss, could not be answered unless it was first determined whether the two amounts of Rs. 25 lakhs and Rs. 121 lakhs were held by the appellant on capital account or on revenue account. The Tribunal while deciding the question also did not take into consideration the said criterion. The question then arises as to whether the finding of fact reached by the Tribunal by referring to irrelevant matters and not taking into consideration the relevant matters is binding on the High Court in a reference. Mr. Sibal has argued that such a finding is vitiated and not binding. He has referred to CIT v. Daulat Ram Rawatmull [1973] 87 ITR 349 (SC). On the other hand, the learned counsel for the revenue has strenuously urged that such a finding is binding. In support of his contention, he has referred to CIT v. Scindia Steam Navigation Co. Ltd. [1961] 42 ITR 589 (SC), Aluminium Corporation of India Ltd. v. CIT [1972] 86 ITR 11 (SC) and CIT v. Madan Gopal Radhey Lal [1969] 73 ITR 652 (SC). We have given due consideration to the arguments of the learned counsel. In our view, the finding of fact arrived at by the Tribunal by taking into consideration irrelevant matters is not binding in a re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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