TMI Blog2005 (9) TMI 217X X X X Extracts X X X X X X X X Extracts X X X X ..... sts 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 cross appeals (ITA Nos. 780 991/AHD./99) are against this order of the CIT(A). Assessing Officer made fresh order in compliance with direction of CIT, and the appeal in ITA No. 1056/AHD./99 is against the order of CIT(A) disposing of an appeal against this consequential order of the Assessing Officer. 3. According to the Commissioner of Income-tax, the Assessing Officer has not made complete enquiry with reference to certain issues and his failure to make such enquiry has made the order of the Assessing Officer erroneous and has caused prejudice to the interests of the revenue. According to him, the Assessing Officer is not only art adjudicator but also an investigator and he cannot remain passive in the face of the return which may apparently be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. 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 and reduced the amount from the WDV of the depreciable assets for computing the depreciation by considering the assessee's submission that the contracts in question were entered into in order to insulate itself against adverse fluctuation of exchange rates of foreign currency which were to hedge against any rise in future liability in respect of loans taken for purchase of plant and machinery from abroad. 6. According to the Commissioner of Income-tax, the gains on cancellation of forward exchange contract is revenue receipt and failure on the part of the Assessing Officer to treat the entire receipt as revenue receipt and his order to exclude the said amount from the WDV of the block of assets by invoking the provisions of section 43A was erroneous and prejudicia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and for the earlier period ended on May, 1992 demonstrating that profit and loss is arising out of cancellation of Forward Exchange Contract has been treated as revenue item and accordingly, included in the profit and loss account and on perusal of certain contracts, the copies of which have been furnished by the assessee, he concluded that the gain which has arisen to the assessee on cancellation of foreign exchange contract had no connection whatsoever with the purchase of any assets; that the gain was not utilised for repayment of loan obtained in connection with purchase of assets from abroad; that the gain from cancellation of foreign exchange contract was in rupee which, therefore, could not have been utilised to liquidate any of the foreign exchange liability including those ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 course of business transaction, any gain on cancellation of such contract, according to him, would be a business profit and not capital receipt as claimed by the assessee. 6.3 He also rejected the contention of the assessee that the receipt was of casual and non-recurring nature by referring to the decision of Supreme Court in the case of Raghuvanshi Mills Ltd. v. CIT [1952] 22 ITR 484, Barendra Prosad Ray v. ITO [1981] 129 ITR 295, S.G. Mercantile Corpn. (P.) Ltd. v. CIT [1972] 83 ITR 700 (SC), CIT v. Calcutta National Bank Ltd. [1959] 37 ITR 171 (SC) and Gillanders Arbuthnot Co. Ltd. v. CIT [1964] 53 ITR 283 (SC). He further observed that the assessee had entered into the contract with certain banks in India for foreign exchange cover and to hedge its fluctuation and to avoid loss o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry 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 in to existence during the year under consideration. 7.2 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 1992-93 these contracts were cancelled as no longer required due to greater stability of rupee against US $. It was probably because the Government announced partial convertibility of rupee and announcement by the RBI allowing cancellation of forward contracts. Forward cover are thus taken against the liabilities for payment of machinery, technical know-h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 7A. The learned CIT-DR Sh. 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 CED v. V. Venugopala Varma Rajah [1976] 105 ITR 593; decision of the Calcutta High Court in the case of CIT v. Sutna Stone Lime Co. Ltd. [1982] 138 ITR 37 (Cal.) and the decision of the Orissa High Court in the case of CIT v. Orissa State Warehousing Corpn. [1993] 201 ITR 729. He also referred to paras 13 to 15 of AS-11 of the guidelines issues by the Institute of Chartered Accountants of India. He further submitted that outstanding loan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ombay 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 ultimately settled in its favour by the insurer in USA. The Indian rupee was devalued and, therefore, in terms of rupee, the assessee got Rs. 3,43,556 as against its payment of Rs. 2,00,164 at the pre-devaluation rate. The assessee claimed that the difference was not taxable. The matter reached the Supreme Court, wherein it was held that the payment made for loss of the ingots did not bear any nexus with the assessee's business and that so long as the ingots did not reach Bombay and were converted into strips and sheets, the connection with the assessee's business was remote and any payment made in respect of the loss of the ingots could not be said to accrue from business. It was further held that the assessee did not carry on the business of buying and selling ingots. The compensation paid by the insurer to the assessee was not for any tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 3,13,651 being the difference in exchange rate less charges. The Assessing Officer taxed this amount as revenue receipt arising from the assessee's business. The AAC however held that the amount was not taxable as income from the business but was assessable as capital gains. But the Tribunal found on material on record that there had been no case of acquisition and, therefore, it was not assessable to capital gain. The revenue carried the matter to the High Court and the Court held that there was no profit or gain as contemplated under section 45. The assessee did not spend anything. He got his rights under the contract and transformed that contractual right into monetary right. The amount was obtained not because the assessee surrendered any license or because the assessee gave up its right under a contract but because the assessee realised its du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh 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 the opinion that: (a) the loan obtained is not an asset or advantage of an enduring nature; (b) that the expenditure was made for securing the use of money for a certain period; and (c) that it is irrelevant to consider the object with which the loan was obtained. Consequently, in the circumstances of the case, the expenditure was revenue expenditure within section 10(2)(xv). This is a case on which the revenue heavily rely upon and submits that it is irrelevant to consider the object for which the loans were obtained. If the expenditure for raising the loans, could be revenue account the profit on account of devaluation foreign exchange fluctuation would also be of revenue account. 8.7 In the case of Garden Silk Mills Ltd. v. Dy. CIT [1996] 222 ITR 27 (Guj.) and Garden Silk Mills Ltd. v. Dy. CIT [1996] 222 ITR 68 (Guj.), the assessee company claimed Rs. 2,96,04 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... khs 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 company, that though the trading operations had begun prior to the receipt of the loan, yet the loan had to be treated as part of capital structure, and that it was immaterial to consider whether the loan was utilized for acquiring any capital asset or used as circulating capital. The Court held that the person from whom the loan was taken or the time of the loan cannot be considered for determining whether the loan was towards the trading account or capital account. The crucial thing was as to how the loan was utilized. By relying upon the two decisions of the Supreme Court in the case of Tata Locomotive Engg. Co. Ltd. and of CIT v. Canara Bank Ltd [1967] 63 ITR 328 the Court held it to be on capital account. 8.9 In the case of V.S. Dempo Co. (P.) Ltd. the Bombay High Court laid down the following principles to determine whether a loss is allowable as a business loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 entire amount of loan which had been advanced to D company for the purchase of machinery had been repaid by that company D to the assessee by way of adjustment against the price of iron ore supplied to it which was its stock-in-trade. That being so, it could not be disputed that whatever might have been the original object of the loan, at the time of devaluation, the amount of loan was utilised by the assessee as circulating capital. That being so, the loss which occurred due to devaluation of the Indian rupee, it was held was clearly a revenue loss and allowable as a deduction in computation of the income of the assessee. 8.11 In the case of Tata Iron Steel Co. Ltd. relied upon by the learned DR., their Lordships of the Supreme Court held that the manner of repayment cannot affect the cost of assets acquired by the assessee. What is the actual cost depends on the amount paid by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilders ). 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. 41,82,062 in March 8/9, 1961. In the assessment for the assessment years 1970-71 and 1971-72 the assessee-companies claimed depreciation on account of increased liability for development as aforesaid on the sum of Rs. 18,46,023. The said amount of Rs. 18,46,023 was arrived at by deducting from the increased liability on March 7/8, 1961, a sum of Rs. 3,36,039 being loss written off during the period 7-3-1961 to 6-6-1966. The assessee further reduced the sum by deducting the notional amount of depreciation which would have been allowed for the assessment years 1967-68, 1968-69 and 1969-70, respectively and claimed depreciation on the increased liability after deducting these amounts. The ITO concerned allowed the claim of the assessees to depreciation on the increased liability reduced as aforesaid. The Addl. CIT however called for and examined the records of the assessee-companies. He took the view that the assessment orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 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 and agency commission. The mills were completely destroyed as a result of fire and a certain amount was paid to the assessee by the insurance companies. The question was whether this amount which was treated as paid on account of loss of profits was assessable to income-tax. It was held that the amount received by the assessee was income and so was taxable and that the receipt was inseparably connected with the ownership and conduct of the business and arose from it and, therefore, it was not exempt. 8.16 In the case of Calcutta National Bank Ltd. the question was of the business and by majority it was held that the business is a word of very wide, though by no means determinate, scope. It is neither practicable nor desirable to make any attempt at delimiting the ambit of its connotation. Each case has to be determined with reference to the particular kind of activity and occupation of the person concerned. Though ordinarily business implies a continuous activity i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of bond by which the UP Government was to pay a fixed sum of money every year on a specified date and for a specified number of years. The Zamindars sold these bonds against cash in the open market to several investors. The assessee purchased interest bearing bonds of the face value of Rs. 10 lakhs for Rs. 4,87,500. The question was whether in respect of the UP Zamindari Abolition Compensation Bonds any income in excess of the interest at the stipulated rate was realised by the assessee and whether any income arose to the assessee in respect of UP Zamindari Abolition Rehabilitation Grant Bonds. Their Lordships held that this was not a case analogus to an asset being sold and the price of the asset being paid in annual instalments. What is to be considered is the nature of the transaction of purchase of the bonds at a price which is much less than their face value. The assessee thought it fit to invest large sums of money only because it would get a regular substantial return on the investments. The only int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mit 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 business or dealing in foreign exchange and as such, the exchange acquired by the assessee-company, does not partake the character of a trading asset. The foreign exchange acquired under the contract is for the purpose of discharging an obligation on capital account, i.e., for borrowing for the purpose of importing capital asset by entering into the foreign exchange forward contract, the assessee-company was merely wishing to freeze its capital liability to discharge debts/borrowing in foreign exchange. In this view of the matter, any gain to the assessee-company upon cancellation of the foreign exchange forward contracts will partake the character of a capital receipt, as per the ratio of decisions of the Supreme Court in the case of CIT v. Telco (60 ITR 405) as well as in the case of Universal Radiators v. CIT (201 ITR 800). It is also pertinent to note that the gain arising on the cancellation of the contracts in the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 realised 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 earned on cancellation of foreign exchange forward contract was a revenue receipt or as capital gain, because he directed the Assessing Officer to being to tax the profit either as revenue profit or as capital gain. In our view, setting aside an assessment is not ordinary matter. In fact, in tax laws as in other laws, certainty and finality are the pre-requisites of a good tax administration. The orders of the subordinate authorities should, therefore, not be cancelled or set aside on mere whims and fancies, there must be very compelling reasons for interference by the CIT under section 263 of the IT Act. Thus, keeping in view the totality of the facts and circumstances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital account. Similarly if a loan taken to pay the seller that liability would also be on capital account. An arrangement for meeting such liability would also be on capital account and the expenditure by way of interest or exchange fluctuation would increase the capital expenditure; conversely any concession in discharge of liability or gain on account of exchange fluctuation would decrease the capital cost. These would all be items of fixed capital. The expenditure or loss would increase the cost and concession or gain would decrease cost as per accountancy provision and with regard to exchange fluctuation as provided in section 43A of the Act. Again if any foreign exchange is earmarked for purchase of capital assets the loss or gain on account of exchange fluctuation would be on capital account. Similarly if a forward contract is taken to meet the liability in foreign currency of the seller or the lender, the gain 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act that they were allowed by the RBI to be cancelled on the contrary gives the impression of the stability of Indian rupee vis-a-vis US Dollar. 8.26 As regards speculation nature of the gain we observe that section 43(5) applies to transactions of commodities and currency is not a commodity. A commodity ordinarily means processed or processed goods i.e., grain, fruits, vegetable, precious metal etc. It does not include currency. Even otherwise unless one deals in currency which is permitted only to a license holder under the RBI rules it cannot be covered by section 43(5). As aforesaid the assessee had taken forward contracts for meeting liabilities to be discharged in foreign currency and not to deal in the currency, the gain would not be speculative under section 43(5). 8.27 We, therefore, hold that the Commissioner of Income-tax is not justified in holding that the gain on cancellation of forward contract in all cases were revenue 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 no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich according to the Commissioner of Income-tax was capital in nature. On examination of Schedule XI to the printed accounts, the CIT noticed that the aforesaid sum of Rs. 71,93,24,207 was the net amount after reducing therefrom the expenditure of Rs. 13,68,58,878 being the expenditure which the assessee had to pay as premium and other incidental charges in connection with entering into foreign contract. According to the CIT, the gain from cancellation of foreign exchange contracts is of a different nature and the expenditure incurred in connection with entering into contract for hedging against foreign exchange fluctuation is entirely of another nature. According to him, the cancellation of the contracts has no connection with acquisition of assets from abroad or repayment of loan taken in connection with the acquisition of assets which gain accrued in India and received in Indian rupee was of revenue nature and the expenditure incurred in connection entering into contract for hedging was connected with acquisition of assets abroad. He, therefore, held that while the gain is taxable as revenue income, the expenditure was capital and would add to the cost of the assets. As the prem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roneous and prejudicial to the interests of revenue is in not taxing the gain amounting to Rs. 53,73,04,137 on transfer of business units. The facts are that in the year under consideration, the assessee-company sold three of its units/divisions to its wholly owned subsidiary - the first two being energy division and offshore division to M/s. Essar Oil Ltd., and the third being construction division to M/s. Essar Projects Ltd. A sum of Rs. 15.16 crores on the sale of the above three divisions was treated as profit in the printed accounts and the claim of the assessee has been that it was a sale of undertaking as a going concern as there was no itemized sale of assets of the undertaking and, therefore, gain was of capital nature not liable to tax. The Assessing Officer treated the receipt as capital and deducted the same from the block of assets and recomputed depreciation thereon by holding that the amount received over and above the book value of the assets was only towards fixed assets in respect of which the assessee was entitled to depreciation and by treating the consideration as money payable within the meaning of section 43(6) of the Act. The Commissioner of Income-tax consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 3,46.257 3,46257 NIL 7 Furniture and Fixtures 47,119 47,119 Nil 8 Vehicles 3,14,899 3,14,899 Nil 73,20,107 73,20,107 Nil Sale of undertaking to M/s. Essar projects Ltd. Construction Division 1. (a) Plant and Machinery 1,30,60,582 4,55,08,799 (b) Tugs and Barges 55,81,344 79,30,000 1,90,41,926 5,34,38,799 3,43,96,873 2. Furniture and Fixtures 1,77,343 1,77,344 Nil 3. Office equipments 5,91,297 5,91,297 Nil 4. Vehicles 77,372 1,00,000 1,98,87,938 5,43,07,440 Total difference 53,73,94,137 12.1 He concluded that value of assets transferred was ascertainable and in respect of the transfer of each asset capital gain could be computed. He rejected the contention of the assessee that the transfer was of the entire business as a going concern and, therefore, no profit could be computed. He further observed that with the omission of section 41(2) in respect of depreciable assets, profit has to be computed in view of the provisions of section 50 of the Act and any surplus arising out of such transfer would be treated as capital gains. He referred to certain decisions wherein it was held that transfer of running business as surplus would give rise to capital gains - CIT v. Artex Mfg. Co. Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... units/division was separately claimed by the assessee-company itself; (4) The business in each unit is different and independent of other units; (5) It is also seen that severance of these units has not affected the profit earning capacity of the remaining units/main business. 12.3 Justifying the values to be adopted he observed that the subsidiary companies who have purchased the units would not have adopted the higher value arbitrarily and he observed that these values have been taken on the basis of some valuation report as on the first day. He observed that it is not the case of the assessee that there was a revaluation of subsequent date and the higher value was taken by crediting revaluation reserve and as the subsidiary companies of the assessee were wholly owned subsidiaries and were under the control of the assessee, the value adopted in the books of the subsidiaries was within the general knowledge of the assessee and that it was for this reason the value of depreciable assets as appearing in the books of the subsidiary companies has been directed to be adopted as the basis for working out the short-term capital gain under section 50 of the Act. 12.4 He also observed tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nover of construction and oil businesses. It was submitted that the transfer of undertaking was not the transfer of capital asset within the meaning of section 2(14) of the Act and that the entire business of both the divisions have been transferred to the respective subsidiary company and no new assets or liabilities as shown in the balance sheet were individually transferred. The transfer of the entire undertaking was at the lump sum price. It is submitted that the business as such cannot be called the capital asset and in any case an asset to which section 48 cannot be applied cannot be brought to tax under section 45 in view of the decision of the Karnataka High Court in the case of Syndicate Bank Ltd. the decisions of the Supreme Court in the case of Mugniram Bangur and CIT v. B.C. Srinivasa Shetty [1981] 128 ITR 294 (SC), the Gujarat High Court in Artex Mfg. Co. Ltd. 131 ITR 559 and Calcutta High Court in Hindustan Co-operative Insurance Society's case. Reference is also made to the decision of Bombay High Court in the case of Evans Fraser Co. Ltd. v. CIT [1982] 137 ITR 493. It was further submitted that neither the cost of acquisition nor the cost of improvement is ascer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, it could not be said to be a slump sale. He referred to in this connection, various details referred to in the agreement pointing out that certain assets were subject to hypothecation and mortgage already created in favour of the lenders. He also submitted that certain construction contracts and other operating agreements which are assignable only with the consent of the clients and other contractors and customers from whom the same were receivable are awarded or held. He referred to the decision of the Tribunal in the case of Camphor Allied Products Ltd. v. Dy. CIT [2001] 79 ITD 489 (Ahd.), the decision of the Tribunal in the case of ITA No. 5108/Ahd./1996; decision of the Tribunal in the case of Kishorechand Bansal ITA No. 3580 (Ahd.) 1999; and a decision of the Tribunal (Third Member). He then referred to the decision of the Supreme Court in the case of Artex Mfg. Co. and the decision of the Kerala High Court in the case of Karvalves Ltd. and submitted that chargeability provisions of profit under section 41(2) as well as capital gain are clearly applicable in view of the decisions of the Supreme Court but because of the specific provision of section 50 in respect of deprecia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Court, the machinery of a factory belonging to a firm was transferred to a private limited company and a surplus of Rs. 40,743 was realised over the written down value of the machinery. It was held to be a case of realisation sale and even under the realisation sale the excess over the written down value not exceeding the original cost and the written down value is liable to be brought to tax under the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922 which is equivalent to section 41(2) of the Income-tax Act, 1961. 15.2 In the case of Mugneeram Bangur Co. before Their Lordships of the Supreme Court the business of the assessee-firm of buying land, developing it and then selling, was sold as a going concern with its goodwill and stock-in-trade to a company by the partners for a total consideration of Rs. 34,99,300 and in the Schedule to the agreement indicated as to how the said price was arrived at by taking into consideration the respective values of land, goodwill, motor car and lorries, furniture, fixture, etc. The Supreme Court held that the sale was the sale of whole concern and no part of the price was attribute to the cost of land and no part of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtaking of the assessee was taken over. One of the questions was whether the compensation received by the assessee was subject to capital gain tax and in that context it was held that the word property in the definition of capital asset would include an undertaking acquired as a whole. When the whole business of the undertaking together with the assets and liabilities, is transferred for a consolidated price, and not sold by claiming any itemised value or item by item price fixed for the different assets of the firm, any surplus in the sense of excess of consideration for the transfer of the business of the undertaking over the cost of the acquisition of the business or undertaking will be capital gain and the excess is assessable as capital gain. 15.6 In the case of Syndicate Bank Ltd. before Their Lordships of the Karnataka High Court the assessee was carrying on the banking business which was nationalized and on transfer of its business undertaking the assessee became entitled to a compensation of Rs. 3.6 crores for the entire business undertaking taken over by the Government of India. It was claimed by the assessee that the compensation was a lump sum compensation for the trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upreme Court in the case of Alapati Venkataramiah v. CIT [1965] 57 ITR 185 that, this decision, in our view, gives the quietus to the dispute whether a business as a going concern would constitute a capital asset within the meaning of section 45. It is a capital asset, the Supreme Court observes. Applying this principle to the facts of the case on hand we are of the view that title to the land and building and the plant and machinery, etc. (the business was sold as a going concern), passed to the State on the date of the execution of the registered deed, namely April 14, 1971 only, and not on January 12, 1954, the date on which the agreement was executed. 15.8 In the decision of Camphor and Allied Products a computer manufacturing unit was sold by the assessee wherein also the claim of the assessee was that the entire business undertaking was sold as a going concern and the assessee claimed that there was no occasion for invoking section 50(2) of the Act. The Tribunal from various clauses of the sale agreement found that there was a stipulation that on the date of take over of the operation, the exact value of the assets including cash and bank balances shall be determined and nece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... putation provision together constitute an integrated code. When there is a case to which the computation provision cannot apply at all, it is evident that such a case was not intended to fall within the charging section. It was further held that all transactions encompassed by section 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by section 45 to be the subject of the charge. What is contemplated by section 48(ii) is an asset in the acquisition of which it is possible to envisage a cost, it must be an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. It was further observed that the date of acquisition of the asset is a material factor in applying the computation provision pertaining to capital gain; but in case of goodwill generated in a new business, it is not possible to determine the date when it comes into existence. 15.11 In the case of Evans Fraser Co. Ltd. a case before Their Lordships of the Bombay High Court, a private limited company decided to convert itself into a public limited compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court, therefore, set aside the matter to the Tribunal as it had not undertaken any such exercise to find out whether the parties have evaluated the value of plant and machinery or stock or the liability taken over by the buyer and on what basis the sum of Rs. 36,000 was ultimately agreed to be paid by the buyer in favour of the assessee. The court also observed, admittedly, there was a transfer of business and the business was taken over by the purchaser. 15.13 In the case of Southern Roadways Ltd. v. CIT [1999] 235 ITR 21 (Mad.) bus transport undertaking of the assessee was taken over by the State Government and there was compulsory acquisition of capital assets of the assessee used in this business amounting to sale of those assets which was held to be a compulsory acquisition of assets within the meaning of the term sold found in sections 32 and 41 and also in the definition of transfer in section 2(47) of the Act. All the assets of the transport division of the assessee vested in the Government by operation of law and it was held that provisions of sections 41(2) and 45 were attracted, in this case the compensation had to be determined by the Government for each and ever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e capital asset in the shape of the business undertaking as a whole and not the individual items. The provisions of section 50 would be applicable as if the business as a whole was an asset. The various component parts of the business being building, plant and machinery and furniture would be forming part of the block of assets in respect of which depreciation has been allowed the gain would be computed as short-term capital gain by virtue of provisions of section 50 of the Act. 15.16 In the preset case, a respective lump sum consideration was fixed for the transfer of the three units which is stated to have not been bifurcated item by item. But the case of the CIT is that the consideration can be ascertained with reference to the values put by the parties and the valuation report on the basis of which the transferee-company has made the entries in their books of account. The CIT has computed the gain at Rs. 53,73,94,137 based on the valuation put by the transferee company which is much more than what has been stated in agreements and received by the assessee. We do not find ourselves in agreement with the CIT that the consideration should be taken as per the revaluation done by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gain arising from the transfer of short-term capital assets. 15.18 On a reading of this section, it is apparent that when a block of assets ceases to exist as such for the reason that the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets is to be taken as the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of the assets acquired during the previous year. The income received or acquiring as a result of such transfer of the block of assets is to be deemed as short-term capital gain. By transfer of the three units to the two subsidiary companies, the block of assets of those units ceased to be in existence and, therefore, the written down value of the units as appearing in the books of account is to be treated as the cost of acquisition for working out the capital gain and the entire capital gain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he next dispute is against the disallowance of trial production expenses of Rs. 14,92,74,847 which, according to the assessee related to third unit of 'Hot Breacketed Iron' (HBI) set up by the assessee. The first two units producing HBI were already working and producing articles and things being sold commercially. The facts are that during the year under consideration the assessee has started a new unit Steel Module-III which unit started trial production from September, 1992 and commercial production in January, 1993. During this period the assessee has claimed the expenditure of Rs. 3,51,41,000 on account of payment of interest and Rs. 11,41,33,843 being other expenses aggregating to Rs. 14,92,74,843. The other expenses consisted of start up expenses of Rs. 9,73,02,844 and other pre-operative expenses of Rs. 1,68,30,999. The goods produced during the trial production according to the assessee were also sold. Though in the printed accounts, the aforesaid expenditure has been treated as part of the cost of plant and machinery, it was claimed as revenue expenditure for income-tax purposes and was accepted by the Assessing Officer. 18. This order of the Assessing Officer, ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tart up [Rs.9,73,02,843]; establishment [Rs. 1,52,65,000] and Folio maintenance [Rs. 15,66,000] aggregating to Rs. 11,41,33,843 and an interest of Rs.3,51,41,347 on CCI/OD, Security Deposits, on documents retired, on bills discounted and bank charges were claimed under the head deferred revenue expenditure. These are expenses related to a third unit being Steel Plant Module III and they pertain to the period from September, 1992 to December, 1992. The commercial production admittedly started from 1st January, 1993. For the payment of interest, the learned counsel of the assessee also relied upon the decision of the Gujarat High Court in the case of CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715 and in the case of Dy. CIT v. Core Healthcare Ltd. [2001] 251 ITR 61 (Guj.) and of Calcutta High Court in the case of Smt. Santosh Debi Baid v. ITO [1971] 81 ITR 552. It was further submitted that the decision in the case of Food Specialities Ltd. was rendered in a different context and the decision of the Bombay High Court in the case of G.T. Industries was a case where the expenditure have been directed to be capitalised on trial production because it was a case of starting a new ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the actual cost of the machinery. The High Court following the decision of the Supreme Court in the case of Chellapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 held that the expenditure incurred was part of actual cost of the plant for the purpose of computing depreciation and development rebate. It was a case where the assessee himself has claimed the expenditure to be on capital account. 21.1 In the case of G.T. Industries, a case before the Bombay High Court, also the assessee claimed expenditure of Rs. 86,799 pertaining to trial expenses, interest and legal charges in connection with the construction of a factory and erection of plant. It was also a case where the assessee himself has claimed the expenditure to be on capital account and was held justified in capitalising the expenditure of Rs. 86,799 and claiming depreciation and development rebate thereon. 21.2 In the case of Alembic Glass Industries Ltd., a case before the Gujarat high Court, the assessee was manufacturing glass at Baroda from 1947, incurred expenditure on the payment of interest of Rs. 50,000 and Rs. 2,00,000 in the two years respectively on borrowings. The High Court observed that even assuming that the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounted for the cost of preparing and providing additional specifications for analysis and testing the various indigenous raw materials and finished goods to conform with the special secret formula and for providing production methods for processes was not revenue expenditure but expenditure incurred for plant and was entitled to depreciation. Here again, the claim of the assessee was that it was capital expenditure entitled to depreciation and development rebate and the Court found that the expenditure was for providing production methods for processes and, therefore, part of the plant. 21.5 In the case of Madras Fertilizers Ltd. a case before the Madras High Court, the assessee started its business on November 1, 1971 and for assessment year 1971-72 it claimed deduction of expenditure of Rs. 4,04,96,240 incurred on trial run and the Court held that the expenditure incurred on trial run such as raw material, fuel, water, power, etc. would go to add up to the actual cost of the plant and machinery. It may be noticed that this was a case where the assessee had started its business for the first time on November 1, 1971, there was no business already in existence and the expenditure w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal it was an uncontroverted fact that the new unit under construction at Jhagadia relate to caustic chloride project. That was a unit which was being set up for manufacture of one of the important input of existing product manufactured by the appellant-company. The appellant-company had set up various new units at different locations which were part of the expansion of the existing business. The company started manufacturing of items which were towards backward integration or forward integration of the existing line of business. Since the caustic chloride project was also a part of expansion of the existing business, the interest pertaining to this unit though capitalised in the books of account was clearly allowable as a deduction under section 36(1)(iii) which according to the Tribunal does not draw a distinction between the capital borrowed for acquiring the capital asset and capital borrowed for meeting requirements of working capital. As regards the other expenditure on travelling, salary and wages relating to setting up of the new units incurred before the commencement of the production in the new unit the Tribunal observed as under: XXI(5). We have considered the submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses incurred between 1963 to 1966. The assessee started manufacturing activity sometime in the year 1968-69. Thus in this case also the assessee was not carrying on any existing business and the expenditure related to setting up of an altogether new business and it Was not a case of setting up of a new unit of the existing business. The aforesaid decision is, therefore, clearly distinguishable with the facts of the present case. The learned CIT-DR then relied on the judgment of the Gujarat High Court in McGaw Ravindra Laboratories (India) Ltd's case. The facts of this case are also distinguishable with the facts of the present case. The manufacturing unit in this case was to be established in Malaysia as a joint venture of the assessee and Government of Malaysia or other person. It was not going to be an expansion of assessee's business which is carried on in India. There has been nothing to indicate that the business organisation, administration and funds of both the units were to be common. The High Court recorded a definite finding in this case that there was not going to be complete inter-connection, inter-lacing or inter-dependence of both the units. The Court als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facturing products. The assessee claimed interest towards borrowings made for the purpose of acquiring the new machinery and the Gujarat High Court held that the deduction under section 36(1)(iii) was allowable even though pertaining to the period prior to the commencement of production. 21.10 In the case of L.M. Chhabda Sons before the Supreme Court the assessee was carrying on business of exhibiting cinematograph films in Ahmedabad and in Bombay and the assessee had to pay a sum of Rs. 92,240 as mesne profits consequent to a suit filed by the landlord for ejectment of the lease in respect of one cinema theatre i.e., the Prakash Talkies. The Supreme Court held that the mere circumstance that the result of the accounts of the different ventures was entered in the accounts maintained at the head office, no inference necessarily arose that the exhibition of films in different theatres constituted the same business and that there is no such general principle that where an assessee carries on business ventures of the same character at different places it must be held as a matter of law that the ventures are part of a single business. Whether different ventures carried on by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he relevant period it imported air jet looms from Japan. It was stated that the assessee started trial production on March 26,1993 and some cotton fabrics were also produced which had been shown as closing stock and that the assessee was entitled to depreciation as the, assets of the new division were put to use during the previous year on trial run basis. The High Court held that the Tribunal on appreciation of evidence arrived at a conclusion that plant and machinery was used from March 26,1993 till the end of the accounting year i.e., March 31, 1993. The Tribunal also found that gray cotton was manufactured and with the permission of the authorities of Kandla Port Trust, the material was disposed of. The question was not one of setting up a new unit, but the question was of expansion of the unit. The Tribunal found that 2,68,412 meters of grey cloth was manufactured. Law does not require that there must be optimum production for granting the benefit. Law only requires that there must be use of plant and machinery for the purpose of business. The assessee was entitled to depreciation on the machinery. 21.13 In the case of Prithvi Insurance Co. Ltd. the assessee company carried on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered to be same and integrated business:- (i) Life Insurance and General Insurance business irrespective of the different mode of computation of business income under the Income-tax Act in Prithvi Insurance Co. Ltd.'s case; (ii) Cloth business and other business in general section in Hooghly Trust (P.) Ltd. v. CIT [1969] 73 ITR 685 (SC); (iii) Share business and business in diverse commodities in Produce Exchange Corpn. Ltd v. CIT [1970] 77 ITR 739 (SC); (iv) Import business closed in 1953-54 and export business started in 1954-55 in B.R. Ltd. v. V.P. Gupta, CIT [1978] 113 ITR 647 (SC); (v) Diverse commodities like sugar, vanaspati, soap, etc., and special alloy ware and blades in CIT v. Modi Industries [1993] 200 ITR 341 (Delhi); (vi) Fertilizer and cement in the case of IAC v. Coromondal Fertiliser Ltd. [1989] 29 ITD 455 (Hyd.); (vii) Agro chemical/soda ash and fertiliser business under process of construction in the case of Tata Chemicals Ltd. v. Dy. CIT [2000] 72 ITD 1 (Mum.); (viii) Diverse business in textile, fibre on different places and cement/ sponge iron at other places in Grasim Industries Ltd. v. Dy. CIT [1999] 64 TTJ (Mum.) 357, etc. 21.16 From all these decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istered office. Common funds were being utilised in these ventures of activities and, therefore, it is a case of one and the same business. It was further submitted that thus there was a complete inter-connection and inter-lacing amongst different lines of activities of business carried on by the assessee and, therefore the expenses have been incurred in such business. 21.19 The details of the expenditure disallowed by the CIT are as under:- I. Expenses incurred during the trial production of Module-III, during the period September, 1992 to December, 1992 Start-up expenses (Rs.) Raw materials consumed 19,86,118 Stores, spares used 21,97,885 Natural gas 3,97,86,756 Power 1,30,49,928 Water charges 15,787 Repairs maintenance Exp. 88,41,829 Administration expenses 16,47,270 Raw material testing charges 1,18,263 Interest payments 2,96,59,007 9,73,02,843 Establishment expenses : (Rounded off) Salaries and wages 8,92,000 Staff welfare 5,26,000 Repairs maintenance expenses 1,90,000 Rent 10,16,000 Rates taxes 9,000 Communication expenses 3,09,000 Travelling expenses 10,95,000 Establishment expenses-Others 1,09,20,000 1,52,65,000 Folio Maintenance Charges For the maintenance of secretarial r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner of Income-tax observed that the ALV relating to one assessment year is to be assessed in that particular assessment year and accordingly, directed the Assessing Officer to take into consideration the income of Rs. 27,88,800 less Rs. 1,20,000 as shown by the assessee on estimate basis in the income for the year under consideration. 23. Though in the grounds of appeal the addition is stated to be Rs. 49,54,675 it consists of the amount of Rs. 26,92,800 being the additional amount directed to be assessed by the CIT and Rs. 22,61,875 offered by the assessee himself in the return of income. We also find a discussion on the computation of income from house property, details of which are given in paragraph 26.5 of CIT's order as under: Name of the property Admitted ALV as estimated (Rs.) Rent actually realised (Rs.) Difference now to be assessed (Rs.) (Rs.) (Rs.) (Rs.) Flat in Sealord 1,20,000 25,20,000 24,00,000 Twin Tower flat 18,000 60,000 42,000 Parimal building 48,000 2,02,344 1,54,344 Flat in Navrang Basant Co-op. Housing Society Flat in Versova Janak 15,000 2,25,000 2,10,000 Deep Housing Society 9,000 30,000 21,000 Jolly Makers Chambers in para 20.6 of this order 1,20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year 1993-94 was not carried out which resulted in an enhanced allowance to the assessee of Rs. 1,59,94,150. The recomputed figure should have been according to the CIT at Rs. 78,10,000 and thus there was an enhanced allowance of Rs. 81,84,100. The objection raised by the assessee was that this could have been rectified under section 154 and not under section 263. This contention of the assessee was rejected by the CIT by following the decision of the Supreme Court in the case of South India Rolling Mills Ltd. v. CIT [1997] 224 ITR 654 wherein a similar contention raised by the assessee was rejected. The learned counsel of the assessee has raised no objection and submitted that it may be directed to allow 1/10th of the finally determined amount incurred in the initial year. We accordingly uphold the order of the CIT and direct, however that the deduction of 1/10th expenditure of the amount as is finally determined for the purpose be allowed to the assessee. 27. The next dispute is against the disallowance of the payment on account of loyalty coupon amounting to Rs. 10,24,30,110 which was disallowed by the CIT being the amount paid to shareholders who were allotted shares on conve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee. 28. The learned counsel of the assessee submitted that convertible-debentures were issued in September, 1989 and as per the terms of the issue, the debentures were to be converted into two equity shares on 1-6-1990 and 1-6-1992. The payments were to be made as per terms of conversion for getting equity shares in period for three years, the assessee was to pay a sum of Rs. 10 per scrip in cash wherever the debenture holders retain the debentures/shares for three years. The three years period expired in the year under consideration and the assessee had paid a sum of Rs. 10,24,30,110 which was claimed as revenue expenditure and allowed by the Assessing Officer. It is submitted by the assessee that the expenditure on issue of convertible debentures is an allowable deduction in view of the decision of the ITAT in ITA No. 538/Ahd./89, the decisions in the case of Tungabhadra Industries Ltd. and the decisions in Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802 (SC) and Universal Cables Ltd. v. CIT [2000] 243 ITR 371 (Cal). It is further submitted that the expenditure was to save the administration cost of transfer. It is further submitted that it was in the nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the assessee on the conversion of the debentures. It is, therefore, an expenditure in relation to the share capital of the assessee and cannot be said to be an expenditure for raising finance only. The expenditure, therefore, in our opinion, was rightly disallowed by the CIT. 31. In the case of Punjab State Industrial Development Corpn. Ltd., the Supreme Court considered the question of fee paid to the Registrar of Companies for expansion of the capital base of the company and held it to be directly related to the capital expenditure incurred by the assessee and although incidentally that would certainly help in the business of the company and may also help in profit-making, it still detains the character of capital expenditure since the expenditure is directly related to the capital expansion of the capital base of the company. 31.1 The case of Brooke Bond India Ltd., the Supreme Court held that the expenditure incurred by a company in connection with the issue of shares, with a view to increase its share capital, is directly related to the expansion of the capital base of the company, and is capital expenditure, even though it may incidentally help in the business of the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in respect of premium on loan convertible secured debenture was allowed to be spread over and allowed as deduction during the period of redemption. 33. In this case the redemption has also taken place as on 1-6-1990 and 1-6-1992 and the loyalty coupon was to be paid only for retaining the debenture and shares for a period of three years after the debentures have been initially allotted. The expenditure, therefore, is both for raising finance by way of debenture and retaining the debentures for certain period and ultimately converting those debentures into shares and that part alone could be directly relatable to the capital structure of the company. Therefore, in view of the Supreme Court decision in Madras Industrial Investment Corpn.'s case the expenditure is to be bifurcated in three years period from October 1989 to September 1992 and three months period which falls in this year for holding debenture i.e., from 1-4-1992 to 30-6-1992 could not be disallowed. In other words 1/12th (3/36) of Rs. 10,24,30,110 being Rs. 85,35,843 is to be allowed to the assessee. We direct accordingly. The order of the CIT on this ground is modified to this extent. 34. The next dispute is with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect of a bad debt is to be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such bad debt or part thereof is written off or of an earlier year or earlier previous year. By virtue of Explanation below section 36(1)(vii) any bad debt or part thereof is written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee. The assessee made the provision and transferred as such to the EOL. Therefore, the assessee would not be entitled to any deduction of this amount. The two cases of the Gujarat High Court referred to above were before the insertion of the Explanation below section 36(1)(vii) and, therefore, would not be of any help to the assessee. Accordingly, the CIT, in our opinion, was justified in disallowing the same. 37. The next ground in the assessee's appeal against the order of assessment is for the disallowance of expenditure of Rs. 6,51,95,614 relating to issue of debenture claimed as revenue expenditure. This expenditure has been capitalised by the assessee being expenditure in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive, on the other hand, supported the orders of the revenue authorities. 39. We have heard the parties and considered the rival submissions. In the case of VXL India Ltd, the assessee issued convertible debentures of Rs. 125 each out of which Rs. 45 each is to be converted into three shares on 1-7-1983. The expenditure was disallowed by the Assessing Officer on the ground that portion of the convertible debenture is converted into equity shares. The Tribunal referred to the decision of the Supreme Court in the case of India Cements Ltd the decision of the Tribunal in the case of Voltas Ltd. v. Dy. CIT [1998] 61 TTJ (Mum.) 543 as well as in the case of Telco [In IT Appeal No. 1154 (Bom.) of 1985] wherein it was held that the question of convertibility arrives at the time of repayment which is a mode of repayment only. The expenditure was incurred for raising the loan and, therefore, it was an allowable deduction. In the present case, right share of debentures were issued which were to be converted into shares within a period of 15 months. The expenditure when it was incurred was for raising loan and as held by the Tribunal in the case of VXL India Ltd. and decisions referred to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil well or other sources of mineral deposits (including the searching for, discovery or testing of deposits or the winning of access thereto) . The underlined portion namely, likely to assist in the manufacture or processing of goods clearly suggests that know-how covered by this section is which would assist in manufacture of processing of goods. It does not include, in our opinion, the know-how acquired by the assessee for setting up the plant and machinery. Therefore, the assessee was justified in capitalising the same to the plant and machinery and claiming depreciation thereon. This issue is also covered in favour of the assessee by the decision of the Supreme Court in the case of Scientific Engg. House (P.) Ltd. v. CIT [1986] 157 ITR 86 and the decision in the case of CIT v. Elecon Engg. Co. Ltd. [1987] 166 ITR 66 (SC) wherein assessee was held entitled to depreciation incurred on technical know-how in the form of drawings and designs. We, accordingly, allow the claim of the assessee and direct the Assessing Officer to allow depreciation to the assessee in place of deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the correct profits and gains could be deduced from the accounts so maintained and if he was of the opinion that the correct amount could not be deduced from the accounts, he was obliged to have recourse to the proviso to section 145 of the Act. We are, therefore, of the opinion that expenditure which related to the year under consideration as per the mercantile system of accounting being followed by the assessee alone would be allowable. However, we find force in the contention of the assessee that some of the expenditure must have crystallized in the year under consideration though it may relate to earlier year and that should be allowed as a deduction because it becomes an ascertained liability only when the expenditure has crystallized in the year under consideration. We, accordingly, direct the Assessing Officer to allow the claim of the assessee of such an expenditure as relating to the year under consideration and in respect of which the liability has crystallized during the previous year under consideration. 46. In the revenue's appeal against the original order of the CIT (A), the first dispute is with regard to the income of Hot Rolled Coil (Steel-II Division). A sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has to be classified under six heads. It is possible for a company to have six different sources of income, each one of which will be chargeable to income-tax. Profits and gains of business of profession is only one of the heads under which a company's income is liable to be assessed to tax. If a company has not commenced business, there cannot be any question of assessment of its profits and gains of business. That does not mean that until and unless the company commences its business, its income from any other source will not be taxed. The company may keep the surplus funds in short-term deposits in order to earn interest. Such interests will be chargeable under section 56. In other words, if the capital of a company is fruitfully utilised, instead of being kept idle, the income thus generated will be of a revenue nature and not an accretion to capital. Whether the company raised the capital by issue of shares or debentures or by borrowing, will not make any difference to this principle. If borrowed capital is used for the purpose of earning income, that income will have to be taxed in accordance with law. Income is something which flows from the property. Something ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (including interest and finance charges), which would ultimately be capitalised. During the previous year relevant to the assessment year 1983-84, the assessee had received interest income of Rs. 1,08,336. The assessee filed its return in which it claimed that the; interest income of Rs. 1,08,336 should go to reduce the pre-production expenses including the interest and finance charges which would ultimately be capitalised. The Income-tax Officer rejected the assessee's claim that the interest was not eligible to tax. The view of the Income-tax Officer was upheld by the Commissioner of Income-tax (Appeals). The company's further appeal to the Income-tax Appellate Tribunal was dismissed. 49. On these facts it was Held, that the company had surplus funds in its hands. In order to earn income out of the surplus funds, it had invested the amount for the purpose of earning interest. The interest thus earned was clearly of revenue nature and would have to be taxed accordingly. The accountants might have taken some other view but accountancy practice was not necessarily good law. This was not a case of diversion of income by overriding title. The assessee was entirely at liberty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he claim being capital. The CIT(A), however, relying upon the decision in the case of Century Ginning Mfg. Co. 128 Taxation 332 allowed the1 claim as a capital loss in terms of section 45 of the Act. 52. We have heard the parties and considered their rival submissions. In the case of Narang Industries Ltd. the assessee owning a distillery entered into an agreement with P for a scheme for manufacture of bricks and as per the terms of the agreement the assessee was to finance the business. P was to acquire necessary land in consultation with its Chairman and to be in charge of the work, but the staff was to be appointed by the assessee. Pursuant to the agreement, the assessee advanced a sum of Rs. 21,000 but due to partition of the country, the business could not be started. The assessee filed a suit of recovery and nothing could be recovered on its claims and a sum of Rs. 15,700 remained due to the assessee which was written off and the question was whether it is allowable. The Delhi High Court held that the assessee venturing on a new business and the sum of Rs. 21,000 was put in as a capital investment in the new business and, therefore, the loss of Rs. 15,700 was not in connectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cquired the land and became owner of the land before the surrender because then the assessee would be entitled to the benefit of such loss being treated a loss under the head 'capital gain' within the meaning of section 45 of the Act. 56. The next dispute in the revenue's appeal is against the direction of the CIT(A) to give the benefit of utilising own interest-free funds for advancing interest-free loan while making disallowance with regard to funds advanced as interest-free advances. The Assessing Officer disallowed a sum of Rs. 28,23,222 by observing that the assessee had advanced certain interest-free deposits to its sister concern out of interest-bearing loan. Such deposits were to the tune of Rs. 4,85,00,000 to a sister concern and an another advance of Rs. 25 lakhs to Essar Consultants Ltd. The CIT(A) on a perusal of the balance sheet as on 31-3-1993 found that interest-free funds being shareholders' contribution less miscellaneous expenditure amounting to Rs. 82,90,50,000 were available whereas the loan funds amounted to Rs. 11,21,09,00,000. According to him the Assessing Officer was not able to correlate the borrowed funds with interest-free advances. He, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer who was of the view that the certificate only allows the assessee to make the payment but does not specifically state that no tax need to be deducted. Another certificate allowing remittance of payment and also working out the tax payable thereon was submitted before the CIT(A) and it was submitted that the Reserve Bank of India on the basis of the certificate issued by the Income-tax Officer allowed the remittance of the amount without deduction of tax. This, according to the assessee, clearly showed that tax was not required to be deducted. Double Taxation Agreement between India and Singapore was also brought to the focus before the CIT(A). A copy of the agreement was also filed wherein it was stated that work was to start on 16-3-1992 and was to be completed by 30-4-1992. The CIT(A), therefore, held that the present case was covered by the Double Taxation Agreement between India and Singapore. The CIT(A) has decided the issue by taking the new evidence on record without affording an opportunity of being heard to the Assessing Officer. 59. The parties have agreed that the order of the CIT(A) is after taking into consideration the new evidence. We, therefore, vacate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A and the assessee need not make any claim for depreciation of the current year as its admissibility under the law and section 32 only required as to how the allowance of the depreciation was to be quantified, Reference in this connection was also made to the Circular of the Board dated 11-4-1995. The contention of the revenue was negatived by the Supreme Court by stating that the circular merely imposes a duty on the officers of the department to assess the taxpayer in every reasonable way, particularly, in the matter of claiming and securing relief. The officer is required to do not more than to advise the assessee. It does not place any mandatory duty on the officer to allow depreciation if the assessee does not want to claim that. The provisions for claim of depreciation is certainly for the benefit of the assessee and if he does not wish to avail of that benefit for some reason the benefit cannot be forced upon him. Their Lordships further held that it is for the assessee to see if the claim of depreciation is to his advantage. Rather the Assessing Officer should advise him not to claim depreciation if that course is beneficial. That was considered to be the spirit of the circ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulars necessary for granting the two deductions before the Assessing Officer at the time of making the original assessment or not. If the necessary particulars were given and/or the claim was made and it was restricted to nil because there being no or nil income, the assessee would be at liberty to claim the same when the positive income is ascertained and computed by the Assessing Officer subsequently. No such finding has been given by the CIT(A) as to whether particulars for making claim were there in the original assessment or not and whether this was a fact that the assessee was not allowed the claim because there was no positive income. If the assessee has failed to make a claim in the original assessment, the same cannot be claimed in subsequent proceedings while giving effect to the appellate or revision order of the CIT(A) or CIT as the case may be. We, therefore, set aside the order of the CIT(A) and remit the matter back to the file of the Assessing Officer on this issue as well to find out whether the necessary details for allowing the claim of the assessee were there at the time of original assessment and whether any such claim was made by the assessee but restricted to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder was considered erroneous and prejudicial to the interest of revenue and the circumstances under which such a conclusion was arrived was also indicated the show-cause notice. Relying on judicial decision the legal position was also brought to the notice of the assessee that CIT, before reaching his decision has to give the assessee an opportunity of being heard and may or cause to make such inquiry as deems necessary. But this is not the requirement of commencing or initiating proceedings under section 263. Before passing the final order the CIT has make an enquiry after giving an opportunity of being here and then only to pass on necessary instructions to the Act. These requirements have nothing to do with the jurisdiction of the Commissioner. This pertains to the question of natural justice [CIT v. Electro House [1971] 82 ITR 82 (SC)]. It was also brought to the notice of the assessee that the Assessing Officer has not made complete inquiry with reference to certain issues and it will be clear from following discussion that failure to make such inquiries has made the order of the Assessing Officer erroneous and has caused prejudice to the interest of the revenue. The Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fluctuation of exchange rate of foreign currency and that these were to fetch against any rise in future liability in respect of loans taken for purchase of plant and machinery from abroad. The assessee contended that gain on cancellation of foreign exchange contract was a capital receipt not taxable under the IT Act and also that the amount was not deductible from the block of assets, although it was ready to acquisition of capital assets. Assessing Officer held that the loans were for purchase of capital goods and the gains on cancellation of foreign exchange contract should go to reduce the cost/W.D.V. of fixed assets. According to the Assessing Officer the only capital goods purchased from abroad were the plant and machinery which are depreciable assets. Invoking the provisions of section 43A he deducted the gains arising out of cancellation of forward exchange contract from the block of the assets. The depreciation was accordingly reduced. 66.2 According to the CIT the order of Assessing Officer is erroneous and prejudicial to the interest of revenue for the following reasons:- (i) There is no nexus between the gain arising on cancellation of exchange forward contract, and ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not liable to be taxed as capital gains, as there is no transfer of capital assets. Further, it also states, that the gains could not be taxed as speculative profit as foreign exchange is not a commodity as understood in the sense the word 'commodity' as mentioned in section 43(5). (iii) The assessee also furnished certain extracts from Exchange Control Manual. Para 3C. 4 of extract is in connection with forward exchange cover which has been reproduced as under: 3C.4-authorised dealer should satisfy themselves that the underlying commitments are firm and should ensure that forward cover is not provided for anticipated transactions. Cancellation of forward contract: Para 3C.9(a) Authorised dealer may cancel forward contracts booked if so desired by their customers. The exposure can be covered again by the customer with same or another authorised dealer. Authorised dealer will have to ensure that the genuine exposure to the extent of amount of forward contract in respect of a permissible transaction continues to exist. (b) full particulars of cancellation of forward contract of the equivalent US dollars five lakhs and above should be kept on record for verification by Rese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rse of hearing before CIT, the assessee also furnished copies of certain contracts which were entered in connection with purchase of forward exchange contract and cancellation thereof. From the facts on record, CIT observed that the gain which has arisen to the assessee on cancellation of foreign exchange contract have no connection whatsoever with purchase of any assets. The gains were not utilised for the repayment of loans obtained in connection with the purchase of assets from abroad. The gains from cancellation of foreign exchange contract was in rupee and, therefore, could not have been utilised to liquidate any of the foreign exchange liability, including those incurred in connection with acquisition of capital from aboard. Therefore, it is not possible to accept the contention of the assessee that gain on cancellation of foreign exchange contract has in any way gone to reduce the foreign exchange liability in respect of loans obtained for purchase of capital goods; the Assessing Officer was, therefore, not justified in reducing the cost of block of assets by the amount of gain on foreign exchange contract. 67.5 As regards the opinion given by C.C. Chokshi and Company referr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver, when the contract was cancelled the purpose for which it was entered into was given a go-bye. With an eye to earn profit, contract was cancelled and the liability towards foreign exchange loan was not reduced. Instead of receipt of foreign exchange the money was accepted in Indian rupee. In this situation CIT found it difficult to agree with the contention of assessee that it had any nexus or connection with foreign exchange liability, be it loan or acquisition of assets from abroad or any other payment in foreign currency. 67.8 Further the assessee claimed that receipt is a capital receipt not liable to tax. This contention was also not accepted by CIT. The contract was entered into the normal course of business transaction. Any gain on cancellation of such contract will be business profit, it cannot be capital receipt. The plea that it was connected with contract for repayment of loan obtained for acquisition of capital asset was not accepted by CIT. It is also not possible that receipt was of casual or non-recurring nature. In case of Raghuvanshi Mills Ltd, the Hon'ble Supreme Court has held that receipt even if it was casual or non-recurring in nature would be liable t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct was settled by non-delivery. Accordingly contention of the assessee was not accepted. 67.12 CIT further observed that there is yet another angle from which also gain on cancellation of forward exchange can be considered namely, there is an element of adventure in nature of trade in whole process of cancellation of contract. The assessee entered into cancellation for as many as fifty-two contracts and received gain in Indian rupee. The purpose for which contract was entered into was not allowed to be fulfilled. The adventure was thus in the nature of trade and receipt or gain therefrom will be taxable as normal business profit. Keeping all these things in view the CIT directed the Assessing Officer to treat the entire gain on cancellation of foreign exchange contract as revenue receipt. A sum of Rs. 71,93,24,207 was directed to be treated as revenue receipt subject to direction in paras 16.7 and 17.5 of his order. Assessing Officer was directed to include this amount in the total income. The CIT further directed that the depreciation will be reworked as the Assessing Officer had wrongly reduced the block of assets by the amount of gain on foreign exchange contract as indicated ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... encement of production, who gave advance of 100 million US $ in four instalments of 25 million US $ over a period of 18 months. This advance was to be liquidated by the assessee to the extent of 1/3rd in each of the three years from the commencement of commercial production. As stated earlier a forward contract of 100 million US $ was sought from RBI commencing from 1994. US $ 35 lakhs is the interest worked out thereon. 68.4 According to the learned counsel of the assessee Shri S.N. Soparkar, the Commissioner of Income-tax has failed to appreciate that Forward Exchange Contract entered into by the assessee related to reduce the foreign exchange liability for purchase of capital equipment and was, therefore capital receipt and that foreign exchange contracts were undertaken to cover the liability on capital account namely, the repayment of loan taken in foreign currency which were granted for the purchase of capital equipment. He referred in this connection to the decisions of the Supreme Court in the case of Tata Locomotive Engg. Co. Ltd.; Universal Radiators; Swadeshi Cotton Mills Co. Ltd; Sutlej Cotton Mills Ltd. decision of Calcutta High Court in the case of Anglo Indian Jute M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Barendra Prasad Ray at page 306. He also referred to the decision of the Supreme Court in the case of India Cement Ltd., wherein it was held that the loan is not a capital asset and, therefore, the interest pertaining thereto is an allowable revenue deduction. He further referred to the decision of the Supreme Court in the case of Tata Iron Steel Co. Ltd. wherein it was held that the manner of payment does not affect the cost. 70. Hon'ble V.P./A.M. has discussed various aspects of the case including case laws relied by both the parties and held as under: Commissioner of Income-tax is not justified in holding that the gain on cancellation of forward contract in all cases were revenue receipt of assessee and, therefore, liable to tax because (1) reliability towards the loan taken for repayment to the seller and, therefore, it was of the capital account and is relatable to acquisition of capital goods and assets which had not by then reached destination and/installed in factory premises of the assessee and unit was yet not set up. It would reduce the assessee's liability to purchase capital goods. (2) Because the liability towards sponge iron is for existing pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s from abroad. The gains from cancellation of foreign exchange contracts was in rupee and, therefore, could not have been utilised 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 the purchase of capital goods. Accordingly, Assessing Officer was not justified in reducing the cost of block of assets by the amount of gains on foreign exchange contracts. The treatment in books accepted by directors and approved by concerned auditors, is extremely piece of evidence to the fact that receipt is revenue in nature. Each fact has to be decided in its own facts and circumstances. F. Company opted to cancel the contract whereby the liability towards capital expenditure was left uncovered. Basically the Foreign Exchange contracts were entered for hedging the fluctuations in foreign exchange. The purpose for which contract was entered was not fulfilled. Several such contracts were cancelled time and again and gains in Indian rupee was earne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsactions. 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 wherein power subsidy to new industries, based on consumption per unit for small scale industry and percentage of electricity charges, for medium and large industries, subject to specified limit, is revenue receipt and is benefit arising out of business, inasmuch as it went towards reduction in electricity bills, was held as revenue receipt. So CIT has rightly rejected the plea that it was connected with contract for repayment of loans obtained for acquisition of capital assets. J. In the facts and circumstances of the case it justified to accept that receipt was of casual and recurring nature. As held by Hon'ble Supreme Court in Raghuvanshi Mills Ltd. Further Hon'ble Supreme Court in the case of Barendra Prasad Ray has held that expression business is very wide import it means an activity carried continuously and systematically by a person by application of his labour and skill with a view to earn income. Further wide definition h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... settled by nondelivery. Accordingly the contention of the assessee in this regard, is not acceptable. M. It is further interesting to observe that assessee entered into cancellation for as many as 52 contracts and received gains in rupee. The purpose for which the contracts were entered into was not allowed to be fulfilled. The adventure was thus in the nature of trade and the receipt of gains therefore, will be taxable as normal business profit. N. Before concluding it is pertinent to mention here that all cases relied on by the parties have been taken into consideration though the same have not been specifically mentioned. 72. In view of above discussion, CIT was justified in directing the Assessing Officer to treat the entire gains of Rs. 71,93,24,207 on cancellation of foreign exchange contracts, as revenue receipt. REFERENCE UNDER SECTION 255(4) OF INCOME-TAX ACT As there is difference of opinion between the undersigned Members who heard the appeal on the following points, the matter is referred under section 255(4) of the Income-tax Act, 1961 to the Hon'ble President, Income-tax Appellate Tribunal for nominating one or more other members for hearing on the point of differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntire 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/as adventure in the nature of trade/as casual income and/ or profit arising on speculative transactions under section 43(5) of the Act? 74. Facts of the case briefly stated are that the assessee has been manufacturing sponges for the past several years. In order to expand its production capacity, the assessee decided to set up another division of hot salted drain for which it needed imported machine of value of more than Rs. 450 crores. For financing above project the assessee borrowed funds, which were interest bearing. In order to safeguard its interest against fluctuation in foreign currency, repayment in Indian currency, the assessee entered into forward contracts before March, 1992 with Indian Banks to cover its risk and liabilities in foreign exchange. 75. The Government of India changed its policy and as per Notification dated 27-3-1992 permitted the enterprises to cancel forward contracts and enter into new contracts. In the light of above change in policy, the assessee cancelled old contracts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd's case; (5) Anglo India Jute Mills Co. Ltd.'s case; (6) Ambica Mills Ltd.'s case; (7) India Cement Ltd.'s case; (8) Garden Silk Mills Ltd.'s case; (9) Groz-Beckert Saboo Ltd.'s case; (10) V.S. Dempo Co. (P.) Ltd.'s case. Most of above cases related to gain earned on contracts involving foreign exchange or on account of devaluation of rupee. Question involved was whether such gain was a revenue receipt or a capital account. The learned Accountant Member (Vice President) after appraisal and detailed consideration of above decisions, held that gain arising to the assessee to the extent of Rs. 57 crores on cancellation of forward foreign exchange contracts was on capital account. 80. The learned Vice President (A.M.) also relied upon decision of the Tribunal in the of Garden Silk Mills wherein gain on cancellation of similar foreign exchange contracts was said to be taxable as a revenue receipt but this claim of the revenue was rejected by the Tribunal. The learned Vice President reproduced paras 9 and 10 from the above order which is to the following effect:- 9. We have considered the rival submissions. Regarding issue No. 1 relating to the receipt of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the right or entitlement under the forward Exchange Contract, but the cancellation of contract with the other party to the contract, viz., the Bank, and, as such the receipt flowing to the assessee-company on cancellation of the forward foreign exchange contract is on capital account and since there is no transfer within the meaning of section 2(47), the surplus arising to the assessee-company is not liable to tax in view of the decision of the Supreme Court in the case of Vania Silk Mills Ltd v. CIT (191 ITR 647). 10. The attempt of the ld. CIT to hold that the profit arising to the assessee-company on cancellation of forward foreign exchange contract was a revenue receipt taxable under section 28(iv) is rather-misconceived. Firstly, because the assessee is not dealing in machineries in relation to which the foreign exchange contract was 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 realized on cancellation of the contract was in cash, the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluded as under:- 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 arrangement for meeting such liability would also be on capital account and the expenditure by way of interest or exchange fluctuation would increase the capital expenditure; conversely any concession in discharge of liability or gain on account of exchange fluctuation would decrease the capital cost. These would all be items of fixed capital. The expenditure or loss would increase the cost and concession or gain would decrease cost as per accountancy provision and with regard to exchange fluctuation as provided in section 43A of the Act. Again in any foreign exchange is earmarked for purchase of capital assets the loss or gain on account of exchange fluctuation would be on capital account. Similarly if a forward contract is taken to meet the liability in foreign currency of the seller or the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 give the impression of the stability of Indian rupee vis-a-vis US Dollar. 8.26 As regards speculation nature of the gain we observe that section 43(5) applied to transactions of commodities and currency is not a commodity. A commodity ordinarily means processed or processed goods i.e., grain, fruits, vegetable, precious metal etc. It does not include currency. Even otherwise unless one deals in currency which is permitted only to a license holder under the RBI rules it cannot be covered by section 43(5). As aforesaid the assessee had taken forward contracts for meeting liabilities to be discharged in foreign currency and not to deal in the currency, the gain would not be speculative under section 43(5). 8.27 We, therefore, hold that the Commissioner of Income-tax is not justified in holding that the gain on cancellation of forward contract in ail cases were revenue rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment of the liability of Reddington is upheld. 82. The learned Judicial Member did not agree with the conclusion of the learned Vice President (Accountant Member). He held that gain was a revenue receipt. For above conclusion he gave the 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 as 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:- SCHEDULE XVIII Note to financial statement Note 3. The company has cancelled some of the forward exchange contracts and realized a net profit of Rs. 1699,47 lakhs. This has been recognized as other income of the year. The entire amount has been transferred to general reserve. C. However, in computation for filin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced. 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 Accountant 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 CIT v. Tata Locomotive and Engineering Co. Ltd. [1966] 60 ITR 405 (SC) 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 unutilized amount was remitted into India resulting in a surplus in terms of post-devaluation exchange rate, which was held as capital receipt. But in the instant case the profit on cancellation of forward contract was not retained for purpose of capital goods. But same was remitted to India in Indian rupee and same had no nexus with acquisition of capital ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 for foreign exchange cover and to hedge its foreign exchange liability and to avoid loss of any future profits. In case the contract had matured and profit/loss utilized ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 71 crores as assessable income. 84. While supporting the order of the learned Vice President (A.M.), Shri Soparkar emphasized that the assessee admittedly had entered into a genuine forward contract relating to purchase of machinery. The assessee had satisfied all the conditions under which Reserve Bank of India had permitted entrepreneurs to enter into forward foreign exchange contracts. The contracts were cancelled in the light of liberal approach adopted by the Reserve Bank of India as reflected in their Circular dated 27-3-1992. Therefore, receipts earned on cancellation related to a capital asset and was thus a capital receipt not liable to tax. He argued that the Judicial Member was wrong in saying that contracts were inter-connected. This observation was wrong and contrary to record. He drew my attention to page 314 of the Paper Book where purpose of entering into the contract was duly disclosed. The contracts were further approved by Reserve Bank of India. He also referred to page 353 of the Paper Book to show that contracts were entered into to cover foreign exchange risk involved due to fluctuation in the currency needed to purchase of plant and machinery. Referring f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions operates in field of business and not in field of capital gains . It only helps in deciding whether business is speculative or otherwise. It has nothing to do whether capital gains has accrued to the assessee or not. 87. Shri Soparkar further submitted that the mere fact that the assessee had entered into and cancelled 52 contracts did not make any difference to the question of nature and character of receipt. Having regard to requirement of foreign exchange of Rs. 450 crores, the assessee had to enter into large number of contracts. A single party or even few parties were not prepared to take risk of volume of Rs. 450 crores and, therefore, the assessee had to enter into large number of contracts but number of contracts does not matter. The principle, which is applicable to one contract, would be applicable to all the contracts. He argued that all the questions have to be decided in favour of the assessee in the light of decision of the Special Bench. Shri Soparkar accordingly supported proposed order of the learned Vice President (A.M.). 88. Shri Girish Dave, learned DR opposed above submissions. He argued that the matter was not covered by Special Bench's decision. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ering and cancelling of a contract was a business activity. The gain thus accrued to the assessee was liable to be taxed as a business/revenue receipt. It was not received on capital account. Thus decision of Special Bench was distinguishable. 90. Shri Dave further drew my attention to Accounting Standards (AS-11), which was revised in 1993 and was applicable in the case of the assessee. It required as to how gain on account of cancellation of foreign contract was to be shown in the books of account. The assessee in the light of above accounting standard had rightly shown this receipt on revenue account. The entries were made as per report of the directors and in accordance with Schedule 2 to Part-I of the Companies Act. The assessee, therefore, could not be heard to contend that receipts were wrongly shown in the books of account as of revenue nature. The Special Bench did not take into account implications of the change made and referred to above to say that hedging was permitted for all purposes. Shri Dave also referred to changes made in Foreign Exchange Derivative Contract. 91. Shri Dave further submitted that foreign currency was an asset and this position as accepted by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital asset as recorded by the learned CIT(A). Further, the learned Vice President (A.M.) was wrong in saying that cancellation of contract was a one-time affair. It is evident from record that the assessee had been entering and cancelling forward foreign exchange contract throughout the year. Further finding that the assessee was not dealing in foreign currency had nothing to do with the issue involved before the Bench. Purpose and intention as also conduct of the assessee relating to an activity was to be seen to determine whether it was business transaction. It is not necessary that the assessee should be authorized dealer in foreign exchange to make business profit in foreign currency. Shri Dave also challenged finding of the learned Vice President (A.M.) that foreign currency was not a commodity. He argued that above finding was contrary to decision of the Hon'ble Calcutta High Court in the case of CIT v. Surajmull Nagarmull [1981] 129 ITR 169. 95. Shri Dave further supported observations/findings recorded by the learned 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, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... books of account. Shri Soparkar once again emphasized that no single Bank was prepared to take risk of thousand crores and, therefore, the assessee had to enter into several contracts to cover volume of foreign exchange involved for purchase of plant and machinery. Contracts were entered into and cancelled in accordance with different guidelines of Reserve Bank of India. In every transaction, foreign exchange risk was involved. In fact under the guidelines, entrepreneurs like the assessee are prohibited from dealing in foreign exchange. Shri Soparkar relied upon decision of the Bench in the case of Munjal Showa Ltd. v. Dy. CIT [2005] 94 TTJ (Delhi) 227. A copy of above decision was placed on record. 98. Shri Soparkar further submitted that Explanation 3 to section 43A was correctly interpreted by the Special Bench. He further argued that in fact in real terms there was no gain to the assessee. He pointed out that on the date when forward contract was cancelled, there was correspondent increase in the cost of machinery to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of approximately Rs. 450 crores. The assessee needed foreign exchange to acquire machinery and in order to safeguard 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. 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 Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would not depreciate. It was explained that forward foreign exchange contracts were entered mainly to acquire machinery and plant. The assessee never dealt in such contracts nor entering into such contracts and cancellation thereof was assessee's business. The assessee was also not authorized dealer in foreign exchange business. 104. Before the Special Bench, it was further submitted on behalf of the assessee that gains arising from cancellation of forward contracts are in the nature of capital receipts and these were not covered by provision of section 43A. In support of above proposition assessee had placed reliance on the decision in the case of CIT v. Elgi Rubber Product Ltd. [1996] 219 ITR 109 (Mad.) and on case of Beco Engg. Co. Ltd. v. CIT [1999] 236 ITR 344 (Punj. Har.). 105. The learned Departmental Representative before the Special Bench had contended that assessee in that case had indulged in adventure in the nature of trade and this way made gain of 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in brief facts relating to forward contracts in foreign currency which had a crucial bearing on the controversy before them in para 14 of its order. It found that after purchase of machinery abroad assessee had entered into 13 forward contracts in Sterling and Pounds. Six of such contracts related to repayment of interest liabilities whereas 7 contracts related to repayment of principal amount of foreign loans. All these contracts were cancelled on 30-4-1992 pursuant to revised instructions of Reserve Bank of India dated 27-3-1992. The Special Bench observed that liabilities under the contracts were connected with acquisition of capital assets, the contracts were in capital field and gains arising from such cancellation represented capital receipt. The Special Bench referred to observations of Justice Rowlatt in Thew v. South West Africa Co. Ltd. [1924] 9 TC 141 (CA) It also referred to and quoted observations of Justice Clerk in Californian Copper Syndicate v. Harris [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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xchange variation was a capital profit. The aforesaid view was supported by referring to decision of Supreme Court in the case of CIT v. Canara Bank Ltd. [1967] 63 ITR 328, Sutlej Cotton Mills Ltd.'s case, as also decision of Hon'ble Punjab Haryana High Court in Beco Engg. Co. Ltd.'s case. 107. Thereafter, the Special Bench examined implication of provisions of sections 43 and 43A of the Income-tax Act. After considering the relevant case law and Explanations to section 43A, the Special Bench observed as under: 24. Forward foreign exchange contracts entered into by the assessee are clearly covered under the aforesaid Explanation and, therefore, it would need to be read in conjunction with the provision enacted under section 43A(1). section 43A(1) speaks of increase or reduction in the liability of the assessee as expressed in Indian currency for making payments towards the whole or part of the cost of the asset or for repayment 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he present language of the Explanation which makes it inapplicable to a case where the contracts have not been rolled over to the date of actual repayment of the liability. We are unable to accept the interpretation suggested by the learned counsel which in fact would cause grave violence to the language of the provision. Any such interpretation would be contrary to well-accepted principles of interpretation, namely, rule of literal interpretation as well as rule of purposive interpretation. It is an elementary principle of interpretation of statutes, reiterated by Courts time and again that the Court cannot read anything into a statutory provision which is plain and unambiguous. In our considered opinion, the gain arising from cancellation of forward contracts which are connected with the foreign loans raised for purchase of machinery are capital in nature and are liable to be capitalized towards the cost of the 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 Expla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Application of Accounting Standard 11 (AS 11) has also been thoroughly considered by the Special Bench as also application of provision of section 43A. I do not see any scope to add anything to the elaborate discussion already made by the Special Bench on these issues. Shri Dave has also emphasized that the finding of the learned Vice President in paras 8.25 and 8.26 of the proposed order as incorrect but this in my opinion does not make any material difference to the final conclusion arrived in the case. The basic finding recorded by the learned Accountant Member as also by the Special Bench is that forward contracts were entered to procure a capital asset. Therefore, gain or loss arising on cancellation of forward contracts would be on capital account. 111. Further the assessees are not dealers in foreign exchange as transactions were carried on capital account having direct connection 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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