ACIT, CHENNAI V. M/s. Chettinad Cement Corporation Ltd., CHENNAI

ITA 1235/CHNY/2008

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 4881 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-06-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 22-06-2011
• Assessment Year: 1993-1994
• Appeal Filed On: 06-06-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K E B RENGARAJAN
• Assessee Lawyers: S SRIDHAR
• Keywords: Capital asset; Capital receipt

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BENCH A CHENNAI BEFORE SHRI ABRAHAM P.GEORGE, ACCOUNTANT MEMBER AND SHRI GEORGE MATHAN, JUDICIAL MEMBER .. ITA NO.1235/MDS./08 ASSESSMENT YEAR: 1993-94 ACIT, COMPANY CIRCLE-I(3), CHENNAI. VS. M/S.CHETTINAD CEMENT CORPORATION LTD., RANI SEETHAI HALL, 603, ANNA SALAI, CHENNAI 600 006. PAN AAACC 3130 A (APPELLANT) (RESPONDENT) DEPARTMENT BY : SHRI K E B RENGARAJAN ASSESSEE BY : SHRI S.SRIDHAR O R D E R PER ABRAHAM P.GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY THE REVENUE, ITS GRIEVAN CE IS THAT CIT(A) DELETED THE ADDITION MADE BY THE ASSESSING O FFICER TOWARDS GAIN ON ACCOUNT OF CANCELLATION OF FORWARD COVER EXCHANGE CONTRACT. 2. SHORT FACTS, APROPOS ARE THAT ASSESSEE ENGAGED IN T HE BUSINESS OF MANUFACTURING CEMENT HAD DURING THE RE LEVANT PREVIOUS YEAR TAKEN A FOREIGN CURRENCY LOAN FROM IF CA FOR PURCHASE OF PLANT AND MACHINERY. IN ORDER TO COVER THE RISK ASSOCIATED WITH FLUCTUATION IN FOREI GN CURRENCY WHILE REPAYING THE LOAN, ASSESSEE ALSO ENTERED INTO FORWARD COVER CONTRACT WITH HSBC BANK. HOWEVER, DURING THE PAGE OF 7 ITA.1235 /MDS/08 CHETTINAD CEMNET CORPORATION LTD 2 RELEVANT PREVIOUS YEAR, ASSESSEE IN ITS WISDOM CANC ELLED THE FORWARD COVER CONTRACT WITH HSBC BANK AND IN THE PR OCESS EARNED A SUM OF RS.86.02 LAKHS. ASSESSEE TREATED S UCH GAIN AS CAPITAL RECEIPTS AND ADJUSTED IT FROM THE COST O F ASSETS ACQUIRED. ASSESSING OFFICER HOWEVER, TREATED IT AS A REVENUE GAIN AND TAXED IT. COMMISSIONER OF INCOME TAX(A) O N ASSESSEES APPEAL DELETED THE ADDITION. ASSESSEE MO VED FURTHER APPEAL BEFORE THE TRIBUNAL, WHICH DIRECTED THE ASSESSING OFFICER TO EXAMINE THE TERMS OF THE LOAN AGREEMENT AS ALSO THE FORWARD COVER CONTRACT AND DECIDE ON TH E ISSUE AFRESH. IN THE FRESH PROCEEDINGS, PLEADING OF THE ASSESSEE WAS THAT THE GAIN ARISING OUT OF TREATMENT OF FORWA RD COVER CONTRACT, WHICH WAS TAKEN FOR COVERING FLUCTUATIONS IN EXCHANGE RATES AT THE TIME OF REPAYMENT OF LOANS TA KEN FOR ACQUIRING FIXED ASSETS WERE TO BE CAPITALIZED ALONG WITH THE COST OF FIXED ASSETS. HOWEVER, AS PER THE ASSESSING OFFICER, IN ASSESSEES CASE, FORWARD COVER CONTRACT DID NOT GO THROUGH ITS FULL TENURE BUT ASSESSEE HAD CANCELLED IT TO TAKE A DVANTAGE OF FOREIGN EXCHANGE FLUCTUATION AND THEREFORE, HE CONS IDERED THE AMOUNT AS REVENUE RECEIPT ACCOUNT. 3. ASSESSEE MOVED IN APPEAL BEFORE THE COMMISSIONE R OF INCOME TAX(A) IN SECOND ROUND. SUBMISSION OF ASSES SEE WAS THAT ASSESSING OFFICER DIRECTED TO EXAMINE WHETHER THE GAINS AROSE ON ACCOUNT OF INTEREST LIABILITY OR REPAYMENT OF LOAN. AS PER ASSESSEE, THE GAINS AROSE ON ACCOUNT OF CANCEL LATION OF FORWARD COVER CONTRACT, WHICH WAS TAKEN FOR REPAYM ENT OF LOANS FOR ACQUISITION OF FIXED ASSETS, AND SUCH GAI NS HAD NECESSARILY TO BE TREATED AS CAPITAL RECEIPT ONLY. IN OTHER PAGE OF 7 ITA.1235 /MDS/08 CHETTINAD CEMNET CORPORATION LTD 3 WORDS. AS PER ASSESSEE THE GAINS COULD HAVE BEEN T REATED IN THE REVENUE ACCOUNT, ONLY IF IT WAS RELATABLE TO IN TEREST LIABILITY. LD. COMMISSIONER OF INCOME TAX(A) WAS APPRECIATIVE OF THIS CONTENTION. HE HELD AS UNDER AT PARA-4 OF HIS ORDER :- I HAVE CONSIDERED THE SUBMISSIONS OF THE REPRESENTATIVE AND GONE THROUGH THE AGREEMENT. THE APPELLANT WAS ALSO REQUIRED TO CLARIFY AS TO WHETHE R THE FOREIGN COVER CONTRACT IS IN RESPECT OF LOAN REPAYM ENT OR INTEREST LIABILITY ON THE LOAN. THE APPELLANT C LARIFIED THAT IT WAS ONLY IN RESPECT OF REPAYMENT OF LOAN AN D NOT IN RESPECT OF INTEREST LIABILITY. IN THE ABOVE CIRCUMSTANCES, I ACCEPT THE PLEA OF THE REPRESENTAT IVE THAT THE ASSESSING OFFICER PROCEEDED ON THE BASIS T HAT FOREIGN COVER CONTRACT WAS CANCELLED BEFORE THE EXP IRY OF TIME FOR REPAYMENT OF LOAN. I FIND THAT THE CRI TERIA APPLIED BY THE ASSESSING OFFICER IS WRONG. THE ASSESSING OFFICER HAS TO ONLY EXAMINE AS TO WHETHER THE GAIN AROSE ON THE CAPITAL FIELD OR ON THE REVEN UE FIELD. IF THE GAIN AROSE IN RESPECT OF CAPITAL FIEL D, THE SAME SHOULD BE TREATED AS CAPITAL RECEIPT AND IF TH E GAIN AROSE OUT OF CIRCULATING CAPITAL, THE SAME SHO ULD BE TREATED AS REVENUE RECEIPT. THE HONBLE SUPREME COURT IN THE CASE OF SUTLEJ COTTON MILLS LTD 116 I TR 1 REITERATED ITS VIEW THAT THE QUESTION WHETHER THE L OSS SUFFERED BY THE ASSESSEE IN THE PROCESS OF CONVERSI ON OF FOREIGN EXCHANGE INTO INDIAN CURRENCY DUE TO EXCHANGE RATE FLUCTUATION WOULD BE A TRADING LOSS O R A CAPITAL LOSS WOULD BE DETERMINED ON THE BASIS OF A PAGE OF 7 ITA.1235 /MDS/08 CHETTINAD CEMNET CORPORATION LTD 4 FACTS WHETHER THE AMOUNTS IN FOREIGN EXCHANGE WERE HELD AS CAPITAL ASSET OR AS TRADING ASSETS. SIMIL AR VIEW WAS TAKEN BY THE HONBLE MADRAS HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. SOUTH INDIA VISCOSE LTD [120 ITR 45]. FURTHER, EXPLANATI ON 3 TO SEC.43A WOULD BE APPLICABLE IN THIS CASE AS PER WHICH THE GAIN AROSE WOULD GO TO REDUCE THE COST OF THE ASSET. THIS IS THE VIEW TAKEN BY THE HONBLE DE LHI TRIBUNAL IN THE CASE OF M/S.APOLLO TYRES LTD [89 IT D 235] FOLLOWING THE ABOVE DECISION, I FIND THAT THE ASSESSING OFFICER IS NOT CORRECT IN TAXING THIS AMO UNT AS THE GAIN AROSE ON THE CAPITAL FIELD. THE APPELL ANT HAS ALREADY REDUCED THE RECEIPT AGAINST THE COST OF THE ASSET AS PER EXPLANATION 3 TO SECTION 43A. AS LONG AS THE GAIN IS ON CANCELLATION OF FOREIGN EXCHANGE COV ER CONTRACT IN RESPECT OF LOAN LIABILITY AND NOT IN RE SPECT OF INTEREST LIABILITY, THE SAME CAN NOT BE TAXED. I TH EREFORE, DIRECT THE ASSESSING OFFICER TO DELETE THE ADDITION . 4. NOW BEFORE US, THE LD. DR PLACING A COPY OF AGR EEMENT ENTERED INTO BY ASSESSEE WITH M/S.IFCA SUBMITTED T HAT THE LOANS RAISED WERE NOT EXCLUSIVELY FOR ACQUISITION O F PLANT AND MACHINERY. ACCORDING TO HIM, THEREFORE, COMMISSION ER OF INCOME TAX(A) WITHOUT ANY REASON ACCEPTED THE ARGUM ENT OF THE ASSESSEE THAT THE FORWARD COVER CONTRACT WAS AG AINST LOANS TAKEN FOR ACQUIRING CAPITAL ASSETS. THEREFORE, ACC ORDING TO HIM REVENUE RECEIPTS EMANATING FROM CANCELLATION OF FOR WARD COVER CONTRACT, DONE BY THE ASSESSEE TO TAKE ADVANTAGE OF FAVOURABLE FOREIGN EXCHANGE FLUCTUATION, WOULD NEVE R GO TO PAGE OF 7 ITA.1235 /MDS/08 CHETTINAD CEMNET CORPORATION LTD 5 REDUCE THE COST OF CAPITAL ASSET. PER CONTRA THE LD . AR SUPPORTED THE ORDER OF THE LD. COMMISSIONER OF INCO ME TAX(A). 5. WE HAVE PERUSED THE ORDERS OF THE AUTHORITIES BELOW AND HEARD THE RIVAL CONTENTIONS. THE TERMS CONCERNING THE UTILIZATION OF LOAN TAKEN BY THE ASSESSEE FROM IFCA IS AVAILABLE AT CLAUSE-C OF PARA 6.1. OF THE AGREEMENT PRODUCED BY LD. DR. THIS IS REPRODUCED HEREUNDER:- (C) UTILIZATION OF LOAN: USE THE PROCEEDS OF THE LOAN AND THE GOODS AND SERVICES PURCHASED OR OBTAINED WITH SUCH PROCEEDS F OR THE PURPOSE OF THE PROJECT, AND FURNISH TO THE LEND ERS AT THE END OF EACH MONTH FOLLOWING THE MONTH IN WHICH THE LOAN MONEYS ARE DISBURSED BY THE LENDERS A STATEMEN T SHOWING THE MANNER IN WHICH THE SAID MONEYS OR PORT ION THEREOF HAVE BEEN UTILIZED. IF, FOR ANY REASON, THE BORROWER FINDS ITSELF UNABLE TO COMPLY WITH THIS CO NDITION, IT SHALL IMMEDIATELY INFORM THE LENDERS IN WRITING OF THE SAME AND THE REASONS THEREFORE AND SHALL, UNLESS -- - WISE AGREED TO BY THE LENDERS, REPAY FORTHWITH THE OUTSTANDING --- OF THE LOANS, TOGETHER WITH INTERE ST AND ALL OTHER --- RESPECT THEREOF. IT IS CLEAR FROM THE ABOVE THAT THE LOANS WERE RAIS ED FOR THE PURPOSE OF THE PROJECT. THUS, CONTENTION OF THE ASS ESSEE THAT LOANS WERE FOR ACQUIRING A CAPITAL ASSET STANDS JUS TIFIED. COST OF THE NEW PROJECT COULD ONLY BE CAPITALIZED TILL S UCH TIME PROJECT GOES ON COMMERCIAL STREAM. THERE IS NO CAS E FOR THE PAGE OF 7 ITA.1235 /MDS/08 CHETTINAD CEMNET CORPORATION LTD 6 REVENUE THAT THE RECEIPTS ON ACCOUNT OF CANCELLATIO N OF FOREIGN EXCHANGE COVER CONTRACT WERE AFTER COMMERCIAL STREA MING OF THE PROJECT. ASSESSEE HAD TAKEN A RISK COVER FOR RE PAYMENT OF THE LOANS, WHICH WERE RAISED FROM IFCA FOR THE PURP OSE OF MEETING ITS PROJECT COST. THERE IS NOTHING ON RECO RD TO SHOW THAT THE FOREIGN EXCHANGE COVER WAS INTENDED TO COV ER EXCHANGE RATE DIFFERENCES ON INTEREST ACCOUNT. THIS BEING SO, THE RECEIPTS EARNED BY THE ASSESSEE ON CLOSURE OF T HE CONTRACT WHICH WAS TAKEN FOR COVERING FLUCTUATIONS, THAT WOU LD HAVE ARISEN ON REPAYMENT OF LOAN RAISED FOR FINANCING TH E PROJECT, COULD ONLY BE CONSIDERED AS CAPITAL RECEIPT AND IT WOULD GO TO REDUCE THE CAPITAL COST OF THE PROJECT. COMMISSION ER OF INCOME TAX(A) WAS THEREFORE JUSTIFIED IN DELETING T HE ADDITION MADE BY THE ASSESSING OFFICER. NO INTERFERENCE IS R EQUIRED. 6. IN RESULT, THE APPEAL OF THE REVENUE STANDS DIS MISSED. ORDER PRONOUNCED IN THE OPEN COURT AT THE TIME OF HEARING THE APPEAL ON 22 ND JUNE, 2011. ( GEORGE MATHAN ) ( ABRAHAM P. GEORGE ) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 22 ND JUNE, 2011. K S SUNDARAM COPY TO: ASSESSEE/AO/CIT (A)/CIT/D.R./GUARD FILE PAGE OF 7 ITA.1235 /MDS/08 CHETTINAD CEMNET CORPORATION LTD 7 DATE INITIALS 1. DRAFT DICTATED ON 22.06.11 2. DRAFT PLACED BEFORE AUTHORITY 22.06.11 3. DRAFT PLACED BEFORE THE SECOND MEMBER 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER 5. APPROVED DRAFT COMES TO P.S. 6. KEEP FOR PRONOUNCEMENT ON 7. FILE SENT TO THE BENCH CLERK 8. DATE ON WHICH FILE GOES TO THE 9. DATE OF DISPATCH OF ORDER