COASTAL GUJARAT POWER LTD, MUMBAI V. CIT 6, MUMBAI

ITA 1410/MUM/2015

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 2713 (ITAT-MUMBAI)
• Duration Of Justice: 7 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-11-2015
• Appeal Filed By: Assessee
• Bench Allotted: C
• Assessment Year: 2009-2010
• Appeal Filed On: 09-03-2015
• Court: TRIBUNAL
• Assessee Lawyers: AGAINST PASSED
• Keywords: Capital asset; Depreciation; Wholly owned subsidiary; Condonation of delay
• Section: 143(3); 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH C MUMBAI. BEFORE SHRI R.C. SHARMA , ACCOUNTANT MEMBER AND SHRI PAWAN SINGH , JUDICIAL MEMBER ITA NO 1410 /MUM/201 5 ASSESSMENT YEAR: - 2009 - 10 COASTAL GUJARAT POWER LIMITED C/O TATA POWER CO. LTD. 34, SANT TUKARAM ROAD, CARNAC BUNDER, MUMBAI 400 009. VS.` THE COMMISSIONER OF INCOME TAX 6 MUMBAI, AAYKAR BHAVAN, M.K. ROAD, MUMBAI 400 020. PAN/GIR NO. AADCC1347A APPELLANT RESPONDENT O RDER PER R.C. SHARMA, AM THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER PASSED BY CIT DATED 26.02.2014 U/S 263 OF THE INCOME TAX ACT FOR ASSESSMENT YEAR 2009 - 10. 2. THIS APPEAL IS BARRED BY 314 DAYS. LD. AR FILED AN APPLICATION FOR CONDONATION OF DELAY, WHEREIN HE HAS MENTIONED THAT THE ASSESSEE WAS OF THE ASSESSEE SHRI F.V. IRANI BY REVENUE BY SHRI DEEPKANT PRASAD DATE OF HEARING 10.08.2015 DATE OF PRONOUNCEMENT 6 - 11 - 2015 2 ITA NO 1410/MUM/2015 ASSESSMENT YEAR: - 2009 - 10 PAGE 2 OF 7 BELIEF THAT THE ISSUE OF TAXABILITY OF GAINS FORWARD EXCHANGE CONTRACTS COULD BE CHALLENGED IN APPEAL AGAINST ORDER U/S.143(3) R.W.S.263 OF THE ACT. SUBSEQUENTLY THE ASSESSEE WAS ADVISED TO FILE AN APPEAL AGAINST THE ORDER OF CIT U/S.263 AS THE AMOUNTS INVOLVED ARE MATERIAL AND CONSIDERING THE RECURRENCE OF SIMILAR ISSUE IN SUBSEQUENT ASSESSMENT YEARS. HENCE, DELAY OF 314 DAYS HAS OCCURRED IN FILING THE PRESENT APPEAL BEFORE THE TRIBUNAL, WHICH MAY KINDLY BE CONDONED . 3. WE HAVE GONE THROUGH THE APPLICATION FOR CONDONATION OF DELAY AND FOUND THAT THERE IS SUFFICIENT CAUSE MENTIONED IN THE APPLICATION FOR DELAY AND CONSIDERING THE SAME, WE CONDONE THE AFORESAID DELAY AND THIS APPEAL IS HEARD ON MERITS. 4 . RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED . F ACTS IN BRIEF ARE THAT ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF SPECIAL PURPOSE VEHICLE FORMED TO FACILITATE THE ACQUISITION OF LAND AND COMPLETE PRELIMINARY FORMALITIES INCLUDING THE REQUIRED STATUT ORY CLEARANCE FOR ESTABLISHING THE 4000 MW ULTRA MEGA POWER PROJECT BASED ON IMPORTED COAL AT MUNDRA IN KUTCH, GUJARAT. THE COMPANY IS A 100% SUBSIDIARY OF TATA POWER CO. LT D. THE ASSESSEE FILED ITS RETURN OF INCOME AT NIL. THE AO PASSED SCRUTINY ASSESS MENT ORDER U/S 143(3) DATED 26.12.2011 WHICH WAS ALLEGED BY THE CIT U/S 263 AS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE INSOFAR AS THE AMOUNT EARNED ON CANCELLATION OF FORWARD CONTRACTS ENTERED IN FOREIGN EXCHANGE WAS NOT TAXED BY THE AO. THE C IT FURTHER OBSERVED THAT AO HAS NOT MADE ANY ENQUIRY WHILE FRAMING ASSESSMENT U/S 143(3) WITH REGARD TO THE GAIN REALIZED ON FORWARD CONTRACT IN FOREIGN EXCHANGE. ACCORDINGLY, HE SET ASIDE THE ORDER OF AO AND RESTORE D THE MATTER BACK TO HIS FILE FOR REDOI NG THE ASSESSMENT DE 3 ITA NO 1410/MUM/2015 ASSESSMENT YEAR: - 2009 - 10 PAGE 3 OF 7 NOVO AFTER VERIFYING THE FACTS REGARDING GAIN REALIZED ON FORWARD CONTRACT IN FOREIGN EXCHANGE. 5 . SHRI F. V. IRANI APPEARED ON BEHALF OF THE ASSESSEE AND CONTENDED THAT THE LD. CIT WAS NOT JUSTIFIED IN OBSERVING THAT FOREIGN EXCHANG E GAIN ON CANCELLATION OF FORWARDING CONTRACTS AMOUNTING TO RS. 62,91,30,554/ - IS REVENUE RECEIPTS LIABLE TO BE TAXED. IT WAS FURTHER CONTENDED THAT THE LD. CIT WAS NOT JUSTIFIED IN OBSERVING THAT UNRECOGNIZED GAIN ON FORWARDING CONTRACTS IN FOREIGN EXCHANGE AMO UNTING TO RS. 74,78,108/ - AND UNRECOGNIZED GAIN IN FORWARD CONTRACT OF RS. 20,32,35,393/ - WAS LIABLE TO TAX. AS PER THE LD. A.R., COMMERCIAL PRODUCTION OF POWER PLANT OF ASSESSEE HAD NOT BEGUN IN THE YEAR UNDER CONSIDERATION, THEREFORE, THE COMPANY HAS C APITALIZED ALL THE EXPENSES INCURRED IN RELATION TO SETTING UP ITS PLANT AND THE GAINS ON FORWARD CONTRACTS WERE REDUCED FROM THE EXPENSES TO BE CAPITALIZED RESULTING IN LESSER CAPITALIZATION TO THAT EXTENT. HE FURTHER CONTENDED THAT DURING THE PROCESS O F INSTALLATION OF PLANT AND MACHINERY , THE ASSESSEE HAS RECEIVED AMOUNT WHICH IS INEXTRICABLY LINKED WITH THE PLANT AND MACHINERY, SUCH RECEIPTS WILL GOES TO REDUCE THE COST OF ASSE TS . THESE RECEIPTS ARE CAPITAL IN NATURE AND CANNOT BE TAXED AS INCOME. F OR THIS PROPOSITION, HE PLACED RELIANCE ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CHALLAPALLI SUGARS LTD. VS. CIT, [1975] 98 ITR 167 (SC) WHEREIN IT WAS HELD THAT EXPENSES INCURRED IN CONNECTION WITH THE ACQUISITION OF PLANT DURING RE - COMMENC EMENT PERIOD FORMS PART OF ACTUAL COST OF PLANT AND THE SAME SHOULD BE CAPITALIZED. FURTHER RELIANCE WAS PLACED IN THE CASE OF SUTLEJ COTTON MILLS LTD., 116 ITR 1. IN VIEW OF THESE SUBMISSIONS 4 ITA NO 1410/MUM/2015 ASSESSMENT YEAR: - 2009 - 10 PAGE 4 OF 7 IT WAS CONTENDED THAT THE ORDER OF AO IS NEITHER ERRONEOUS NO R PREJUDICIAL TO THE INTEREST OF REVENUE. 6 . ON THE OTHER HAND, THE LD. D.R. RELIED ON THE ORDER OF LD. CIT PASSED U/S 263 OF THE ACT AND CONTENDED THAT THE AMOUNT RECEIVED ON ACCOUNT OF GAIN ON CANCELLATION OF FORWARDING CONTRACTS WAS LIABLE TO BE TAXED AS INCOME OF THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION. HE FURTHER CONTENDED THAT T HE AO FAILED TO TAKE INTO ACCOUNT THIS VITAL ASPECT AND COMPLETED THE ASSESSMENT WHEREIN THE GAIN ON CANCELLATION OF FORWARD TRANSACTION WAS ALLOWED TO BE REDUCED FR OM THE CLAIM OF THE EXPENDITURE UNDER THE HEAD 'FINANCE CHARGE'. AS PER THE CIT, ASSESSEE H AS UNRECOGNIZED GAIN IN RESPECT OF FORWARD CONTRACT IN FOREIGN EXCHANGE TO THE EXTENT OF RS.74,7 8 ,10 8/ - . IT IS SEEN THAT NO DETAILS HAVE BEEN CALLED BY THE AO TO FIND OUT HOW AND WHY THESE CONTRACTS WERE ENTERED INTO, WHEN THE ASSESSEE IS ENGAGED I N CONSTRUCTION ACTIVITIES OF POWER PLANT? WHETHER THESE CONTRACTS ARE INTEGRAL PART OF THE MAIN ACTIVITY UNDERTAKEN BY THE ASSESSEE? FINALLY W HEN THESE CONTRACTS WERE SET TLED AND WHAT IS THE OUTCOME, WERE NOT EXAMINED AT ALL. 7 . WE HAVE CONSIDERED THE RIVAL CONTENTIONS, CAREFULLY GONE THROUGH THE ORDERS OF AUTHORITIES BELOW AND FIND FROM THE RECORD THAT THE LD. CIT IN HIS ORDER U/S 263 OBSERVED THAT THE ASSESSEE HAS EARN ED RS. 62,91,30,554/ - ON ACCOUNT OF CANCELLATION OF FORWARDING CONTRACTS ENTERED IN FOREIGN EXCHANGE. THIS INCOME EARNED HAS BEEN REDUCED FROM THE TOTAL FINANCIAL CHARGES DEBITED IN THE ACCOUNTS S INCE THE BUSINESS OF THE ASSESSEE HAS NOT YET STARTED . IN THE YEAR UNDER CONSIDERATION & FOLLOWING THE RATIO OF CHALLAPALLY SUGAR LTD., 5 ITA NO 1410/MUM/2015 ASSESSMENT YEAR: - 2009 - 10 PAGE 5 OF 7 THE CIT WAS NOT JUSTIFIED IN HOLDING THAT THESE GAINS ARISING FROM CANCELLATION OF FORWARD CONTRACT I N FOREIGN EXCHANGE IS TO BE ASSESSED AS 'INCOME FROM OTHER SOURCES' AND T AXED ACCORDINGLY. THE CIT WAS ALSO INCORRECT IN OBSERVING THAT THESE GAINS ON CANCELLATION OF FORWARD CONTRACT ARE PURSUANT TO ACTUAL SETTLEMENT AND THEREFORE, ASSESSEE WAS BOUND TO RECOGNIZE THE SAME AS INCOME. THE LD. CIT ALSO REFERRED TO CBDT INSTRUC TION NO. 3/2010 AND OBSERVED THAT THE A.O. HAS NOT TAKEN PAIN TO CALL FOR FOREIGN EXCHANGE TRANSACTIONS BY CALLING DETAILS AS PER THE REQUIREMENT OF CBDT INSTRUCTION DATED 23.3.2010. ACCORDINGLY, HE HELD THAT ORDER PASSED BY THE A.O. WAS ERRONEOUS AND PRE JUDICIAL TO THE INTEREST OF REVENUE. 8 . IN THIS REGARD WE FIND THAT CGPL WAS INCORPORATED IN 2006 AS A SPECIAL PURPOSE VEHICLE FORMED TO FACILITATE THE ACQUISITION OF LAND AND COMPLETE PRELIMINARY FORMALITIES INCLUDING THE REQUIRED STATUTORY CLEARANCES F OR ESTABLISHING THE 4000 MW (5 UNITS X 800 MW) ULTRA MEGA POWER PROJECT (UMPP) BASED ON IMPORTED COAL AT MUNDRA IN T HE STATE OF GUJARAT. THE BUSINESS OF THE COMPAN Y HAD NOT COMMENCED DURING AY 2009 - 10 UNDER CONSIDERATION . THE COMPANY IS REQUIRED TO PURCHAS E/ACQUIRE OFFSHORE EQUIPMENT, BYPASS VALVES SYSTEMS ETC. TO SET UP A POWER PLANT. THE SAID IMPORTS/PURCHASES FORM PART OF PROJECT CAPITAL OF THE COMPANY WHICH IS REFLECTED AS CAPITAL WORK - IN - PROGRESS DURING THE PRE - COMMENCEMENT PERIOD. THE COMPANY ALSO ENT ERS INTO THE FORWARD CONTRACTS IN RESPECT OF SUCH PAYMENTS TO BE MADE TO THE OVERSEAS SU PPLIERS. 9 . AS PER THE DOCUMENTS PLACED ON RECORD, WE FIND THAT THE GAIN AROSE ON FORWARDING CONTRACTS WAS ON ACCOUNT OF CANCELLATION FOR FORWARDING CONTRACTS 6 ITA NO 1410/MUM/2015 ASSESSMENT YEAR: - 2009 - 10 PAGE 6 OF 7 ENTERED INTO IN CONNECTION WITH THE OFFSHORE EQUIPMENT, BYEPASS VALVE SYSTEM ETC. SINCE THE COMMERCIAL PRODUCTION HAD NOT BEGUN DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE COMPANY CORRECTLY CAPITALIZED ALL THE EXPENSES INCURRED IN RELATION TO SETTING UP OF PLANT AND MACHINERY AND THE GAINS REDUCED FROM THE EXPENSES TO BE CAPITALIZED RESULTING IN LESSER CAPITALIZATION TO THAT EXTENT. OUR VIEW IS FURTHER SUPPORTED BY THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CHALLAPALLY SUGAR LTD. (SUPRA). ACCORDINGLY, WE DO NOT FIND ANY INFIRMITY IN ASSESSEES CLAIM FOR SETTING OF GAINS ON SUCH FORWARD CONTRACTS FROM THE COST OF PLANT AND MACHINERY DURING PRE - COMMENCEMENT STAGE. WITH REGARD TO UNRECOGNIZED GAIN IN FORWARDING CONTRACTS, WE FIND THAT GAIN A RISING ON FORWARD CONTRACT IS AN UNREALIZED GAIN ON AC COUNT OF RESTATEMENT OF THE LIABILITY AT THE YEAR END. THE SAID FORWARD CONTRACTS WERE ENTERED INTO IN CONNECTION WITH THE PURCHASE OF TURBINES. T HE NATURE OF GAIN ON ACCOUNT OF FORWARD CONTRACT IS IN C ONNECTION WITH THE ACQUISITION OF FIXED ASSETS AND IN VIEW OF OUR ABOVE DISCUSSION, THE SAME IS TO BE ADJUSTED FROM THE COST OF THE FIXED ASSETS . THE HONBLE SUPREME COURT IN THE CASE OF SUTLEJ COTTON MILLS LTD. (SUPRA) HELD THAT PROFIT OR LOSS ARISES TO A N ASSESSEE ON ACCOUNT OF APPRECIATION OR DEPRECIATION IN THE VALUE OF FOREIGN CURRENCY HELD AS CAPITAL ASSET OR AS FIXED ASSETS IS LIABLE TO BE TREATED AS CAPITAL IN NATURE, THEREFORE, PROFIT OR LOSS WOULD BE OF CAPITAL NATURE. 10 . IN VIEW OF ABOVE, WE D O NOT FIND ANY MERIT IN THE ORDER OF THE LD. CIT PASSED U/S 263 OF THE ACT AND WE SET ASIDE THE SAME. 11 . IN THE RESULT APPEAL OF THE ASSESSEE IS ALLOWED. 7 ITA NO 1410/MUM/2015 ASSESSMENT YEAR: - 2009 - 10 PAGE 7 OF 7 ORDER PRONOUNCED IN THE OPEN COURT ON THIS 6 T H DAY OF N O V . 2015. S D / - S D / - ( PAWAN SINGH) (R.C. SHARMA ) JUDICIAL MEMBER ACCOUNTANT MEMBE R MUMBAI DATED 6 - 1 1 - 2015 RK, EX SR. PS / P K M COPY TO: THE APPELLANT THE RESPONDENT THE CONCERNED CIT(A) THE CONCERNED CIT THE DR, C BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI