The ITO, Ward-4(3), Ahmedabad V. Hazira Port Pvt.Ltd., Ahmedabad

ITA 2749/AHD/2009

• Counselvise Citation: 274920514 RSA 2009
• Duration Of Justice: 1 year(s) 11 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 28-09-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 05-10-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K GUPTA
• Assessee Lawyers: P M MEHTA
• Keywords: Capital asset; Business income; Depreciation; Diversion of income; Capital receipt
• Section: 143(3)

Judgement Text

, , , , , IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD, C BENCH . .. . . .. . , , , , !' !' !' !', , , , #$ #$ #$ #$ %&' ( %&' ( %&' ( %&' (, , , , ) ) ) ) & ' & ' & ' & ' BEFORE S/SHRI G.D. AGARWAL, VICE-PRESIDENT AND BHAVNESH SAINI, JUDICIAL MEMBER) ITA NO.2749/AHD/2009 [ASSTT.YEAR : 2005-2006] ITO, WARD-4(3) AHMEDABAD. /VS. HAZIRA PORT PVT. LTD. 101-103, ABHIJEET-II MITHAKHALI CICLE NAVRANGPURA, AHMEDABAD. PAN : AAACH 9142 C ITA NO.2750/AHD/2009 [ASSTT.YEAR : 2005-2006] ITO, WARD-4(3) AHMEDABAD. /VS. HAZIRA LNG P. LTD. 101-103, ABHIJEET-II MITHAKHALI CICLE NAVRANGPURA, AHMEDABAD. PAN : AAACH 9143 C ( (( (+, +, +, +, / APPELLANT) ( (( (-.+, -.+, -.+, -.+, / RESPONDENT) ) / 0 &/ REVENUE BY : SHRI S.K. GUPTA 23 / 0 &/ ASSESSEE BY : SHRI P.M. MEHTA 45 / 36/ DATE OF HEARING : 29 TH SEPTEMBER, 2011 789 / 36/ DATE OF PRONOUNCEMENT : 30 TH SEPTEMBER, 2011 &' / O R D E R PER G.D. AGARWAL, VICE-PRESIDENT : THESE ARE TWO REVENUES APPEALS AGAINST ORDER OF THE COMMISSIONER OF INCOME -TAX (APPEALS)-VIII, AHMEDABAD AGAINST THE ORDERS OF THE ASSESSING OFFIC ER UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961. SINCE ISSUES ARE COMMO N IN BOTH THE APPEALS, FOR THE SAKE OF CONVENIENCE, WE DISPOSE OF THE APPEALS BY THIS CONSOLIDATED ORDER. ITA NO.2749/AHD/2009 HAZIRA PORT PVT. LTD. ITA NO.2657/AHD/2009 WITH CO. NO250/AHD/2009 -2- 2. THE ONLY GROUND RAISED IN THIS APPEAL READS AS U NDER: 1. THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION MADE ON ACCOUNT OF GAIN ON FOREIGN EXCHANG E FLUCTUATIONS OF RS.4,21,35,401/-. 3. AT THE TIME OF HEARING BEFORE US, IT STATED BY T HE LEARNED DR THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS NOT COMMENCED ANY BUSINESS. THIS FACT IS EVIDENT FROM THE NOTE IN THE ASSESSEE S AUDIT REPORT AS WELL AS THE FINDING RECORDED BY THE AO IN THE ASSESSMENT ORDER. THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE MADE A GAIN OF RS .13,04,29,208/- ON ACCOUNT OF CANCELLATION OF FOREIGN EXCHANGE CONTRACTS. THA T OUT OF SUCH GAIN, THE AO TREATED THE GAIN OF RS.4,21,35,401/- AS INCOME FROM OTHER SOURCES. THE CIT(A) DELETED THE ADDITION FOLLOWING THE DECISION OF THE SPECIAL BENCH OF THE ITAT IN THE CASE OF APOLLO TYRES LTD. VS. ACIT, 89 ITD 235 (SB). THE DECISION OF THE THIRD MEMBER OF THE ITAT IN THE CASE OF ESSAR STEEL LTD., 97 ITD 125 (AHD) (TM) WAS ALSO RELIED ON. HE SUBMITTED THAT THE FAC TS IN THOSE CASES WERE DIFFERENT BECAUSE IN BOTH THE CASE, THE ASSESSEE HA D COMMENCED THE BUSINESS. WHILE IN THE CASE OF THE ASSESSEE, NO BUSINESS WAS COMMENCED. HE HAS STATED THAT ON THESE FACTS, THE DECISION OF THE HONBLE AP EX COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. VS. A CIT, 227 ITR 172 WOULD BE APPLICABLE. HE THEREFORE SUBMITTED THAT THE ORDER OF THE CIT(A) ON THIS POINT SHOULD BE REVERSED AND THAT OF THE AO MAY BE RESTOR ED. 4. THE LEARNED COUNSEL FOR THE ASSESSEE, ON THE OTH ER HAND, STATED THAT NOW THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASS ESSEE BY THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF DC IT VS. GARDEN SILK MILLS LTD., 320 ITR 720. HE ALSO STATED THAT THE FACT THA T THE ASSESSEE HAS NOT COMMENCED THE BUSINESS WOULD SUPPORT THE CASE OF TH E ASSESSEE RATHER THAN THE CASE OF THE REVENUE BECAUSE WHEN THE ASSESSEE HAS N OT COMMENCED BUSINESS NATURALLY THE BORROWING IN FOREIGN EXCHANGE WAS FOR THE PURPOSE OF ACQUISITION ITA NO.2657/AHD/2009 WITH CO. NO250/AHD/2009 -3- OF CAPITAL ASSETS. THAT THE CONTRACT OF FOREIGN EX CHANGE WAS MADE IN RESPECT OF THE LOAN TAKEN IN THE FOREIGN EXCHANGE FOR ACQUISIT ION OF CAPITAL ASSETS. THEREFORE, ON THESE FACTS, THE DECISION OF THE HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF GARDEN SILK MILLS LTD. (SUPRA) WOULD BE SQUARELY APPLICABLE. HE ALSO STATED THAT THE DECISION OF THE HONBLE APEX C OURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. (SUPRA) RELIED UPON BY THE LEARNED DR IS ON ALTOGETHER DIFFERENT FACTS THEREFORE, THE SAME WILL NOT BE APPLICABLE IN THE CASE OF THE ASSESSEE. IN THAT CASE, DISPUTE WAS WITH R EGARD TO TAXABILITY OF EARNING OF THE INTEREST INCOME FROM INVESTMENT OF SURPLUS FUND . 5. WE HAVE CAREFULLY CONSIDERED THE ARGUMENTS OF BO TH THE SIDES AND PERUSED THE MATERIAL PLACED BEFORE US. WE FIND THA T THE AO AS WELL AS THE LEARNED DR HAS HEAVILY RELIED UPON THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF TUTICORIN ALKLI CHEMICALS (SUPRA), WHER EIN THE HONBLE APEX COURT HELD AS UNDER: .. THAT THE COMPANY HAD SURPLUS FUNDS IN ITS HANDS . IN ORDER TO EARN INCOME OUT OF THE SURPLUS FUNDS, IT HAD INVESTED TH E AMOUNT FOR THE PURPOSE OF EARNING INTEREST. THE INTEREST THUS EARN ED WAS CLEARLY OF REVENUE NATURE AND WOULD HAVE TO BE TAXED ACCORDING LY. THE ACCOUNTANTS MIGHT HAVE TAKEN SOME OTHER VIEW BUT AC COUNTANCY PRACTICE WAS NOT NECESSARILY GOOD LAW. THIS WAS NOT A CASE O F DIVERSION OF INCOME BY OVERRIDING TITLE. THE ASSESSEE WAS ENTIRE LY AT LIBERTY TO DEAL WITH THE INTEREST AMOUNT AS IT LIKED. THE APPLICATI ON OF THE INCOME FOR PAYMENT OF INTEREST WOULD NOT AFFECT ITS TAXABILITY IN ANY WAY. THE COMPANY COULD NOT CLAIM ANY RELIEF UNDER SECTION 70 OR SECTION 71 SINCE ITS BUSINESS HAD NOT STARTED AND THERE COULD NOT BE ANY COMPUTATION OF BUSINESS INCOME OR LOSS INCURRED BY THE ASSESSEE IN THE RELEVANT ACCOUNTING YEARS. IN SUCH A SITUATION, THE EXPENDIT URE INCURRED BY THE ASSESSEE FOR THE PURPOSE OF SETTING UP ITS BUSINESS COULD NOT BE ALLOWED AS DEDUCTION, NOR COULD IT BE ADJUSTED AGAINST ANY OTHER INCOME UNDER ANY OTHER HEAD. SIMILARLY ANY INCOME FROM A NON-BUS INESS SOURCE COULD NOT BE SET OFF AGAINST THE LIABILITY TO PAY INTERES T ON FUNDS BORROWED FOR THE PURPOSE OF PURCHASE OF PLANT AND MACHINERY EVEN BEFORE COMMENCEMENT OF THE BUSINESS OF THE ASSESSEE. ITA NO.2657/AHD/2009 WITH CO. NO250/AHD/2009 -4- FROM THE ABOVE, IT IS EVIDENT THAT IN THE ABOVE CAS E, DISPUTE WAS WITH REGARD TO THE EARNING OF THE INCOME FROM THE INVESTMENT OF SU RPLUS FUND. THE ASSESSEE HAD SET OFF THE INTEREST INCOME EARNED FROM THE INV ESTMENT OF SURPLUS FUND AGAINST THE EXPENDITURE INCURRED BY THE ASSESSEE FO R SETTING UP OF THE BUSINESS WHICH WAS HELD TO BE NOT ALLOWABLE BY THEIR LORDSHI PS OF THE HONBLE APEX COURT. HOWEVER, IN THE CASE OF THE ASSESSEE, FACTS ARE ALTOGETHER DIFFERENT. IN THIS CASE, THE ASSESSEE HAD TAKEN FOREIGN CURRENCY LOAN OF US DOLLAR FOR FINANCING THE DEVELOPMENT OF PORT PROJECT. ADMITTE DLY, SUCH FOREIGN CURRENCY LOAN WAS UTILISED FOR ACQUISITION OF CAPITAL ASSETS . THE CONTRACT IN THE FOREIGN CURRENCY WAS MADE BY THE ASSESSEE FOR THE REPAYMENT OF SUCH FOREIGN CURRENT LOAN, WHICH WAS TAKEN FOR ACQUISITION OF THE CAPITA L ASSETS. ON THESE FACTS, THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT I N THE CASE OF GARDEN SILK MILLS LTD., (SUPRA) WOULD BE SQUARELY APPLICABLE. THEIR LORDSHIPS HELD AT PAGE NO.727 AND 728 OF THE ITR 320 AS UNDER: ON THE MERITS ALSO, IT IS NOT POSSIBLE TO STATE TH AT THE IMPUGNED ORDER OF THE TRIBUNAL SUFFERS FROM ANY LEGAL INFIRMITY. THE OBSE RVATION OF THE TRIBUNAL AGAINST THE INSTALMENT OF LOAN PAYABLE AND INTEREST PAYABLE ON SUCH LOANS, THE ASSESSEE-COMPANY HAS ENTERED INTO CONTRACT COVERING THE FOREIGN EXCHANGE COMPONENTS TO GUARD AGAINST THE FLUCTUATION IN THE RATE OF THE FOREIGN CURRENCY AS APPEARING IN PARAGRAPH NO. 9 OF THE ORDER HAS TO BE READ IN THE CONTEXT OF THE FOLLOWING FINDING WHICH APPEARS IN THE SAME PAR AGRAPH. THE FOREIGN EXCHANGE ACQUIRED UNDER THE CONTRACT IS FOR THE PUR POSE OF DISCHARGING AN OBLIGATION ON CAPITAL ACCOUNT, I.E. FOR BORROWING F OR THE PURPOSE OF IMPORTING CAPITAL ASSET BY ENTERING INTO THE FOREIGN EXCHANGE FORWARD CONTRACT, THE ASSESSEE-COMPANY WAS MERELY WISHING TO FREEZE ITS C APITAL LIABILITY TO DISCHARGE DEBTS/BORROWING IN FOREIGN EXCHANGE. HENC E, UNDUE EMPHASIS ON BEHALF OF THE REVENUE BY PICKING UP ONE SENTENCE OU T OF THE ENTIRE ORDER AND TRYING TO BUILD A CASE THEREON TO SUBMIT THAT AT LE AST SOME PORTION OF THE SURPLUS WAS RELATABLE TO INTEREST AND THUS ON REVEN UE ACCOUNT DOES NOT MERIT ACCEPTANCE. IT IS NECESSARY TO NOTE THAT THE VERY S AME SENTENCE APPEARS IN THE JUDGMENT RENDERED BY THIS COURT IN THE ASSESSEE'S O WN CASE IN THE JUDGMENT REPORTED IN GARDEN SILK MILLS LTD. V. DEPUTY CIT (N O. 2) [1996] 222 ITR 68 (GUJ) (AT PAGE 70) OF THE REPORTS. THUS, THE FINDING BY THE TRIBUNAL IS THAT THE FORE IGN EXCHANGE WAS ACQUIRED UNDER THE CONTRACT FOR THE PURPOSE OF DISC HARGING AN OBLIGATION ON ACCOUNT, VIZ., TOWARDS BORROWING FOR THE PURPOSE OF IMPORT OF CAPITAL ASSETS, ITA NO.2657/AHD/2009 WITH CO. NO250/AHD/2009 -5- WHICH WOULD INDICATE THAT THE SURPLUS REALISED ON C ANCELLATION OF SUCH CONTRACT WOULD BEAR THE SAME CHARACTERISTIC. AS HEL D BY THE APEX COURT, THE PRINCIPLE THAT IS TO BE APPLIED FOR DETERMINING THE CHARACTER OF A RECEIPT, WHETHER RESULTS IN ANY PROFIT OR LOSS ON ACCOUNT OF APPRECIATION OR DEPRECIATION IN THE VALUE OF FOREIGN CURRENCY HELD BY THE ASSESSEE, UPON CONVERSION INTO ANOTHER CURRENCY, WOULD DEPEND ON W HETHER THE TRANSACTION IS RELATABLE TO A TRADING TRANSACTION OR IS IN RELATIO N TO A CAPITAL ASSET OR IN RELATION TO FIXED CAPITAL. ON READING OF THE ENTIRE CASE LAW ON THE SUBJECT MATTER, IT BECOMES CLEAR THAT THIS PRINCIPLE HAS BE EN REITERATED BY THE APEX COURT TIME AND AGAIN. APPLYING THE SETTLED PRINCIPL ES TO THE FACTS FOUND BY THE TRIBUNAL, IT CANNOT BE STATED THAT THE ASSESSING OF FICER AND THE TRIBUNAL HAVE COMMITTED ANY ERROR IN LAW IN HOLDING THAT THE SURP LUS RECEIVED BY THE ASSESSEE-COMPANY UPON CANCELLATION OF FORWARD FOREI GN EXCHANGE CONTRACT WILL PARTAKE OF CHARACTER OF A CAPITAL RECEIPT. 6. THE FACTS OF THE CASE ARE IDENTICAL BECAUSE THE ASSESSEE HAD ALSO BORROWED THE MONEY FOR THE PURPOSE OF IMPORTING THE CAPITAL ASSETS AND BY ENTERING INTO FOREIGN EXCHANGE FORWARD CONTRACT, TH E ASSESSEE-COMPANY TRIED TO FREEZE ITS CAPITAL LIABILITY TO DISCHARGE DEBT/BORR OWING IN FOREIGN EXCHANGE. THEIR LORDSHIPS OF THE JURISDICTIONAL HIGH COURT HE LD THAT THE PRINCIPLE THAT HAS TO BE APPLIED FOR DETERMINING THE CHARACTER OF THE RECEIPT ON ACCOUNT OF APPRECIATION OR DEPRECIATION IN THE VALUE OF THE FO REIGN EXCHANGE CURRENCY HELD BY THE ASSESSEE WOULD DEPEND ON WHETHER THE TRANSAC TION IS RELATABLE TO THE TRADING TRANSACTION OR IS IN RELATION TO THE CAPITA L ACCOUNT. ADMITTEDLY IN THIS CASE THE TRANSACTION WAS RELATING TO A CAPITAL ASSE T. SIMILAR VIEW IS ALSO TAKEN BY THE SPECIAL BENCH OF THE ITAT IN THE CASE OF APO LLO TYRES LTD. (SUPRA) AND ALSO BY THE THIRD MEMBER, AHMEDABAD B BENCH IN TH E CASE OF ESSAR STEEL LTD. THE LEARNED DR TRIED TO DISTINGUISH THIS DECI SION ON THE GROUND THAT FACTS OF THE ASSESSEES CASE ARE DIFFERENT BECAUSE IN THE ABOVE TWO CASES, THE ASSESSEE HAD COMMENCED BUSINESS WHILE IN THE CASE OF THE ASS ESSEE, THE BUSINESS WAS NOT COMMENCED. IN OUR OPINION, IT IS NOT THE RELEVANT WHETHER THE ASSESSEE HAS COMMENCED THE BUSINESS OR NOT. THE RELEVANT FACT W OULD BE WHETHER THE CONTRACT IN THE FOREIGN EXCHANGE IS RELATABLE TO TH E TRADING TRANSACTION OR IN RELATION TO THE CAPITAL ASSETS. IN FACT, IF THE AS SESSEE HAS NOT COMMENCED ITS ITA NO.2657/AHD/2009 WITH CO. NO250/AHD/2009 -6- BUSINESS, THIS WILL SUPPORT THE CASE OF THE ASSESSE E BECAUSE THEN OBVIOUSLY, THE TRANSACTION WAS MADE IN RELATION TO A CAPITAL ASSET . THEREFORE, IN OUR OPINION BOTH THE DECISIONS OF THE ITAT I.E. IN THE CASE OF APOLLO TYRES LTD. AND ESSAR STEEL LTD. (SUPRA) AND THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF GARDEN SILK MILLS LTD. (SUPRA) WOULD BE SQUARELY APPLICABLE TO THE FACTS OF THIS CASE. RESPECTFULLY FOLLOWING THE SAM E, WE UPHOLD THE ORDER OF THE CIT(A) ON THIS POINT AND REJECT THE REVENUES APPEA L. ITA NO.2705/AHD/2009 HAZIRA LNG PVT. LTD. 6. THE ONLY GROUND RAISED IN THIS APPEAL OF THE REV ENUE READS AS UNDER: 1. THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION MADE ON ACCOUNT OF GAIN ON FOREIGN EXCHANG E FLUCTUATIONS OF RS.6,09,97,186/- 7. AT THE TIME OF HEARING BEFORE US, BOTH THE PARTI ES FAIRLY ADMITTED THAT THE FACTS IN THIS CASE ARE IDENTICAL TO THE FACTS IN TH E CASE OF HAZIRA PORT P. LTD., VIDE ITA NO.2749/AHD/2009. THEREFORE, THEIR ARGUMENTS I N THE CASE OF HAZIRA PORT P. LTD., SHOULD BE CONSIDERED WHILE DISPOSING OF TH IS APPEAL. 8. WE HAVE ALREADY CONSIDERED THE RIVAL CONTENTIONS IN THE CASE OF HAZIRA PORT PVT. LTD. AND FOR THE DETAILED DISCUSSION IN P ARA-5 AND 6 ABOVE, WE ARE OF THE OPINION THAT THE CIT(A) RIGHTLY HELD THE GAIN O N THE FOREIGN EXCHANGE AT RS.6,09,97,186/- TO BE CAPITAL RECEIPTS. WE THEREF ORE UPHOLD THE ORDER OF THE CIT(A) ON THIS POINT AND REJECT THE REVENUES APPEA L. 9. IN THE RESULT, THE REVENUES APPEALS ARE DISMISS ED. ORDER PRONOUNCED IN OPEN COURT ON THE DATE MENTIONE D HEREINABOVE. SD/- SD/- ( %&' ( %&' ( %&' ( %&' ( /BHAVNESH SAINI ) ) ) ) ) /JUDICIAL MEMBER ( . .. . . .. . G.D. AGARWAL) !' !' !' !' /VICE-PRESIDENT