The ACIT, 3(1), V. M/s Shalimar Synthetics P.Ltd.,

ITA 464/IND/2006

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 9486 (ITAT-INDORE)
• Duration Of Justice: 4 year(s) 9 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-03-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 06-01-2011
• Assessment Year: 2000-2001
• Appeal Filed On: 23-06-2006
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Capital asset; Depreciation; Capital receipt; Capital expenditure

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL, INDORE BENCH, INDORE BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER AND SHRI R.C. SHARMA, ACCOUNTANT MEMBER ITA NO. 464/IND/2006 A.Y. 2000-01 ASSTT. COMMISSIONER OF INCOME TAX 3(1), BHOPAL APPELLANT VS M/S SHALIMAR SYNTHETIC (P) LTD. BHOPAL PAN AAFCS-4631-R RESPONDENT C.O. NO. 7/IND/2011 ARISING OUT OF ITA NO. 464/IND/2006 M/S SHALIMAR SYNTHETIC (P) LTD. BHOPA OBJECTOR VS ASSTT. COMMISSIONER OF INCOME TAX 3(1), BHOPAL RESPONDENT REVENUE BY BY : SHRI KESHAV SAXENA CIT DR ASSESSEE BY : SHRI JITENDRA JAIN, ADVOCA TE O R D E R PER R.C. SHARMA, ACCOUNTANT MEMBER THIS IS AN APPEAL FILED BY THE REVENUE AND THE CROS S OBJECTION BY THE ASSESSEE AGAINST THE ORDER OF THE LEARNED COMMISSIONER OF INCOMETAX (APPEALS) DATED 28.3.2006 IN THE 2 MATTER OF ORDER PASSED U/S 143(3)/147 OF THE INCOME TAX ACT, 1961. 2. THE MAIN GROUND IN THE REVENUES APPEAL RELATES TO ADDITION OF RS. 1,00,52,446/- ON ACCOUNT OF APPRECI ATION IN FOREIGN CURRENCY ON REMITTANCE OF FOREIGN FUND DEPO SITED IN FRANKFURT BRANCH OF SBI. THE FACTS, IN BRIEF, ARE THAT THE ASSESSEE HAS ENTERED INTO FOREIGN COLLABORATION AGR EEMENT. THE FOREIGN COLLABORATORS APPLIED FOR 54,000 SHARES AND AGAINST SHARE APPLICATION MONEY THEY HAD DEPOSITED RS. 54,00,000/- IN DM WITH SBI FRANKFURT BRANCH AFTER O BTAINING PERMISSION FROM THE RBI WHICH WAS GIVEN BY THE RBI VIDE ITS PERMISSION LETTER DATED 16.8.1989. THE ASSESSEE H AD ALSO GIVEN ADVANCE TO FOREIGN COLLABORATOR AGAINST SUPPL Y OF PLANT AND MACHINERY. HOWEVER, THE PROJECT OF THE ASSESSEE COMPANY WAS ABUNDANT, ACCORDINGLY, IT WAS UNDER OBL IGATION TO REPAY THE SHARE APPLICATION MONEY RECEIVED FROM THE COLLABORATORS. AT THE TIME OF REPAYMENT DURING ASSE SSMENT YEAR 2000-01 DUE TO APPRECIATION IN VALUE OF FOREIG N CURRENCY, THE CREDIT BALANCE OF THE ASSESSEE WAS MORE BY THE AMOUNT OF RS.1,00,52,446/-. AS THE PROJECT WAS ABUNDANT , TH E RBI ALSO PERMITTED THE ASSESSEE TO ADJUST THE ADVANCE GIVEN TO THE COLLABORATORS FOR SUPPLY OF PLANT AND MACHINERY AGA INST THE CREDIT BALANCE IN THE SHARE CAPITAL ACCOUNT. ACCOR DINGLY, THE 3 ASSESSEE WAS TO PAY THE DIFFERENCE BETWEEN THE CRED IT BALANCE IN THE FOREIGN ACCOUNT AS REDUCED BY THE AM OUNT OF ADVANCE ALREADY GIVEN FOR PLANT AND MACHINERY. THU S, THE FUND LYING IN THE FOREIGN BANK ON ACCOUNT OF THE AM OUNT RECEIVED FROM FOREIGN COLLABORATOR AGAINST ALLOTMEN T OF SHARES WAS IN THE NATURE OF CAPITAL RECEIPT AND ALSO ADVAN CE GIVEN TO THE COLLABORATOR FOR SUPPLY OF PLANT AND MACHINERY WAS ALSO OF THE CAPITAL NATURE. HOWEVER, THE EXCESS AMOUNT ON ACCOUNT OF FLUCTUATION IN FOREIGN EXCHANGE RATE WAS TREATED BY THE ASSESSING OFFICER AS REVENUE RECEIPT AND THE SAME W AS BROUGHT TO TAX NET. BY THE IMPUGNED ORDER, THE LEA RNED COMMISSIONER OF INCOMETAX (APPEALS), AFTER CONSIDER ING THE PERMISSION LETTER ISSUED BY RBI FOR OBTAINING THE S HARE CAPITAL MONEY AND ALSO PERMISSION LETTER GIVEN FOR REPAYMEN T OF THE SAME AFTER ADJUSTING THE ADVANCE GIVEN AGAINST THE SUPPLY OF PLANT AND MACHINERY, CAME TO THE CONCLUSION THAT BO TH THE AMOUNTS WERE STANDING ON CAPITAL ACCOUNT. HE, THE REFORE, APPLIED THE PROPOSITION LAID DOWN BY THE HONBLE SU PREME COURT IN THE CASE OF SATLUJ COTTON MILLS LIMITED; 1 16 ITR 1 AND M/S TATA LOCOMOTIVE & ENGG. COMPANY LIMITED; 50 ITR 405, WHEREIN IT WAS HELD THAT FOREIGN CURRENCY REMITTANC E RECEIVED BY THE ASSESSEE PARTAKES THE NATURE OF CAPITAL RECE IPT NOT LIABLE TO TAX. FOLLOWING WAS THE OBSERVATION OF TH E HONBLE 4 SUPREME COURT IN THE CASE OF SATLUJ COTTON MILLS LI MITED (SUPRA) :- WHERE PROFIT OR LOSS ARISES TO AN ASSESSEE ON ACCOUNT OF APPRECIATION OF DEPRECIATION IN THE VALUE OF FOREIGN CURRENCY HELD BY HIM, ON CONVERSION INTO ANOTHER CURRENCY, SUCH PROFIT OR LOSS WOULD ORDINARILY BE TRADING PROFIT OR LOSS IF THE FOREIGN CURRENCY IS HELD BY THE ASSESSEE ON REVENUE ACCOUNT OR AS A TRADING ASSET OR AS PART OF CIRCULATION CAPITAL EMBARKED IN THE BUSINESS. BUT, IF ON THE OTHER HAND, THE FOREIGN CURRENCY IS HELD AS A CAPITAL ASSET OR AS FIXED CAPITAL, SUCH PROFIT OR LOSS WOULD BE OF CAPITAL NATURE. 3 BY APPLYING THE PROPOSITION LAID DOWN BY THE HON BLE SUPREME COURT, THE LEARNED COMMISSIONER OF INCOMETA X (APPEALS) REACHED THE CONCLUSION THAT THE DOCUMENTS PLACED BEFORE HIM HAVE ESTABLISHED THE FACTS THAT THE ASSE SSEE HAS SENT MONEY TO THE FOREIGN COMPANY M/S J. WRITHS & C OMPANY FOR THE PURCHASE OF MACHINERY AND TECHNICAL KNOW-HO W AND THE CONSIDERATION WAS SUBSEQUENTLY REPAID TO THE AS SESSEE COMPANY ON ABANDONMENT OF THE PROJECT. THE CONTENT ION OF THE LEARNED COUNSEL FOR THE ASSESSEE IS, THEREFORE, CORRECT. HE, THEREFORE, DELETED THE ADDITION OF RS.1,00,52,446/- BECAUSE THIS RECEIPT OF CAPITAL NATURE IS NOT ASSESSABLE TO TAX. 4. AGGRIEVED BY THE ABOVE ORDER, THE REVENUE IS IN APPEAL BEFORE US. 5 5. WE HAVE CONSIDERED THE RIVAL CONTENTIONS, CAREFU LLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND DEL IBERATED ON THE CASE LAWS DISCUSSED BY THE LOWER AUTHORITIES IN THEIR RESPECTIVE ORDERS AND THOSE CITED BY THE LEARNED CO UNSEL FOR THE ASSESSEE AND THE LEARNED DR DURING THE COURSE O F HEARING BEFORE US, IN THE CONTEXT OF FACTUAL MATRIX OF THE CASE. FROM THE RECORD WE FIND THAT THE MONEY WAS RECEIVED BY THE A SSESSEE ON ACCOUNT OF SHARE CAPITAL GIVEN BY THE FOREIGN CO LLABORATOR AND THE FUND WAS KEPT LYING IDLE IN THE FOREIGN BAN K ACCOUNT WITH SBI FRANKFURT BRANCH. THE ASSESSEE HAS ALSO G IVEN ADVANCE TO THE COLLABORATOR FOR SUPPLY OF PLANT AN D MACHINERY. AS THE PROJECT WAS ABANDONED, THE ASSESSEE WAS UNDE R OBLIGATION TO REPAY THE SHARE CAPITAL AND ALSO TO G ET BACK THE MONEY ADVANCED FOR PLANT AND MACHINERY. THE RBI HA S ALSO GRANTED PERMISSION FOR REMITTANCE OF THE BALANCE AM OUNT STANDING IN SHARE CAPITAL ACCOUNT AFTER ADJUSTING T HE ADVANCE GIVEN FOR PLANT AND MACHINERY. THE MONEY RECEIVED B Y THE ASSESSEE ON SHARE CAPITAL ACCOUNT AS WELL AS THE MO NEY PAID FOR PLANT AND MACHINERY, BOTH WERE ON CAPITAL ACCOU NT. THEREFORE, ANY APPRECIATION OR DEPRECIATION WITH RE SPECT TO THESE MONEYS ON ACCOUNT OF DEVALUATION OF CURRENCY, IS LIABLE TO BE TREATED AS CAPITAL RECEIPT/CAPITAL EXPENDITUR E. IF DUE TO FLUCTUATION IN CURRENCY, THE ASSESSEE GOT HIGHER AM OUNT OUT OF 6 THE CREDIT BALANCE IN SHARE CAPITAL ACCOUNT, THE SA ME IS LIABLE TO BE TREATED AS CAPITAL RECEIPT NOT LIABLE TO TAX. SIMILARLY, IF ANY HIGHER AMOUNT LIABLE TO BE PAID TO SUPPLIER ON ACCOUNT OF REFUND OF ADVANCE DUE TO APPRECIATION IN VALUE OF F OREIGN CURRENCY, THE SAME IS NOT LIABLE TO BE ALLOWED AS R EVENUE EXPENDITURE. HONBLE SUPREME COURT IN THE CASE OF SUTLEJ COTTON MILLS COMPANY LTD. (SUPRA) HELD THAT WHERE P ROFIT OR LOSS ARISES TO THE ASSESSEE ON ACCOUNT OF APPRECIAT ION OR DEPRECIATION IN FOREIGN CURRENCY HELD BY HIM, ON CO NVERSION INTO ANOTHER CURRENCY, SUCH PROFIT OR LOSS WOULD BE TRADING PROFIT OR LOSS IF THE FOREIGN CURRENCY IS HELD BY T HE ASSESSEE ON REVENUE ACCOUNT OR AS A TRADING ASSET OR AS A PART OF CIRCULATING CAPITAL. HOWEVER, IF, ON THE OTHER HAN D, THE FOREIGN CURRENCY IS HELD AS CAPITAL ASSET OR AS FIXED CAPIT AL, SUCH PROFIT OR LOSS WOULD BE OF CAPITAL NATURE. APPLYING THIS PROPOSITION TO THE SHARE CAPITAL HELD IN FOREIGN BANK ACCOUNT, WHI CH IS PURELY UNDER CAPITAL HEAD, ANY APPRECIATION OR DEPRECIATIO N ATTRIBUTABLE TO SUCH ACCOUNT IS CAPITAL RECEIPT OR THE CAPITAL EXPENDITURE. 6. IN VIEW OF THE ABOVE, WE DO NOT FIND ANY INFIRMI TY IN THE ORDER OF THE LEARNED COMMISSIONER OF INCOMETAX (APP EALS) IN TREATING THE EXCESS AMOUNT SO RECEIVED ON ACCOUNT O F APPRECIATION IN FOREIGN CURRENCY AS CAPITAL RECEIPT . 7 7. THE NEXT GRIEVANCE RELATES TO PRE-OPERATIVE EXPE NSES. WE FIND THAT THE ASSESSEE HAS INCURRED PRE-OPERATIV E EXPENSES OF RS.47.59 LACS UPTO 31 ST MARCH, 1999 WHICH WAS DEBITED TO PROFIT AND LOSS ACCOUNT. THE SAME WERE DISALLOWED BY THE ASSESSING OFFICER. BY THE IMPUGNED ORDER, T HE LEARNED COMMISSIONER OF INCOMETAX (APPEALS) ALLOWED THE DED UCTION OF 1/10 TH OF THE PRE-OPERATIVE EXPENSES. WE DO NOT FIND ANY INFIRMITY IN THE SAME SINCE ALLOWING THE CLAIM OF 1 /10 TH IS AS PER LAW. 8. IN THE COURSE OF ASSESSMENT THE ASSESSING OFFICE R HAS DISALLOWED PROFESSIONAL FEE OF RS.12 LACS PAID TO M /S RAMESH SONPAR. BY THE IMPUGNED ORDER , THE LEARNED COMMIS SIONER OF INCOMETAX (APPEALS) ALLOWED THE SAME BY OBSERVIN G THAT PROFESSIONAL RECEIPTS WERE ACTUALLY PAID AND ADMITT ED BY THE RECIPIENT IN HIS INCOMETAX RETURNS. 9. WE HAVE CONSIDERED THE RIVAL CONTENTIONS, CARE FULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND FIN D FROM RECORD THAT THE DISALLOWANCE HAS BEEN MADE BY THE A SSESSING OFFICER ON THE PLEA THAT NO EVIDENCE IN SUPPORT OF THE SERVICES HAVING BEEN RENDERED BY RAMESH SONPAR WAS FILED BE FORE HIM. AS SHRI RAMESH SONPAR WAS ONE OF THE DIRECTOR S OF THE COMPANY, THE SAME WAS DISALLOWED IN THE HANDS OF TH E ASSESSEE COMPANY. AS THE EVIDENCE OF SERVICE RENDE RED HAS 8 NOT BEEN FURNISHED, MERELY BECAUSE THE RECIPIENT HA S SHOWN THE INCOME IN HIS HANDS CANNOT BE TREATED AT PAR FO R ALLOWING THE CLAIM OF DEDUCTION OF EXPENDITURE IN THE HANDS OF THE ASSESSEE COMPANY. THE LEARNED COMMISSIONER OF INCO METAX (APPEALS) HAS DELETED THE DISALLOWANCE WITHOUT CONT ROVERTING THE FINDING OF THE ASSESSING OFFICER WITH REGARD TO THE EVIDENCE FOR THE SERVICES RENDERED HAVING NOT BEEN FURNISHED . IN THE INTEREST OF JUSTICE, WE RESTORE THIS GROUND TO THE FILE OF THE ASSESSING OFFICER FOR DECIDING AFRESH. 10. WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF TH E LEARNED COMMISSIONER OF INCOMETAX (APPEALS) IN DELETING THE DISALLOWANCE OF TELEPHONE EXPENSES WHICH WAS DISALL OWED BY THE ASSESSING OFFICER ON THE PLEA OF PERSONAL USE O F TELEPHONE BY THE DIRECTORS. SINCE THE ASSESSEE IS A CORPORAT E ENTITY, NO DISALLOWANCE CAN BE MADE FOR ANY PERSONAL USE OF TE LEPHONE OR CAR IN ITS HANDS. 11. THE ASSESSING OFFICER HAS DISALLOWED A SUM OF RS.1,50,000/- OUT OF TRAVELING EXPENSES ON THE PLEA THAT THE TRAVELING EXPENSES WERE NOT FOR THE PURPOSE OF BUSI NESS AND THE VISITS BY THE DIRECTORS WERE ON PERSONAL ACCOUN T. AS THE GENUINENESS OF THE EXPENDITURE HAVING NOT BEEN DOUB TED, THE LEARNED COMMISSIONER OF INCOMETAX (APPEALS) RESTRIC TED THE DISALLOWANCE TO THE EXTENT OF RS. 75,000/- IN THE A BSENCE OF 9 FULL DETAILS OF TRAVELING EXPENSES. WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LEARNED COMMISSIONER OF INCOMET AX (APPEALS) IN RESTRICTING THE DISALLOWANCE TO THE EX TENT OF RS. 75,000/-. 12. IN THE RESULT, THE APPEAL OF THE REVENUE IS AL LOWED IN PART. HOWEVER, THE CROSS OBJECTION WAS BARRED BY 4 YEARS AND 120 DAYS. THE ASSESSEE COULD NOT EXPLAIN THE REASON FO R THE DELAY. THE SAME IS, THEREFORE, DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 29 TH MARCH, 2011. (JOGINDER SINGH) ( R.C.SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 29 TH MARCH, 2011 COPY TO: APPELLANT, RESPONDENT, CIT, CIT(A), DR, GU ARD FILE DN/-