Essar Steel Ltd. Vs. Deputy Commissioner of Income Tax - Court Judgment

Excerpt:
1. these are four appeals two by the assessee and two by the revenue.one appeal by the assessee is against the order of the cit and the others including two by the revenue are against the orders of the cit(a). they all relate to asst. yr. 1993-94 and are being disposed of by this common order for the sake of convenience.2. the assessment was completed on 29th march, 1996. the assessee filed appeal against the assessment order. when the appeal was pending, the cit on perusal of the record, felt that the order of assessment was erroneous insofar as the same was prejudicial to the interests of the revenue in respect of certain items. the cit, 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.....

Judgment:
1. These are four appeals two by the assessee and two by the Revenue.

One appeal by the assessee is against the order of the CIT and the others including two by the Revenue are against the orders of the CIT(A). They all relate to asst. yr. 1993-94 and are being disposed of by this common order for the sake of convenience.

2. The assessment was completed on 29th March, 1996. The assessee filed appeal against the assessment order. When the appeal was pending, the CIT on perusal of the record, felt that the order of assessment was erroneous insofar as the same was prejudicial to the interests of the Revenue in respect of certain items. The CIT, 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 CIT, Central-II, Chennai. The appeal filed by the assessee against the assessment order was disposed of by the CIT(A) on 24th March, 1999. Two cross-appeals (ITA Nos. 780 and 991/Ahd/1999) are against this order of the CIT(A).

AO made fresh order in compliance with direction of CIT, and the appeal in ITA No. 1056/Ahd/1999 is against the order of CIT(A) disposing of an appeal against this consequential order of the AO.3. According to the CIT, the AO has not made complete enquiry with reference to certain issues and his failure to make such enquiry has made the order of the AO erroneous and has caused prejudice to the interests of the Revenue. According to him, the AO is not only an adjudicator but also an investigator and he cannot remain passive in the face of the return which may apparently be in order but calls for further enquiry. He then referred to the decision of the Delhi High Court in the case of Gee Vee Enterprises v. Addl. CIT , the decision of the Rajasthan High Court in the case of CIT v. Emery Stone Manufacturing Co. (1995) 213 ITR 843 (Raj) and the decision of the Kerala High Court in the case of Malabar Industrial Co. Ltd. v. CIT . He referred to the following 11 issues in the notice on which he thought the order of the AO was erroneous insofar as prejudicial to the interests of the Revenue : (ii) Expenses connected with cancellation of foreign exchange contract, (iii) Difference in the amount of receipt on cancellation of foreign exchange contract, (ix) Depreciation on items on which deduction under Sections. 35D and 35AB was allowed in the earlier years, (xi) Incorrect computation of income from house property by taking the estimated annual letting value.

4. The first ground against the revision order is that the CIT has no jurisdiction and made order without considering the record, only considering the order passed by the AO under Section 143(3), considering totally new issues which were never considered in the original notice under Section 263 and without being satisfied that the order passed by the AO was erroneous insofar as it is prejudicial to the interests of the Revenue. Reliance in this connection was placed on the Calcutta High Court decision in the case of Jeewanlal (1929) Ltd. v. Addl. CIT , wherein it was held that the revision jurisdiction cannot be based on audit objection and the Supreme Court decision in the case of Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC) wherein it was held that merely because one view is preferable to the other, the jurisdiction under Section 263 cannot be exercised. Challenge of the revision order on various grounds is discussed in subsequent paragraphs; we, therefore, need not deal with this issue in isolation and the issue will be discussed along with and while dealing with each item individually.

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 AO 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 CIT, the gains on cancellation of forward exchange contract is revenue receipt and failure on the part of the AO 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 prejudicial to the interests of the Revenue for the following reasons : (i) There is no nexus between the gain arising on cancellation of exchange orward contract and the assets acquired from abroad by the assessee. Therefore, there was no justification to reduce the cost/WDV of capital assets by the amount of gain on cancellation of forward exchange contract.

(ii) The assessee had entered into foreign exchange contract in India. On cancellation of the forward exchange contract, the amount was paid in India in Indian rupee. The amount received by the assessee in Indian rupee will not in any way reduce the foreign exchange liability of the assessee as regards the payment of loan obtained in connection with the acquisition of capital goods from abroad.

(iii) It is on record that the gain from cancellation of forward exchange contract was not utilised for payment of foreign loan which was obtained for the acquisition of capital goods or for acquiring any capital goods from abroad.

(iv) The gains from cancellation of forward exchange contracts was of revenue nature. The action of the AO in reducing the value of block of assets was erroneous and also prejudicial to the interest of Revenue. The observation of the AO that the gains on cancellation of foreign exchange contract had any relation with the loan from abroad or acquisition of any asset from abroad was also erroneous.

(v) The AO failed to consider that the amount received was in the nature of revenue receipt being compensation received on cancellation of foreign exchange contract, which was entered during the course of assessee's busing Sections 6.1 In response to show-cause notices, the assessee contended before the CIT that the foreign exchange contracts were undertaken to cover the liability on capital account, i.e., repayment of loan taken in foreign currency, that these loans were term loans granted for purchase of capital equipments including certain loans which were taken for payment of technical know-how and payment of cost of plant and machinery and such other items which were of capital nature, and, therefore, the profit and loss arising therefrom could be capital receipt only. Reliance in this connection was placed on the opinion of C.C. Chokshi and Co., chartered accountants, Bombay, suggesting that gains from cancellation of foreign exchange 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 CIT 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 arising out of cancellation of forward exchange contract has been treated as revenue item and accordingly, included in the P&L a/c 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 incurred in connection with the acquisition of capital assets from abroad did not find it possible to accept the contention of the assessee that the gain on cancellation of foreign exchange contract had in any way gone to reduce the foreign exchange liability in respect of loan obtained for purchase of capital goods. In his opinion, therefore, the AO was not justified in reducing the cost of block of assets by the aforesaid amount. He further observed that the assessee-company opted to cancel the contract and thereby the liability towards capital expenditure was left uncovered and that these contracts were basically entered for hedging the fluctuation in foreign exchange which purpose was not fulfilled. The contracts were cancelled and the gain in Indian rupee was earned. He narrated two situations which could happen on these facts--(i) The foreign exchange contract is allowed to mature and gain realised is utilised for the purpose of repayment of foreign loan obtained for acquiring assets from abroad; and (ii) The contract is cancelled with an eye on profit on a judgment taken by the management.

The foreign exchange liability is left uncovered. The contract is not allowed to mature. The gains are not utilised for the purpose of repayment of loan. The foreign exchange liability was not reduced. In the first situation, he observed that there could have been a benefit of reduction of cost by treating the receipt as connected with capital assets, but in the case of the assessee where the second situation applied, the gain is purely revenue receipt unconnected with the purchase for which contracts were originally entered. According to him, the facts on record clearly indicate that the foreign exchange contracts were undertaken to cover the liability on capital account which was cancelled and the liability was left uncovered and the gain on such cancellation was in Indian rupee which would not have in any way reduced the foreign exchange liability of the assessee. He further observed that had the contract matured in the normal course and had the assessee made some gains on maturity, the gains could have been reduced from the cost of capital asset provided they were utilised for reducing the foreign exchange liability. In the case of the assessee, he observed that the purpose for which the contract was entered into was given a go-by when it was cancelled with 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 Mitts Ltd. v. CIT , Barendra Prasad Ray and Ors. v. ITOS.G. Mercantile Corporation (P) Ltd. v. CIT 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 of any future profit. In case the contract had matured and profit or loss were utilised for liquidating the foreign exchange liability, the action of the AO could have been justified. The gain, according to him, arose due to cancellation of contracts which were entered into in connection with the business of the assessee and, therefore, the gain was incidental to business and cannot be treated as casual income.

6.4 He saw the transaction with another aspect also. According to him, the entire contract was settled without delivery of commodity. The commodity in this case is foreign exchange. The foreign exchange is created when it is quoted in the foreign exchange market. It can be purchased and sold. For the purposes of Section 43(5), therefore, foreign exchange can be treated as commodity and the profit on cancellation would be speculative profit as the contract was settled by non-delivery.

6.5 He considered yet another angle from which also the gain on cancellation of the foreign exchange contracts namely, there was an element of adventure in the whole process of cancellation of contracts.

The assessee entered into cancellation for as many as 52 contracts and received gain in Indian rupee. The purpose for which the contracts were entered into was not allowed to be fulfilled. It was thus an adventure in the nature of trade and the receipt of gain therefrom would be taxable as normal business profit.

6.6 Resultantly, the CIT directed the AO to treat the entire gain on cancellation of foreign exchange contracts as revenue receipt subject to the allowance of expenditure incurred in connection therewith and the treatment of difference in the amount of receipt on cancellation of foreign exchange contracts.

7. The details of gross and net gain on cancellation of forward contracts are as under : Corporate Division Gross Premium Net HRC Plant Machinery supply and know-how 24.25 Interest and Supervision Charges 3.95 28.20 II Repayment to Redding ton -- Advance 22.00 for sale of product and interest III NRI-OCB-Right issue of HRC plant 0.72 IV. Mode-Ill 2.04 62.35 9.39 52.95 Steel-I Mode III 23.27 5.29 18.98 85.62 13.69 71.93 7.1 The assessee had been manufacturing sponge iron. In connection with that it had to import certain machinery. It had also planned extension and for that it had to import machinery 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 into 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 directors' 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-how and repayment of advance taken to suppliers of the equipment and interest thereon. This is what is stated by the AO and also supported by permissions sought for taking forward covers from RBI, one of such letter is dt. 2nd/30th Sept., 1991, written by the assessee to the RBI for taking a forward cover of US $ of 100 million.

7.3 To finance the project the assessee entered into contract with Reddington Pvt. Ltd., a firm of Singapore, who is its prospective buyer of production of 1.5 lakh tonne of HRC in three years from the date of commencement of production, who gave advance of 100 million US $ in four installments of 25 million US $ over a period of 18 months. This advance was to be liquidated by the assessee to the extent of l/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 lakh is the interest worked out thereon.

7.4 According to the learned Counsel of the assessee Sh. S.N. Soparkar, the CIT 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 cases of CIT v. Tata Locomotive and Engineering Co. Ltd. , Universal Radiators v. CIT , Swadeshi Cotton Mills Co. Ltd. v. CIT (1967) 63 ITR 65 (SC), Sutlej Cotton Mills Ltd. v. CIT , decision of Calcutta High Court in the case of CIT v. Anglo India Jute Mills Co.

Ltd. (1981) 129 ITR 352 (Cal), the decisions of the Gujarat High Court in the cases of Ambica Mills Ltd. v. CIT and Garden Silk Mills Ltd. v. Dy. CIT , wherein the reopening on similar ground was quashed, and the decision of Tribunal in ITA No.2032/Ahd/1997. He also referred to the decision of the Punjab and Haryana High Court in the case of Groz-Beckert Saboo Ltd. v. CIT , wherein the loan taken but utilised for payment of purchase price of goods was 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 43(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--Departmental Representative 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 , decision of the Calcutta High Court in the case of CIT v. Sutna Stone and Lime Co. Ltd. and the decision of the Orissa High Court in the case of CIT v. Orissa State Warehousing Corporation . He also referred to pp. 13 to 15 of AS-11 of the guidelines issued by the Institute of Chartered Accountants of India. He further submitted that outstanding loan was circulating capital and consequently the gain would be of a revenue account in view of the decision of the Bombay High Court in the case of CIT v. V.S. Dempo and Co. (P) Ltd. and the decision of the Gujarat High Court in the case of Indian Dyestuff Industries Ltd. v. IAC . Supporting the order of the CIT, he submitted that the gain was a business income if seen with reference to the volume of transactions entered by the assessee during the year under consideration and also in the earlier years. In this connection, he referred to the decisions of the Supreme Court in the cases of Raghuvanshi Mills Ltd. v. CIT (supra); CIT v. Calcutta National Bank Ltd. (supra), Gillanders Arbuthnot and Co. Ltd. v. CIT (supra), S.G.Mercantile Corporation (P) Ltd. v. CIT (supra), the decision of the Bombay High Court in the case of CIT v. Scindia Workshop Ltd. and the decision of the Supreme Court in the case of Barendra Prasad Ray and Ors. v. ITO (supra). He also referred to the decision of the Supreme Court in the case of India Cement Ltd. v. CIT , 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 CIT v. Tata Iron and Steel Co. Ltd. (1998) 231 ITR 285 (SC), wherein it was held that the manner of payment does not affect the cost.

8. We have heard the parties and considered the rival submissions. In Tata Locomotive and Engineering Co. Ltd. (supra) the commission receivable by the assessee agent from abroad was allowed to be not actually repatriated and retained to be utilised for the purchase of capital goods. Consequent upon devaluation, the assessee decided not to purchase the capital goods and the money was remitted to India. The assessee thus made a gain because by that time devaluation had taken place and this gain was held to be of capital account. This is a case of the foreign currency receivable by the assessee earmarked for the payment for purchase of capital goods. The gain on devaluation of rupee repatriated was held to be on capital account even though originally the foreign currency was its income from commission.

8.1 In the case of Universal Radiators (supra), the assessee manufacturer of radiators for automobiles, booked copper ingots from a Corporation in USA for being brought to Bombay 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 busine Sections 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 trading or business activity, but a just equivalent in money of the goods lost by the assessee which it was prevented from using and ingots were not stock-in-trade and even if the ingots were assumed to be stock-in-trade, they were blocked and sterilised due to hostilities between India and Pakistan and, therefore, they ceased to be stock-in-trade and any surplus arising due to devaluation of Indian rupee was a capital receipt. It was further held that where payment is made to compensate for loss of the use of any goods in which the assessee does not carry on any business or the payment is a just equivalent of the cost incurred by the assessee, but excess accrues due to fortuitous circumstances or is a windfall, then the accrual may be a receipt, but it would not be income arising from business and, therefore, not taxable under the Act. In this connection, the gain which the assessee had made was directly related to the payment made by the assessee for the purchase of capital goods and, therefore, the devaluation was held to be not taxable.

8.2 In the case of Swadeshi Cotton Mills Co. Ltd. (supra), the assessee carried on the business of manufacturing and selling cloth and other textile goods and entered into two contracts for the purchase of textile machinery in order to expand its factory. Having regard to altered circumstances, the assessee subsequently cancelled the contracts, as the machinery to be purchased would not be required for its business, and paid Rs. 35,000 as compensation for cancelling the contracts. The expenditure was held to be with the object of avoiding an unnecessary investment in capital asset and was in the nature of a capital expenditure. It was further held that the payment was neither made for the purpose of earning profits, nor for the purpose of furthering, protecting or continuing its business which was to be carried on from day-to-day.

8.3 In the case of Anglo India Jute Mills Co. Ltd. (supra), the assessee who was engaged in the manufacture of jute goods wanted to import certain machinery and in that connection obtained the licence and placed the order for the machinery. In order to safeguard the financial deal it entered into the contract like the assessee, with the State Bank of India for the purchase of sterling. The assessee did not advance anything to the bank against this contract. In the meantime the Indian rupee was devalued and as a result 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 licence 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 AO taxed this amount as revenue receipt arising from the assessee's busine Sections The AAC, however, held that the amount was not taxable as income from the business but was assessable as capital gain. 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 licence or because the assessee gave up its right under a contract but because the assessee realised its dues or, in other words, the assessee transformed its contractual rights into money and, therefore, was no transfer nor did any profits arise from the receipt which could be considered as capital gain under Section 45 of the Act.

8.4 In the case of Sutlej Cotton Mills Ltd. (supra), the Supreme Court laid down a principle as to how appreciation or depreciation in the value of foreign currency is to be determined. Their Lordships held that normally such loss or profit on account of holding in foreign currency on conversion into another currency is trading profit if the currency is held by the assessee on revenue account or is a trading receipt or as part of circulating capital embarked in the busine Sections 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. In that connection it was held that the way in which entries are made in his books of account is. not determinative of the question whether the assessee has earned any profit or suffered any to Sections What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee.

8.5 In the case of Ambica Mills Ltd. (supra), the assessee claimed loss of Rs. 11,55,170 due to fluctuation in foreign exchange as revenue expenditure, which was considered to be capital expenditure entitled to depreciation by the AO. Their Lordships referred to Section 43(1) and its earlier decision in the case of CIT v. Windsor Foods Ltd. and held that where there is a fluctuation in the exchange rate which increases or reduces the liability to pay the cost of the asset after it is acquired from a foreign country, liability so increased or reduced during the previous year is to be added or deducted from the actual cost of the asset, as defined in Section 43(1) of the Act and, therefore, it cannot be allowed as a revenue expenditure.

8.6 In the case of India Cement Ltd. (supra), their Lordships of the Supreme Court considered the liabilities of stamp charges, registration fees and lawyers fees, etc. for obtaining the loans which were secured on fixed assets. The said loan was utilised to pay prior debt of Rs. 25 lakhs due to M/s A.F. Harvey Ltd. and Madurai Mills Ltd. And the balance Rs. 15 lakhs as stated by the directors in their report was utilised towards working funds. The High 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 p. 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 and foreign exchange fluctuation would also be of revenue account.Garden Silk Mills Ltd. v. Dy. CIT (supra), the assessee-company claimed Rs. 2,96,04,082 being the surplus on cancellation of forward contracts. The AO during the course of assessment proceedings raised the question regarding the aforesaid items and called upon the assessee to explain and the assessee explained the matter by pointing out that they had entered into forward exchange contracts and on cancellation of the same, it received an amount, a part out of which was credited to plant and machinery account, another part, to roll over premium expense account and the balance to P&L a/c. It was pointed out that the company being a manufacturer of textile fabrics, imports various machinery and equipment against loans in foreign currency and against the installments of loans payable and interest payable on such loans, it entered into contracts covering the foreign exchange contracts to guard against the fluctuation in the rate of foreign currency. The RBI permitted the assessee to enter into the contracts for the foreign exchange to be drawn by the company with a view to limit or regulate exposure of the Indian companies. It was specifically pointed out that the company was not engaged in financing business or dealing in foreign exchange. The AO after considering the submissions made by the assessee and having gone through the decision held that the assessee was not a banking company and was not engaged in the business of purchasing foreign exchange or dealing in the same by entering into forward exchange contracts. After following the decision of the apex Court, the AO in the original order of assessment held that there was no transfer of a capital asset on cancellation of the forward exchange contracts.

The said assessment of the AO was reopened by invoking the provisions of Section 148 and in that context their Lordships of the Gujarat High Court held that there was no new information but only a change of opinion. The assessee had disclosed the material to the AO who was satisfied about the factual and legal aspect and following the judgments of the apex Court, the High Court quashed the opening of the proceedings.

8.8 In the case of Gmz-Beckert Saboo Ltd. (supra), a case before the Punjab and Haryana High Court, the assessee under a collaboration agreement, imported certain hosiery and knitting machinery against which the foreign company granted loan of Rs. 5.5 lakhs 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 utilised 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's (supra) and of CIT v. Canam Bank Ltd. the 8.9 In the case of V.S. Dempo and Co. (P) Ltd. (supra), the Bombay High Court laid down the following principles to determine whether a loss is allowable as a business loss : (i) A loss arising in the process of conversion of foreign currency which is part of the trading asset of the assessee is a trading loss as any other loss; (ii) The cause which occasioned the loss is immaterial; what is material is whether the loss has occurred in the course of carrying on the business or is incidental to it; (iii) If there is loss in a trading asset, it would be a trading loss, whatever be its cause, because it would be a loss in the course of carrying on the busine Sections (iv) Loss in respect of circulating capital is revenue loss whereas loss in respect of fixed capital is not.

(v) Loss resulting from depreciation of foreign currency which is utilised or intended to be utilised in business and is part of the circulating capital, would be a trading loss, but depreciation of fixed capital on account of alteration in exchange rate would be a capital to Sections (vi) For determining whether devaluation loss is revenue loss or capital loss what is relevant is the utilisation of the amount at the time of devaluation and not the object for which the loan had been obtained. Even if the foreign currency was intended or had originally been utilised for acquisition of fixed assets, if at the time of devaluation it had changed its character and had assumed the new character of stock-in-trade or circulating capital, the loss occurred on account of devaluation shall be a revenue loss and not a capital to Sections (vii) The way in which the entries are made by an assessee in the books of account is not determinative of the question whether the assessee has earned any profit or suffered any to Sections What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee.

8.10 In the aforesaid case the assessee-company borrowed a sum of $ 7,00,000 from its selling agent for iron ore, in Tokyo. The method of extracting iron ore from its mines by the said company had become outdated and it was felt necessary to import from Germany the machinery for mechanisation. Accordingly, the assessee-company advanced the sum of $ 7,00,000 which it had obtained as a loan from E to the said company D for the import of machinery and the loan given by him was utilised by D for the import of mining machinery. The amount so advanced was agreed to be adjusted against the price of iron ore supplied by the said company D to the 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 and Steel Co. Ltd. (supra) relied upon by the learned Departmental Representative, 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 assessee to acquire the asset. The amount may have been borrowed by the assessee. But even if the assessee did not repay the loan it will not alter the cost of the asset and if the borrower defaults in repayment of a part of the loan, the cost of the asset will not change. What has to be borne in mind is that the cost of an asset and the cost of raising money for purchase of the asset are two different and independent transactions. Even if an asset is purchased with non-repayable subsidy received from the Government, the cost of the asset will be the price paid by the assessee for acquiring the asset. In that case at the time of repayment of loan, there was a fluctuation in the rate of foreign exchange as a result of which, the assessee had to repay a much lesser amount than he would have otherwise paid. This was not a factor which could alter the cost incurred by the assessee for purchase of the asset. The assessee might have raised the funds to purchase the asset by borrowing but what the assessee had paid for it, was the price of the asset. That price could not change even subsequent to the acquisition of the asset. The manner or mode of repayment of the loan had nothing to do with the cost of an asset acquired by the assessee for the purpose of his busine Sections This was a case prior to introduction of Section 43A.8.12 The facts as reported in the case of CIT v. Tata Hydro Electric Power Supply Co. Ltd. are as under: In this case the three assessees are companies doing the business of generation and supply of electric power to consumers. They belong to the Tata Group of companies. The assessee-companies undertook the erection of a thermal power station at Trombay and the erection of that power station was completed during the previous years relevant to the asst. yrs. 1958-59 and 1959-60, respectively. For the purpose of purchase of the machinery required for the setting up of the said thermal power station, the assessee raised loans from the World Bank. According to the terms of the loan agreements under which the said loans were given, they were repayable in foreign currencies and in instalments agreed to between the World Bank and the said assessee companies. The foreign currencies in which these loans were to be repaid were Deutsche Marks (referred to hereinafter as "Marks") and Netherlands Guilders (referred to hereinafter as "Guilders"). There was a revaluation of Marks and Guilders on 7th/8th March, 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. 21,82,062 on 8th/9th March, 1961. In the assessment for the asst. yrs. 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 7th/8th March, 1961, a sum of Rs. 3,36,039 being loss written off during the period 7th March, 1961, to 6th June, 1966. The assessee further reduced the sum by deducting the notional amount of depreciation which would have been allowed for the asst. yrs. 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 orders passed by the ITO allowing depreciation on the basis of the increased liability on account of revaluation of the German and Dutch currencies as aforesaid was erroneous and prejudicial to the interests of the Revenue inasmuch as, according to him, under Section 43A of the Act, the adjustment for increased liability could be allowed only if the aforesaid liability was increased or decreased during the relevant previous year in consequence of a change in the rate of exchange. The Bombay High Court held that Section 43A only deals with the effect of a change in the rate of exchange with the foreign currency concerned in determining the "actual cost" referred to in Section 43, and there is nothing in the language of Section 43 to indicate that the actual cost has anything to do with the cost of the asset in question being capitalised or not.

8.13 In the case of CED v. V. Venugopala Varma Rajah (supra) relied upon by the learned Departmental Representative, the question was whether forest land covered by trees of spontaneous growth could be held to be "agricultural lands" within the meaning of Section 5 of the Estate Duty Act and in that connection their Lordships of the Supreme Court held that the burden of establishing the exemption from estate duty on the ground that the lands are agricultural lands lies upon the accountable person claiming the exemption. It was further held that after it is- admitted by the accountable person that the land in question is forest land T no burden can be placed on the Department on the ground that the further question of immunity of the subject-matter from taxation by Parliament arises and even if there could be such an onus, it would be sufficiently discharged by the admission that the land was "forest land" covered with the natural and wild growths. After that, at any rate, the accountable person has to prove change of its character.

8.14 In the case of CIT v. Sutna Stone and Lime Co. Ltd. (supra) in a case before their Lordships of Hon'ble Calcutta High Court, the question was with regard to exemption under Section 80-1 and in that connection it was held that it is well-settled that in order to be entitled to exemption, an assessee must strictly come within the terms of the provisions under which such exemption is being claimed but the provisions must be construed reasonably in the context of the purpose for which the section has been introduced.

8.15 In the case of Raghuvanshi Mills Ltd. (supra), 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 profit 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. (supra) 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 in carrying on a particular trade or avocation, it may also include an activity which may be called "quiescent". It may be noted that it was a case under Excess Profits Tax Act and their Lordships of the Supreme Court observed that the definition of business under Section 2(5) of the Excess 'Profits Tax Act is wider than the definition of that term under Section 2(4) of the Act.

8.17 In the case of Gillanders Arbuthnot and Co, Ltd. (supra), the assessee-company carried on business in diverse lines, besides acting as managing agents, shipping agents, purchasing agents, and secretaries, the company also acted as importers and distributors on behalf of foreign principals and bought and sold on its own account.

One of the agencies was cancelled and the assessee received compensation with regard thereto. In that connection it was held by the Supreme Court that having regard to vast array of business done by the appellant as agents, the acquisition of agencies was in the normal course of business and determination of individual agencies a normal incident not affecting or impairing its trading structure. The amounts received by the appellant for the cancellation of the explosives agency, therefore, did not represent the price paid for the loss of a capital asset.

8.18 In the case of S.G. Mercantile Corporation (P) Ltd. (supra), the term "business" was held to be of wide amplitude and it could embrace within itself dealing in real property as also the activity of taking a property on lease, setting up a market thereon and letting out shops and stalls in the market. In this case one of the objects specified in its memorandum of association was to take on lease or otherwise acquire and to hold, improve, lease or otherwise dispose of land, houses and other real and personal property and to deal with the same commercially. The assessee within less than 2 weeks of its incorporation took on lease a market place for an initial term of 50 years, undertaking to spend Rs. 5 lakhs for the purpose of remodeling and repairing the structure on the site and also gave the right to sublet the different portions.

8.19 In the case of CIT v. Scindia Workshop Ltd, (supra), it was held by their Lordships of the Bombay High Court that whenever there is a receipt of an amount by an assessee, it is not the nature of the receipt under the general law that determines its nature for the purpose of the IT Act but the receipt would have to 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 analogous 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 intention that can be attributed to the assessee making such investments would be that was an investment to earn income. It cannot be contended that merely because the amount of the annual payments is related to the gross amount due on the bonds, the monthly payments partake of the nature of capital. In the hands of the assessee, the annual instalment clearly represented a payment of capital coupled with interest. This interest receipt would clearly be income.

8.20 In the case of Garden Silk Mills Ltd. (ITA No. 2032/Ahd/1997) the Tribunal dealt with almost similar situation wherein the receipt of sum of Rs. 68,66,673 on account of profit on cancellation of foreign exchange contract which was also booked by the assessee in the profit and loss but claimed in the computation of income as capital receipt.

The assessee in this case was a manufacturer of textile fabrics. It imported various machinery and equipments, inter alia, against loans in foreign currency. Against the instalment of loan payable and interest payable on such loans, the assessee entered into contracts covering the foreign exchange components to guard against the fluctuation in the rate of the foreign currency. In that connection, the Tribunal held that the receipt was on account of capital account by observing as under : "9. We have considered the rival submissions. Regarding issue No. 1 relating to the receipt of a sum of Rs. 68,66,673 on account of profit on cancellation of forward foreign exchange contract, the undisputed facts are amount to the P&L a/c under the head "profit on cancellation of forward exchange contracts". In computation of income filed along with the return, the assessee claimed this amount as a deduction from the net profit computed on the ground that this is a capital receipt not liable to tax. The assessee-company is a manufacturer of textile fabrics. It imports various machineries and equipments, inter alia, against loans in foreign currency. Against the instalment of loan payable and. interest payable on such loans, the assessee-company has entered into contracts covering the foreign exchange components to guard against the fluctuation in the rate of the foreign currency. In respect of foreign currency, the policy of the RBI permits the companies to enter into forward contracts for the foreign exchange to be drawn by the companies with a view to limit 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 , as well as in the case of Universal Radiators v. CIT . It is also pertinent to note that the gain arising on the cancellation of the contracts in the forward cover of foreign exchange does not involve any transfer or assignment of any asset within the meaning of Section 2(47) of the IT Act, 1961. In the instant case, there is no transfer or assignment 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 ." 8.21 There also, an attempt was made by the Revenue that the profit arising to the assessee-company on cancellation of foreign exchange contract was a revenue receipt taxable under Section 28(iv) which was held to be misconceived by observing in paras. 10 and 10.1 as under : "10. The attempt of the learned 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 realised on cancellation of the contract was in cash, the same cannot be taxed as a perquisite within the meaning of Section 28(iv) in view of the decision of the Gujarat High Court in the case of CIT v. Alchemic (P) Ltd 10.1 In the instant case, the learned CIT had not given valid reasons to show as to how the profit earned on cancellation of the forward foreign exchange contract was assessable as a revenue profit. The learned CIT has not also indicated the facts to which the AO has not applied his mind and he has also not stated in what respect the AO was required to make any further enquiries relating to the subject-matter of dispute. In any case, whether in the set of facts which are available in the instant case, 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 AO 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 learned 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 AO to bring 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 prerequisites 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 of the case discussed above, we are of the considered opinion that the learned CIT was not justified in setting aside the order of the AO with regard to the issue relating to taxability of the amount of Rs. 68,66,673 which was treated by the AO as a capital receipt not liable to tax." 8.22 It is true that the onus to prove that receipt is exempt from income-tax is on the assessee in view of the three decisions referred to by the learned Departmental Representative; the assessee has to demonstrate that it was not taxable in the light of the legal and accountancy principle. AS-11 titled as "Accounting for the Effects of Changes in Foreign Exchange Rates" states that if the gain relates to liability incurred for acquiring the fixed assets, the profit and loss should be adjusted in the carrying amount of the respective fixed assets. It reads : "13. An enterprise may enter into a forward exchange contract, or another financial instrument that is in substance a forward exchange contract, to establish the amount of the reporting currency required or available at the settlement date of a transaction. The difference between the forward rate and the exchange rate at date of the transaction should be recognised as income or expense over the life of the contract, except in respect of liabilities incurred for acquiring fixed assets, in which case, such difference should be adjusted in the carrying amount of the respective fixed assets.

14. The difference between the forward -rate and the exchange rate at the inception of a forward exchange contract is recognized as income or expense over the life of the contract. The only exception is in respect of forward exchange contracts related to liabilities in foreign currency incurred for acquisition of fixed assets.

15. Any profit or loss arising on cancellation or renewal of a forward exchange contract should be recognised as income or as expense for the period, except in case of a forward exchange contract relating to liabilities incurred for acquiring fixed assets, in which case, such profit or loss should be adjusted in the carrying amount of the respective fixed assets." 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 s. 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 liabilities in foreign currency.

These contracts could not have been taken otherwise without there being an existing liability as is evident from the guidelines issued by the RBI. The liabilities for the repayments of loans against the purchase of equipments, or machinery, or acquisition of know-how for installing the plant, therefore, the conclusion of the CIT that there was no nexus between gain arising on cancellation of forward contracts and acquisition of capital assets cannot be accepted. As the contracts were taken against the capital liability, their cancellation cannot be de hors that liability.

8.25 Cancellation of the contracts in this was one time cancellation and not one after the other. Even otherwise, as held by Supreme Court in Dalhousie Investments Trust Co. Ltd v. CIT . "The mere fact that an investment company varies its investment does not necessarily mean that the profit resulting from such variation is taxable under the IT Act. Variation of its investments must amount to dealing in investment before such profit can be taxed as income under the IT Act." The assessee was not dealing in foreign exchange which is permitted only to a licence-holder. When the forward contracts were taken, they were to guard against the loss due to fluctuation in exchange rate in repayment of loan of foreign currency taken for the purchase of capital goods. But their cancellation has frustrated that object. Remaining liabilities thereafter has to continue but that by itself does not establish that the contracts were taken and/or cancelled to make profit. Profit motive otherwise also is not decisive of the question whether a particular receipt is capital or income [See A.K.T.K.M. Vishnudatta Antharjanam v. Commr. of Agrl. IT ]. The forward contracts were cancelled before the due date because, it was no more necessary to have a cover continued in view of greater stability of Indian rupee pursuant to the announcement by the . Government of the partial stability (sic-convertibility) of Indian rupee and allowing cancellation of such contracts by RBI.Cancellation before the due date also, in our opinion, is not 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 gives the impression of the stability of Indian rupee vis-a-vis US dollar.

8.26 As regards speculative 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 licence-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 CIT 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 not by then reached destination and/or installed in the factory premises of the assessee and the unit was yet not set up. It would reduce the assessee's liability to purchase capital goods; (ii) because the liability towards sponge iron is for existing plant and the liability for capital goods not being capital assets by itself gain or loss arising therefrom could have been on revenue account, the same way as the interest payment of such liability. The said interest liability prior to installation of the plant has to be capitalised under the accountancy principles as also on the analogy of the statutory Expln. 8 to Section 43(1), it cannot be treated as a receipt on revenue account; and because the facts are not on record to determine the exact nature as regards the other gain of Rs. 0.72 crores. We, therefore, set aside the order of the CIT on these issues and restore that of AO.8.28 However, the liability towards advance taken from Reddington, on a consideration of the totality of the facts and circumstances of the case, in our opinion, was against supplies of assessee's product to be made by the assesses to them. Though the. advance so received was utilized for payments for capital goods directly to the suppliers, the liabilities towards Reddington has arisen not for acquisition of capital goods. The capital liability was discharged by making the payment out of the receipts of advance against supplies from Reddington. It was thereafter assessee's liability to supply goods against those advance taken which subsisted and that was a part of the circulating capital. The liability cannot be said to be for making the payment in foreign exchange nor on account of purchase of capital goods. It was in the nature of a circulating capital and in view of the decision of the Supreme Court in the case of Sutlej Cotton Mills Ltd. (supra) and the discussion aforesaid, the gain arising on cancellation of forward contract relating thereto has to be on revenue account. The order of the CIT to this extent i.e., the gains of Rs. 22 crores arising on cancellation of forward contract stated to be relating to repayment of the liability of Reddington is upheld.9. Ground No. 3 against revision order is for not allowing expenditure on premium paid for taking forward contracts. It is connected with cancellation of foreign exchange contracts of Rs. 13,68,58,878 which according to the CIT 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 (with) 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 premium was paid for taking forward covers it would, in our opinion, retain the same character as the gain made by the assessee on cancellation of foreign exchange contracts. There would be no justification in merely stating that the expenditure is claimed by the assessee as capital or revenue as the case may be. Its nature is to be that of gain. Only net amount of gain of each contract, after expenditure, is to be taken as revenue or capital, as the case may be.

The AO is accordingly directed to bifurcate the expenditure with reference to treatment given to the gain made by the assessee on cancellation of contracts.

10. Ground No. 4 against revision order is against the direction to assess the difference of Rs. 3.68 crores in the amount of receipt on cancellation of foreign exchange contract. On comparison of the balance sheet of May, 1992, and March, 1993, the CIT noticed that the consideration amount received on cancellation was Rs. 75.61 crores (Rs. 16.99 crores plus Rs. 58.62 crores). However, in the Schedule XI attached to the return only a sum of Rs. 71.93 crores was disclosed.

There was thus a difference of Rs. 3.68 crores which has not been offered in the computation of total income. He, therefore, held that this aspect escaped the attention of the AO and, accordingly, his order to that extent was erroneous and prejudicial to the interests of Revenue. The assessee's contention that this amount was included in other income was not accepted in absence of any specific head of income was brought to his notice to show that the amount in fact had been included therein. In the net result, of the three issues, he directed the AO to treat the aggregate as business profit and to increase the cost/WDV of the assets by Rs. 89,29,83,055 (Rs. 71,93,24,207 plus Rs. 13,68,58,878 plus Rs. 3,68,00,000) and directed him to allow depreciation thereof. This gain pertains to the energy division for the period from April to May, 1992, and is actually included in the miscellaneous income of Rs. 5,41,08,225 of this division and which formed part of total miscellaneous income of Rs. 10,48,38,254 shown in the final accounts for the year ended 31st March, 1993. The AO may verify this and give necessary relief to the assessee.

11. The next issue on which the CIT found the order of the AO to be erroneous 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 itemised sale of assets of the undertaking and, therefore, gain was of capital nature not liable to tax. The AO 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 CIT considered the above order of the AO as erroneous and prejudicial to the interests of Revenue for the following reasons : "(1) The units sold were independent units. The business in each unit was separate. They were sold as going concerns. The assessee was, therefore, liable to capital gains tax on the transfer of those assets, which attracts levy of capital gains tax. Instead of adopting this method, the action of the AO in reducing the ' WDV was not in accordance with the provisions of law.

(2) The AO wrongly accepted the plea of the assessee that the capital gains was not leviable. It will be clear from the details discussed below that the value of assets transferred was ascertainable both in the books of the assessee-company and also in the books of the transferee-company. Keeping in view the same, the capital gains could have been worked out.

(3) The AO has not taken into consideration the fact that when the particular unit/division was sold, the value of block of assets of that division was reduced to nil in respect of that division/unit and, therefore, the entire surplus with reference to the block of assets would be chargeable to tax as short-term capital gains under Section 50 of the Act. The AO wrongly deducted the value of sale proceeds from WDV for the entire business which included the WDV of the above three units/divisions which is not in accordance with law.

The AO should have treated each unit separately for the purpose of arriving at capital gains." 12. According to the CIT, the value of assets transferred are known from the books of its divisions which were maintained separately. The assessee also furnished details of assets as accounted for in the books of transferee-company and he reproduced the figures in the following table in this behalf: S. No. Particulars of the assessee- Value in the books of the purchaser(Rs.) Value in the books company (Rs. ) Difference company (Rs. ) 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--Cir v.Artex Manufacturing Co. considering its earlierCIT v. B.M. Kharwar and CIT . H3 also referred to Gujarat High Court decision in the case of Artex Manufacturing Co. v. CIT which has been partly reversed by the Supreme Court holding that profit under Section 41(2) could be worked out in case separate value of each asset transferred is available on record; the Calcutta High Court decision in the case of CIT v. Hindustan Co-op. Insurance Society , Kerala High Court decision in the case of CIT v.Karnataka High Court in the case of Syndicate Bank Ltd. v. Addl. CIT wherein the business undertaking as a whole was held to constitute a capital asset within the meaning of Section 2(14) of the Act; a decision of Kerala High Court in the case of CIT v. F.X.Periem and Sons (Travancore) (P) Ltd. , the decision of the Gujarat High Court in the case of Sarabhai M. Chemicals (P) Ltd. v. P.N. Mittal, IAC and the Board's Circular No. 23D (LXXVIII-6) of 1966 explaining the decision of the Supreme Court in the case of Mugneeram Bangui and Co', (supra) as considered in the case of CIT v. Narkeshari Prakasan Ltd. . In view of the aforesaid decisions, he concluded that transfer of business as a whole would constitute capital asset and the profit on sale of the undertaking as taxable profit. However, in view of the specific provisions of Section 50 in respect of depreciable assets he held that surplus would be assessed as short-term capital gain and in doing so, the AO is directed to take into account only the value as recorded in the books of the transferee as indicated in the table aforesaid. He, however, directed that this would result in increase of WDV as the AO has reduced the WDV by the amount of the surplus.

12.2 He gave the following reasons to arrive at the gain from sale of each division : (1) The assessee-company itself accounted for the sale consideration separately for each unit/division; (2) Books of account for each unit/division are separately maintained and block of assets in respect of such unit/division are separately shown by the assessee itself; and (3) Deduction under Section 35D in respect of such 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 busine Sections" 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 that although the sale was to subsidiary companies, the exemption under Section 47(iv) would not be available in view of the fact that the assessee had disinvested its holdings in the wholly-owned subsidiary companies in the year 1995-96 and as per the provisions of Section 47A the transfer took place during the asst. yr.

1993-94 itself and, therefore, chargeable to tax in this year only.

13. The learned Counsel of the assessee reiterated the submission that the energy division and offshore division transferred to Essar Oil Ltd. on 31st May, 1992 and construction division to Essar Projects Ltd. transferred on 31st March, 1993 were as a going concern without valuing individual items and, therefore, the receipt was capital in nature not liable to tax. Reference in this connection is made to the decision of the Tribunal in the case of Industrial Machinery Associates v. CIT (2003) 78 TTJ (Ahd) 434 : (2002) 81 ITD 482 (Ahd) and of the Gujarat High Court decision in the case of IT Ref. No. 238/01, dt. 17th Sept., 2001. In the P&L a/c, the profit on sale of undertaking is shown at Rs. 15,31,93,662. It was actually worked out to Rs. 15,16,48,504 i.e., after adjusting the loss of Rs. 9,655 on sale of assets and profit and loss on sale of depreciable assets of Rs. 18,57,425 and 3,21,922 in the computation of income.

Net block of fixed assets : 80,55,94,816 73,20,107 Current assets 48,38,19,445 71,79,58,685 Misc. expenses 2,40,66,648 86,625 131,34,80,909 72,53,65,417 (Rs. 131,34,80,909 + Rs. 72,53,65,417) = 203,88,46,326 Less : Consideration = 215,00,00,000 11,11,53,674 2. Sale of Essar Projects Ltd. (Construction division) Net block of fixed assets : 1,98,87,938 Current assets : 14,35,83,685 16,34,71,623 Less : Liabilities : 5,39,66,453 10,95,05,170 Less : Consideration : 15,00,00,000 4,04,94,830 13.2 Initially, the businesses carried on in the three units were the main businesses of the assessee-company but subsequently, it entered into steel business and its expansion was on very much large scale. It was thought fit that it will not be suitable for the company to carry on the construction and oil exploration business together with steel business as the turnover which will be generated from the steel business will not be comparable to the turnover 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 companies and no new assets or liabilities as shown in the balance sheet were individually transferred. The transfer of the entire undertaking was at the lumpsum 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 v.Addl. CIT (supra), the decisions of the Supreme Court in the case of Mugneeram Bangui (supra) and CIT v. B.C. Srinivasa Setty . the Gujarat High Court in Artex Manufacturing Co.

(supra) and Calcutta High Court in Hindustan Co-operative Insurance (supra). Reference is also made to the decision of Bombay High Court in the case of Evans Fraser and Co. Ltd. (in liquidation) , it was further submitted that neither the cost of acquisition nor the cost of improvement is ascertainable and, therefore, capital gain is not chargeable to tax.

13.3 The consideration for the sale of undertaking was discharged by the issue of 65 lakhs equity shares of Rs. 10 each by Essar Projects Ltd. of Rs. 6.5 crores and interest-free instruments convertible at the option of the company into equity shares at per of Rs. 8.5 crores.

Similarly, the consideration by Essar Oil Ltd. of Rs. 215 crores was by issue of equity shares of Rs. 65.37 crores, take-over of secured loan of Rs. 55.13 crores and takeover of current liabilities of Rs. 94.5 crores.

13.4 The assets mentioned in the agreement with Essar Oil Ltd. are enumerated in Clause 1 to be any land and building, all furniture, fixtures, fittings used and occupied by EGL whether as licensee or tenant or owner or otherwise; all plant and machinery, rigs, barges, pontoons, dredgers used and occupied by EGL whether as a licensee or tenant or owner or otherwise, all plant and machinery, patents, trade-mark and designs, vehicles, etc.; the amount of advances (including loans and other debts whether secured or unsecured bills of exchange, advances recoverable in cash or in kind or for value to be received, e.g., rates, taxes, insurance, etc.); current assets including interest accrued on investments, the securities, shares, debentures, bonds and other investments; any other asset appearing in the books; technical collaboration and operating agreements, human resources, technical expertise and supporting designs and drawings, warrantees, inventions, power of attorneys, assignments, deed of confirmations, mortgages, goodwill, permits, licences, quotas and other intangible benefits, ongoing contracts, tenancies, pending claims, lease of various premises, right and other easements, technical and engineering data, design data, etc. and the claim and receipts under arbitration, negotiations, disputes, Court proceedings, etc.

13.5 It is submitted that the CIT had no basis for increasing the consideration for computing the capital gain at Rs. 53,73,04,107 as against Rs. 15,16,48,504..

13.6 In any case, he submitted that the AO was justified in reducing the consideration from the block of assets and there was no reason for exercising the revisionary jurisdiction.

14. The learned Departmental Representative submitted that certain liabilities to be transferred subject to consent of the third parties and, therefore, 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 and Allied Products v. Dy. CIT (2002) 74 TTJ (Ahd) 751 : (2001) 79 ITD 489 (Ahd), the decision of the Tribunal in the case of ITA No. 5108/Ahd/1996; in the case of Kishorchand K. Bansal v. Dy. CIT [reported at (2003) 78 TTJ (Ahd) 429--Ed.] 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 Manufacturing Co.

(supra) and the decision of the Kerala High Court in the case of Karvalves Ltd. (supra) 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 depreciable assets, the CIT was justified in holding that the surplus would be assessed as short-term capital gain.

15. We have heard the parties and considered the rival submissions. In the case of Artex Manufacturing Co. (supra), the question was for the assessment of the balancing charge on the sale of the business as a going concern (the business of manufacturing art silk cloth.) During the course of assessment proceedings before the ITO, for the purpose of determination of the purchase consideration, the assets were shown at Rs. 41,73,973, out of which the plant and machinery and dead stock, as revaluted by H was Rs. 15,87,2296. The liabilities were shown at Rs. 30,23,573 and the balance amount of Rs. 11,50,400 was shown as the purchase consideration. The written down value of the plant and machinery as dead stock as per books was Rs. 4,36,896. The difference between Rs. 15,87,296, the value of plant, machinery and dead stock was revalued, at Rs. 4,36,896, the written down value of plant, machinery and dead stock as per the assessee's books came to Rs. 11,50,400. The written down value as per income-tax record however, was Rs. 3,32,276.

After deducting the same from the amount of Rs. 15,87,296 the AO brought the balance Rs. 12,56,020 to tax under Section 41(2) of the Act and it was upheld by Their Lordships of the Supreme Court. In this connection, Their Lordships of the Supreme Court observed, "that in the agreement of sale, there was no reference to the value of the plant, machinery and dead stock. But on the basis of the information that was furnished by the assessee before the ITO it became evident that the amount of Rs. 11,50,400 had been arrived at by taking into consideration the value of the plant, machinery and dead stock as assessed by and valued at Rs. 15,87,296. Section 41(2) was applicable".

It was further observed, "that the liability under Section 41(2) was limited to the amount of surplus to the extent of the difference between the written down value and the actual cost. If the amount of surplus exceeded the difference between the written down value and the actual cost, then the surplus amount to the extent of such excess would have to be treated as capital gains for the purpose of taxation." Since this issue was not discussed the matter was remanded.

15.1 In the case of B.M. Kharwar (supra) before Their Lordships of the Supreme 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 IT Act, 1922, which is equivalent to Section 41(2) of the IT Act, 1961.

15.2 In the case of Mugneeram Bangur and Co. (Supra) 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 attributable to the cost of land and no part of the price was taxable. The fact that in the schedule to the agreement the price of the land was stated did not lead to the conclusion that part of the slump price was necessarily attributable to the land sold. What was given in the schedule was the cost price of the land as stood in the books of the vendor and even if the sum of Rs. 2,50,000 attributed to goodwill could be added to the cost of the land, there was nothing to show that this represented the market value of the land.

15.3 In the case of Artex Manufacturing Co. (supra) before Their Lordships of the Gujarat High Court what was transferred and sold was the whole business of the undertaking together with the assets and liabilities for a slump price and it was not sold for any itemised value or item by item price fixed for each assets of the firm. The entire business of the undertaking together with its assets and liabilities sold was for a slump price and, therefore, it was held that provisions of Section 41(2) were not applicable. This decision was reversed by Their Lordships of the Supreme Court in (supra) wherein it was held that though in the agreement of sale there was no reference to value of the plant, machinery and dead stock, but on the basis of information that was furnished by the assessee before the ITO, it became evident that the amount of consideration had been arrived at by taking into consideration the value of the plant, machineries and dead stock as assessed by the valuer.

15.4 In the case of Hindustan Co-operative Insurance Society (supra) a case before Their Lordships of the Calcutta High Court, the assessee was carrying on life insurance business which was taken over by the Life Insurance Corporation of India and compensation was paid for such taking over. It was held that the capital asset in the present case was the running business itself and the value of compensation was based on the calculation on the valuation dt. 1st Jan., 1954. The acquisition was on 19th Jan., 1956, and the Tribunal held that there was improvement in the capital assets after 1st Jan., 1954, which could not have been estimated at a price less than Rs. 3,98,000 which was received by the assessee over and above the value in 1954 and, therefore, there was no surplus chargeable to tax.

15.5 In the case of Kar Valves Ltd. (supra) before Their Lordships of the Kerala High Court the electricity supply undertaking 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. (supra) before Their Lordships of the Karnataka High Court the assessee was carrying on the banking business which was nationalised 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 lumpsum compensation for the transfer of business undertaking as a whole and it was not possible to split it up and apportion the same to any particular assets taken over by the Central Government and, therefore, it was not chargeable to tax either under Section 41(2) nor as capital gain on transfer of the undertaking. The matter reached the High Court wherein it was held that the term "capital asset" has a wide meaning and includes every kind of property as generally understood except those that are expressly excluded in the definition. A business undertaking as a whole would constitute a capital asset within the meaning of Section 2(14). If there is a transfer of a whole concern and no part of agreed price is indicated against different and definite items having regard to their valuation on the date of sale, the agreed price cannot be apportioned on capital assets in specie. What is sold in such a case is not the new item of property forming part of the aggregate, but the capital asset consisting of business of the whole concern or undertaking. What arises for consideration from the point of view of taxation is only the gain in respect of that transaction and nothing else. In this case, the decision of the Gujarat High Court in the case of Sarabhai M. Chemicals (supra), Artex Manufacturing Co.

(supra), the Supreme Court decision in the case of Mugneeram Bangur and Co. (supra) and the decision of the Bombay High Court in the case of Killick Nixon and Co. v. CIT and also the decision of CIT v. West Coast Chemicals and Industries (1962) 46 ITR 135 (SC) were referred to.

15.7 In the case of F.X. Periera and Sons (Travancore) (P) Ltd. (supra), a case before Their Lordships of the Kerala High Court, the business of the assessee in extraction and sale of mineral and mineral sands as an agent of the government, consequent to a dispute, was sold to the Government by an agreement dt. 12th Jan., 1954. One of the questions for consideration before Their Lordships was whether on the facts and circumstances of the case, the assessment of profit under Section 41(2) of the Act was valid. In that context, it was held that the section applies only to four types of assets, namely, building, plant, machinery or furniture and since it was a transfer of the undertaking as a whole Section 41(2) was not applicable. A question also arose as to the date on which the sale took place and in that connection, it was observed by referring to the decision of the Supreme Court in the case of Alapati Venkataramiah v. CIT 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 observed. 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, 14th April, 1971, only, and not on 12th Jan., 1954, the date on which the agreement was executed." 15.8 In the decision of Camphor and Allied Products (supra) 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 necessary adjustments will be made in the consideration agreed to be at Rs. 224 lakhs and thereafter, at the time of take over of operation such adjustments were actually made as per Article 3 of the preamble of the supplementary agreement and after referring to the decision of the Supreme Court in the case of Artex Manufacturing Co. (supra) the Tribunal held that facts in the instant case stood on a stronger footing inasmuch as sale consideration with regard to various assets have been indicated in the sale agreement itself. The following observations of the Supreme Court in the case of Artex Manufacturing Co. (supra) were noticed: "It is no doubt true that in the agreement there is no reference to the value of the plant, machinery and dead stock. But on the basis of the information that was furnished by the assessee before the ITO, it became evident that the amount of Rs. 11,50,400 had been arrived at by taking into consideration at Rs. 15,87,296. This is not a case in which it cannot be said that the price attributed to the items transferred is not indicated and, hence Section 41(2) of the 1961 Act cannot be applied. We are, therefore, unable to agree with the view of the High Court that Section 41(2) of the 1961 Act is not applicable." 15.9 In the case of Kishorchand K. Bansal (supra), the Tribunal found that in the assessee's own computation, the current assets and current liabilities reflected in the books of the unit as on 31st Aug., 1982 were Rs. 2,81,63,224 and Rs. 2,71,95,415 respectively. Thus, the excess current assets over the current liabilities worked out to Rs. 9,61,809 and this excess has been deducted from the sale consideration of Rs. 86,21,000 and the balance Rs. 76,53,197 represented the sale realisation of the block of assets held by the assessee. The total WDV of the block of assets aggregated to Rs. 28,17,418. The assessee has deducted therefrom the sale consideration of Maruti car separately for an amount of Rs. 50,000 and thus, the total WDV of the block of assets excluding the consideration for Maruti car was Rs. 28,17,418. On the basis of this computation the assessee paid the surplus realisation on the sale of fixed assets at Rs. 48,37,773. This was held to be taxable in the light of decision of the Supreme Court in the case of Artex Manufacturing Co. (supra).

15.10 In the case of B.C. Srinivasa Setty (supra), Their Lordships of the Supreme Court held that the charging section and the computation 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 and Co. Ltd. (in liquidation) (supra) a case before Their Lordships of the Bombay High Court, a private limited company decided to convert itself into a public limited company and as per the provisions of the Companies Act the private company was would up on 23rd April, 1947, and the public company was incorporated later on the same day. An agreement was executed on 5th April, 1948, between the liquidator of the private limited company and the public limited company which provided that the assets were transferred from 1st April, 1947, and in that context it was held that the public company was not in existence on 1st April, 1947, and, therefore, there could not be transfer of property without a transferee. It was only the Board of Directors of the public limited company which approved the agreement and there was nothing to show that the agreement was approved by the company in any general meeting and, therefore, the provisions of Section 12B of the 1922 Act were held not applicable. In this case, following the decision in the case of B.C. Srinivasa Setty (supra) it was observed that the charging section and the computation provision in the IT Act, 1961, together constitute an integrated code and in a case to which computation provision cannot apply, the charging section shall also not apply. " 15.12 In the case of CIT v. S. Natarajan before Their Lordships of the Madras High Court the assessee, an individual, sold a proprietary business as a going concern for a consideration of Rs. 36,900. The AO computed Section 41(2) profit at Rs. 2,08,595 on the ground that it has arisen by reason of sale of the business and the other question was whether the assessee was liable to long-term capital gain of Rs. 1,58,800 on transfer of this busine Sections Their Lordships of the Madras High Court referring to the subsequent decision in the case of Artex Manufacturing Co. (supra) explaining its earlier decision of Mugneeram Bangur and Co. (supra) holding that even" in the case of realisation sale, the excess amount realised over the written down value over the sale of assets, would be liable to tax, where it is possible to attribute the sale price of the assets sold and where the value of the plant and machinery was evaluated and transferred. It had also referred to its earlier decision in the case of Addl. CIT v.Govindoss Purushothamdoss holding that the parties showed a particular value for the assets in the books, the value arrived at by the parties cannot be taken as a notional figure but a real one. The Madras 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 , 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 every one of the assets mentioned in Section 3 of the Tamil Nadu Fleet Operators Stage Carriages (Acquisition) Act, and consequently, when the Government paid the compensation which the assessee received, after negotiation, it must be taken the Government reckoned the compensation for each and every item of the assets taken over. The assessee had also disclosed profit under Section 41(2) of the Act and in that context, it was held that, "the liability under Section 41(2) of the Act is limited to the amount of surplus to the extent of difference between the written down value and the actual cost and if the compensation amount exceeded the difference between the written down value and the actual cost, then the surplus to the extent of such excess was liable to be treated as capital gains for the purpose of levy under Section 45 of the Act." 15.14 On the analysis of the aforesaid decisions, the following principles can be culled out : (i) The business undertaking as a whole in itself is a property and a capital asset as such; (ii) That when the business as a whole is transferred it would be a transfer of property within the meaning of Section 41(2) (since deleted) and Section 45 of the Act.

(iii) Even if a slump price is paid for the transfer of the business as a whole, the liability under Section 45 could arise : (b) where it can be determined on the basis of the details furnished by the parties; or (iv) As the transfer of the business undertaking as a whole by itself is a property within the meaning of Section 2(47) of the Act it may be subjected to capital gain by virtue of the provisions of Section 50 of the Act. In that case the capital gain is to be determined on the basis of the consideration received for the transfer of the undertaking as reduced by the book value or written down value as shown in the accounts maintained by the assessee.

15.15 The claim based on the decision of the Supreme Court in the case of B.C. Srmivasa Setty (supra) that it would not be possible to find out the cost/sale consideration of individual items and, therefore, computation provision would not apply, would not be of any help to the assessee in this case because what is being considered is the transfer of the 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 this 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 present case, a respective lumpsum 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 the transferee-company which gives a distorted figure of profit which has not even been earned by the assessee. Profits and gains under the head "capital gain" can arise to an assessee only on the basis of the consideration stated in the deed which alone would be the full value of the consideration received by the assessee. It could not be any other figure unless of course, a case of underhand transaction is made out by the Revenue which is not the case in the present case. However, on perusal of the figures of valuation put up to respective assets and recorded by the CIT we. find that there is no difference in various items of depreciable assets except in the valuation of plant and machinery in energy division and in construction division where the difference is also in the valuation of tugs and barges. Therefore, the entire excess would be relatable to the depreciable assets, and, therefore, the said bifurcation of the consideration has to be taken as price attributable to these assets sold and accordingly, the assessee would be liable to capital gain tax on this exce Sections 15.17 Section 50 as it stood at the relevant time and applicable to the year under consideration provides that where the capital asset is an asset forming part of the block of assets in respect of which depreciation has been allowed under this Act or under the Indian IT Act, 1922, the provisions of Sections 48 and 49 shall be subject to the following modification : "(1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate of the following amounts, namely : (i) expenditure incurred wholly and exclusively in connection with such transfer or transfers; (ii) the written down value of the block of assets at the beginning of the previous year; and (iii) the actual cost of any asset falling within the block of assets acquired during the previous year, such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets; (2) where any block of assets ceases to exist as such, for the reason that all the assets in that block of assets shall be the written down value of the block of assets at the beginning 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 accruing 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 would be assessable as short-term capital gain.

It cannot be reduced from the cost of block of assets as allowed by the AO in the assessment order under Section 143(3) or is alternatively claimed by the assessee. This is dehors the question of transfer of the units of the concern as a going concern whether it be a slump sale or otherwise. After introduction of Section 50, the entire business is to be taken as a whole and the difference between the written down value and the sale consideration is to be charged to tax under the head "short-term capital gain". The action of the CIT in revising the assessment to this extent, in our opinion, is justified. However, as aforesaid, the amount of gain which the CIT has determined at Rs. 53,73,94,137 based on the values put by the transferee-company cannot be upheld as that amount is much more than the full value of the consideration and was never received nor receivable by the assessee.

The capital gain is to be worked out on the basis of the consideration received or accruing to the assessee on account of transfer and as recorded in the sale deeds. The gain of the amount of Rs. 15,16,48,504 as computed by the assessee which is based on the actual consideration received alone would be the chargeable amount. We, therefore, direct the AO to substitute this figure as against the direction of the CIT to assess Rs. 53,73,94,137 to capital gain.

16. In ITA No. 780/Mad/1999 of the assessee, the first four grounds are seeking allowance of consequential depreciation which was not allowed by the CIT(A) though directed to be allowed by the CIT in Section 263 order. This is on account of the foreign exchange gain and the gain on transfer of three units of the assessee as a going concern which was reduced by the AO from the amounts of the written down value of the block of assets but held to be revenue nature by the CIT. In the second round of appeal CIT(A) has given necessary directions to allow the depreciation on the enhanced WDV. However, these grounds are now consequential to our order in the appeal of the assessee against the order under Section 263 aforesaid. The AO will give consequential effect to our finding aforesaid while working out the written down value of the block of assets as aforesaid and rework the depreciation.

17. The 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-Ill 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 AO.18. This order of the AO, according to the CIT, was erroneous and prejudicial to the interests of the Revenue because the above expenditure was of capital nature in view of the decision in the case of CIT v. Food Specialities Ltd. and the action of the assessee in capitalising the same in its books of account. The assessee's claim is that once the business is set up, expenses are allowable and there is no concept of commercial production, that the expenditure was incurred in connection with the expansion of the business and no new business was set up, the business was completely integrated and, therefore, the expenditure on trial production was a revenue expenditure. The expenditure was on consumption of gas, power and other related items. The CIT, however, held that it was a case of setting up a new unit and the contention of the assessee that there is only an expansion of the existing unit is not borne out by any evidence on record. The details of the expenditure incurred also indicated, according to him, that the expenditure was on trial run in respect of new Module-Ill and the capitalisation whereof was approved by the company's auditor and, therefore, there was no basis for treating the expenditure as revenue expenditure. He also referred to in this connection the decision of Bombay High Court in the case of CIT v. G.T.Industries and directed the AO to capitalise the expenditure and allow depreciation as was done by the assessee in its books of account at the prescribed rate.

19. The assessee's submission is that the CIT erred in holding that all expenses incurred till commencement of commercial production of the third unit of HBI plant are capital expenditure even though it had commenced trial production in saleable quality and has also made sales during the year. According to the assessee, the CIT has erred in differentiating between trial production and commercial production which is immaterial for income-tax purposes and that he failed to appreciate the difference between setting up a new business and setting up a new unit forming part of the same busine Sections The learned Counsel of the assessee submitted that the expenses upto the trial production have been capitalized by the assessee and trial production to the date of commercial production have been treated as revenue expenses which include the expenses of start 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 Jan., 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. and in the case of Dy. CIT v. Core Healthcare Ltd. and of Calcutta High Court in the case of Smt Santosh Debi Baid v. ITO . It was further submitted that the decision in the case of Food Specialities Ltd. (supra) was rendered in a different context and the decision of the Bombay High Court in the case of G.T.Industries (supra) was a care where the expenditure have been directed to be capitalised on trial production because it was a case of starting a new and an initial unit and not a case of an extension of the already existing unit. It is further stated that it is a case where the old unit and new unit amount to same business carrying on the same business and, therefore, expenditure relating thereto is to be allowed as revenue expenditure in view of the decision of the Supreme Court in the case of Bansidhar (P) Ltd. v. CIT and the decision of the Supreme Court in the case of CIT v. Prithvi Insurance Co. Ltd. . It is submitted that the assessee has already commenced the business and, therefore, the expenditure has to be allowed in view of the decision of the Gujarat High, Court in the case of Asstt. CIT v. Ashima Syntex Ltd. . He also referred to the decision of the Tribunal in the case of United Phosphorus Ltd. v. Jt. CIT (2001) 73 TTJ (Ahd) 404 : (2002) 81 ITD 553 (Ahd) at p. 670. Reference is also invited to the decision in the case in CIT v. Kanoria General Dealers (P) Ltd. wherein it was held that once business is set up the assessee would be. entitled to depreciation even if it were not employed any commercial production.

20. The learned Departmental Representative, on the other hand, submitted that the CIT was justified in disallowing the claim of the assessee and in this connection he relied upon the decisions of the Gujarat High Court in the cases of Shree Vallabh Glass Works Ltd. v.CIT (1981) 127 ITR 37 (Guj) at p. 42 and CIT v. McGaw Ravindra Laboratories (India) Ltd. (1981) 132 ITR 401 (Guj) wherein the expenditure before regular production was disallowed. He also relied upon the decision of the Madras High Court in the case of Madras Fertilizers Ltd. v. CIT wherein the pre-production expenditure have been disallowed. For explaining the concept of commencement of commercial production he referred to the decision of the Gujarat High Court in the case of CIT v. Sarabhai Sons (P) Ltd. ; the decision of the Bombay High Court in the case of CIT v. G.T. Industries (supra) and the decision reported in 108 ITR 650 (sic).

21. We have heard the parties and considered their rival submissions on this issue. In the case of Food Specialities Ltd. (supra), a case before the Delhi High Court, the assessee incurred an expenditure of Rs. 23,069 on purchasing milk used for testing the plant and machinery to be included in the actual cost of the machinery. The High Court following the decision of the Supreme Court in the case of Chellappalli Sugars Ltd. v. CIT 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 CIT v. G.T. Industries (supra), 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 CIT v. Alembic Glass Industries Ltd. (supra), 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 test for considering whether a particular unit is a separate business from the business of the other unit or not, is to see whether the closure of one unit would affect the other unit or not, as contended by the Revenue, the closure of any of the two units here would surely affect the working and the business of the remaining unit, for the simple reason that a larger liability of the whole business would obviously have to be borne by the other unit on the closure of one unit. The High Court further held that the Tribunal was justified in holding that the new factory at Bangalore did not constitute a new business but was only an establishment of a new unit of the existing business at Baroda and that the interest incurred by the assessee on the borrowing utilised for the purpose of establishing the Bangalore unit is for the purposes of the assessee's business and as such allowable as revenue expenditure.

21.3 In the case of Shree Vallabh Glass Works Ltd. (supra) before the Gujarat High Court, the assessee which manufactured safety glasses, wired glasses, etc. started construction of its factory in the year 1961-62 and imported machinery from West Germany for the erection thereof. The plant was commissioned in October, 1963. The assessee incurred expenditure before commencement of production in asst. yr.

1964-65 was of Rs. 4,80,873 which had been capitalised and the assessee claimed depreciation thereon. Here also, following the decision of the Supreme Court in the case of Chellappalli Sugars Ltd. (supra) the Court held that the expenses incurred prior to the plant of the assessee coming into production were incurred by the assessee for putting its plant into production and, therefore, to be treated as part of the actual cost of plant and machinery.

21.4 In the case of McGaw Ravindra Laboratories (India) Ltd. (supra), a case before the Gujarat High Court, the assessee manufacturing blood transfusion equipment had decided to manufacture testing chemicals which form part of it and the expenditure incurred in connection with manufacture of testing chemicals was held to be on revenue account by the Tribunal by observing that the assessee-company was already manufacturing blood transfusion equipment and, therefore, it could not be said that the expenditure incurred was capital in nature. The High Court however, found that the expenditure of Rs. 24,000 relating to testing formula accounted 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. (supra), a case before the Madras High Court, the assessee started its business on 1st Nov., 1971, and for asst. yr. 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 1st Nov., 1971, there was no business already in existence and the expenditure was incurred in that initial start.

21.6 In the case of Sarabhai Sons (P) Ltd. (supra), a case before the Gujarat High Court, the assessee, a private limited company, decided to start a new business for the manufacture of scientific instrument and communication equipment. It placed orders for machinery and raw material and stores and also took on lease premises from an industrial estate. The assessee claimed Rs. 16,237 spent in connection with this new business and the High Court held that the new business could not be ready to discharge the functions for which it was established, namely, the manufacture of scientific instruments and communication equipment until the machinery necessary for the purpose of manufacture was installed. It was further observed that the business could not be set up until July, 1966, when the machinery had been installed and the factory was ready to commence busine Sections Revenue expenditure incurred before that date would not be a permissible deduction in the assessment for the asst. yr. 1966-67. It is a case where even machinery was not installed and obviously the expenditure cannot be on revenue account.

21.7 In the case of Prem Conductors (P) Ltd. (supra), a case before the Gujarat High Court, the question was as to when a business can be said to have started. It was held that a company can be said to have set up its business from the date when one of the categories of its business is started and it is not necessary that all the categories of its business activities must start either simultaneously or that the last stage must start before it can be said that the business was set up.

The test to be applied is as to when a businessman would regard a business as being commenced and the approach must be from a commonsense point of view. In this case, the company which was incorporated on 4th Nov., 1963, actually started production on 26th June, 1965. In this case, the company had commenced its business by securing orders first and gone into production later on and since the business activity of securing order had practically started from the very date of incorporation of the company, it was held that the business activity of the company started from the day of incorporation and the expenditure incurred before the actual production was allowed as a revenue expenditure.

21.8 In the case of United Phosphorus Ltd. (supra) before the Ahmedabad Bench of the 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 inputs 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 busine Sections The company started manufacturing of items which were towards backward integration or forward integration of the existing line of busine Sections" 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(l)(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 submissions made by the learned representative and have gone through all the judgments cited by them. Let us first consider the applicability of various judgments relied upon by the learned CIT-Departmental Representative on the facts of the present case. Shri Dave, the learned CIT-Departmental Representative relied on the decision of the Tribunal in the case of Core Health Care Ltd. (supra). It is true that the Tribunal in that case has held that other expenditure including miscellaneous expenses and travelling expenses incurred in relation to new units of existing business cannot be allowed as revenue expenditure as unlike provisions of Section 36(1)(iii), the provisions of Section 37 clearly and unmistakably deny any deduction of expenditure in the capital field. The Tribunal had relied on the judgment of the Gujarat High Court in the case of Shree Vallabh Glass Works Ltd. (supra). The learned Counsel contended that the said decision has been impliedly overruled by the Supreme Court in Akkambamba Textiles Ltd.'s case (supra) and Siwakami Mills Ltd.'s case (supra) is not correct as that was another judgment in the case of CIT v. Vallabh Glass Works Ltd. (1982) 137 ITR 389 (Guj) which relate to the allowability of guarantee commission. In the judgment in Shree Vallabh Glass Works Ltd.'s case (supra), the High Court held that all expenditure necessary to bring assets into existence and to put those assets in working condition is part of the actual cost of assets to the assessee and depreciation thereon has to be allowed by the IT authorities: The assessment year under consideration was 1964-65. The construction of factory at Anand was started in the accounting year 1961-62 and the plant was commissioned and put into service from October, 1963. The expenses incurred before commencement of production amounting to Rs. 4,80,873 had been capitalised and the assessee claimed depreciation thereon. On these facts the High Court held that the assessee is entitled to depreciation on such pre-production expenses. The facts of the present case are clearly distinguishable. It is a case where the assessee is carrying on its business for last several years. The expenses have been incurred in relation to setting up of new units which are part of the same existing business of the company. The other judgment relied upon by the Tribunal in this case is Peas Industrial Engineers (P) Ltd. (supra). This was also a case where the claim for such expenditure was made in respect of 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 busine Sections The aforesaid decision is, therefore, clearly distinguishable with the facts of the present case. The learned CIT-Departmental Representative then relied on the judgment of the Gujarat High Court in McGaw Ravindra Laboratories (India) Ltd.'s case (supra). 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 interconnection, interlacing or interdependence of both the units. The Court also referred to the judgment of Alembic Glass Industries Ltd. (supra) at pp. 1008 and 1009 in McGaw Ravindra Laboratories (India) Ltd.'s case (supra). It was observed that in Alembic Glass Industries Ltd.'s case (supra) new unit at Bangalore was nothing but expansion of the existing business of manufacturing glass at Baroda. The Court also observed that there was complete interconnection and interlacing of both the units in the case of Alembic Glass Industries Ltd. (supra) which is the test laid down for determining whether two lines of business constitute "same business". The aforesaid judgment, therefore, also instead of supporting the case of the Revenue, supports the decision rendered by the learned CIT(A) on this point. Likewise, the facts and all other judgments relied upon by the CIT-Departmental Representative are clearly distinguishable, as all these cases relate to expenditure incurred in connection with setting up of an altogether new business and those are not cases of expansion of existing busine Sections XXI(6). The allowability of such expenditure incurred by the assessee in relation to new units/projects constituting part of the same existing business of the assessee, is supported by various judgments relied upon by the learned Counsel. On a careful consideration of the entire relevant facts and the judgments cited supra, we are of the opinion that the view taken by the learned CIT(A) in relation to the allowability of travelling expenses and salary and wages expenses relating to setting up of new units forming part of the existing business of the assessee, is perfectly valid and justified. We do not find any justification to interfere with the view taken by the learned CIT(A). Hence, ground Nos. (3) to (6) of Revenue's appeal are dismissed." 21.9 In the case of Core Healthcare Ltd. (supra) the assessee-company was principally engaged in the business of manufacturing intravenous injection of two types-large volume parenterals i.e., LVP and sterile water for injection (small volume parenterals) i.e., SVP. The commercial production has commenced in February, 1988, and the manufacturing activity had been generally increased from time to time.

During the financial year ended on 31st March, 1992, the company installed three more machines in addition to the existing three machines for the production of LVP and SVP resulting in substantial increase in the investment of the manufacturing 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(l)(iii) was allowable even though pertaining to the period prior to the commencement of production.

21.10 In the case of L.M, Chhabda and Sons (supra) 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 busine Sections Whether different ventures carried on by the assessee form parts of the same business must depend on the facts and circumstances of each case, and it is for the assessee to establish that the different ventures constitute parts of the same busine Sections It was thus a case held to be of an independent and separate business carried on by the assessee.Bansidhar (P) Ltd. v. CIT (supra), the assessee, a private limited company, was carrying on five different business activities at different point of time, viz., purchase and sale of cloth, manufacture of machinery, etc. The assessee could not recover the outstanding dues and claimed deductions under Section 37 of a sum of Rs. 9,603 paid as retrenchment compensation and also claimed deduction under Section 36(1)(vii) of an amount of Rs. 34,617 by way of bad debts. The ITO as well as AAC rejected both the claims. The Tribunal held that since retrenchment compensation was paid and bad debts were incurred in business totally distinct from the business carried on by the assessee, the deductions could not be allowed in the assessment of the assessee because several businesses were widely different in nature. The High Court held that the Board of Directors of the assessee, which was a private company, was in overall control of all the five business activities which were owned and carried on by the assessee. There was a common fund from which the necessary capital and working funds were supplied to the various business activities. The ultimate gain or loss of the businesses was also worked out by a consolidated P&L a/c and balance sheet. The source of finance for running the various businesses was thus one and the same and there was consolidation of accounts for the purpose of ascertaining the ultimate working result of the businesses carried on by the assessee. The High Court further held that there was complete Interconnection, interlacing, interdependence and dovetailing of the different business activities carried on by the assessee and all the activities constituted one and the same business and the deduction on account of retrenchment compensation paid by the assessee upon the closure of one of its businesses and the write off of its outstanding dues as bad debts in the other were allowable deductions under Section 37 and Section 36(1)(iii) respectively.

21.12 In the case of Asstt. CIT v. Ashima Syntex Ltd. (supra), the assessee was a manufacturer of fabrics. During the relevant period it imported air jet looms from Japan. It was stated that the assessee started trial production on 26th March, 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 26th March 1993 till the end of the accounting year, i.e., 31st March, 1993.

The Tribunal also found that grey 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 busine Sections The assessee was entitled to depreciation on the machinery.

21.13 In the case of CIT v. Prithvi Insurance Co. Ltd. (supra) and Ors.

cases the assessee-company carried on more than one businesses. The question was whether the unabsorbed losses could be set off against its profits. The Supreme Court held that assessee was entitled to the set off claimed by it as the two businesses constituted one composite busine Sections The interconnection, interlacing, interdependence and unity were furnished by the existence of common management, common business organisation, common administration and common funds, etc.

21.14 In the case of L.M. Chhabda (supra), the Supreme Court observed that the question whether different ventures carried on by the assessee are parts of the same business must depend on the facts and circumstances of the case. In a later decision of Supreme Court in Waterfall Estates Ltd. v. CIT , it was observed : "We do not think it necessary to deal with the facts of each of the decisions for the aforesaid reason and also because the said question is essentially a question of fact. No single test can be devised as universal and conclusive. The question has to be decided on a consideration of all the relevant facts and circumstances. Some facts may tend one way and some other the other way. An overall view has to be taken and a conclusion arrived at." 21.15 There is no doubt about the proposition as canvassed by the learned CIT-Departmental Representative that the liability of an expenditure cannot be allowed if a business is not yet started and carried on by the assessee during the year under consideration in the light of the decisions. But there are several decisions of the Supreme Court and various High Courts and also of the Tribunal wherein the expenditure related to expansion of business was held allowable against the business income of other business on the basis of the principle of 'same business'. On that basis if the business of the assessee of third Module was part of the integrated business carried on by the assessee, we do not find any reason how the same could be disallowed on the ground that the trial run expenditure was pertaining to the new unit which was nothing but an expansion of the same business of manufacturing sponge iron. It is a clear case of a same and integrated business with a complete interconnection and interlacing between the different lines of activities carried on by the assessee in ' the light of the following decisions, wherein even different and various businesses' carried on by the assessee were considered 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 IT Act in Prithvi Insurance Co. Ltd. (supra);Hooghly Trust (P) Ltd. v. CIT (iii) share business and business in diverse commodities in Produce Exchange Corporation Ltd. v. CIT ; (iv) import business closed in 1953-54 and export business started in 1954-55 in B.R. Ltd. v. V.P. Gupta, CIT (v) diverse commodities like sugar, vanaspati, scap, etc., and special alloy ware and blades in CIT v. Modi Industries ; (vi) fertilizer and cement in the case of IAC v. Coromondal Fertilizer 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 (2001) 70 TTJ (Mumbai) 805 : (2000) 72 ITD 1 (Mumbai); (viii) diverse business in textile, fibre on different places and cement/sponge iron at other places in Grasim Inds. Ltd. v. Dy. CIT (1999) 64 TTJ (Mumbai) 357; etc.

21.16 From all these decisions and other decisions considered above, the following principles can be deducted : (i) The nature of two lines of business is not relevant--in this case even that is also same; (ii) the fact that one business can be conveniently closed down without affecting the other business is a strong indication that both the businesses are distinct and separate, but no decisive inference can be drawn from that; (iii) the decisive test is the unity or control which is indicated by interlacing, interdependence and interconnections between the business and that should be shown to exist by reason of the common management, common administration, common fund and common place of busine Sections 21.17 The assessee's argument is that the assessee is engaged in the business of manufacture and sale of hot briquetted sponge with 8,80,000 MT capacity, it expanded its capacity to 13,20,000 MT with the introduction of the third module having capacity of 4,44,000 MT. The assessee who in the present case, has already been in the business and in view of the supreme decisions referred to above, was engaged in a same and integrated business with a complete interconnection and interlacing between the different lines of activities carried on by the assessee and that the fact that nature of two lines of business is not relevant and the decisive test is the unity of control which is indicated by interlacing, interdependence and interconnection between the business by reason of the common management, common administration, common fund, etc. and since the assessee is already in the business arid various units of the assessee amounts to same business, the expenditure of start up, establishment and folio maintenance aggregating to Rs. 11,41,33,843 was an allowable deduction and so also the claim of interest of Rs. 3,51,41,347. It may also not be lost sight of that the assessee has started production from 1st Jan., 1993, and the product during trial production between September, 1992, to December, 1992, was sold and shown in the sales declared by the assessee and has been assessed as income of the assessee. Consequently, the expenditure incurred by the assessee in producing those items would also be an expenditure of revenue nature though incurred during the trial production which was before starting of the commercial production.

21.18 Though the assessee started a new unit, it has a common management with a registered office. Common funds were being utilised in these ventures of activities and, therefore, it is a case of one and the same busine Sections It was further submitted that thus there was a complete interconnection and interlacing amongst different lines of activities of business carried on by the assessee and, therefore, the expenses have been incurred in such busine Sections 21.19 The details of the expenditure disallowed by the CIT are as under : I. Expenses incurred during the trial production of Module-Ill, during the period September, 1992 to December, 1992 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 and 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 stablishment expenses : (Rounded off) Salaries and wages 8.92,000 Staff welfare 5,26,000 Repairs and maintenance expenses 1,90,000 Rent 10,16,000 Rates and taxes 9,000 Communication expenses 3,09,000 Travelling expenses 10,95,000 Establishment expenses-Others 1,09,20,000 1,52,65,000 olio Maintenance Charges debentures 15,66,000 The above expenditure has been Module-III 11,41,33,843 II. Interest on working capital shown under : i) Interest on CC/OD 2,01,73,734 (ii) Interest on security deposit 15,000 (iii) Interest on documents retired 1,10,87,836 (iv) Interest on bills discounted 37,89,375 (v) Bank charges 75,402 3,51,41,347 14,92,74,847 21.20 From these details we find that the expenses actually incurred on trial run are only those shown in the aforesaid chart as "start-up" expenses as reduced by the element of interest, i.e., Rs. 6,77,43,836 (9,73,02,843 - 2,96,59,007). The other expenses allocated from out of establishment and folio maintenance including interest are not the direct expenses on trial run but are even otherwise allowable as revenue expenditure, the assessee being already in existence irrespective of the fact whether it is a case of expansion of an existing business or establishing a new business altogether. .

22. The next dispute is with regard to addition of annual letting value of house property amounting to Rs. 49,64,675 which according to the assessee, is over and above the amount actually received and offered for taxation by the assessee. The CIT observed that the assessee was owner of house property at Mumbai, being a flat occupied by M/s On A Way Engineering (P) Ltd. for which an estimated income of Rs. 1,20,000 was shown in the computation of total income relevant to asst. yr.

1992-93 wherein an addition of Rs. 1 lakh was made in the absence of any details furnished. No such value according to him was estimated for the year under consideration. The CIT, therefore, was of the opinion that the order of the AO was erroneous and prejudicial to the interests of the Revenue. He also found from the details of prior period expenses/income as on 31st March, 1994 that the assessee had received a sum of Rs. 27,88,800 in respect of property for the period 1st April, 1992 to 31st March, 1993 i.e., for the year under consideration. The assessee had submitted that a total sum of Rs. 55,77,600 was received during the financial year 1993-94 being rent for the period from 1st April, 1992 to 31st March, 1994 and the entire amount has been offered to tax in the asst. yr. 1994-95 and was assessed to tax. The CIT observed that the ALV relating to one assessment year is to be assessed in that particular assessment year and accordingly, directed the AO 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 para 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.) Jolly Makers Chambers in para 20.6 of this order 1,20,000 Already considered 23.1 The learned Counsel of the assessee submitted that the rent payable has been actually settled in the next year and, therefore, the assessee offered the full amount in the next year, which has been assessed in asst. yr. 1994-95. Therefore, that amount was offered and had already been assessed in the subsequent year; the same is not required to be added again.

24. Income from house property is assessed under Section 22 of the Act and it is the annual value of the property which is chargeable to tax from year to year. Section 23 deals with the ascertainment of the annual value. It provides that for the purpose of Section 22, annual value of the house property shall be deemed to be (a) the sum for which property might reasonably be expected to let from year to year, or (b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in Clause (a), the amount so received or receivable; 25. The taxability is on the annual letting value which the assessee is entitled to receive or reasonably expect from year to year, whichever is higher. If the amount pertained to the year under consideration which has been settled in the subsequent year as per the provisions of Sections 22 and 23, it has to be brought to tax in the relevant year under consideration irrespective of the fact that the assessee had received it and/or offered the same in the subsequent year. We, therefore, agree with the CIT on principle and uphold his order on this point. However, the amount if assessed in the year under consideration, the same may be excluded from the next year's income offered and assessed on actual receipt basis.

26. The next dispute is with regard to disallowance of Rs. 98,01,013 claimed under Section 35D of the Act. The CIT noticed that a sum of Rs. 2,49,97,769 was allowed to the assessee in some of the earlier years which included a sum of Rs. 1,59,94,140 (39,00,339 + 1,20,09,380) which was allowed for the first time in asst. yr. 1990-91 without restricting it to 2.5 per cent of the project cost. Though the assessment order for the asst. yr. 1990-91 was rectified, but the consequential rectification for asst. yr. 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 Steel Rolling Mills Ltd. v. CIT 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 conversion of fully convertible debenture. The assessee's contention is that the expenditure was akin to premium paid on debentures and, therefore, wholly and exclusively allowable as business expenditure. The facts are that the assessee has reduced from the share premium account the said sum of Rs. 10,24,30,110 from the reserves and surplus account but claimed the same as revenue expenditure in the computation of income filed along with the return.

The assessee issued fully convertible debentures in the year 1989 which were converted into shares partly on allotment in 1990 and fully by 1992. While issuing fully convertible debentures the assessee announced that debentureholders and shareholders upon conversion of debentures into shares would be entitled to loyalty coupon at Rs. 10 per convertible debentures provided the debenture and shares were not transferred by the original debenture holders and the shareholders for three years after allotment of convertible debentures. According to the CIT, the payment on account of loyalty coupon has no nexus to the business of the assessee and the expenditure was not related to the issue, of debentures because the debentures were issued in 1989 and the liability in respect of loyalty coupons arose in 1992. He further observed, that payment on account of loyalty coupon was not an allowable deduction. It was an incentive if at all for conversion into shares and holding the same for three years. He, therefore, held that expenditure has no relevance to the issue of debentures and the expenditure was not incurred wholly and exclusively for the purposes of busine Sections The assessee's reliance on Calcutta High Court decision in the case of CIT v. Tungabhadra Industries Ltd. was found to be of no help as according to him, the debentureholder once he parts with the debenture becomes ineligible to the loyalty arising under the loyalty coupon which for him was contingent being on the happening of subsequent year. According to him, the loyalty coupon was in connection with allotment of shares and, therefore, expenditure was not an allowable deduction in view of the Supreme Court decisions in the case of Punjab State Industrial Development Corporation Ltd v. CIT and Brooke Bond India Ltd. v. CIT .

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 1st June, 1990 and 1st June, 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 debentureholders retain the debentures/share for three years. The three year 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 AO. 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 Tribunal in ITA No.538/Ahd/1989, the decision in the case reported in Tungabhadra Industries Ltd. (supra) and the decisions in Madras Industrial Investment Corporation Ltd. v. CIT and Universal expenditure was to save the administration cost of transfer. It is further submitted that it was in the nature of cost of raising the finance and, therefore, in view of the decision of the Supreme Court in the case of India Cements Ltd. (supra) it is an allowable expenditure.

29. The learned Departmental Representative referred to the provisions of Section 78 of the Companies Act and submitted that the payment was related to shares and not the debentures because it was to be paid only when the debenture-holders became shareholders and retain the shares for three years period. He, therefore, supported the order of the CIT in view of the decisions reported in Punjab State Industrial Development Corporation Ltd. (supra) and Brooke Bond India Ltd. (supra).

30. We have heard the parties and considered the rival submissions. In para 4 of the Terms and Conditions of the issue it is stated that the assessee intended to introduce the concept of one loyalty coupon for each debenture allotted as a gesture of reward and appreciation of such of those original debentureholders who have remained with the company for a minimum of three years. A loyalty coupon was to be attached with each convertible debenture except those to be allotted to promoters. An amount of Rs. 10 per debenture was to be paid to holders of each debenture if they do not sell the shares on account of the conversions for the first three years from the date of allotment, provided the couponholder is the original allottee or his successors; if he has not disposed of through sale or otherwise the shares issued on the first and second conversion. The conversion terms as aforesaid are--Part A debenture is to be converted into two fully equity shares at the premium of Rs. 30 per share on 1st June, 1990 and Part B also into two equity shares of Rs. 10 each by premium to be decided by CCI at that time. Should the premium so determined be less than Rs. 40, the balance amount will be treated as a debenture and was to be redeemed at par at the end of 7th year from the date of allotment. It is true that when the debentures were issued, the assessee agreed to pay loyalty coupon to the debenture holders and it was an impetus to subscribe to the debenture initially but if the scheme of the assessee is read as a whole, it would be evident that this is a reward for holding of shares after a period of three years of the initial allotment of debentures.

The liability of the assessee arises only on expiry of the third year and on subscription of the shares which have been allotted to the assessee on the conversion of the debentures. It is, therefore, an expenditure in relation to the shares 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 Corporation Ltd. (supra), 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 retains the character of capital expenditure since the expenditure is directly related to the capital expansion of the capital base of the company.

31.1 In the case of Brooke Bond India Ltd. (supra), 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 company and in the profit making. In this case, the assessee issued ordinary shares of Rs. 16,75,000 of Rs. 10 at a premium with a view to increase its share capital and in that connection it incurred an expenditure of Rs. 13,99,305.

31.2 In the case of Tungbhadra Industries Ltd. (supra) the fees paid to the Registrar of companies in connection with the increase of the authorised capital of a company was held to be capital expenditure and, therefore, the expenditure was not allowable under Section 37. In this case, a clear distinction was made by the High Court that a share is clearly distinct and different from a debenture. It is well-settled that taking of a loan does not lead to acquisition of any capital asset or any advantage of an enduring nature. The loan is a liability and cannot be considered as an advantage irrespective of the purposes for which the loan is utilised, namely, whether the acquisition of a capital asset or for meeting revenue disbursements. The expenditure incurred on the loan would be an allowable revenue expenditure. In that case, the expenditure was incurred on non-convertible secured debentures of the total value of Rs. 80 lakhs in 1983 and the said debentures were redeemable after expiry of seven years from the date of allotment.

31.3 In the case of Universal Cables Ltd. (supra), the Calcutta High Court following the decision of the Supreme Court in the case of Madras Industrial Investment Corporation Ltd. (supra) held that there was a continuing benefit to the business of the assessee over the entire period and, therefore, the premium payable on redemption of non-convertible secured debentures issued during the. year should be spread over the period of the debentures.

32. The reliance on the decision of the Calcutta High Court in the case of Tungbhadra (supra) and the decision of the Supreme Court in the case of Madras Industrial Investment Corporation Ltd. (supra) is of not much help as the expenditure in that case was for raising loan by issue of non-convertible debentures and retaining the debentures for a certain period and that was a reason that the expenditure was held to be for raising the finance and which had continued utilisation for a particular period and the expenditure was allowed to be deducted on the basis of the period for which the debentures were retained by the debentureholders. Similarly the case of the Calcutta High Court in Universal Cables Ltd. (supra) was 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 1st June, 1990 and 1st June, 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 sharees 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 Corporation (supra), 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 1st April, 1992 to 30th June, 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 regard to disallowance of bad debt of Rs. 53,28,909 written off during the year under consideration. The claim of the assessee was that the CIT failed to appreciate that the bad debt written off pertained to the Offshore Division and they were written off before the transfer to Offshore Division of Essar Oil Ltd. The contention of the assessee that the amount was written off was not found to be correct as accordance to the CIT. there was no write off in the books of account and instead this amount was deducted from the contract receipts details whereof have also not been furnished. He further observed that in the total consideration received from M/s Essar Oil Ltd. the above amount got merged and, therefore, there cannot be any separate deduction for this amount. He, accordingly, directed the AO to bring the amount to tax as business income for the asst. yr.

1993-94 by disallowing the deduction which has been claimed from the contract receipts.

35. The learned assessee's counsel submitted that the assessee had made a provision for doubtful debts amounting to Rs. 53,28,909. The provision was reduced from the contract receipts and the AO allowed the same. These bad debts are stated to be in connection with the transfer of Essar Oil division and the debts were written off at the time of transfer of undertaking and so the provision was also transferred to EOL who have written off the bad debts to the provision account transferred with the undertaking. The learned Counsel of the assessee relied upon the decisions reported in CIT v. Girish Bhagwat Prasad and in Samngpur Cotton Manufacturing Co. Ltd. v. CIT (1983) 143 ITR 166 (Guj) and submitted that it was actually written off. The assessee's contention is that the CIT was not justified in stating that it was a loss of EOL because the assessee has written off the debts on 31st May, 1992 in its books of account and before transfer. EOL in its turn had written off the debts by debiting it to provision for doubtful debts and did not claim for any allowance of the same.

36. As per the provisions of Section 36(1)(vii) the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for any previous year is to be allowed as a deduction subject to provisions of Section 36(2). As per the provisions of Section 36(2), no deduction in respect 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 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 incurred in connection with right issue of debentures during the relevant accounting year. However, in the computation of total income it was claimed as revenue expenditure. The AO noted the objects of the issue to be--(i) to part-finance the steel project and related investment; (ii) to meet the expenses of the issue; (iii) to repay the bridge loan, if any, taken against the loan issue; and (iv) to meet normal capital expenditure (and) working capital needs. He also referred to para 5 of the prospectus stating "the proceeds of this issue will be used for purposes mentioned in the objects of the issue and for incurring the expenditure on the benefits of the project listed under the head "cost of project". In case any project loan is taken to meet the project expenditure, the proceeds of this issue will be first utilised towards repayment of this loan". He, therefore, concluded that the project which is being financed by the issue represents an expenditure of the existing activities in the form of yet another steel division. He also observed that the entire issue went to increase the paid-up capital and share premium account because the entire debenture was fully convertible into shares within a period of 15 months. He, therefore, held that the expenditure was in the nature of expenditure mentioned in Section 35D and allowed 10 per cent thereof in the year under consideration under that section. The CIT(A) upheld the disallowance by agreeing with the AO that the expenditure was covered by Section 35D and by observing that after a period of 15 months the same fund was available as equity funds and the amount raised, therefore, was available with the assessee on a permanent basis. In the Supreme Court decision in the case of India Cements (supra) relied upon by the assessee the expenditure on issue of debentures was held to be revenue expenditure taking into consideration the object that the funds were in the nature of loan and were available temporarily.

38. In the grounds of appeal the claim of the assessee is that the expenditure is covered by the decision of the Supreme Court in the case of Madras Industrial Investment Corporation (supra). However, at the time of hearing, reliance was placed on the decision of the Tribunal in the case of VXL India Ltd. ITA Nos. 5382 and 5383/Ahd/1999, dt. 16th June, 1999. The learned Departmental Representative, 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. (supra), the assessee issued convertible debentures of Rs. 125 each out of which Rs. 45 each to be converted into three shares on 1st July, 1983. The expenditure was disallowed by the AO on the ground that a 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. (supra), the decision of the Tribunal in the case of Voltas Ltd. v. Dy. CIT (1998) 61 TTJ (Mumbai) 543 as well as in the case of Telco in ITA No.1154/Bom/1985 wherein it was held that the question of convertibility arises 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. (supra) and the other decisions referred to therein, the conversion was only a mode of repayment of loan raised by issue of debentures. The expenditure was thus for raising the loan and, therefore, in view of the Supreme Court decision in the case of Madras Industrial Investment Corporation (supra), the proportionate expenditure has to be allowed during the period of 15 months of the debenture. The proportionate expenditure pertaining to the year under consideration may thus be allowed to the assessee in the light of the aforesaid Supreme Court decision. The observation of the Revenue authorities that it was in the nature of expenditure under Section 35D is not warranted because at the time when the expenditure was incurred, it was for right issue of debentures and not capital. We direct accordingly.

40. The next ground is against the disallowance of entire expenditure incurred in acquisition of plant and machinery from the cost of machinery though it should have been held towards cost of plant and machinery. The assessee incurred a sum of Rs. 40,39,98,000 towards acquisition of know-how and consulting in engineering services for the installation of the plant. This amount was capitalised towards the cost of the plant. The assessee claimed depreciation thereon at the rate of 25 per cent. The AO, however, held that it being cost of acquisition of the know-how, it was covered by the provisions of Section 35AB of the Act. He, therefore, disallowed the depreciation claimed and allowed l/6th of the aforesaid expenditure being Rs. 6,73,33,000. The assessee's appeal was dismissed by the CIT(A).

41. The learned Counsel of the assessee submitted that know-how was obtained for setting up the plant and not for the purpose of manufacture or processing of goods which is covered by Section 35AB.This argument and interpretation of the counsel of the assessee, it is submitted by the learned Departmental Representative, is in nature of hair-splitting.

42. Section 35AB provides that where an assessee has paid any lumpsum consideration for acquiring any know-how for use and for the purposes of his business, one-sixth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance amount shall be deducted in equal instalments for each of the five immediately succeeding years. The Explanation to this section defines the term 'know-how' to mean "any industrial information 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 (italicised in print), 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 or 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 Engineering House (P) Ltd. v. CIT and the decision in the case of CIT v. Elecon Engineering Co. Ltd. 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 AO to allow depreciation to the assessee in place of deduction under Section 35AB.43. The next ground is against the order of the CIT(A) in confirming the disallowance of the expenditure relating to earlier year. The assessee submitted that it is a big company and the expenditure should not have been disallowed as according to the system of accounting consistently and regularly followed by the assessee, the expenditure relating to the earlier year are being claimed and allowed. The assessee has claimed a sum of Rs. 63,52,274 which have been debited under the head "prior period expenses". As the assessee was following mercantile system of accounting, the AO disallowed the same. It was submitted before the CIT(A) that due to large size of the business with the turnover of more than Rs. 300 crores some of the expenses relating to an earlier year was pending to be debited in the next year because they do not crystallize till finalisation of the transaction, receipt of final sale bills, etc. Referring to the earlier order, the CIT(A) however, directed the AO to disallow net amount i.e., after setting off the prior period income though he found some force in the contention of the assessee that certain expenses might not have been debited in the earlier year due to the fact that it had not crystallised in that year.

44. The learned Counsel of the assessee relied upon the decision of the Tribunal in the case of United Phosphorus Ltd. v. Jt. CIT ITA No.35/Ahd/2000, dt. 22nd May, 2001 (supra) wherein the Tribunal set aside the matter to the file of the AO to determine the allowability of the expenditure as per the decision of the Gujarat High Court in the case of Saurashtra Cement and Chemical Industries Ltd. v. CIT .

45. We have heard the parties and considered the rival submissions. The assessee is following mercantile system of accounting and, therefore, its income and expenditure are to be considered based on such system of accounting. If the assessee has been following a wrong system in the earlier year that cannot be a ground for allowing the same in the subsequent year as well. In the light of the Supreme Court decision in the case of CIT v. British Paints India Ltd. , wherein it was held that even if the assessee had adopted a regular system of accounting it was the duty of the AO under Section 145 of the IT Act, 1961, to consider whether 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 AO 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 of Rs. 7,47,46,923 was the income from interest received and other miscellaneous income of Steel-II Division which has not started production. The assessee has credited the same to the capital work-in-progre Sections According to the AO, the income received during the pre-production stage is assessable under the head "other sources" and the expenditure incurred in the pre-production stage only is to be capitalised and added to the capital work-in-progre Sections He has referred to the decision of Karnataka High Court in the case of CIT v. Cap Steel Ltd. , the decision of the Madras High Court in the case of CIT v. Seshasayee Paper and Boards Ltd. , the decision of the Delhi High Court in the case of Modi Rubber Industries (supra) and decision of Andhra Pradesh High Court in the case of Andhra Pradesh Carbides Ltd. v. CIT . The CIT(A) following his decision in the appeal for asst. yr. 1994-95, directed the AO to treat the interest as income from busine Sections Revenue is against this finding of the CIT(A).

47. We have heard the parties and considered the rival submissions. In the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT , the Supreme Court observed that "interest income is always of a revenue nature, unless it is received by way of damages or compensation. If a person borrows money for business purposes but utilises that money to earn interest, however, temporarily, the interest so generated will be his income. This income can be utilised by the assessee whichever way he likes. He may or may not discharge his liability to pay interest with this income. Merely because it was utilised to repay the interest on the loan taken by the assessee, it did not cease to be his income. When the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law, and not in accordance with accountancy practice. Accounting practice cannot override Section 56 or any other provision of the IT Act." "Under the IT Act, 1961, the total income of a company is chargeable to tax under Section 4. The total income has to be computed in accordance with the provisions of the Act. Section 14 lays down that for the purpose of computation, income of an 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 or 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 busine Sections 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 received in place of the property will be a capital receipt. The amount of interest received by the company flows from its investments and is its income and is clearly taxable even though the interest amount is earned by utilising borrowed capital. It is true that the company will have to pay interest on the money borrowed by it. But that cannot be a ground for exemption of interest earned by the company by utilising the borrowed funds as its income. Any set-off or deduction of any expenditure can only be made in accordance with the provisions of the Act." 48. In this case "the assessee was a company incorporated on 3rd Dec., 1971, for the purpose of, inter alia, manufacturing heavy chemicals such as ammonium chloride and soda ash. The trial production of the factories of the company commenced on 30th June, 1982. For the purpose of setting up of the factories, the company had taken term loans from various banks and financial institutions. That part of he borrowed funds which was not immediately required by the company was kept invested in short-term deposits with banks. Such investments were specifically permitted by the memorandum and articles of association of the company. The company had also deposited certain sums with the Tamil Nadu Electricity Board. It had also given interest-bearing loans to its employees to purchase vehicles. Upto the asst. yr. 1980-81, interest earned by the company from the various loans given by the company and also from the bank deposits was shown as income and was taxed accordingly. For the accounting year ending on 30th June, 1981 (asst.

yr. 1982-83), the assessee received a total amount of interest of Rs. 2,92,440. In its return of income filed on 22nd June, 1982, the company disclosed the said sum of Rs. 2,92,440 as "income from other sources".

It also disclosed business loss of Rs. 3,21,802. After setting off the interest income against the business loss, the company claimed the benefit of carry forward of net loss of Rs. 29,360. The company later on realised its mistake and on 26th Dec., 1984, it filed a revised return showing business loss of Rs. 3,21,802. It claimed that according to the accepted accounting practice, interest and finance charges along with other pre-production expenses had to be capitalised, and that, therefore, the interest income of Rs. 2,92,440 should go to reduce the pre-production expenses (including interest and finance charges), which would ultimately be capitalised. During the previous year relevant to the asst. yr. 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 ITO rejected the assessee's claim that the interest was not exigible to tax. The view of the ITO was upheld by the CIT(A). The company's further appeal to the 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 to deal with the interest amount as it liked. The application 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 expenditure 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-business income source could not be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plant and machinery even before commencement of the business of the assessee." 50. In view of the aforesaid decision of the Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra) the interest received during the pre-production period is to be assessed under the head "income from other sources". We, accordingly, uphold the order of the AO to this extent and reverse that of the CIT(A).

51. The next dispute in the Revenue's appeal is against the finding of the CIT(A) that the loss incurred in surrendering back the industrial land to Government of Andhra Pradesh was a capital loss in terms of Section 45 of the Act. In the computation of income, the assessee claimed that a sum of Rs. 1,70,87,944 represented capital loss incurred by the assessee which was in connection with surrender of industrial land to the Government of Andhra Pradesh which it required in Kakinada to set up pellatisation plant and as it did not materialise and the land which has been acquired by the Government from public who opposed it, the assessee surrendered the land back to the Government. It was contended by the assessee that it had neither acquired any capital asset on account of this expenditure nor any benefit of enduring nature has accrued to the assessee and the expenditure was, therefore, allowable as revenue expenditure The AO found that the claim of the assessee was contrary to the accepted principle distinguishing a capital expenditure from one of revenue expenditure. Relying upon the decision of Delhi High Court in the case of Namng Industries Ltd. v.CIT (1967) 66 ITR 316 (Del), he disallowed the claim being capital. The CIT(A), however, relying upon the decision in the case of Century Ginning and Manufacturing Co. 128 Taxation 332 allowed the 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. (supra) 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 busine Sections 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 guestion 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 connection with the business carried on by the assessee. It was thus a capital loss and not a loss incidental to the busine Sections 53. In a subsequent decision of the Delhi High Court in the case of Triveni Engineering Works v. CIT the incurred a sum of Rs. 5,000 for preparing a project report for manufacturing insecticide formulations, an item to be used for improving the quality of the cane produced in the area by the individual agriculturists and societies and since the manufacture of insecticide formulation was not carried out by the assessee and the amount paid was for project report only, the AO disallowed the same as capital expenditure. The Delhi High Court held that the expenditure was attributable to capital having been incurred with a view to bring an asset or advantage into existence and merely because the project did not materialise the nature of expenditure would not change to revenue.

54. In the case of Century Ginning and Manufacturing Co. (supra), the question was -whether the business trip abroad for setting up a new plant could be claimed as a revenue expenditure and the Court held that it was an expenditure of capital nature. The CIT(A) has also given a finding that the assessee-company wanted to start a new plant and the loss was incurred at the time of acquiring the plant.

55. In the present case also, the expenditure on acquisition of land was a capital expenditure and, therefore, its surrender to the Andhra Pradesh Government would be an expenditure of capital nature. Both the CIT(A) as well as the AO agreed on this point. The CIT(A), however, qualified this loss to be in the nature of Section 45 meaning thereby that it was a loss on transfer of capital asset. Section 45 provides for the charge of any profit or gain arising from the transfer of capital asset effected during the previous year. Therefore, there should be a transfer in relation to a capital asset. The term "transfer" is defined in Section 2(47) of the Act and it includes (i) the sale, exchange or relinquishment of any asset or (ii) the extinguishment of any right therein. By surrendering the asset there was a relinquishment of right by the assessee and the CIT(A), in our opinion, was justified in allowing that this loss to be in terms of Section 45 of the Act. His order on this issue is upheld. This is, however, subject to verification that assessee acquired 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 AO 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 another advance of Rs. 25 lakhs to Essar Consultants Ltd. The CIT(A) on a perusal of the balance sheet as on 31st March, 1993 found that interest-free funds being shareholders' contribution less miscellaneous expenditure amounting to Rs. 82,90,50,000 were available whereas the loans funds amounted to Rs. 11,21,09,00,000.

According to him, the AO was not able to correlate the borrowed funds with interest-free advances. He, however, held that nonetheless a part of the advances had been met Out of the borrowed funds. Considering this position, he was of the opinion that interest proportionate to the loan funds should be disallowed. In other words, he held that the assessee should be given the benefit of using its own funds for advancing interest-free loans and on such basis a sum of Rs. 16,23,010 was found to be disallowable which was pertaining to the loan funds.

57. We have heard the parties and considered the rival submissions. In the absence of any nexus established that only borrowed funds have been utilised by the assessee in advancing interest-free loans to the sister-concern there would not be any justification to disallow the interest on the entire advances. The CIT(A), in our opinion, was justified in resorting to the proportionate amount after taking into consideration the assessee's own funds and the borrowed funds. He has proceeded on a just and proper method and no fault therein could be alleged. The reliance by the Revenue on the decision of Karnataka High Court in the case of CIT v. V.M. Salgaokar and Bros. (P) Ltd is of no help because in that case the question was whether non-charging of interest in debit balance in running account by the directors constituted perquisite or not. There is no such question in the present case as to whether the non-charging of interest from the sister-concern would constitute any such income to the assessee or not.

It is a case of mere disallowance by the AO on the assumption that borrowed funds alone have been utilised in advancing interest-free loan to the sister-concern. The order of the CIT(A) is, therefore, upheld.58. The next ground in the Revenue's appeal is against deletion of disallowance made under Section 40(a)(i) of the Act in respect of payments made to Scandia Essar (P) Ltd., Singapore. The assessee paid a sum of Rs. 15,54,17,620 to this nonresident concern towards contract charges which have been disallowed by the AO under Section 40(a)(i) on the ground that tax has not been deducted at source on this amount.

Before the CIT(A), the counsel, however, submitted a certificate from the AO of Scandia Essar (P) Ltd. to the effect that tax need not be deducted out of payment to be made to them. This certificate was made available to the AO 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 ITO 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 16th March, 1992 and was to be completed by 30th April, 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 AO.59. The parties have agreed that the order of the CIT(A) is after taking into consideration the new evidence. We, therefore, vacate his order and restore the matter back to the file of the AO to decide this issue afresh after taking into consideration the material placed by the assessee before the CIT(A) or any other material to be produced in the fresh proceedings. We direct accordingly.

60. In the Revenue's appeal in ITA No. 1056/Mad/1999 the issues raised are against acceptance of assessee's claim with regard to deduction under Sections. 80HH and 80-1 which was raised before him for the first time and the claim of the Revenue is that these claims were not made before the AO in the original assessment proceedings nor during the course of proceedings under Section 263 and, therefore, while giving effect to the order of the CIT under Section 263 the assessee could not have made this fresh claim nor the AO could have admitted any such claim. With regard to the claim of Section 80HH, the assessee was required to file an audit report which was also not submitted and the direction of the CIT(A) to the AO to obtain such a report from the assessee is also challenged before us.

61. Admittedly, these claims were not made by the assessee before the AO and the reason is stated to be that as the AO had computed the income of the assessee at a loss in the original order of assessment at Rs. 2,65,51,990 and, therefore, the question of claiming deduction under these two sections did not arise at the stage of the assessment.

Consequent to the revision under Section 263, a positive income is worked out and, therefore, the assesse has made the claim under these two sections for the first time in these proceedings. The CIT(A) observed that as the AO has to work out the taxable income in accordance with the provisions of the IT Act, he has to necessarily allow the deduction to which the assessee is entitled to, so as to compute the correct taxable income, without which the exercise would be incomplete.

62. The learned Departmental Representative referred to the decision of the Supreme Court in the case of CIT v. Mahendra Mills (2000) 243 ITR 56 (SC) wherein at p. 79, the contention of the Revenue was to the effect that ITO is duty-bound to allow depreciation in order to compute the income referred to in Section 28 of the Act which he has to do keeping in mind the provisions contained in Sections 30 to 43A 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 dt. 11th April, 1955. 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 no 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 AO should advise him not to claim depreciation if that course is beneficial. That was considered to be the spirit of the circular issued by the Board. It was further held that if Section 34 is not satisfied and the particulars are not furnished by the assessee, his claim under Section 32 cannot be allowed. Section 29 was thus held to be read with reference to other provisions of the Act as it was not in itself a complete code. The learned Departmental Representative also relied upon the decision of the Gujarat High Court in the case of Chokshi Metal Refinery v. CIT wherein the relief under Section 84 or 80J not asked for or given at the original assessment was not allowed on the ground that material which was necessary for the purpose of granting relief under Section 84/80J could not be said to have been available with the AO at the time of making the assessment. It was, therefore, held that since the relief could not have been allowed at the time of original assessment proceedings, no question of rectifying the mistake ever arose and it was for the assessee to satisfy the ITO that each of the conditions of Section 84/80J was satisfied in this particular case and further that the material for granting the relief under Section 84/80J was available on the record of the case before him.

63. We have heard the parties and considered the rival submissions. In our opinion, it is of course for the assessee to claim a particular deduction or not and in the light of the circular of the board the Departmental authorities may point out to the assessee that such a claim was admissible, but it is also for the assessee to claim the relief and comply with the requirement of the sections under which the deductions are claimed. In the original assessment, the claim was not made by the assessee. We are not aware as to why that was not made. It may be as contended by the learned Counsel of the assessee that the income was loss and, therefore, there was no occasion for claiming the same. But in that case also, the assessee is not absolved from furnishing the necessary particulars of the claim and if because of the fact that there was no income against which the deduction could be allowed, would not be a ground for rejecting the claim of the assessee.

In our opinion, the claim is to be put up by the assessee before the Departmental Authorities. We are not aware nor necessary particulars have been furnished before us to find out as to whether the assessee made a claim by giving the particulars necessary for granting the two deductions before the AO 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 AO 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 AO 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 nil because there was no positive income. If the necessary material is there and the assessee satisfies all other conditions, the claim of the assessee for deduction can be allowed. We direct accordingly. We may, however, observe at this stage that in view of the Gujarat High Court decision in the case of CIT v. Gujarat Oil and Allied Industries report should be filed along with the return is not a mandatory condition and the audit report filed after the return was submitted but before the assessment was framed would be sufficient compliance of the condition and the decision in the case of Zenith Processing Mills v.CIT wherein also it was held that though audit of accounts is a mandatory requirement, furnishing of proof of such audit is a directory requirement and the proof can be furnished at the time when the special deduction under Section 80J is being considered. The AO shall take into consideration these two decisions in the fresh proceedings.

65. I am not able to persuade myself to agree with Hon'ble Vice President/AM on issue i.e., cancellation of forward exchange contract.

The assessment in this case was completed under Section 143(3) on 29th March, 1996. On scrutiny of assessment for asst. yr. 1993-94 CIT found that the order of AO was erroneous insofar as same was prejudicial to the interest of Revenue in respect of certain items which are discussed in detail. Accordingly, the assessee was given an opportunity of being heard with a direction to make its submission as to why necessary direction should not be issued to the AO in respect of issues under consideration and for the reason shown in show-cause notice, issued to the assessee. Assessee was also asked to furnish the details and evidence in support of its submission with reference to various issues.

In response to the same, assessee-company submitted that notice under Section 263 was not valid in law. It was submitted that show-cause notice did not indicate as to how the order of AO was erroneous. Beside this, certain submissions were raised and CIT was requested to drop the proceedings. The CIT vide letter dt. 21st Jan., 1998 clarified that on perusal of assessment record, the impugned order was considered erroneous and prejudicial to the interest of revenue and the circumstances under which such a conclusion was arrived was also indicated in 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 to make an enquiry after giving an opportunity of being heard and then only to pass on necessary instructions to the AO. These requirements have nothing to do with the jurisdiction of the CIT. This pertains to the question of natural justice CIT v. Electro House . It was also brought to the notice of the assessee that the AO 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 AO erroneous and has caused prejudice to the interest of the Revenue. The AO is not only an adjudicator but also an investigator. He cannot remain passive in face of return which may apparently be in order but cause for further inquiry. It is the duty of the AO to find out the fact stated in the return and whether circumstances of the case are such as to provoke inquiry. The order becomes erroneous because such an enquiry has not been made and not because there is any wrong with the order, if all facts in return are assumed to be correct. The word prejudicial to the interest of Revenue in Section 263 have not been defined but they must mean that impugned orders of assessment challenged are such as not in accordance with law.

in consequence whereof the lawful revenue to the State has not been realised. Due to want of proper and necessary enquiries, order of AO resulted prejudicial to the interest of Revenue as observed by the Hon'ble Delhi High Court in the case of Gee Vee Enterprises v. Addl.

CIT . Hon'ble Rajasthan High Court in CIT v. Emery Stone Manufacturing Co. (1995) 213 ITR 843 (Raj) has held that where deductions have been allowed without proving the claim and proper verification on the basis of which order was passed would also be prejudicial to interest of Revenue and could be set right in revisionary jurisdiction by CIT.66. After taking into consideration the details filed and submissions made in response to show-cause notice, under relevant provisions of Section 263 of the IT Act, various issues arose. First issue was regarding cancellation of forward exchange contract. During the period relevant to asst. yr. 1993-94 the assessee has shown a receipt of Rs. 71,93,24,207 net towards gains from cancellation of forward exchange contract. This amount was shown as revenue income in the printed account of assessee-company. However, for the purpose of income-tax, assessee claimed the receipt as not taxable stating that it was only a capital receipt.

66.1 AO has discussed the issue in para 6.1 of the assessment order.

The amount being gains on cancellation of forward exchange contract, has been reduced by the AO from written down value of the depreciable assets and accordingly, depreciation allowable for this year has been reduced. The AO considered the assessee's submission that the contracts in question were entered in order to insulate itself against adverse 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. AO 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/WDV of fixed assets. According to he AO 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 AO 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 assets acquired from abroad by the assessee. Therefore, there was no justification to reduce the cost/WDV of capital asset by the amount of gain on cancellation of forward exchange contract.

(ii) Assessee had entered into foreign exchange contract in India.

On cancellation of forward exchange contract, the amount was paid in India in Indian rupee. The amount received by the assessee in Indian rupee will not in any way reduce the foreign exchange liability of the assessee, as regards the payment of loans obtained in connection with the acquisition of capital goods from abroad.

(iii) It is on record that gain from cancellation of forward exchange contract was not utilised for payment of foreign loan which was obtained for acquisition of capital goods or for acquiring any capital goods from abroad.

(iv) The gains from cancellation of forward exchange contract was of revenue nature. The action of AO in reducing the value of block of assets was erroneous and also prejudicial to the interest of Revenue. The observation of AO that the gains on cancellation of foreign exchange contract had any relation with the loan from abroad or acquisition of any asset from abroad was also erroneous.

(v) The AO failed to consider that amount received was in nature of revenue receipts being compensation received on cancellation of foreign exchange contract, which was entered during the course of assessee's busine Sections Failure on the part of AO to treat the entire receipt as revenue receipt was erroneous and prejudicial to the interest of Revenue.

66.3 In this regard the submissions of assessee before the CIT are as under: (i) The foreign exchange contracts were undertaken to cover the liability on capital account, i.e., repayment of loans taken in foreign currency. These loans were term loans granted for purchase of capital equipment. Also, certain loans were taken for payment of technical know-how and to make payment towards cost of plant and machinery and such other items. These items and expenditure were of capital nature and, therefore, profit or loss arising therefrom could be of capital nature only.

(ii) The assessee also relied on opinion given by C.C. Chokshi and Company, chartered accountants, Mumbai. The opinion suggests that gains from cancellation of foreign exchange contracts is 'capital receipt' which 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 profits 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.

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 Reserve Bank.

(iv) As regards the contention as to why the gain should not be treated as profit in nature of speculative transaction, in view of provisions of Section 43(5), it was submitted that these provisions are applicable to purchase or sale of any commodity (including stock in share) which is periodically or ultimately settled otherwise than by actual delivery or transfer of commodity or script. It was submitted that foreign exchange is not a commodity and is a currency of settlement. The definition given in the Act has extended the definition of commodity by including stock and shares which otherwise is not commodity. The fact that only stock and shares had been included in the extended definition goes to prove that foreign exchange is not a commodity. Therefore, the extended definition cannot be applied to foreign exchange. In view of above, it was submitted that transaction under consideration which is in respect of foreign exchange cannot be treated as profit arising out of speculative transaction.

67. After taking into consideration various details and submissions, CIT observed that assessee had earned profits on cancellation of forward exchange contract. In the printed balance sheet these have been shown as revenue receipts as under: "Profits and losses" arising out of cancellation of forward contract is treated as revenue item and accordingly included in P&L a/c.

67.1 Similarly in the printed balance sheet for period ended May, 1992, it is shown as under: Note 3--"The company has cancelled some of the forward exchange contracts and realised a net profit of Rs. 1,699.47 lakhs. This has been recognised as other income of the year. The entire amount has been transferred to general reserve." 67.2 However, in computation for filing the income-tax return the amount was treated as capital receipt and was excluded from computation of total income.

67.3 In the schedule attached to accounts (Schedule XI), the gain from foreign exchange contract was shown as other income under item (f) as under: Schedule XI Other income(f) gain from cancellation of foreign exchange contract net premium paid Rs. 71,93,44,207.

67.4 During the course 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 abroad.

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 AO 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 referred to above, following observation from the opinion is reproduced for the convenience: "In case company decided to cancel the contract, its liability towards capital expenditure would remain uncovered and would keep changing from time to time." The company opted for second option on a judgment taken by the management. The company opted to cancel the contract and thereby liability towards capital expenditure was left uncovered. Basically the contracts were entered for hedging the fluctuation in foreign exchange.

The purpose for which the contract was entered was not fulfilled. It was cancelled and gain in Indian rupee earned. Thus, there are two situations : One : the foreign exchange contract is allowed to mature and the gain realised is utilised for the purpose of repayment of foreign loan obtained for acquiring assets from abroad.

Two : the contract is cancelled with an eye on profit on a judgment taken by the management. The foreign exchange liability is left uncovered. The contract is not allowed to mature. The gains are not utilised for the purpose of repayment of loan. Foreign exchange liability is not reduced.

Both the situations are not similar. In the first situation assessee could claim benefit of reduction of cost/WDV by treating the receipt as connected with capital asset. In the second situation the gains are purely revenue receipt, unconnected with purpose for which contracts were originally entered. Therefore, CIT did not agree with the opinion of learned chartered accountants referred above.

67.6 CIT observed that foreign exchange contracts were undertaken to cover the liability on capital account which was cancelled and liability was left uncovered. As indicated earlier, the gain on such cancellation was earned in Indian rupee and, therefore, would not have in any circumstance reduced the foreign exchange liability.

67.7 CIT further observed that had contract matured in the normal course and the assessee had some gains on maturity, the gains would have been reduced from cost of capital assets provided they were utilised for reducing foreign exchange liability. Conversely, if there was a loss and as the contract was for the purpose of repayment of loan instalments, the loss would have been considered for increasing the cost of capital assets acquired abroad. However, 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. v. CIT , the Hon'ble Supreme Court has held that receipt even if it was casual or non-recurring in nature would be liable to tax, if it arose from busine Sections In Barendra Prosad Ray v.ITO the apex Court has held that expression "business" is of very wide import and it means an activity carried on continuously and systematically by a person by application of his labour and skill with a view to earning income. The width of the definition has been recognised by the Hon'ble Supreme Court in case of S.G. Mercantile Corporation (P) Ltd. v. CIT and CIT National Bank Ltd. . "Even a single venture has been held to amount to business and profit arising out of such a venture has been held to be taxable as income arising from business". Further, in case of Gillanders Aibuthnot and Co. Ltd. v. CIT the Hon'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.

67.9 From the facts of the case, CIT observed that the entire receipt was of revenue nature and this should have been treated as revenue receipt. The assessee has given the same treatment; in the printed balance sheet the same was also certified by the auditor. No basis has been given by the assessee to treat the said amount received as capital in nature. The treatment given by the assesses to the above sum in computation filed along with the return is incorrect.

67.10 The CIT further observed that assesses had entered into contract with certain banks in India for foreign exchange cover and to hedge its foreign exchange liability and to avoid loss of any future profit. In case contract had matured and profit/loss utilised for liquidating the foreign exchange liability, the action of AO would have been justified.

The gain arose due to cancellation of contracts which were entered in connection with the business of the assessee. The gains are incidental to business and, therefore, cannot be treated as casual income. The gain will, therefore, be treated as business income.

67.11 CIT further observed that entire contract was settled without delivery of commodity. The commodity in the instant case is foreign exchange. The foreign exchange is traded. It is quoted in foreign exchange market. It can be purchased and sold. Therefore, for the purpose of Section 43(5), foreign exchange can be treated as a commodity. In case there is profit on cancellation of contract for purchase of foreign exchange, same can be treated as speculative profit as the contract 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 the nature of trade in the 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 AO 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. AO was directed to include this amount in the total income. The CIT further directed that the depreciation will be reworked as the AO had wrongly reduced the block of assets by the amount of gain on foreign exchange contract as indicated above.

68. The details of gross and net gain on cancellation of forward contracts are as under: Corporate Division Gross Premium Net A. HRC Plant Machinery supply and know-how 24.25 Interest and Supervision charges 3.95 28.20 II. Repayment to Reddington Advance for 22.00 sale of product and interest III. NRI-OCB-Right Issue of HRC Plant 0.72 IV Model-III 2.04 62 9.39 52.96 Steel-I Mode III 23.27 5.29 18.98 85.62 13.69 71.93 68.1 The assessee had been manufacturing sponge iron. In connection with that it had to import certain machinery. It had also planned extension and for that it had to import machinery 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 into existence during the year under consideration.

68.2 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 contracts 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-how and repayment of advance taken to suppliers of the equipment and interest thereon. This is what is stated by the AO and also supported by permissions sought for taking forward covers from RBI, one of such letter is dt. 2nd/3rd Sept., 1991, written by the assessee to the RBI for taking a forward cover of US $ 100 million.

68.3 To finance the project the assessee entered into contract with Reddington (P) Ltd., a firm of Singapore, who is claimed to be its prospective buyer of production of 1.5 lakh tonne of HRC in three years from the date of commencement 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 lakh is the interest worked out thereon.

68.4 According to the learned Counsel of the assessee Sh. S.N.Soparkar, the CIT 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 CIT v. Tata Locomotive and Engineering Co. Ltd. , Universal Radiators v. CIT , Swadeshi Cotton Mills Co. Ltd. v. CIT (1967) 63 ITR 65 (SC), Sutlej Cotton Mills Ltd. v. CIT (1978) 116 ITR 1 (SC), decision of Calcutta High Court in the case of CIT v. Anglo India Jute Mills Co. Ltd. (1981) 129 ITR 352 (Cal), the decisions of the Gujarat High Court in the cases of Ambica Mills Ltd. v. CIT and Garden Silk Mills Ltd. v. Dy. CIT , wherein the reopening on similar ground was quashed, and the decision of Tribunal in ITA No. 2032/Ahd/1997. He also referred to the decision of the Punjab and Haryana High Court in the case of Groz-Beckert Saboo Ltd. v.CIT , wherein the loan taken but utilised for payment of purchase price of goods was 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 43(5) treating the gain to be speculative in nature would not arise and also in view of the fact that there was no transfer.

69. The learned CIT-Departmental Representative, Shri 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 , decision of the Calcutta High Court in the case of CIT v. Sutna Stone and Lime Co. Ltd. and the decision of the Orissa High Court in the case of CIT v. Orissa State Warehousing Corporation . He also referred to paras 13 to 15 of AS-11 of the Guidelines issued by the Institute of Chartered Accountants of India. He further submitted that outstanding loan was circulating capital and consequently the gain would be of a revenue account in view of the decision of the Bombay High Court in the case of CIT v. V.S. Dempo and Co. (P) Ltd. and the decision of the Gujarat High Court in the case of Indian Dyestuff Industries Ltd. v. IAC . Supporting the order of the CIT, he submitted that the gain was a business income if seen with reference to the volume of transactions entered by the -assessee during the year under consideration and also in the earlier years. In this connection, he referred to the decisions of the Supreme Court in the cases of Raghuvanshi Mills Ltd. v. CIT (supra), CIT v. Calcutta National Bank Ltd. (supra), Gillanders Arbuthnot and Co. Ltd. v. CIT (supra), S.G.Mercantile Corporation (P) Ltd. v. CIT (supra), the decision of the Bombay High Court in the case of CIT v. Scindia Workshop Ltd. and the decision of the Supreme Court in the case of Barendm Prosad Ray and Ors. v. ITO (supra). He also referred to the decision of the Supreme Court in the case of India Cements Ltd. v. CIT , 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 CIT v. Tata Iron and Steel Co. Ltd. (1998) 231 ITR 285 (SC) wherein it was held that the manner of payment does not affect the cost.

70. Hon'ble Vice President/AM has discussed various aspects of the case including case laws relied by both the parties and held as under: "CIT 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 part and the liability for capital goods not being capital assets by itself being on loss arising thereon would have been on revenue account, the same way as interest payment of such liability. The said interest liability prior to installation of plant has to be capitalised under accountancy principles as also on analogy of statutory Explanation to Section 43(1), it cannot be treated as receipt on revenue account and because the facts are not on record to determine the exact nature as regards the other gains of Rs. 0.7 crore. Accordingly, order of the CIT was set aside on these issues and restored to that of AO." 71. I am not able to persuade myself to agree with the findings of Hon'ble Vice President on this issue for 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 : "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 P&L a/c." B. Similarly, in the printed balance sheet for the period ended May, 1992, it is shown as under : Note 3--"The company has cancelled some of the forward exchange contracts and realised a net profit of Rs. 1699.47 lakhs. This has been recognised as other income of the year. The entire amount has been transferred to general reserve." C. However, in computation for filing the income-tax return the amount was treated as capital receipt and was excluded from computation of total income.

D. In schedule attached to accounts (Schedule XI), the gains from foreign exchange contracts was shown as other income under item (f) as under: Schedule IX Other Income (f) of gains from cancellation of foreign exchange contract (net of premium paid) Rs. 71,93,44,207.

E. It is abundantly clear from the record that gain which has arisen to the assessee on these cancellation of foreign exchange contracts have no connection whatsoever with the purchase of any assets. The gains were not utilised for the repayment of loan obtained in connection with purchase of assets 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, AO 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 contracts 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 contracts was entered was not fulfilled. Several such contracts were cancelled time and again and gains in Indian rupee was earned. In case foreign exchange contract is allowed to mature and gains realised is used for the purpose of repayment of foreign loans obtained for acquiring assets from abroad but this was not the situation in the present case. The contract is cancelled with an eye on profit on judgment taken by the management. The foreign exchange liability has been left uncovered.

The contract is not allowed to mature. The gains are not utilised for the purpose of repayment of loans. The foreign exchange liability is not reduced. 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 accountants 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. 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 unutilised 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 assets.

H. There is no nexus between gain on cancellation of these foreign exchange contracts and foreign exchange liability be it loan or acquisition of an asset from abroad or any other payment in foreign currency. It is evident from the fact that the moment the contract was cancelled, the purpose for which it was entered into was not on assessee's agenda. The conduct of the assessee shows that with an eye to earn profit, the contract was cancelled and the liability towards foreign exchange was not reduced. It is further clear from the conduct of assessee that instead of receipt of foreign exchange, the profit was accepted in Indian rupee.

I. The contracts were entered in normal course of business transactions. 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 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 is justified to accept that receipt was of casual and non-recurring nature. As held by Hon'ble Supreme Court in Raghuvanshi Mills Ltd. v. CIT . Further, Hon'ble Supreme Court in the case of Barendra Prosad Ray v. ITO (supra) has held that expression "business" is of very, wide import; it means an activity carried on continuously and systematically by a person by the application of his labour and skill with a view to earn income. Further, wide definition has been recognised by Hon'ble Supreme Court in case of S.G. Mercantile Corporation (P) Ltd. v. CIT and venture has been held to amount to business and profit arising out of such a venture has been held to be taxable as income arising from busine Sections In case of Gillanders Arbuthnot and Co. Ltd. v. CIT Hon'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 utilised for liquidating the foreign exchange liability the action of AO would have been justified. The gains arose due to cancellation of contracts which were entered in connection with the business of assessee. The gains are incidental to business and therefore, cannot be treated as casual income. Accordingly, the gains have rightly been treated as business income by the CIT. L. The significant aspect of the whole transaction is that the entire contracts were settled without delivery of commodity. The commodity in the instant case is foreign exchange. Foreign exchange is traded. It is quoted in foreign exchange market. Therefore, for the purpose of Section 43(5) foreign exchange can be treated as commodity. In case there is profit on cancellation of contract for the purchase of foreign exchange, same can be added as speculative profit as the contract was settled by non-delivery. 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 AO to treat the entire gains of Rs. 71,93,24,207 on cancellation of foreign exchange contracts, as revenue receipt.

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 IT Act, 1961, to the Hon'ble President, Tribunal, for nominating one or more other members for hearing on the point of difference : 1. "Whether, on the facts and in the circumstances of the case, the CIT was right in holding that the order of AO was erroneous insofar as prejudicial to the interest of Revenue in treating the entire gain arising on cancellation of all the foreign exchange forward contracts as on capital account and thereby in reducing the same from the cost/WDV of the block of assets ?" 2. "Whether, on the facts and in the circumstances of the case, it is the only gain amounting to Rs. 22 crores, as had arisen on cancellation of only those foreign exchange forward contracts as were relating to liability towards repayment of advance taken from Reddington Pvt Ltd. alone is the Revenue receipt and not the entire gain of Rs. 71,93,24,207 as related to the cancellation of all the foreign exchange forward contracts ?" 3. "Whether, on the facts and in the circumstances of the case, the CIT was right in holding that the entire 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/an adventure in the nature of trade/as casual income and/or profit arising on speculative transactions under Section 43(5) of the Act?" 73. On account of difference between the Hon'ble Members of Tribunal, Ahmedabad Bench 'B1, Ahmedabad, the following questions have been referred to me under Section 255(4) of the IT Act, 1961, for consideration : "1. Whether, on the facts and in the circumstances of the case the CIT was right in holding that the order of AO was erroneous insofar as prejudicial to the interest of Revenue in treating the entire gain arising on cancellation of all the foreign exchange forward contracts as on capital account and thereby in reducing the same from the cost/WDV of the block of assets 2. Whether, on the facts and in the circumstances of the case, it is the only gain amounting to Rs. 22 crores, as had arisen on cancellation of only those foreign exchange forward contracts as were relating to liability towards repayment of advance taken from Reddington Pte. Ltd., alone is the Revenue receipt and not the entire gain of Rs. 71,93,24,207 as related to the cancellation of all the foreign exchange forward contracts 3. Whether, on the facts and in the circumstances of the case, the CIT was right in holding that the entire 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 dt. 27th March, 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 and entered into new forwarding contracts, which resulted in gain of Rs. 71.93 crores to the assessee. In its return for the relevant assessment year, the assessee claimed that above amount was a capital receipt as forward contracts were entered into, to acquire a capital asset, i.e., machinery and plant and, therefore, any gain accruing therefrom was on capital account and not assessable. The AO accepted above claim of the assessee as per assessment order dt. 29th March, 1996.

76. Subsequently, the CIT called for record of assessment of the assessee and held that above assessment was erroneous insofar prejudicial to the interests of the Revenue as gains arising to the assessee on cancellation of contracts were taxable receipts. Various reasons for taking action under Section 263 are also enumerated and these are reproduced by the learned Vice President in this proposed order. The learned CIT accordingly cancelled the assessment and asked the AO to make fresh assessment in the light of directions issued by him. The assessee challenged above action of the CIT in appeal ITA No.949/Mds/1998 before the Tribunal.

77. Meanwhile, the AO made fresh assessment in accordance with directions of the learned CIT and treated above amount of Rs. 71.93 crores as taxable receipts. On appeal against the above fresh assessment, some relief was allowed by the CIT(A) and accordingly, Revenue filed further appeal ITA No. 1056/Mds/1999 before Tribunal. The original assessment of ITO was also subject-matter of appeal before the CIT(A) and against the decision of the learned CIT(A) both the assessee and Revenue filed appeals. All the appeals were consolidated and taken up for hearing by Tribunal 'B' Bench, Ahmedabad.

78. After considering submissions of both the parties, members passed dissenting orders. According to the learned AM, (Hon'ble Vice President) out of receipt of Rs. 71.93 crores from cancellation of forward foreign exchange contracts, a sum of Rs. 49.93 crores was a capital receipt and could not be charged to tax.

79. For reaching above conclusion, the learned Vice President examined the following decisions : (1) CIT v. Tata Locomotive and Engineering Co. Ltd. ;CIT v. V.S. Dempo and Co. (P) Ltd. 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 AM (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 (AM) also relied upon decision of the Tribunal in the case of Garden Silk Mills (ITA No. 202 to 203/Ahd/1997) 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 a sum of Rs. 68,66,673 on account of profit on cancellation of forward foreign exchange contract, the undisputed facts are amount to the P&L a/c under the head "Profit on Cancellation of Forward Exchange Contracts". In computation of income filed along with the return, the assessee claimed this amount as a deduction from the net profit computed on the ground that this is a capital receipt not liable to tax. The assessee-company is a manufacturer of textile fabrics. It imports various machineries and equipments, inter alia, against loans in foreign currency. Against the instalment of loan payable and interest payable on such loans, the assessee-company has entered into contracts covering the foreign exchange components to guard against the fluctuation in the rate of the foreign currency. In respect of foreign currency, the policy of the RBI permits the companies to enter into forward contracts for the foreign exchange to be drawn by the companies with a view to limit 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. Tata Locomotive and Engg. Co. Ltd. as well as in the case of Universal Radiators v. arising on the cancellation of the contracts in the forward cover of foreign exchange does not involve any transfer or assignment of any asset within the meaning of Section 2(47) of the IT Act, 1961. In the instant case, there is no transfer or assignment 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 "10. The attempt of the learned 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 cannot be taxed as a perquisite within the meaning of Section 28(iv) in view of the decision of the Gujarat High Court in the case of CIT v. Alembic (P) Ltd. "10.1 In the instant case, the learned CIT had not given valid reasons to show as to how the profit earned on cancellation of the forward foreign exchange contract was assessable as a revenue profit. The learned CIT has not also indicated the facts to which the AO has not applied his mind and he has also not stated in what respect the AO was required to make any further enquiries relating to the subject-matter of dispute. In any case, whether in the set of facts which are available in the instant case, 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 AO that the surplus realized 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 learned 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 a capital gain, because he directed the AO to bring 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 prerequisites 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 of the case discussed above, we are of the considered opinion that the learned CIT was not justified in setting aside the order of the AO with regard to the issue relating to taxability of the amount of Rs. 68,66,673 which was treated by the AO as a capital receipt not liable to tax." 81. The learned Vice President also dealt with the effect of change made in Accountancy Principle AS-11 and after taking note of relevant paras 13, 14 and 15 of above AS-11, concluded 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, 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 liabilities in foreign currency. These contracts could not have been taken otherwise without there being an existing liability as is evident from the guidelines issued by the RBI. The liabilities for the repayments of loans against the purchase of equipments, or machinery, or acquisition of know-how for installing the plant, therefore, the conclusion of the CIT that there was no nexus between gain arising on cancellation of forward contracts and acquisition of capital assets cannot be accepted. As the contracts were taken against the capital liability, their cancellation cannot be de hois that liability.

8.25. Cancellation of the contracts in this was one time cancellation and not one after the other. Even otherwise, as held by Supreme Court in Dalhousie Investment's case (supra) "The mere fact that an investment company varies its investment does not necessarily mean that the profit resulting from such variation' is taxable under the IT Act. Variation of its investments must amount to dealing in investment before such profit can be taxed as income under the IT Act." The assessee has not dealing in foreign exchange which is permitted only to a license holder. When the forward contracts were taken they were to guard against the loss due to fluctuation in exchange rate in repayment of loan of foreign currency taken for the purchase of capital goods. But their cancellation has frustrated that object. Remaining liabilities thereafter has to continue but that by itself does not establish that the contracts were taken and/or cancelled to make profit.

Profit motive otherwise also is not decisive of the question whether a particular receipt is capital or income--see A.K.T.K.M. Vishnudatta Antharjanam v. Commr. of Agril IT (supra). The forward contracts were cancelled before the due date because, it was no more necessary to have a cover continued in view of grater stability of Indian rupee pursuant to the announcement by the Government of the partial stability of Indian rupee and allowing cancellation of such contracts by RBI. Cancellation before the due date also, in our opinion, is not 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 CIT 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 not by then reached destination and/or installed in the factory premises of the assessee and the unit was yet not set up. It would reduce the assessee's liability to purchase capital goods; (ii) because the liability towards sponge iron is for existing plant and the liability for capital goods not being capital assets by itself gain or loss arising therefrom could have been on revenue account, the same way as the interest payment of such liability. The said interest liability prior to installation of the plant has to be capitalized under the Accountancy Principles as also on the analogy of the statutory Expln. 8 to Section 43(1), it cannot be treated as a receipt on revenue account; and because the facts are not on record to determine the exact nature as regards the other gain of Rs. 0.72 crore, we, therefore, set aside the order of the CIT on these issues and restore that of the AO. 8.28 However, the liability towards advance taken from Reddington, on a consideration of the totality of the facts and circumstances of the case, in our opinion, was against supplies of assessee's product to be made by the assessee to them. Though the advance so received was utilized for payments for capital goods directly to the suppliers, the liabilities towards Reddington has arisen not for acquisition of capital goods. The capital liability was discharged by making the payment out of the receipts of advance against supplies from Reddington. It was thereafter, assessee's liability to supply goods against those advance taken which subsisted and that was a part of the circulating capital. The liability cannot be said to be for making the payment in foreign exchange nor on account of purchase of capital goods. It was in the nature of a circulating capital and in view of the decision of the Supreme Court in the case of Sutlej Cotton Mills Ltd. (supra) and the discussion aforesaid the gain arising on cancellation of forward contract relating thereto has to be on revenue account. The order of the CIT to this extent, i.e., the gains of Rs. 22 crores arising on cancellation of forward contract stated to be relating to repayment of the, liability of Reddington is upheld." 82. The Learned JM did not agree with the conclusion of the learned Vice President (AM). 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 : "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 P&L a/c." B. Similarly, in the printed balance sheet for the period ended May, 1992, it is shown as under : Note--3--"The company has cancelled some of the forward exchange contracts and realized a net profit of Rs. 1,699.47 lacs. This has been recognized as other income of the year. The entire amount has been transferred to general reserve." C. However, in computation for filing the income tax return the amount was treated as capital receipt and was excluded from computation of total income.

D. In schedule attached to accounts (Sch. XI), the grains from foreign exchange contracts was shown as other income under item--(f) as under: (f) of gains from cancellation of foreign exchange contract (net of premium paid) Rs. 71,93,44,207.

E. It is abundantly clear from the record that gain which has arisen to the assessee on these cancellation of foreign exchange contracts have no connection whatsoever with the purchase of any assets. The gains were not utilized for the repayment of loan obtained in connection with purchase of assets from abroad. The gains from cancellation of foreign exchange contracts was in rupee and, therefore, could not have been utilized 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, AO 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 earned. In case foreign exchange contract is allowed to mature and gains realized is used for the purpose of repayment of foreign loans obtained for acquiring assets from abroad but this was not the situation in the present case. The contract is cancelled with an eye on profit on judgement taken by the management. The foreign exchange liability has been left uncovered. The contract is not allowed to mature. The gains are not utilized for the purpose of repayment of loans. The foreign exchange liability is not reduced. 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 accounts 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. (supra) 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 assets.

H. There is no nexus between gain on cancellation of these foreign exchange contracts and foreign exchange liability be it loan or acquisition of an asset from abroad or any other payment in foreign currency. It is evident from the fact that the moment the contract was cancelled, the purpose for which it was entered into was not on assessee's agenda. The conduct of the assessee shows that with an eye to earn profit, the contract was cancelled and the liability towards foreign exchange was not reduced. It is further clear from the conduct of assessee that instead of receipt of foreign exchange, the profit was accepted in Indian rupee.

I. The contracts were entered in normal course of business transactions. 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 , 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 is justified to accept that receipt was of casual and non-recurring nature, as held by Hon'ble Supreme Court in Raghuvanshi Mils Ltd. v. CIT . Further, Hon'ble Supreme Court in the case of expression business is of very wide import. It means an activity carried on continuously and systematically by a person by the application of his labour and skill with a view to earn income.

Further, wide definition has been recognized by Hon'ble Supreme Court in case of S.G. Mercantile Corporation (P) Ltd. v. CIT and CIT business and profit arising out of such a venture has been held to be taxable as income arising from busine Sections In case of Gillanders Arbuthnot and Co. Ltd. v. CIT . Hon'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 on 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 for liquidating the foreign exchange liability the action of AO would have been justified. The gains arose due to cancellation of contracts which were entered in connection with the business of assessee. The gains are incidental to business and, therefore, cannot be treated as casual income. Accordingly, the gains have rightly been treated as business income by the CIT. L. The significant aspect of the whole transaction is that the entire contract was settled without delivery of commodity. The commodity in the instant case is foreign exchange. Foreign exchange is traded. It is quoted in foreign exchange market. Therefore, for the purpose of Section 43(5) foreign exchange can be treated as commodity. In case there is profit on cancellation of contract for the purchase of foreign exchange, same can be added as speculative profit as the contract was settled by non-delivery. Accordingly, the contention of the assessee in this regard, is not acceptable," 83. On account of above difference between the Hon'ble members, the matter has been referred to me in the shape of three questions reproduced in the early part of this order. The case was fixed for hearing of parties at Mumbai. Shri S.N. Soparkar, learned senior advocate argued on behalf of the assessee. He highlighted that forward foreign exchange contracts were entered into for purposes of acquiring capital assets like machinery and know-how. For large number of contracts, the assessee needed approximately Rs. 500 crores for expansion of its manufacturing division. Accordingly, the assessee entered into large number of contracts but merely because several contracts were entered into, it cannot be said the character of the receipt accruing to the assessee on cancellation of contracts changed from capital to revenue. He further submitted that the AO during the course of original assessment proceedings, accepted assessee's claim that amount received on cancellation of contract was a capital receipt.

However, these gains were reduced while working out the value in the block of assets for purposes of depreciation. On certain other points, appeal of the assessee was pending before the CIT(A) when action under Section 263 was taken by the CIT. Accordingly, gain of Rs. 71 crores was held to be revenue receipt. On fresh assessment the AO added above receipt of Rs. 71 crores as assessable income.

84. While supporting the order of the learned Vice President (AM), Shri Soparkar emphasized that the assessee admittedly had entered into genuine forward contracts 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 dt. 27th March, 1992.

Therefore, receipts earned on cancellation related to a capital asset and was thus a capital receipt was not liable to tax. He argued that the JM was wrong in saying that contracts were interconnected. This observation was wrong and contrary to record. He drew my attention to p. 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 p. 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 further to reasons 'A' to 'D' of the learned JM, he submitted that gain arising on cancellation of contracts relating to purchase of machinery was clearly on capital account and this was well-settled. In this connection, the learned Counsel for the assessee referred to the following decisions of Hon'ble Supreme Court in the cases of (1) Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT ; (2) Suite) Cotton Mills (supra); and Hon'ble Gujarat High Court in the case of Dy. CIT v. Core Healthcare Ltd. . It was not correct on the part of the learned JM to hold that gains were not linked to purchase of machinery or had nothing to do with liability to be discharged by the assessee relating to purchase of machinery. Findings of the learned JM were not only against facts, but even had no legal basis, the learned Counsel further submitted.

85. Finding 'E' was contrary to the earlier finding recorded in paras 'A' to 'D'. It was erroneous to hold that payment was made in domestic currency. The conclusion in para 'E' was inconsistent on facts recorded by the JM in earlier paras of the proposed order. The finding recorded is also contrary to circular and guidelines of Reserve Bank of India permitting entrepreneurs to enter into forward contract. Findings recorded by the JM were also contrary to decision of the Special Bench in the case of Appollo Tyres Ltd. v. Asstt. CIT (2004) 84 TTJ (Del)(SB) 741 : (2004) 89 ITD 235 (Del)(SB). In this connection, he referred to p. 11 of the decision wherein it has been specifically held that risk of foreign exchange fluctuation was kept open. However, learned JM held to the contrary. Shri Soparkar stated that factual presumption of the learned JM were contrary to his own findings. Reliance of JM on example of power subsidy is not comparable. Every gain made in the course of business is income, is not correct proposition of law. It may be a capital receipt or capital gains. Capital gain can be casual and not taxable as held by the Hon'ble Supreme Court in the case of CIT v. D.P.Sandu Bros. Chembur (P) Ltd 86. Shri Soparkar further said that Special Bench had also dealt with question of speculative income in para 9 of the order but speculative gain is a business gain. Definition of "speculative transactions" 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 (AM).

88. Shri Girish Dave, learned Departmental Representative, opposed above submissions. He argued that the matter was not covered by Special Bench's decision. He submitted that decision of Special Bench was given on account of peculiar facts before them and said decision laid down no legal principles, which were of universal application. In this connection, Shri Dave read out para 16 of the order of the Special Bench and argued that whether gain arising on cancellation of forward contract would be capital or revenue receipt, would depend upon large number, of factors. He referred to the observations of the Special Bench, "The essential characteristic which stamps the character of a revenue nature on any transaction, namely, multiplicity of transactions, a prior association of business and the existence of a scheme, system and business operations are totally conspicuous by their absence in the present case before us. In our considered opinion, the dominant intention, motive and purpose of entering into forward foreign exchange contracts and cancellation thereof were clearly to provide a hedging mechanism against enhancement of liabilities for repayment of foreign loans raised for the purpose of acquisition of capital asset by the assessee. The conduct of the assessee, as manifested in the facts and features of the case enumerated hereinabove, does not reflect profit motive in entering into forward contracts and cancelling the same thereafter." 89. The above, Shri Dave submitted, clearly showed that character of receipt depended on multiplicity of transaction, association of business and existence of a scheme and not on business operation. The intention, motive and purpose with which contract was entered and cancelled, were also relevant for determining character of receipt. In the case before the Special Bench after taking into consideration number of transactions and intention, motive and purpose of the assessee, the Special Bench held that amount received on cancellation of forward contract was a capital receipt. In that case there were only 13 contracts and out of which six related to interest liability, which admittedly was on revenue account. Only seven contracts were claimed to relate to the capital field. However, facts in the present case were quite different. The assessee had entered into 52 contracts and equal numbers were cancelled in the course of its business from May, 1992, to March, 1993. The cancellation had no connection with acquisition of any capital asset (machinery and plant). Thus activity of entering 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 Sch. 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 was accepted by the Special Bench. He drew my attention to observations of the Bench in para 18 of its order. Thus, when the assessee was dealing in above asset, the gain or loss accruing to the assessee was clearly an assessable receipt. It was a business gain.

92. Shri Dave further submitted that Special Bench did not correctly appreciate import of Expln. 3 to Section 43A of the Act. He submitted that foreign exchange contracts were of executory nature. No inference whether these contracts could operate in capital or in revenue field was possible unless contracts are actually performed. No foreign currency would be involved in case the contracts are not executed or performed. Therefore, existence or cancellation of contract 'has to be treated different from gain accruing or arising to the assessee in foreign exchange. Such a view was taken by the Court of Appeal in the case of Whittles (Inspector of Taxes) v. Uniholdings Ltd. (1996) STC 914 (CA). Borrowing of a loan and foreign exchange were held to be two separate contracts. The learned Departmental Representative submitted that gain on cancellation of contract was rightly held to be a revenue receipt.

93. Shri Dave further emphasized that Expln. 3 to Section 43A did not talk of revocation or cancellation of a forwarding contract. The aforesaid Explanation was twisted and moulded to reach the conclusion that gain arising from forward contract was a capital gain. However, it was settled law that while interpreting a fiscal statute, words cannot be added to or subtracted from the statutory provision. The situation relating to cancellation or revocation of contract is clearly not covered by the Explanation and, therefore, there is no question of adding or deducting gain or loss by using above Explanation. On account of liberalization policies, entrepreneurs could easily do business of entering into and cancellation of contracts to make profit. The circumstances clearly showed that motive of the assessee was to make gain with no intention to discharge any liability. As the gain had accrued in the course of business, it was business gain and not a capital receipt.

94. Shri Dave also stated that learned Vice President (AM) has recorded factually incorrect finding in paras 8.25 and 8.26 of his proposed order. In this connection, he drew my attention to the finding that there was no connection between cancellation of contract and acquisition of capital asset as recorded by the learned CIT(A).

Further, the learned Vice President (AM) 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 (AM) 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. Sooraj Mull Nagaimull .

95. Shri Dave further supported observations/findings recorded by the learned JM in his proposed order. He argued that order should be read in the background that parties before the Bench had made alternative submissions and, therefore, findings were recorded on those alternative submissions. He submitted that there was no justification to argue that findings of the learned JM were haywire. There was no legal infirmity in the basic finding recorded by the learned JM and it was that the profit was made by the assessee in the course of business and that cancellation of contracts was not related to acquisition of capital assets.

96. Shri Dave also drew my attention to the detail of the transactions entered into by the assessee. He argued that several forward contracts related to supply of know-how, which clearly was a revenue receipt. In this connection, he relied upon decision of Bombay High Court in the case of Addl. CIT v. Buckau Wolf New India Engineering Works Ltd. . This principle was also given statutory recognition under Section 35AB of the IT Act. Thus, even if whole case of the assessee was accepted, gain accruing on contract for supply of know-how was required to be treated as revenue receipt. These receipts should be bifurcated and subjected to tax. The learned Departmental Representative this way supported the proposed order of the learned JM.97. Shri Soparkar, learned Counsel for the assessee, refuted arguments of the learned Departmental Representative in rebuttal. He submitted that Full Bench decision laid legal principles, which are fully applicable to the case before us. The decision of the Special Bench was not distinguishable on facts. Merely because the assessee had cancelled 52 forward contracts as against lesser number in the case involved before Special Bench, did not make any difference. Nature and character of the receipt was to be determined on the basis of legal principle and when so considered, the matter in issue was fully covered by the Special Bench decision. Even if it is accepted that decision of Special Bench was given on facts involved in that case, the facts in the case of this assessee were identical and, therefore, same conclusion should follow. Likewise, the question cannot rest on the entries made by the assessee in the books of account. The manner of making entries was totally irrelevant as held by several decisions of the Hon'ble Supreme Court duly noted by the Special Bench in its decision. Legal implications of an activity/transaction are to be seen for purposes of taxation and not what treatment has been given to the transaction by the assessee in the 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 (Del) 227. A copy of above decision was placed on record.

98. Shri Soparkar further submitted that. Expln. 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 corresponding 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 of incremental cost of a capital asset. In that view of the situation, there was no actual gain to the assessee.

99. Shri Soparkar further emphasized that the assessee had to disclose the purpose for which forward contract was to be entered into. He referred to pp. 311 to 320 of the paper book where copies of three contracts are available. In each of the contract, purpose that contract was being entered into to acquire machinery and plant was duly disclosed. Thus, forward contract was entered into for purposes of acquiring a capital asset. Shri Soparkar further stated that revised AS-11 did not make any difference. Likewise, it is inconsequential that hedging is permitted as per provisions of FERA or FEMA. He also read out relevant portion of proposed order of the learned Vice President to show that there was no material error in the order as principles applicable are to be seen whether contract is one in question or there are many. Likewise, whether foreign money was a commodity or not, is irrelevant for determining matter in issue. The question whether it was speculative transaction or not, is not material because even speculative transactions fall under the head "business". Shri Soparkar also placed on record the definition of "commodity" as per legal dictionary by William P. Statsky and William C. Burton.

100. With reference to the English decision relied upon by the learned Departmental Representative, Shri Soparkar submitted that English decision given on consideration of peculiar provision of English statutes and the facts involved are not parallel to the facts in the case before us. He further argued that payment made for know-how was on capital account and duly added to the cost of machinery and plant.

Therefore, contracts relating to know-how could not be treated as relating to revenue receipts. At any rate no such issue was raised by the Revenue earlier even when the matter was considered by the regular Bench. This argument cannot be permitted to be taken for the first time before the Third Member who has a limited jurisdiction. He emphasized that matter be decided and order of the learned Vice President (AM) be upheld in line with the decision of the Special Bench.

101. I have given careful thought to the rival submissions of the parties. The assessee, as noted earlier, in order to expand its business wanted to export (import) plant and machinery from abroad of value 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 dt. 27th March, 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 Tribunal Special Bench 'E', New Delhi, in the case of Apollo Tyres Ltd. v. Asstt. CIT (supra). In the case before the Special Bench, there was gain to the assessee on cancellation of forward contracts after Reserve Bank of India had issued notification dt. 27th March, 1992. The relevant portion of the above notification is as under: "Customers may be permitted to cancel forward contracts and keep their exposures open or book fresh contracts, at later dates, if they so desire. It will also not be necessary to report these cancellations to the Reserve Bank of India. Full particulars of cancellations of forward cover for the equivalent of US $ 500,000 and above should be kept on record with the authorized dealers for verification by the Exchange Control authorities if necessary. A contract booked with an authorized dealer and subsequently cancelled, may be booked again with another authorized dealer, if the customer so wishes. The authorized dealer booking the subsequent contract will have to verify suitable documentary evidence to ensure that a genuine transaction, permitted under the extant regulations, exist and that the customer continues to be exposed to exchange risk." 103. Before the Special Bench, in the light of above circular, the assessee had claimed that gain of Rs. 11,06,00,000 arising on cancellation of forward contracts was a capital receipt. The Special Bench for consideration of issue before it framed the following two questions : "(i) Whether the gains earned on cancellation of the foreign exchange forward contracts are capital receipt or revenue receipt; and (ii) If gains are capital receipt, whether the same should reduce the actual cost of plant and machinery by virtue of Expln. 3 to Section 43A." In the case before the Special Bench, the assessee had borrowed foreign currency to acquire capital assets and had entered into forward contracts. The assessee had explained that foreign exchange contracts were entered into with Indian Banks with a view to guard against losses on account of foreign exchange rate fluctuations. Such contracts could not be cancelled in view of the Reserve Bank regulation. The Reserve Bank of India had authorized entering into such contracts in respect of genuine transactions in the capital field. These contracts were cancelled when the Reserve Bank changed its policy when assessee felt that dollar rate of exchange would remain stable and rupee 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 busine Sections The assessee was also not authorized dealer in foreign exchange busine Sections 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 Engineering Co. Ltd. v. CIT .

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 forward foreign exchange contracts were cancelled on 30.4.1992 resulting in gain of Rs. 11.06 crores. Thereafter assessee again entered into fresh foreign contracts in May and June, 1992, for dollar loans. Without making remittance these contracts were cancelled on 26th Feb., 1993 resulting in profit to the assessee. Thus, conduct of the assessee amply demonstrated that entire activity of cancellation and execution of fresh contracts Mowed by cancellation was motivated by business consideration. The contracts might have been entered into to cover against exchange rate fluctuation without any motive of profit, but subsequent conduct of the assessee clearly showed that cancellation was done for business consideration. The Departmental Representative had relied upon the decisions noted by the Bench in paras 7 and 8 of its order. The learned Departmental Representative also referred to provision of Section 43 (5) of IT Act and submitted that once these transactions were held to be speculative transactions, provisions of Expln. 2 of Section 28 of IT Act will automatically come to play and such transactions would be treated as business transactions. It was also submitted on behalf of the Revenue that forward contracts could not be said to be capital assets. Without prejudice to the submissions that revenue income was generated on cancellation of contract, it was submitted that if contracts are held to be capital in nature, then Section 43A would be applicable as gain arising on cancellation is inseparably linked to foreign loan amounts. Thus, gain was liable to be capitalized towards the cost of plant and machinery. Shri Salil Gupta, another Departmental Representative, had also emphasized before the Special Bench that subsequent action of the assesses in cancelling the contracts and in entering into new forward contracts was a trading activity and, therefore, gain arising from such activity was a revenue receipt. In this connection, change in pattern of taking forward contracts for a long duration in the past to short-term durations after Reserve Bank of India changed its policy by issuing notification dated 27th March, 1992 was significant It was no longer intention of the assessee to hedge the loss but was clearly to make profit by carrying adventure in the nature of trade. Profit from cancellation of contract was a revenue receipt.

106. The Special Bench before analyzing rival contentions of parties noted 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 30th April, 1992 pursuant to revised instructions of Reserve Bank of India, dt. 27th March, 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 Tax Cases 141 (CA). It also referred to and quoted observations of Justice Clerk in California Copper Syndicate v. Harris (1904) 5 Tax Cases 159. As far as decision of Supreme Court was concerned, the Special Bench took into account the case of G. Venkataswami Naidu and Co. v. CIT CIT v. P.K.N. Co. Ltd. , CIT v.Sutlej Cotton Mills Supply Agency Ltd. . The Special Bench further considered observation of Lord Dunedin in Leeming v.Jones 15 Tax Cases 333 (HL). After considering facts and the case law, the Special Bench expressed the following view : "17. Viewed in the backdrop of the aforesaid facts and circumstances, we are inclined to accept the contention of learned Counsel for the assessee that the entire activity of entering into and cancellation of forward contracts, which are directly connected with the repayment of foreign currency loans fall in the capital field and gains arising therefrom would, therefore, be capital receipts.

18. It is now well-settled that where profit and loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be treated as profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the busine Sections But, on the other hand, if the foreign currency is held as a capital asset or as a fixed asset, such profit or loss would be of capital nature. The first decision of the Supreme Court on the issue in chronological order is that reported in CIT v. Tata Locomotive and Engineering Co. Ltd. relied upon by the learned Counsel for the assessee. In this case, the assessee, which was a limited company carrying on business of locomotive boilers and locomotives had for the purpose of its manufacturing activity to make purchases of plant and machinery in the United States. The assessee remitted a sum of $ 33,850 to the United States with the sanction of the Exchange Control Authorities for the aforesaid purpose of purchasing capital goods. The assessee also earned a commission of $ 36,123 as selling agent in the United States and the amount was retained in the United States for capital purposes after obtaining the sanction of the Reserve Bank of India.

The Court held that even though the amount of $ 36,123 was a revenue receipt in the . assessee's business of commission agency, retention of this amount in the United States with the sanction of the Reserve Bank of India for buying capital goods fall in the capital field and any profit accruing on subsequent repatriation of this amount on account of exchange 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. , Sutlej Cotton Mills Ltd. v. CIT (supra), as also decision of Hon'ble Punjab and Haryana High Court in Beco Engineering Co. Ltd. v. CIT (supra).

107. Thereafter, the Special Bench examined implication of provisions of Sections 43 and 43A of the IT 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 Expln. 3, increase or reduction of the liability of the assessee in repayment of the loan are liable to be ascertained on the basis of the forward contracts. That part of the foreign: liability for repayment of the loan which is covered under the forward contract would be determined on the basis of the exchange rate of the foreign currency into the Indian currency as specified in the contract. Any increase or reduction in the liability being the difference in the rupee equivalent of original liability as well as the liability on the basis of the forward contract would be capitalized towards the actual cost of the assessee in consonance with the provisions of Section 43A. Thus, gains arising on cancelling of the forward contracts in the case of the assessee represent the reduction of the liability for repayment of the foreign loan which is liable to be adjusted in the cost of the asset as per Section 43A(1). We are not persuaded to accept the argument of the learned Counsel for the assessee that the forward contracts have been cancelled by the assessee and are not covered under Expln. 3 to Section 43A. As we have already mentioned above, forward contracts have been initially entered into by the assessee against repayment of foreign loan in Sterling as well as US Dollars and have been rolled over upto 30th April, 1992, when the same were cancelled in pursuance of relaxation of restriction against cancellation by the Reserve Bank of India.

The fact that contracts were not rolled over beyond 30th April, 1992 and the assessee consciously decided not to extend the security cover on maturity of the contracts would not by itself take these contracts out of the purview of Expln. 3. Admitted facts are that these contracts have been entered into for providing the assessee with foreign currency on or after a stipulated future date at the fixed exchange rate. The contracts are thus fully in conformity with the letter and spirit of Expln. 3. If the assessee has not opted for roll over of the contracts, this would not ipso facto make Expln. 3 inapplicable. The language of Expln. 3 does not contain any such qualification. The interpretation suggested by learned Counsel would require the addition of the words "and the contract has been rolled over to the date of actual payment of instalment for foreign liability" after the words "to enable him to meet the whole or any part of the liability aforesaid" in the Explanation. There is nothing in the 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 liberal 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 any thing 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) rule with Expln. 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 Expln.

3 to Section 43A of the IT Act. In this connection, Special Bench referred to paras 13, 14 and 15 of AS-11 which are reproduced in its order.

109. After considering all the relevant material, the Special Bench held as under : "27. From the aforesaid rules as laid down in the AS-11, it clearly emerges that in case of a foreign exchange contract relating to foreign liability incurred for acquiring fixed assets, any profit or loss on cancellation or renewal of a foreign exchange contract should be adjusted in the cost of the respective fixed assets.

Since, in the case of the present assessee, forward contracts relating to foreign loan liabilities incurred for acquiring plant and machinery from abroad have been cancelled, profits arising therefrom are required to be adjusted in the cost of the plant and machinery purchased by the assessee. It is to be noted that entries passed in the books of account by the assessee are in conformity with the aforesaid accounting standard as well as the statutory provisions enacted in the IT Act, 1961, and the Companies Act. We have, therefore, no hesitation in answering the question referred to us as under: The gains earned on cancellation of the foreign exchange forward contracts by the assessee are capital receipts which should be reduced from the cost of plant and machinery in connection with which foreign loans were raised by the assessee." 110. The aforesaid conclusions of the Special Bench are fully applicable to the facts of the case before me. Shri Dave's submissions that Special Bench decision was given on account of peculiar facts and did not lay down any legal principles, do not carry any weight. The dominant intention, motive and purpose of entering into forward foreign exchange contract and cancellation thereof in this case and in the case before the Special Bench are similar. It is true that assessee had entered into and cancelled 52 contracts in this case as against 6 or 7 contracts in the case before the Special Bench. But that in my opinion would not make any difference, having in mind the magnitude of foreign exchange involved in this case. The learned Counsel for the assessee has rightly contended that a single or few parties were not prepared to take risk involved in the deal and, therefore, assessees had to enter into a large number of forward contracts. 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 AM 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 busine Sections 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 was a capital receipt. I have also carefully considered reasons given by the learned JM for holding disputed receipt to be a revenue receipt. I am unable to agree with reasons 'A' to 'L' given by the learned JM in the proposed order. It is settled law that taxability of receipt has to be judged on the basis of legal principles and not in the manner entries are made by the assessee in the books of account. Therefore, gain in dispute on cancellation of contract could not be treated as a revenue receipt. However, the manner in which entries are made influenced learned JM as per reasons 'A' to 'D' of his proposed order. I am unable to agree with the above approach. I am further unable to accept that gains in question had no connection with purchase, of capital assets from abroad. It is further difficult to agree with learned JM that cancellation of foreign exchange agreements had nothing to do with the liabilities of the assessee relating to purchase of machinery. In my opinion, the act of cancellation of contract cannot be treated as independent act unconnected with purchase of machinery. There was a proximate connection between entering and cancellation of contracts and acquisition of machinery. Finding recorded to the contrary cannot be accepted on facts of the: case and in view of decision of Special Bench. It is true that contracts were entered by the assessee in the course of business transactions but from the above it cannot follow that gain arising on cancellation of such contracts would be taxable income as held by the learned JM in paras 'I' and 'J' of his proposed order. A businessman in the course of business can enter into contracts which operate in capital field only. Gains accruing to the assessee from such contracts are connected with business but are not a revenue receipt. The JM's observations that when forward contracts were cancelled the exposure risk was left uncovered are not correct as the assessee at a future date would pay larger amount as price of asset and there would be increase in cost but payment would be on capital account. Further, the view of the learned JM that receipt could be taken as casual and non-recurring receipt is also not justified as receipt was clearly of capital nature. The same could not be casual and non-recurring [GTT v. D.P. Sandu Bros. Chembur (P) Ltd. (supra)].

Another alternative finding that the transactions were adventure in nature of trade can also not be accepted as the assessee was not a dealer in foreign exchange and had entered into foreign contracts to safeguard its interests relating to acquisition of plant and machinery.

Therefore, I am unable to accept reasons given by the learned JM in the proposed order. The submissions of learned Counsel for the assessee on the-proposed order of the learned JM are well taken and are accepted.

The matter in my view is fully covered by the decision of the Special Bench. The gain earned on cancellation of foreign exchange forward contracts is capital receipt and the same should be reduced from cost of plant and machinery in connection with foreign loan raised by the assessee. In the light of above findings, I fully agree with the order proposed by the learned Vice President (AM).

112. The matter should now be put before regular Bench at Ahmedabad for disposal of appeal in accordance with law.