Delhi High Court

M/S. Hero Honda Motors Ltd. vs Dy. Cit on 13 November, 2003

Equivalent citations: (2004) 91 TTJ Del 128

ORDER

Gupta, J.M.

This is an appeal by assessed against the order of CIT(Appeals) relating to assessment year 1993-94.

2. Ground No, 1 was not pressed. Therefore, the same is dismissed accordingly,

3. Ground No, 1,2 relates to confirmation of disallowance of expenditure of gifts and presents, was not pressed. The same is also dismissed,

4. Ground Nos. 2 and 2,1 are against confirming the disallowance of depreciation in respect of addition to plant & machinery on account of foreign exchange fluctuation in respect of foreign currency loan obtained for acquisition of fixed assets under section 43-A.

4.1 This issue has been decided by the Tribunal in case of assessed itself for assessment years 1990-91 to 1992-93 in I.T.A. No. 5772(Del)/95 and 2321 & 2322(Del)/96 in favor of assessed. Copies of the orders of the Tribunal are placed in the paper book. The findings of the Tribunal in ITA Nos. 2312 & 2322(Del)/96 are given in paragraph 14 of its order, which reads as under :

"Considering the fact that there is-no change either in the facts and circumstances or position of law, we are of the opinion that in the interest of consistency, the order of the Tribunal deserves to be followed. No contrary view was relied upon by the learned DR. Accordingly, the ground raised by the assessed is allowed."

4.2 While holding so the Tribunal has followed its order in ITA No, 5772(Del)/95 (supra), wherein the decision of the Madras High Court reported in 244 ITR 440 and decision of Bombay High Court reported in 210 ITR 97 were followed. Therefore, in view of the decisions of the Tribunal for earlier years, we allow this ground here also.

5. Ground Nos. 3 to 3,3 relate to confirming the addition of Rs. 2,40,57,000/made by the assessing officer in respect of income on cancellation of foreign exchange forward contract alleging that the same was not linked to any capital asset.

5.1 The brief facts of the case are that assessed has taken foreign currency loan in 1984 and 1987 for purchase of fixed assets. The assessed had also taken a forward cover for repayment of foreign currency loan to cover for possible exchange loss in future. The forward contract was rolled over by the assessed on expiry of the initial period. The roll over charges were capitalized by debiting the value of equipments in question till the commissioning of the equipments. After the equipment was commissioned the roll over charges were treated as revenue expenditure. The Reserve Bank of India consequent upon introduction of Liberalised Exchange Rate Management Scheme (LERMS) and with a view to creating greater depth in foreign exchange market and to enable participants to have greater flexibility, issued instructions to the authorized dealers vide Circular No. 22 dated 27-3-1992, permitting the customers to cancel forward contract which could not prior thereto, be cancelled, In the light of these instructions of Reserve Bank of India, the assessed cancelled the forward contract in the relevant previous year. The cancellation of contract resulted to the appellant realizing net gain of Rs. 2,40,58,916.54, after reducing the roll overcharges amounting to Rs. 3,11,90,483 capitalized in the earlier years in respect of such contract. Though the assessed had in the original return included the impugned amount in its taxable income, however, after realizing that the -impugned sum is a capital receipt being referable to fixed capital and, therefore, not chargeable to tax, revised its return of income to this effect. During the assessment proceedings the assessed was required as to why the amount should not be treated the income of the assessed The detailed reply was filed wherein it was stated that the contract was in regard to purchase of capital asset, therefore, not liable to tax. However, the assessing officer was not satisfied. In his view, the assessed was instead of utilizing the foreign currency loan for purchase of assets started speculation in foreign currency thereby earning profit. Accordingly he treated such gain as revenue receipt.

5.2 The CIT(Appeals) also confirmed the order of the assessing officer, However, while confirming the order of the assessing officer, the CIT(Appeals) observed that assessed has not produced details to establish that the forward contract related to loan taken for purchase of fixed assets.

5.3 Here at the time of hearing of appeal, the learned counsel rekerated his contentions raised before the lower authorities. The attention of the Bench was drawn on various copies of audited report indicating that the forward contract was made on account of purchase of machinery. It was further stated that without permission of Reserve Bank of India no private agency or person can do the trading by entering forwarding contract. It was further stated that only the authorized agents can trade in foreign currency. It was further stated that section 8 of Foreign Exchange Regulation Act, 1973 provides that except with prior general or special permission of the Reserve Bank of India, no person other than an authorized dealer shall purchase, acquire, borrow or sell foreign currency. It was further stated that prior to the LERMS, residents in India were not even permitted to cancel forward contract. The presumption of any speculative transaction is, therefore, directly rebutted in view of the legal impossibility and in view of the fact that foreign currency was neither commodity or shares. It was also stated that the definition of 'speculative transaction' will not apply to situation where the purpose of entering a forward contract was to hedge/safeguard against any loss on account of repayment of principal amount of loan, cancellation of contract was incidental to that object and consequently any loss/gain 'arising from such cancellation is directly related to repayment of the loan, Further attention of the Bench was drawn to proviso (c) to section 43(5) of the Act which excludes a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing etc. to guard against loss which may arise in the ordinary course of his business as such member from the definition of speculative transaction. Further reliance was placed on decisions reported in 60 ITR 405 (SC); 91 ITR 130 (Bombay); 116 ITR 1. (SC); 130 ITR 351 (Cal.); 156 ITR 202(Del); 166 ITR 397(Cal) and 174 ITR 11 (Mad,). Further reliance was placed on the decision of Ahemdabad Bench in the case of Gujarat Narmada Valley Enterprises, 73 TTJ 787 (All). On the other hand, the learned D.R. strongly placed reliance on the order of the CIT (Appeals).

5.4 We have considered rival submissions and perused the relevant material along with case laws relied upon by the learned AR and found that the issue involved in this appeal is covered by the order of Delhi Bench of the Tribunal in the case of Munjal Showa Limited decided in ITA Nos. 1387 & 5781(Del)/97. Similar issue was involved in the case of Gujarat Narmada Valley Enterprises (supra) and the Tribunal decided the issue in favor of assessed. Various case laws relied upon by the learned counsel mentioned above were also considered by the Delhi Bench as well as by the Ahemdabad Bench. The findings of Delhi Bench in case of Munjal Showa Limited is given in paragraph 36 to 38 of its order, which are as under :

"36. We have considered the rival submissions. Admittedly, the foreign contract was entered in connection with safeguarding the fluctuation in foreign currency for purchase of plant and machinery. Admittedly, the loan was taken for the purpose of capital assets. Thus, any gain connected with the assets will result into capital receipt. The Hon'ble Supreme Court in the case of Sutlej Cotton Co. Ltd., 116 ITR 1 (SC) at page 13 of the report has observed as under :

"The law may, therefore, now be taken to be well settled that where profit or loss arises to an assessed 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 trading profit or loss if the foreign currency is held by the assessed on revenue account or as a trading asset or as part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature."

37. Hon'ble Delhi High Court in the case of Triveni Engineering Works, reported in 156 ITR 202 followed the same., The Ahmedabad Bench of the ITAT in the cases of Gujarat Narmada Valley Enterprises reported in 73 TTJ 787 at 795 of the report has held as under-

"After considering the rival submissions we do not have any hesitation in holding that the receipt by way of gain on cancellation of foreign exchange contracts is a capital receipt which is not liable to tax in view of the clear pranouncement of the Apex Court in (1993) 201 ITR.800 (SC) (supra), (1979) 116 ITR 1 (supra); CIT v. Tata Locomotive & Engg. Co. Ltd. (1966) 60 ITR 405 (SC) and CIT v. Canara Bank Ltd. (1967) 63 ITR 328 (SC). Since it is admitted by the assessed that the foreign exchange contracts were related to the acquisition of plant and machinery (as indicated in the alternative plea raised in the ground of appeal vide para 8 above), it is open to the assessing officer to make necessary adjustments to the cost of acquisition/written down value (WDV) of the plant and machinery to which the said receipt pertains and to make consequential adjustments to the depreciation granted. However, before doing so, the assessing officer should give the assessed reasonable opportunity of'being heard in this connection."

38. In view of the decisions mentioned above, we hold that the amount received by the assessed on account of forward contract in foreign currency was a capital receipt and not exigible to tax. Ground of appeal is accordingly allowed, "

5.5 In the case of Gujarat Narmada Valley Enterprises the Tribunal has held that gain on cancellation of foreign exchange contract constituted capital receipt.

5.6 Therefore, in the light of these decisions, it is established that on cancellation of foreign exchange forward contract, if any loss or gain is there, that is capital in nature. Both the lower authorities have stated that the assessed could not file any evidence that the contract was taken for the purpose of purchase of fixed assets. We have seen that no person other than an authorized agent and money changers are allowed in India to trade in foreign currency, much less speculation. Undisputedly the assessed is not a trader in foreign currency as the assessed is an manufacturer. Therefore, there is no question of taking permission for the purpose of trading in foreign currency. This is also very clear that without permission of the Reserve Bank of India, even assessed cannot enter into any contract in regard to foreign currency. The counsel of the assessed has clearly stated that the contract was entered in the year 1985-86 after taking due permission from RBI in regard to purchase of machinery. At page 46, a copy of profit & loss account for the year under consideration is placed, wherein it is clearly mentioned that extraordinary income (Net surplus on cancellation of foreign exchange forwards contracts) amounting to Rs. 240.57 lakh. At page 48 the note on contingency liability is given. Para 6, which is in regard to forward foreign exchange contract reads as under :

"During the year, with the introduction of LERMS which, inter alia, permitted cancellation of forward foreign exchange contracts, the Company cancelled some contracts which had been entered into in earlier years to recover repayment of loans utilized for acquisition of fixed assets. The net excess on, such cancellation of Rs. 240.57 lacs, after adjusting roll over charges debited to fixed assets in earlier years, has been treated as an extraordinary income in the profit and loss account,"

5.7 At pages 53 to 57, a copy of Investment Agreement is placed on record and by this agreement the assessed entered into a foreign contract agreement in regard to purchase of machines. The detail is also given at page 56 of this agreement.

5.8 From all these details it is clearly established that assessed has not entered into agreement for speculation purpose or for trading in foreign currency but only for purchase of machinery. We are not able to understand that why both the lower authorities drew an inference that assessed has not entered into agreement with a foreign company for purchase of machinery. Both the lower authorities were informed that without taking the permission of Reserve Bank of India, no person can do trading in foreign currency or speculation in foreign currency, other than an authorized person. As we have already stated that undisputedly, the assessed is not doing any trading in foreign currency, nor has taken permission for doing so. As stated above, various Benches have considered this aspect and held that on cancellation of foreign exchange forward contract, if there is any loss or gain, that will be capital in nature. Therefore, in view of all these facts and circumstances and in view of the decisions stated above, we are of the view that the gain arising out of cancellation of foreign exchange forward contract is a capital receipt in the hands of the assessed, because the foreign exchange forward contract was taken for the purchase of machinery. Accordingly we allow these grounds of the assessed.

6. The remaining ground in this appeal i.e., ground Nos. 4 and 4,1 is against not admitting the additional ground relating to claim of investment allowance on foreign exchange fluctuation occurred during the relevant previous year in respect of loans taken for purchase of plant and machinery installed and put to use in earlier previous years, and further in not holding that investment allowance was allowable in respect of above mentioned foreign exchange fluctuation.

6.1 After hearing rival submissions, we fine that the CIT (Appeals) was not right in not admitting the ground raised by assessed before him, because the ground taken by assessed is a pure legal ground. The Hon-'ble Supreme Court in the case of NTPC has held that the legal ground can be raised before any appellate authority at any stage. Therefore, we treat this ground as admitted. We further noted that in case of assessed itself, the Tribunal while deciding the appeals for assessment years 1990-91 to 1992-93 in ITA Nos. 5772(Del)/95 and 2321 & 232 (Del)/96, have considered the similar issue and he that investment allowance was allowable in respect of foreign -exchange fluctuation occurring during the relevant previous year in respect of loans taken for purchase of plant & machinery installed and put to use in earlier years. Therefore, in view of the decision of the Tribunal in the case of assessed itself, we direct the assessing officer to allow the claim of investment allowance as claimed by the assessed.

7. In the result, the appeal of the assessed is partly allowed.