itxa 1779 2016.odt IN HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 1779 OF 2016 Pr. Commissioner of Income Tax 6 .. Appellant. v/s. M/s. Coastal Gujarat Power Ltd., .. Respondent. Mr. A. R. Malhotra with Mr. N. A. Kazi, for Appellant. Mr. F. V. Irani i/b. Mr. A. K. Jasani, for Respondent. CORAM: AKIL KURESHI & M.S.SANKLECHA, JJ. DATE : 27th FEBRUARY, 2019. P.C: This appeal is filed by Revenue to challenge judgment of Income Tax Appellate Tribunal (in short Tribunal ), raising following questions for our consideration: (a) Whether on facts and in circumstance of case and in law, Tribunal was justified in law in holding that gain on cancellation of forwarding contract is capital receipt without appreciating fact that gain was not crystallized from normal activities of assessee company? (b) Whether on facts and in circumstance of case and in law, Tribunal was right in relying upon decision of Apex Court in case of M/s.Challpalli Sugars Ltd., (1975) 98 ITR 167 (SC) and M/s. Sutlej Cotton Mills Limited (116 ITR 1) without appreciating fact that facts of present case are distinguishable with facts of case laws? S.R.JOSHI ::: Uploaded on - 05/03/2019 ::: Downloaded on - 06/03/2019 11:20:14 ::: itxa 1779 2016.odt (c) Whether on facts and in circumstance of case and in law, Tribunal was justified in law in holding that assessment order was not erroneous and prejudicial to interest of revenue when record of assessee in A. Y. 2009 10 show that Assessing Officer failed to call for information as per requirement of CBDT Instruction dated 23.03.2010 regarding foreign exchange connections? 2 Though three different questions are framed, only central issue is of correctness of order passed by Commissioner of Income Tax in exercise of revisional power under Section 263 of Income Tax Act, 1961 (in short Act ), calling for further enquiries with respect to assessee's claim of certain gain being in nature of capital receipt. 3 Brief facts are as under: (i) Respondent Assessee is registered company and was constituted as special purpose vehicle to facilitate acquisition of land and complete preliminary formalities for setting up power project at Mundra, based on imported coal at Mundra in District Kutch, Gujarat. (ii) For Assessment Year 2009 10, assessee had filed return of income on 29th September, 2009, declaring total income at 'Nil'. This return was taken in scrutiny by Assessing Officer who passed order under Section 143 (3) of Act on 26 th December, 2011. He examined various transactions of assessee during relevant accounting period. He noted that during year under consideration, assessee had continued construction activity at site at Mundra. S.R.JOSHI ::: Uploaded on - 05/03/2019 ::: Downloaded on - 06/03/2019 11:20:14 ::: itxa 1779 2016.odt (iii) He also noted that, assessee had earned interest of Rs.94.75 lakhs (rounded of) from Paschim Gujarat Vij Co. Ltd., (PGVCL) against security deposit of Rs.14.788 Crores (rounded of), which assessee had not offered to tax, showing it by way of credit to capital work in progress. Assessing Officer disputed such treatment given by assessee to income. He was of opinion that, interest earned prior to commencement of business, was not business income of assessee but had to be taxed as assesssee's income from other sources. (iv) In such return, assessee had also supplied details of gain arising out of forward contracts entered into by assessee as on 31st March, 2009. It appears that, as result of forward contracts for procurement of plant and machinery in foreign currency, assessee had earned gains due to favourable fluctuation of foreign exchange rate. This gain can be sub divided in to two parts. first part of gain was notional on account of fluctuation of rate of foreign currency. other part was on account of cancellation of contracts. According to assessee, such gain was on capital account and would go to reduce cost of acquiring capital asset. (v) Commissioner of Income Tax was, prima facie, of opinion that, Assessing Officer had not carried out proper enquiries with respect to claim of this assessee. He, therefore, put assessee to notice, why power under Section 263 of Act be not exercised. After referring to assessee's notes on accounts in this respect, he recorded that, Assessing Officer had failed to S.R.JOSHI ::: Uploaded on - 05/03/2019 ::: Downloaded on - 06/03/2019 11:20:14 ::: itxa 1779 2016.odt examine details of these transactions. Assessing Officer should have followed instructions of CBDT Circular No. 3 of 2010 dated 23rd March, 2010, which he had failed to do. He was of opinion that, similar treatment should have been given to notional gain claimed by assessee. (vi) assessee appeared before Commissioner and opposed for proposal for revision. It was pointed out as under: 3.3: In this regard, we would like to submit that CGPL was incorporated in 2006 as special purpose vehicle formed to facilitate acquisition of land and complete preliminary formalities including required statutory clearances for establishing 4000 MW (5 units x 800 MW) Ultra Mega Power Project (UMPP) based on imported coal at Mundra in state of Gujarat. business of Company had not commenced during AY 2009 10. 3.4: company is required to purchase/ acquire offshore equipment. Bypass Valves Systems etc. to set up power plant. said imports/ purchases form part of project capital of Company which is reflected as capital work in progress during pre commencement period. Company also enters into forward contracts in respect of such payments to be made to overseas suppliers. 3.5: gain arising on forward contracts is on account of cancellation of forward contracts entered into in connection with purchase of offshore equipment and Bypass Valves System. 3.6: As commercial production of power had not begun in captioned year, company had capitalized all expenses incurred in relation to setting up its plant and gains on forward contracts were reduced from expenses to be capitalized resulting in lesser capitalization to that extent. 3.7: assessee receives any amount which is inextricably linked with process of setting up its plant and machinery; such receipts will go to reduce cost of its assets. These are receipts of capital nature and cannot be taxed as income. S.R.JOSHI ::: Uploaded on - 05/03/2019 ::: Downloaded on - 06/03/2019 11:20:14 ::: itxa 1779 2016.odt Ignoring such pleas of assessee, Commissioner passed impugned order, making following observations: I have perused submission made. uncontroverted fact remains that AO did not examine on what account foreign exchange transactions were undertaken. Whether, these were in connection with purchase of capital goods or these transactions were revenue in nature. assessee claimed that foreign exchange gains (recognized one) arose on account of cancellation of forward contracts entered into in connection with purchase of offshore equipment and Boiler Bypass Valves System. AO also failed to consider whether foreign exchange gains shall be income of assessee in light of Tuticorn Chemicals decision or capital receipt as claimed by assessee during pre commencement of business period. AO failed to examine foreign exchange transaction totally. I am of considered view that on account of failure of AO to examine contention of assessee that amount of Rs.62,91,30,554/ arising from cancellation of foreign exchange transaction incurred for purchase of capital goods not being taxable income but was required to be reduced from amount being capitalized u/s. 43A of Act, has resulted in making assessment order erroneous and prejudicial to interest of revenue. Likewise, failure to examine forward contract transaction in foreign exchange resulting in gains of offshore equipment and Boiler Bypass Valves System which have not been recognized by assessee in return were on account of capital gains or transaction of speculative nature has also resulted assessment order which is erroneous and prejudicial to interest of revenue. I am satisfied that it is fit case for revision u/s. 263 of Act. I, hereby, set aside assessment order u/s. 263 of Act with direction to AO to redo assessment de novo, as per law after verifying facts pointed out above and after giving reasonable opportunity of hearing to assessee. 4 assessee carried matter in appeal. Tribunal by impugned judgment allowed assessee's appeal. Tribunal referred to and relied upon decision of Supreme Court in case of S.R.JOSHI ::: Uploaded on - 05/03/2019 ::: Downloaded on - 06/03/2019 11:20:14 ::: itxa 1779 2016.odt Challapalli Sugars Ltd v/s. CIT reported in 98 ITR 167 wherein it was held that, expenses incurred in connection with acquisition of plant during re commencement period, forms part of actual cost of plant and same should be capitalized. Tribunal was, therefore, of opinion that, Commissioner was not justified in exercising revisional powers. Tribunal held that, imports made by assessee were part of project of setting up power plant. It was recorded that, business of company had not commenced during period relevant to Assessment Year 2009 10. Tribunal also referred to judgment of Supreme Court in case of Sutlej Cotton Mills Ltd., v/s. CIT reported in 116 ITR 1 in which, it was held that, profit or loss which arises to assessee on account of appreciation or depreciation in value of foreign currency held as capital asset is liable to be treated as capital in nature. This judgment, Revenue has challenged in present appeal. 5 Learned Counsel Shri Malhotra for Revenue vehemently contended that, Tribunal has committed serious error while interfering with order of Commissioner, which was based on sound principles. Assessing Officer had not carried out any enquiries with respect to assessee's gain arising out of foreign exchange rate fluctuation. Commissioner, therefore, was justified in directing Assessing Officer to carry out such enquiries. He submitted that, Assessing Officer had not followed instructions of CBDT as recorded by Commissioner. 6 On other hand, learned Counsel Shri Irani, for assessee opposed appeal, contending that, in order to enable Commissioner to exercise revisional powers, order of Assessing S.R.JOSHI ::: Uploaded on - 05/03/2019 ::: Downloaded on - 06/03/2019 11:20:14 ::: itxa 1779 2016.odt Officer had to be shown to be erroneous and prejudicial to interest of Revenue. In present case, both conditions are not satisfied. 7 Assessing Officer had carried out detail enquiries before passing Assessment Order. CBDT Circular referred to by Commissioner was not applicable in present case at all. question of following instructions contained in said circular, therefore, does not arise. He further submitted that, in any case, Tribunal has examined entire issue minutely and came to conclusion that, on facts of case, gain in question was capital in nature and, therefore, could not have been taxed as income of assessee. He pointed out that, even Revenue does not dispute that business of assessee had not commenced during relevant period. This, therefore, was pre operative expenditure towards capital account. Any gain or loss arising from such activity, would necessarily be on capital account as held by series of judgments of Supreme Court. 8 Having heard learned Counsel for parties and having perused documents on record, we may re call, as held by Supreme Court in Malabar Industrial Co., Ltd., v/s. CIT reported in 243 ITR 83, power of revision under Section 263 of Act can be exercised by Commissioner only if it is found that, order of assessment is erroneous and prejudicial to interest of Revenue. Both conditions have to be satisfied. In present case, controversy is whether Assessing Office was justified in not disturbing assessee's claim that, gain was on capital account and, therefore, correctly not offered to tax. 9 Revenue may be correct in contending that, Assessing Officer had not carried out detailed enquiries with respect to this claim of S.R.JOSHI ::: Uploaded on - 05/03/2019 ::: Downloaded on - 06/03/2019 11:20:14 ::: itxa 1779 2016.odt assessee. However, this by itself would not be sufficient to enable Commissioner to exercise revisional power. In given case, as in present one, if answer to legal issue can be had on basis of material already on record, there would be no useful purpose in asking Assessing Officer to carry out same exercise and come to same conclusion as Tribunal in present case has. In this context, we do not accept contention of Counsel for Revenue that, answer in law had to come from Assessing Officer and not Tribunal. He had argued that even if Tribunal was right in law, since Assessing Officer had not come to said conclusion, order of Commissioner should not be disturbed. In our opinion, if Tribunal has come to correct conclusions in law and said conclusions are based on materials already on record, it would be futile to reinstate order of Commissioner, which in turn, would require Assessing Officer to carry out same exercise and axiomatically come to same conclusion. This line, we are adopting, is within fold of requirement of order of Assessing Officer being 'erroneous'. In other words, if it can be demonstrated that order was not erroneous, order of revision would, in any case, require interference. matter can be looked from slightly different angle. If while examining order of A..O. Commissioner notices that, though A.O. was not examined for claim of assessee, but claim itself is legally tenable, would be judicial in exercising and set aside assessment? answer may be in negative. 10 In this context, we have examined materials on record. Un disputed facts are: S.R.JOSHI ::: Uploaded on - 05/03/2019 ::: Downloaded on - 06/03/2019 11:20:14 ::: itxa 1779 2016.odt (i) that assessee was constituted as special purpose vehicle to carry out foundational tasks for setting up coal based power plant; (ii) during period relevant to Assessment Year in question, business of assessee had not yet commenced; (iii) assessee had entered into contract for purchase of plant and machinery from abroad. In relation to such purchase, either on account of cancellation of contracts or on account of notional adjustment, due to favouable fluctuation of foreign exchange rate. assessee had gained certain income. 11 This being position, as per settled law, profits or gains arising out of fluctuation of foreign exchange rate, would undoubtedly on capital account. In case of CIT v/s. Bokaro Steel Ltd., reported in 236 ITR 315, facts were that, assessee company was set up to produce steel. During period relevant to Assessment Year in question, construction of plant was not completed. assessee earned interest on advance to contractors and also by way of rent from quarters let out to employees of contractors and such other related activities. Court held that, amounts were directly connected to and incidental to construction of plant by assessee and said amounts were, therefore, capital in nature and not income of assessee from other source. 12 In case of CIT v/s. Karnal Co operative Sugar Mills Ltd., reported in 243 ITR 2, facts were that, assessee had deposited amounts to open letter of credit for purchase of machinery required for setting up plant. assessee earned interest out of said investment. It S.R.JOSHI ::: Uploaded on - 05/03/2019 ::: Downloaded on - 06/03/2019 11:20:14 ::: itxa 1779 2016.odt was held that, interest on said amount was directly connected and incidental to construction of plant and, therefore, situation was one covered by Supreme Court in case of Bokaro Steel Ltd., (supra). 13 In case of Bongaigaon Refinary and Petrochemicals Ltd. v/s. CIT reported in 251 ITR 329, facts were business of assessee was of oil refinery and petrochemicals. assessee had earned income from house property, guest house, charges for equipment and recoveries from contractors for supply of water and electricity etc. during period of formation. It was held that, said receipts were capital in nature and not income of assessee. Such receipts would be adjusted against project cost of main business of assessee. 14 In case of Sutlej Cotton Mills Ltd.,v/s. CIT, West Bengal reported in 116 ITR 1, it was held that where profit or loss arises to assessee on account of appreciation or depreciation, in value of foreign currency held by him, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if foreign currency is held by assessee on revenue account but if foreign currency was held as capital or as fixed deposit, such profit or loss would be capital in nature. 15 In view of above, we do not find that Tribunal has committed any error. We are conscious of decision of Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd.,v/s. CIT reported in 227 ITR 172 . It was case in which assessee had invested borrowed fund and earned income from such investments prior to commencement of business. It was in this back ground, Supreme Court S.R.JOSHI ::: Uploaded on - 05/03/2019 ::: Downloaded on - 06/03/2019 11:20:14 ::: itxa 1779 2016.odt held that said prior period income, would be taxed as assesssee's income from other source. facts of present case are different from those in case of Tuticorin Alkali Chemicals and Fertilizers Ltd.,(supra). In result, no question of law arises. 16 Appeal is dismissed. (M.S.SANKLECHA,J.) (AKIL KURESHI,J.) S.R.JOSHI ::: Uploaded on - 05/03/2019 ::: Downloaded on - 06/03/2019 11:20:14 ::: Pr. Commissioner of Income-tax-6 v. Coastal Gujarat Power Ltd