ACEELERATED FREEZE DRYING CO.LTD,ALAPPUZHA vs. DCIT, ALAPPUZHA

Per CHANDRA POOJARI, AM:

These appeals filed by the assessee and the Revenue are directed against the

different orders of the CIT(A)-IV, Kochi for the assessment year 2002-03. These appeals were originally disposed of by the Tribunal vide order dated 13th November,

I.T.A. Nos. 714/Coch/2008 & 1286/Coch/2005

2009. Against this, the Revenue went in appeal before the High Court in ITA No.

201 & 281/2010 wherein the High Court vide judgment dated 02-08-2018 remitted

the issue to the file of the Tribunal with the following observation:

“Especially noticing the long pendency, we request the Tribunal to dispose of the appeals within a period of six months from the date of receipt of a certified copy of this judgment.”

Hence, these appeals came up for hearing today for fresh consideration.

1) The CIT(A) has wrongly held that the effective date of transfer of the Taloja property took place when the assessee took possession of the assets and made entries in the books of account on 31/03/1997 and hence, the holding period was more than 36 months when the assets finally sold on 10/05/2001 and therefore, the assessee is liable only to long term capital gains.

2) The CIT(A) ought to have seen that the deed of assignment by which the assessee took over the Taloja property was registered only on 05/08/1999 and the assessee sold the property on 10/05/2001 and therefore, the holding period was less than 36 months for which the assessee is liable to short term capital gains.

3) The CIT(A) ought to have seen that as per the decision of the Supreme Court in Alappattu Venkitaraman vs. CIT (57 ITR 185), entries in the books are not relevant for the purpose of determining the date of transfer. The effective date of transfer is the date on which the transfer deed is registered.

I.T.A. Nos. 714/Coch/2008 & 1286/Coch/2005

completed the assessment u/s. 143(3) r.w.s. 147 determining a total income of Rs.

Rs.4,85,37,340/- against Nil income. During the relevant assessment year the

assessee had sold two of its units at Taloja in the State of Maharashtra and Veraval

in the State of Gujarat. The assessee was engaged in the processing of frozen

foods either as Block or as IQF. According to the Assessing Officer, the sale of

these two units would partake the nature of slump sales and income arising out of

these should be computed as profit ui/s.50B of the I.T Act. A Report in Form 3CEA

indicating the computation of the net profit of these units was also asked to be filed

The assessee submitted that what was sold were the depreciable assets and

provisions of section 50B were not applicable and the value was clearly bifurcated

as attributable to immovable and movable property.

3.1 It was found that the unit at Taloja Industrial Area was transferred in favour of

Allana Investments and Trading Co., Mumbai for a consideration of Rs.1.25 Crores

which was bifurcated towards land and building at Rs.5 Crores and towards value of

movable plant and machinery and other installation at Rs.7.5 crores. As regards the

Veraval Unit, this was sold to Allana Frozen Foods Ltd., Mumbai, being lease hold

rights for a consideration of Rs.1.75 crores, being Rs.1.00 crore for land and Rs.0.75

lakhs towards movable plant and machinery installation which was treated as slump

sales.

I.T.A. Nos. 714/Coch/2008 & 1286/Coch/2005

3.2 The Assessing Officer referred to various decisions to bring the transactions

within the definition of section 2 of section 42(C) r.w.s. 50B to treat the same as

slump sales.

3.3 It was contended that the Taloja unit initially leased out from innovative

Marine Foods Ltd., an associate concern of the assessee was taken possession by

the assesseeon 31/03/1997, being the leasehold right for factory building and office

building and plant and machinery and on these dates the assessee had passed an

entry for consideration of purchase to the tune of Rs.23.65 cores. The Department

had granted depreciation from the subsequent year. Therefore, it was submitted

that all these assets had been included as early as 31/03/1997 so much so it cannot

be held to be a short term capital gain. Therefore, the assessee had rightly

deducted the sale proceeds from the block of assets..

similar issue was considered by the Jurisdictional High Court in assessee’s own case

in ITA Nos. 640 & 1470 of 2009 dated 06/10/2010 wherein it was held as under:

“3. The admitted facts that lead to the controversy are the following. The assessee which was engaged in seafood processing and export with their own 4

I.T.A. Nos. 714/Coch/2008 & 1286/Coch/2005

factories transferred one of their industrial units as a going concern during the previous year relevant for the assessment year 2003-04 to Hindustan Lever Limited for a total consideration of 22.20 crores. The consideration agreed is the aggregate value for land, building, machinery and all equipments with liabilities specifically mentioned in the agreement entered into between parties. The sale is in two parts, one sale deed executed and registered covers, land, and building and for the purpose of payment of Stamp duty and registration fee a valuation was separately made based on which stamp duty and registration fee were are paid. Besides the valuation of land and building which is specifically stated in the conveyance deed as fair market value adopted only for the purpose of payment of stamp duty and registration charges, sale consideration was not separable between value for land and building and for other items sold. In other words the assessee sold the industrial unit as a going concern and as an operating unit for a total agreed consideration whereby the assessee received the net sale price after retaining liabilities to be borne by the purchaser. In Clause 3.2 of the sale deed executed between the assessee and the purchaser it is clearly stated that the undertaking is transferred as a going concern on "slump sale basis". The assessee also initially treated the sale of industrial unit as "slump sale" and when income tax return was filed assessee submitted auditor's report in form 3 (EA) prescribed under Rule 6(H) of the Income Tax Rules which is the requirement for the purpose of assessment of capital gains on "slump sale" under Section 50B(3) of the Act. In spite of the declaration in the sale deed and treatment of the transfer of the industrial undertaking as a going concern to another company as a "slump sale" by obtaining and producing chartered accounts certification in the prescribed form in. terms of Section 50B(3) of the Act, in the return filed, the assessee returned the transaction for assessment for capital gains as sale of depreciable items under Section 50 of the Act. Before the Assessing Officer assessee contended that Form 3EA is furnished as a precaution and assessee's contention is that the sale of industrial undertaking should be assessed for capital gains as sale of depreciable assets under Section 50.of the Income Tax Act. The Assessing Officer noticed that the sale is a "slump sale" falling within the definition of Section 2(42C) of the Act and he made the assessment for capital gain as provided under Section 50B of the Income Tax Act. The assessment was made by invoking powers under Section 147 of the Act which was also challenged by the assessee in appeal. In this case, the first appellate authority allowed the appeal on both the grounds that is by cancelling the income escaping assessment as passed without jurisdiction and on merits by holding that the sale of the industrial undertaking is not slump sale but is to be assessed as sale of depreciable asset under Section 50 of the Act. In the connected case, the CIT(Appeals) took an entirely different view by upholding the assessment of sale of Industry as a "slump sale". In the second appeal filed by the revenue before the Tribunal in this case, the Tribunal upheld the CIT (Appeals) order on merits but did not consider the validity of reopening raised by the revenue as 5

I.T.A. Nos. 714/Coch/2008 & 1286/Coch/2005

the said ground had become academic by virtue of the Tribunal's decision on merit in favour of the assesses. It is against this order of the Tribunal revenue has filed the appeal.

"Slump sale" means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.

Explanation 1—For the purposes of this clause, "undertaking" shall have the meaning assigned to it in Explanation 1 to clause (19AA).

Explanation 2 —For the removal of doubts, it is hereby declared that determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities."

We have already noticed that the unit transferred by the assessee is an industrial undertaking which is a fish processing factory with land, building, machinery, plant and all equipments as a going concern with all the assets and liabilities. The consideration agreed between assessee and the buyer is admittedly a lump sum amount of 22.20 crores. Since the industrial unit sold is as a whole and as a continuing business concern with land, building, plant, machinery and all equipments as a going business with assets and liabilities for a consolidated sum, the same squarely attracts definition of the undertaking covered by explanation 1 of the definition clause. Further, it has to be noted that the assessee was well aware of explanation 2 of Section 2(42C) because except the value adopted for land and building which is specifically stated as for the purpose of payment of stamp duty and registration fee the sale price agreed and paid was a lump sum amount of Rs.22.20 crores. Further the assessee and the purchaser have specifically stated in Clause 3.2 of the sale deed that the sale is on "slump sale basis" which is nothing but adoption of the said terms as contained in the above provision of the Income Tax Act. ft is also to be taken note that the assessee knowing well the chance of transaction being treated as a "slump sale" for the purpose of assessment of capital gain furnished along with the return filed the chartered accountant's certificate in form 3EA prescribed under Rule 6H in terms of Section 50B(3) of the Income Tax Act. Even after annexing the Chartered Accountant's Certificate issued in the prescribed form for assessment under Section 50B of the Act, assessee claimed 6

I.T.A. Nos. 714/Coch/2008 & 1286/Coch/2005

that capital gain is assessable on sale of the undertaking as sale of depreciable assets under Section 50 of the Act, The question now to be considered is whether the claim of the assessee is tenable or not. In this regard we have to consider the scope of Section 50 and Section 50B of the Act. In our view assessee's claim for assessment of capital gainn under Section 50 of the Act is not tenable because the said Section provides for assessment of capital gains in the case of sale of depreciable assets. This Section provides for assessment for capital gain of assets forming part of block of assets in respect of which depreciation is allowed under the Act. What the assessee has sold is not any asset in a block, if at all the assets sold form part of a block of asset on which depreciation was being allowed. On the other hand sale is of an industrial undertaking as a whole which includes land, building, machinery, equipments etc. as a going concern with all the assets and liabilities. We have already found that the sale is of business undertaking as a going concern and thesame squarely falls within the definition of "slump sale" as defined under Section 2(42C) of the Act. Section 50B which provides for computation of capital gain in the case of slump sale is as follows:-

"(1) Any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains arising from the transfer of long-term capital assets and shall be deemed to be the income of the previous year in which the transfer took place:

Provided that any profits or gains arising from the transfer under the slump sale of any capital asset being one or more undertakings owned and held by an assessee for not more than thirty-six months immediately preceding the date of its transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets.

(2) In relation to capital assets being an undertaking or division transferred by way of such sale, the "net worth" of the undertaking or the division, as the case may be, shall be deemed to be the cost of acquisition and the cost of improvement for the purposes of Sections 48 and 49 and no regard shall be given to the provisions contained in the second proviso to Section 48.

(3) Every assesses in the case of slump sale, shall furnish in the prescribed form along with the return of income, a report of an accountant as defined in The Explanation below sub-section (2) of Section 288, indicating the computation of the net worth of the undertaking or division, as the case may be and certifying that the net worth of the undertaking or division, as the case may be, has been correctly arrived at in accordance with the provisions of this Section.

I.T.A. Nos. 714/Coch/2008 & 1286/Coch/2005

Explanation 1:- For the purposes of this Section, "net worth" shall be the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division as appearing in its books of account."

What is clear from the above is that Section 50B is the only provision which provides for computation of capital gains in the case of slump sale, even though sale of business undertaking as a going concern will involve sale of assets forming block of assets on which depreciation was being allowed. Assessee's counsel contended that when depreciable assets are sold, provision to be applied for assessment of capital gain is Section 50. However we are of the view that Section 50 applies only when an independent asset or a block of asset are sold on which depreciation was allowed and not when the industrial undertaking with depreciable assets are sold as a whole. In fact, when Section 50B provides for computation of capital gain on the sale of the undertaking it covers capital gain payable on depreciable assets forming part of the industrial undertaking also. In other words the distinction between Section 50 and 50B is that while Section 50 provides for computation of capital gain on the sale of only depreciable assets Section 50B provides for computation of capital gain on the sale of an undertaking as a whole which includes depreciable assets as well. In fact there is also difference in the mode of computation of capital gains under Section 50 for depreciable assets and for "slump sale" under Section 50B. Section 50 is a full code for computation of capital gains on depreciable assets. On the other hand under Section 50B the asset has to be first classified between long term or short term capital asset and then for the purpose of Sections 48 and 49 net worth has to be computed in terms of explanation 1 of the said Section. The capital gain under Section 50B is the sale proceeds as reduced by the net worth.

I.T.A. Nos. 714/Coch/2008 & 1286/Coch/2005

appeal by reversing the order of the CIT (Appeal) following their decision in ITA 1470/2009 which we have reversed vide above judgment. Since the facts are the same following our above judgment we allow this appeal also by reversing the order of the Tribunal and by restoring the order of the CIT (Appeal) confirming the assessment.

6.1 Since the similar issue has already been decided against the assessee in

assessee’s own case by the above judgment of the Jurisdictional High Court, we

allow the appeal of the Revenue. Thus, the appeal of the Revenue in ITA No.

714/Coch/2008 is allowed.

ITA No. 1286/Coch/2005 : 2002-03

2) The Officers failed to appreciate the fact that such interest has been waived by the Bank/Financial Institutions shown as income in the assessment year 2004-05 so much so this would amount to double taxation.

3) The Officers below are not justified in confirming the disallowance of interest claimed for the reason that funds have been diverted to sister concern.

I.T.A. Nos. 714/Coch/2008 & 1286/Coch/2005

4) The Officers failed to appreciate the fact that interest claimed as paid to banks and financial institutions have been for specific advances like term loans, export packing credit which are not otherwise available for diversion.

5) The Officers below were not justified in disallowing the loss which has occurred on the re-instatement of foreign exchange loans procured for working capital requirements more so when the appellant has been consistently following the system of accounting year after year and booking into account the loss or gain arising on re-instatement of foreign exchange loans.

6) The Commissioner of Income-tax[Appeals] did not consider the opinion given by the Institute of Chartered Accountants of India in regard to the treatment of similar losses.

For the A.Y. 2002-03, the assessee filed return of income showing net loss of

Rs.1,88,41,046/-. The assessment was completed on a total income of

Rs.10.17,840/-.

8.1 The first ground relates to disallowance u/s 43B of Rs,2,07,99,000/-. The AO

found that the assessee had claimed interest accrued on loans from banks/financial

institutions of Rs.2,07,99,000/-which were not paid before the due date of filing of

the return of income for the A.Y.2002-03. The assessee ‘s contention was that this

interest was waived by the financial institutions and the above sum was offered as

income for the A.Y.2004-05. The AO considered this argument as irrelevant since

only the interest paid to financial institutions before the specified date of filing of

the return could be allowed as deduction u/s 43B.

I.T.A. Nos. 714/Coch/2008 & 1286/Coch/2005

8.2 On appeal, the CIT(A) observed that the provisions of sec. 43B are very clear.

As per sec. 43B, the interest to financial institutions/banks could be allowed as

deduction only on payment basis, that too before the specified date. In this case,

the CIT(A) observed that the assessee had not paid the amount till date and held

that waiver of interest cannot be a valid ground not to apply provisions of sec. 43B.

Accordingly, the CIT(A) sustained the disallowance made by the Assessing Officer

8.3 Against this, the assessee is in appeal before us.

8.4 We have heard the rival submissions and perused the record. As per the

provisions of section 43B(d) and (e) of the Act, the assessee has to pay the interest

on any loan or borrowings in accordance with the terms and conditions of

agreement governing such loan or borrowings when it was borrowed from the

public financial institution or a State financial corporation or a State industrial

investment corporation or a scheduled bank. However, in the present case, the Ld.

AR has fairly conceded that the assessee has not paid interest on loan or

borrowings made from such institutions and shown as income in the subsequent

year on its waiver. According to the Ld. AR, it cannot be added in the assessment

year under consideration. In our opinion, offering of income on waiver in the

subsequent assessment year cannot be a reason to allow non-payment of interest

as deduction when it was not paid in accordance with the provisions of section 43B

I.T.A. Nos. 714/Coch/2008 & 1286/Coch/2005

of the Act. Hence, we are in full agreement with the finding of the CIT(A) and the

same is confirmed. Thus, this ground of appeal of the assessee is dismissed.

in para 4 of the assessment order has stated that the assessee had given interest

free loans to sister concerns amounting to Rs.804.71 lakhs. The assessee had paid

interest of Rs.826,26 lakhs on secured loans 6f Rs.6,424.10 lakhs. The AO held that

proportionate interest on money advanced without charging interest should be

disallowed. He worked out the proportionate disallowance at Rs.1,03,50,000/-. He

also relied on the decision of the Kerala High Court in the case of VI Baby & Co.

(254 ITR 248). The contention of the assessee is that the interest was paid for

specific advance like term loan, export packing credit and export bill discounting

charges. It is the contention of the assessee that interest bearing funds were not

diverted to the sister concerns as the assessee had sufficient resources.

9.1 On appeal, the CIT(A) observed that the AO had made similar disallowance for

the A.Y.1997-98 and he had sustained the disallowance by relying on the decision of

the Kerala High Court in the case of V I Baby & Co. The Court wherein it was held

as under:

"We are inclined to accept the argument raised by counsel for the Revenue, because the advances to the partners, their relatives and the sister concerns are not for business purposes and the assessee has not derived any benefit out of the same. Admittedly, no interest was charged on these advances. The Tribunal appears to have placed reliance on the fact that the partners and their relatives have utilised the amounts for business purposes, such as construction of a shop 12

I.T.A. Nos. 714/Coch/2008 & 1286/Coch/2005

building, etc. So long as the assessee-firm is not the beneficiary of such investments, the nature of investment or the utilisation of such advances has no relevance. So far as the assessee is concerned, it is only an interest free advance. The claim of the assessee's counsel that cash balances were available with the firm for advances to the partners, their relatives and the sister concerns does not advance the assessee's case. If cash balances are available, the borrowing itself is not for the purpose of the business. An assessee with liquidity cannot claim that it can give interest free advances to the partners and others and then borrow funds from the bank on interest for business purposes. Such borrowings will not be for business purposes, but for supplementing the cash diverted by the assessee without any benefit to it, 'Therefore, so long as the assessee is not the beneficiary of the investments made by the partners, their relatives and the sister concerns, and so long as the advances are interest free, the Assessing Officer is perfectly justified in disallowing the interest in proportion to the advances made. There is no dispute with regard to working out of the proportionate disallowance of interest. The decision relied on by the Tribunal and referred to above does not appear to be applicable to the facts of this case, becauSe-that was an individual-assessee advancing interest free loan to a firm engaged in a related business as the assessee and in which he is also a partner along with his wife and minor children. Whatever benefit accrued to that firm will also be treated as income of the assessee assessable in his individual capacity. Therefore such an advance also should be taken as for business purposes of the assessee, and we do not see how that decision will apply to the facts of this case. We are of the view that the Tribunal went wrong in relying on the said decision and allowing the appeals."

9.2 The High Court had held that an assessee with liquidity cannot claim that it can

give interest free advances and then borrow funds on interest for business

purposes. In the light of the decision of the Kerala High Court cited supra, the

CIT(A) confirmed the disallowance of interest.

9.3 Against this, the assessee is in appeal before us.

9.4 We have heard the rival submissions and perused the record. In view of the

judgment of the Jurisdictional High Court in the case of V.I. Baby & Co., cited supra, 13

I.T.A. Nos. 714/Coch/2008 & 1286/Coch/2005

the CIT(A) had confirmed the disallowance of the interest made by the Assessing

Officer. However, we make it clear that Assessing Officer has to compute interest

on diversion of funds to sister concerns on outstanding balances on day to day

basis. With this observation, we remit this issue to the file of the Assessing Officer

for re-computation of interest. This ground of appeal of the assessee is partly

allowed for statistical purposes.

the re-instatement of foreign exchange loans procured for working capital

requirements.

10.1 The brief fact of the case are that the assessee had taken foreign exchange

loans for purchase of assets as well as for working capital requirements. The

practice adopted by the assessee was to revalue the loan amount payable on the basis of exchange rate as on 31st March every year. The loan amount payable was

restated on the basis of the exchange rate prevailing on that date. The difference

between the amount in the books and the restated amount was debited or credited

to the P&L account. If the exchange rate was at a lesser rate than that adopted in

the books of account, the ''profit" arising on "restatement" was credited to the P&L

account. On the other hand, if the restatement results in a loss, then that loss is

debited to P&L account. For the A.Y.2002-03, the assessee had debited to the P&L

account a sum of Rs.84,06,770/- as foreign exchange loss on restatement of foreign

I.T.A. Nos. 714/Coch/2008 & 1286/Coch/2005

exchange loans. The AO issued a notice requiring the assessee to explain why this

amount should not be disallowed. The assessee has stated as under: -

"The foreign exchange loss of Rs.84,06,770/- debited to the Profit and Loss account is on account of the reinstatement of the External commercial Borrowing availed by the company from Sumitomo Mitsui Banking Corporation for working capital purposes. Accordingly, loss on reinstatement of the loan as per the exchange rate prevailing as on 31.3.2002 has been debited to the Profit and Loss account. In fact for the assessment years 2003-04 & 2004-05 the Company has earned profit on reinstatement of the External Commercial Borrowing which has been taken as revenue income. That apart, there is a difference in the fluctuation of the External Commercial Borrowing as between one borrowed for working capital and one borrowed for acquisition of fixed assets. The working capital loan is mainly availed to acquire stock in trade and for meeting other expenditure whereas term loan was availed for acquisition of fixed assets. Therefore, any fluctuation in the reinstatement of External commercial Borrowings as far as working capital is concerned could only be taken as revenue expenditure whereas in other case it is capitalized to the assets. "

10.1 The AO held that the entire claim was in the capital field as the loan

received is a capital receipt. The fluctuation loss was mostly on account of

periodical reinstatement of the External Commercial Borrowings. The Assessing

Officer relied on the decisions of the Delhi High Court reported in 272 ITR 355

and 254 1TR 570.

10.2 Before the CIT(A), the assessee had given a break-up of the total amount

of Rs.84,06,770/-as follows:-

"Rs.26,04,139/-: This amount represents the loss on restatement of the loan utilized to purchase the assets situated at the Taloja factory. We have been consistently following the accounting policy of charging the loss or gain on

I.T.A. Nos. 714/Coch/2008 & 1286/Coch/2005

account of the restatement of the foreign currency loans, to the fixed .assets that have been purchased with the loan.

However, during the relevant financial year ie 2001-02, the Taloja factory was disposed off and the proceeds therefrom was used to repay the loans which was used to finance the acquisition of the Taloja factory. A portion of these loans continued to remain outstanding as on 31st March 2002 since the sales proceeds were inadequate to repay the loans in full. Hence the loss/gain arising on restatement of these loans were debited/credited to the Profit & Loss account.

The above explanation would hold good for the following amounts debited/credited to the Profit & Loss account. ,

a. Rs. 69,158.83 b. Rs. 1.70 c. Rs. 22,934.99 d. Rs. 4,243,12 (Cr)

Rs.57,14,725.60 : This amount represents the loss on restatement of the ECB availed by the company from Sumitomo Bank for its working capital requirements."

10.3 Before the CIT(A), it was argued that the claim was to be allowed as the

assessee had consistently followed the above method of accounting. It was

claimed that for the A.Ys.2003-04 and 2004-05, the company had earned profit

on restatement and these were offered for assessment.

10.4 According to the CIT(A), depending on the foreign exchange rate as on the

last date of the accounting year, the assessee quantified the amount payable to the borrower as on 31sl March of every year. The CIT(A) was of the view that the

amount of loan repayable undergoes a change on the basis of foreign exchange

rate at the end of each year. Thus, the CIT(A) observed that restatement resulted in

I.T.A. Nos. 714/Coch/2008 & 1286/Coch/2005

the assessee requiring a higher or lower amount to clear the loan liability.

According to the CIT(A), the amount debited for Rs.84.06 lakhs actually represented

the excess amount of liability to clear the loan account as on 31.3.2002. The CIT(A)

noted that the assessee had not made any payment on 31.3.2002 and the actual

amount to be paid depended upon the exchange rate at the time of repayment. The

CIT(A) observed that the source was the loan obtained from foreign banks/financial

institutions and undoubtedly, the loan received was a capital receipt. Therefore,

according to the CIT(A), the increase or decrease in the liability should also fall in

the capital field. Therefore, the amount debited represented capital expenditure

only. According to the CIT(A), even if it is to be held that the amount can be

claimed u/s 37, still it is to be disallowed because the claim is purely contingent in

nature. The additional liability, if any, would crystallize only on the date(s) of

repayment of loan. Accordingly, the CIT(A) upheld the disallowance of interest

made by the Assessing Officer.

10.5 Against this, the assessee is in appeal before us.

10.6 We have heard the rival submissions and perused the record. The issue

involved in the appeal is whether the difference amount arising out of restatement

of foreign currency transactions taking into account the prevailing exchange rate as

on the end of accounting year is liable to tax or not. The Supreme Court in the case

of Sutlej Cotton Mills Ltd. Vs. CIT reported in [1979] 116 ITR 1 has held as under:-

I.T.A. Nos. 714/Coch/2008 & 1286/Coch/2005

"The law may, therefore, now be taken to be well settled that where profit or 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 a trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as a 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."

10.7 The ratio of the above decision is whether the gain or loss should be

brought to tax or allowed as deduction depends upon whether the foreign

currency transactions were carried on account of capital or revenue items. If the

foreign currency transactions are undertaken on capital account, the gain made

out of such transaction is outside ambit of taxation, of course subject to the

application of provisions of Section 43A of the Act. If the transactions undertaken

are on account of revenue items, the gain is clearly taxable and so the loss also is

clearly allowable. The assessee except making bald assertion that the

transactions were undertaken on account of capital items no evidence was

brought on record to establish that the foreign currency transactions were

undertaken on capital items. The Assessing Officer also had failed to undertake

this exercise. The Hon'ble Supreme Court in the case of CIT Vs. Woodward

Governor India Pvt. Ltd. reported in [2009] 312 ITR 254 (SC) had clearly held

that the actual payment was not a condition precedent for making adjustment in

respect of foreign currency transactions as the end of the closing year. We are

therefore, unable to concur or agree with the view of the CIT(A), that liability

could arise only when the contract would have matured, as such a stand is totally

divorced from the accounting principles and is in variance with the principle

I.T.A. Nos. 714/Coch/2008 & 1286/Coch/2005

upheld by the Apex Court in the case Woodward Governor India (P.) Ltd. (supra).

It can also be seen that the decision in the case of Woodward Governor India (P.)

Ltd. (supra) has been rendered with regard to items in the revenue account and

capital account.

10.8 In the light of our above findings, we restore the matter to the file of AO

with the direction that to re-do the assessment keeping in view the principles

enunciated above after affording a reasonable opportunity of being heard to the

assessee. Accordingly, the appeal of the assessee is partly allowed for statistical

purposes. Thus, the appeal of the assessee is partly allowed for statistical

purposes.

assessee is partly allowed for statistical purposes. Order pronounced in the open Court on this 28th June, 2019

sd/- sd/- (GEORGE GEORGE K.) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER

Place: Kochi Dated: 28th June, 2019 GJ Copy to: 1. M/s. Accelerated Freeze Drying Co. Ltd., Ezhupuna, Alappuzha. 2. The Deputy Commissioner of Income-tax, Circle-1(Asst.), Alleppey. 3. The Commissioner of Income-tax(Appeals)-IV, Kochi.

I.T.A. Nos. 714/Coch/2008 & 1286/Coch/2005

(ASSISTANT REGISTRAR) I.T.A.T., Cochin