APOLLO TYRES LIMITED, KOCHI-31. vs. ASST. COMMR.OF INCOME TAX, NEW DELHI

Facts

The assessee, Apollo Tyres Limited, is challenging an order of the Income Tax Appellate Tribunal (ITAT) for Assessment Year 1993-94. The dispute centers on gains from the cancellation of foreign exchange forward contracts. Initially, the Assessing Officer's order was partly modified by the Commissioner of Appeals. Both the assessee and the revenue appealed to the ITAT. The ITAT, through a Special Bench, held the gains to be 'capital receipts' in favor of the assessee but directed that these gains be reduced from the cost of plant and machinery for which the contracts were entered into. The assessee is aggrieved by this latter direction. There is also an incidental issue regarding the disallowance of royalty expenses.

Held

The High Court held that the gains arising from the cancellation of forward contracts, which were connected with foreign loans raised for the 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) read with Explanation 3. The court reasoned that the unamended Section 43A allowed for adjustment of the actual cost of imported assets acquired in foreign currency due to fluctuations in the rate of exchange, and this adjustment was not contingent on actual payment. The court relied on the Supreme Court's decision in Oil and Natural Gas Corporation Ltd. Vs. Commissioner of Income Tax, which affirmed that under the unamended Section 43A, actual payment was not a prerequisite for adjustment. Therefore, the first question was answered against the assessee and in favor of the revenue. Regarding the second issue, the court found no illegality in the Commissioner's and Tribunal's disallowance of Rs. 49 lakhs in royalty expenses, as this amount was attributable to the previous year (1992-93) and could not be claimed in Assessment Year 1993-94. Thus, the second question was also answered against the assessee. The appeal was dismissed.

Key Issues

1. Whether, on the facts and circumstances, gains on the cancellation of forward contracts, held to be capital receipts, were liable to be set off against the cost of acquisition of imported plant and machinery? (Question of law/mixed law and fact, concerning Section 43A(1) and Explanation 3 thereto). 2. Whether royalty expenses of Rs. 49 lakhs could be disallowed as not relating to the previous year ended 31.03.1993 relevant to Assessment Year 1993-94? (Question of law/mixed law and fact). Assessee's contentions: - The gains on cancellation of forward contracts, held to be capital receipts, should not be set off against the cost of imported plant and machinery. - The royalty expenses should not have been disallowed. Revenue's contentions: - The gains on cancellation of forward contracts, even if capital receipts, should be reduced from the cost of plant and machinery as per Section 43A(1) read with Explanation 3. - The disallowance of royalty expenses is justified.