ORDER
G.S. Pannu, Accountant Member
1. This appeal has been preferred by the revenue against the order of the CIT(A) dated 29-9-1994 pertaining to assessment year 1991 -92. The first ground raised by the revenue reads as follows:-
On the facts and in the circumstances of the case, the Id. CIT(A) erred in:-
(i) deleting Rs. 1,16,803 out of total disallowance of Rs. 2,57,534 made by the Assessing Officer on account of gifts presented by the assessee company exceeding Rs. 200 each, under Rule 6B of the Income-tax Rules.
2. Briefly stated the facts are that the Assessing Officer disallowed a sum of Rs. 2,57,534 under Rule 6B, being the value of gifts given to dignitaries visiting the assessee’s factory as well as other business associates. The CIT(A), following the judgment of the Hon’ble Delhi High Court in the case of CIT v. Indian Aluminium Cables Ltd. [1990] 183 ITR 611 : [1989] 47 Taxman 64 and the orders of his predecessors in the assessee’s own case for the earlier years has partly deleted the addition on the ground that the expenditure on gifts not containing the logo or name of the company is not covered by the provisions of Rule 6B of the Income-tax Rules, 1962. Except an expenditure of Rs. 1,40,721 incurred on a car gifted which could not be satisfactorily explained, the CIT(A) deleted the balance addition of Rs. 1,16,803.
3. It was a common ground between the parties that the said ground is covered in favour of the assessee by the decision of the Tribunal in the assessee’s own case for assessment year 1987-88 in ITA No. 3890/Del/90 dated 15-5-1995. The disallowance has been made by the Assessing Officer on the ground that the expenditure falls under Rule 6B. For the assessment year 1987-88, the Tribunal has affirmed the decision of the CIT(A) that the expenditure on gifts was not covered under Rule 6B on the ground that the gifts do not contain the logo or name of the assessee-company. Similar is the finding of the CIT(A) for the impugned assessment year with respect to a sum of Rs. 1,16,803. Therefore, following the precedent noted above, which has been rendered in identical circumstances, we affirm the decision of the CIT(A) and thus ground No. (z) preferred by the revenue is dismissed.
4. Ground No. (ii) raised by the revenue reads as follows:-
On the facts and in the circumstances of the case, the CIT(A) has erred in:-
(ii) deleting an addition of Rs. 24.74 crores made by the Assessing Officer due to the loss on account of exchange rate fluctuation incurred by the assessee-company in this year.
5. The background and the facts relevant to this ground can be understood as follows. The Assessing Officer noted that the profit & loss account filed by the assessee showed a debit of Rs. 26,82,45,157 on account of ‘Foreign Exchange Variation’. The Assessing Officer required the assessee to explain the nature and purpose for which the loss on account of ‘Foreign Exchange Variation’ has been claimed by it. It was explained by the assessee that out of the total loss resulting from depreciation of the foreign currency, Rs. 24.75 crores pertained to foreign exchange loans utilized for the purpose of meeting the working capital requirements and the balance of Rs. 2.07 crores pertained to day-to-day fluctuation in payments in foreign currency for import of components, royalties and payment for fees for technical services, etc. With respect to the loss claimed of Rs. 24.75 crores, it was submitted by the assessee that it had taken three different loans, namely US $ 45 million; Japanese Yen 5 billion; and US $ 30 million which were utilized for the purposes of meeting its working capital requirements. The liability in respect of such loans outstanding at the close of the year was expressed in Indian rupees by applying the exchange rates of US $ and Japanese Yen as prevailing on that date. The
loss due to the depreciation in the rate of foreign currency as compared to the rate prevailing on the date of contracting of loan was accordingly charged to the profit & loss account. The assessee further submitted that such method of accounting was regularly followed by it. The assessee submitted that the method of accounting was in accordance with the pronouncements of the Institute of Chartered Accountants of India in this regard. The assessee accordingly justified its claim for deduction of the abovesaid loss as a trading loss. The Assessing Officer has, however, rejected the pleas of the assessee and disallowed the loss. The Assessing Officer held that under the accrual system of accounting, liabilities can be allowed which have either been paid during the year or which have crystallized and become ascertained during the relevant year. The impugned liability on account of variation in the exchange rate, has been considered by the Assessing Officer to be only a notional liability as there was no certainty that it would ultimately be borne by the assessee since the loans were repayable on a future date. The Assessing Officer held that the liability was not quantifiable because the ultimate liability would devolve only when the loan was actually repaid and any loss due to fluctuations in the exchange rate prior to such date may not constitute the ultimate liability. The Assessing Officer has further drawn analogy from the provisions of Section 43A of the Act to support his stand that liability on account of exchange rate fluctuation can be taken into account only at the time of actual repayment of the foreign currency loan. The Assessing Officer thus made the disallowance of Rs. 24.75 crores. Aggrieved with the order of the Assessing Officer, the assessee carried the matter in appeal before the CIT(A).
6. In appeal before the CIT(A), the assessee contended that it has consistently followed a system of applying the exchange rates of J.S. dollars and Japanese Yen as prevailing on last date of the year to express its foreign currency loan liabilities, which system has been accepted in the past by the Revenue. It was submitted that as per the Accounting Standard laid down by the Institute of Chartered Accountants of India, if the result of conversion of the foreign currency loans into Indian Rupees at the rate on the last date of the year is a net loss, the long term liability should be restated and such loss should be charged in the P&L account. The assessee thus contended that the impugned loss was a trading loss and was allowable as a revenue loss. The assessee relied on various judgments in support of its stand, viz. CIT v. Martin and Harris (P.) Ltd. ; Sutlej Cotton Mills Ltd. v. CIT ; New India Industries Ltd. v. CIT ; Padamjee Pulp & Paper Mills v. CIT ; Calcutta Co. Ltd. v. CIT ; and CIT v. Burhwal Sugar Mills Co. Ltd. [1971] 82 ITR 784 (All). The CIT(A) called for the comments of the Assessing Of ficer with respect to the submissions made by the assessee before him. After considering the submissions of the assessee and the comments of the Assessing Officer, the CIT(A) has since deleted the addition. On the basis of the decisions of the Apex Court in the case of
CIT v. Arvind Mills Ltd. [1997] 193 ITR 255 : 60 Taxman 192 and Gujarat High Court in the case of New India Industries Ltd. (supra), the CIT(A) has negatived the stand of the Assessing Officer with respect to the provisions of Section 43A and held that the liability represented by the impugned loss cannot be treated as notional but was an ascertained liability by making the following discussion in para 10 of his order, which reads as under:-
10. In order to understand whether the additional liability in the form of loss on account of change in the rate of exchange claimed in P&L account is an ascertained liability or only notional, the terms and conditions of the three loans were gone through by me. These show that not only the due dates and the amounts in dollars as well as the instalments of the principal sum have already been stipulated in the agreements but the entire payment schedule has been worked out up to a specified date. However, while working out the year and liability of the loan, the appellant applied the rate of exchange prevailing on the last day of the year and worked out exchange loss accordingly. As regards Japanese Yen, loan of 5 billion in assessment year 1990-91, there was a gain of exchange rate fluctuation which was not accounted for on principles of conservatism. The loss in the subsequent year has been computed on the unaltered sum without taking the gain into account. As regards the loan of U.S. dollars of 40 million, a chart has been filed before me showing the position from assessment years 1990-91 to 1993-94 as per which had the exchange rate variation not been taken into account, then in assessment year 1993-94, instead of a loss of Rs. 1,00,75,079 on actual payment, there would have been a loss of Rs. 10,56,63,959. Thus, the system of accounting for exchange loss in P&L Account has not only been followed consistently by the appellant in the past which has been accepted by the Department but it has also resulted in ultimate gain to revenue. The due dates and the amounts in U.S. dollars were already stipulated including the amount of principal as well as interest and I accept the contention of the appellant that such a liability cannot be treated as notional but is ascertained liability only. Not only the time frame but also the quantity has been laid down earlier but there is also certainty that the liability will arise on particular dates. As the judicial interpretations of various courts quoted in preceding paragraphs show the appellant is well within the sound accountancy principles in calculating its liability at the end of the year on the basis of the prevailing rate of exchange at that time and claiming the loss therefrom in the P&L account. The Assessing Officer is, therefore, directed to allow the loss on account of exchange rate variation. This ground in appeal is accepted.
7. The Revenue is in appeal before us on the basis of ground of appeal extracted by us earlier. Further, the Revenue has raised additional grounds of appeal with respect to the impugned issue, which read as follows:-
1. On the facts and circumstances of the case, the Id. CIT(A) has erred in not holding that the claim of enhancement in the liability of foreign loan on account of foreign exchange fluctuation debited in the P&L account by the assessee-company was a capital loss.
2. On the basis of the facts of the case and on the principles of law, the Id. CIT(A) should have held that the liability to repay the increased loan amount due to foreign exchange rate fluctuation was not a revenue loss and was thus not allowed to be debited in the P&L account.
8. The above additional grounds were admitted by the Tribunal vide order dated 28-8-2000 and the writ petition filed against the admission has since been dismissed by the Hon’ble High Court of Delhi.
9. We have heard the rival parties in the above background. Shri S.D. Kapila, Id. Special Counsel for the department submitted that insofar as the original ground of appeal of the Revenue, based on the assumption that the foreign exchange rate variation relates to revenue nature, is concerned, the same is indeed covered by the decision of the Special Bench of the Tribunal in the case of ONGC Ltd v. Dy. CIT [2002] 83 ITD 151 (Delhi). He has further submitted, in the light of the additional grounds of appeal referred above, that the Assessing Officer and the CIT(A) have blindly accepted the assertion of the assessee before them that the foreign exchange variation loss pertains to the foreign currency loans utilized for the purpose of meeting the working capital requirements of the assessee. He highlighted the fact that the loan of US $ from EXIM Bank and the loans from Japanese lenders have been raised for the purposes of meeting the capital expenditures as well. Our attention was invited to pages 2 to 24 of the Revenue’s Paper Book, wherein is placed a copy of the loan agreement between the assessee and EXIM Bank regarding the foreign currency loan of US $. It was highlighted that the loan was raised for a new project of establishment of a production facility for manufacture of 1000CC-3 BOX Car to be added to the existing factory of the assessee. Adverting to page 25 of the Revenue’s Paper Book, the Id. Special Counsel highlighted the financing plan envisaged for the new project which clearly showed that almost 75 per cent of the loan funds are to be utilized for meeting the requirements of capital expenditures. Similarly, in terms of the agreement with Bank for the loan of Japanese Yen, copy placed at pages 48 to 135 of the Revenue’s agreement, the Id. Special Counsel highlighted the averment in the preamble of the agreement to emphasize that the assessee needed funds for the import of “goods for manufacture of motor vehicles”. According to him, the aforesaid clearly brings out that the loans were raised by the assessee for the purpose of making investment on capital account as well. The Id. Special Counsel submitted that his objective of referring to the various clauses of the loan agreements was only to demonstrate, on a prima facie basis, that the assessee’s assertion that the foreign currency loans were utilized only on revenue account has been wrongly accepted by the lower authorities and such assertion cannot be said to be based on record. Ld. Special Counsel for the revenue argued that evidently the lower authorities have not bifurcated the loss on foreign exchange rate variation between the loans contracted for meeting the capital expenditure requirements and the working capital requirements. It was strongly urged that the matter be sent back to the Assessing Officer for an appraisal afresh on the above lines.
10. It was further submitted by the ld. Special Counsel that the contention being raised by the revenue is based on the facts and evidence already existing on record. For this, the loan agreements were referred to as the material which led to the aforesaid inference. The ld. Special Counsel submitted that the loan agreements are part of the record and cannot be said to be a fresh or new material. It is further submitted that the plea taken by the revenue by way of the additional grounds is to the effect that the loss arising on account of variation in the rate of foreign exchange claimed by the assessee is not allowable as it is a capital loss. In a way, according to the Id. Special Counsel, such a plea can be said to be subsumed in the main ground of appeal preferred by the revenue, since the main ground covered the entire controversy pertaining to the allowability of loss on account of exchange rate fluctuation. Of course, the controversy vis-a-vis the aspect regarding the loss being of capital nature is not focused in the main ground of appeal. The decision of the Calcutta High Court in the case of Bestobell (India) Ltd. v. CIT has been relied upon by the Revenue to justify the argument that the loss on account of exchange fluctuation on foreign currency loans was a capital loss. The ld. Special Counsel has relied on the decisions of the Apex Court in the case of Hukam Chand Mills Ltd. v. CIT ; CIT v. Mahalakshmi Textile Mills Ltd. and National Thermal Power Co. Ltd.v. CIT in the course of his submissions.
11. At the outset, the Id. counsel Shri Ajay Vohra, appearing for the respondent asscssee pointed out that the only controversy raised by the Assessing Officer was as to whether the exchange rate variation loss needs to be allowed on accrual or on payment basis. The Assessing Officer decided that the same was to be allowed only on actual payment basis as against the claim of the assessee that the same was to be allowed on accrual basis. The CIT(A) has since allowed the plea of the assessee that such exchange loss is to be allowed on accrual basis. That the issue whether the exchange loss needs to be allowed on accrual or on payment basis is reflected in the original grounds filed by the department and such issue stands covered in favour of the assessee in view of the decision of the Special Bench of the Tribunal in the case of ONGC Ltd. (supra).
12. The Id. Counsel has also opposed the adjudication by the Tribunal on the Revenue’s additional grounds on the plea that in case it is decided against the assessee, this would result in enhancement of assessment which is beyond the powers of the Tribunal. The Id. counsel for the assessee has made detailed arguments on this aspect of the matter with which we shall deal in the later part of our order. For the present, we proceed to consider the efficacy of the rival contentions with respect to the merits of the issue alone.
13. With respect to the additional ground now being preferred, the Id. Counsel submitted that it was based on a misconceived assumption that the loss on Exchange rate variation was on account of foreign currency loans utilized for meeting capital expenditure requirements whereas it was an admitted position that the loss on foreign currency variation was with respect to the foreign currency loans utilized for working capital requirements and only such loss was claimed as a revenue deduction. Explaining the method of accounting adopted by the assessee with respect to the exchange rate difference since earlier years, the Id. Counsel pointed out that wherever the loans were actually contracted/utilized for purchase of capital assets, the difference on account of foreign exchange fluctuation between the rate at the end of the year vis-a-vis the rate at the time the loan was actually raised, was adjusted against the actual cost of assets and wherever such loan was for meeting the working capital requirement, such difference was offered for taxation on revenue account. Such a method of accounting was accepted by the department all along in the past and in this regard our attention was invited to page 76 of the assessee’s paper book wherein is placed a chart showing the treatment of Exchange fluctuation difference in the books of account done by the assessee since the assessment year 1985-86 upto the assessment year 1999-2000. The Id. Counsel submitted that it was only for the assessment year 1991-92 i.e. the year under consideration and for the assessment years 1993-94 to 1995-96, the Assessing Officer chose to dispute the basis adopted by the assessee for accounting for exchange rate fluctuation and held that the liability was to be allowed only on the basis of actual payment as against the accrual basis claimed by the assessee. It was submitted that it would be relevant to notice that hitherto up to the assessment year 1990-91, the loss on account of such fluctuation have been allowed to the assessee on accrual basis.
14. The Id. Counsel submitted that the observations of the Id. Special Counsel for the revenue based on the respective loan agreements only can at best be said to be an indicator that the impugned loans were contracted for by the assessee for meeting its working capital as well its capital expenditure requirements. However, the issue in question is required to be decided on the basis of the actual utilization of the loan funds, whether for working capital requirement or for acquisition of capital assets. Challenging the assertion of the Id. Special Counsel for the Revenue that purport of the expression “goods for manufacture of motor vehicles”, placed in the preamble of the loan agreement goes to indicate that the loan has been transacted for purchase of capital goods alone, it was submitted by the Id. Counsel that the expression ‘goods’ cannot be understood to mean only capital goods. The said expression covers within its scope all items of raw material and also components and not only merely capital assets. The Id. Counsel reiterated that the accounting policy of the assessee was to adjust cost of the respective assets with the amount on account of exchange rate variation if the corresponding loans were used to acquire such fixed assets. In this regard, our attention was invited to note No. 7 of the Annual accounts of the assessee placed at page 39 of the paper book. Furthermore, our attention was invited to page 64 of the paper book wherein is placed the copy of the reply dated 18-3-1994 of the assessee addressed to the Assessing Officer wherein it is explicitly brought out that the loss of Rs. 24.75 crores on account of foreign exchange rate variation pertained to the foreign currency loans utilized for the purposes of meeting the working capital requirements of the assessee and balance of Rs. 2.07 crores was due to day-to-day fluctuation of payment in foreign currency for import of components, technical fee etc. It was therefore contended that the loss thus resulting from the variation in the rate of foreign currency was to be seen as a trading loss alone and the same has been correctly allowed by the CIT(A).
15. With respect to the stand of the Revenue that the additional liability on account of exchange fluctuation is in the nature of capital loss by relying on the case of Bestobell (India) Ltd. v. CIT , the Id. Counsel also submitted that the said decision cannot help the case of the revenue in view of the subsequent decision of the Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT . The Id. Counsel also referred to the decision of the Special Bench of the Tribunal in the case of ONGC Ltd. (supra) which has relied upon the decision of the Apex Court in the case of Sutlej Cotton Mills Ltd. (supra) in coming to its conclusions.
16. In reply, the Id. Special Counsel for the Revenue has submitted that in order to determine the nature of loss on Exchange variation, what is of relevance is the purpose for which the loans, in question, have been contracted for.
17. We have carefully considered the rival submissions, perused the orders of the lower authorities and the material to which our attention has been drawn during the course of hearing including the authorities cited at Bar and proceed to dispose of the issue on the following lines. We shall first take up for consideration the dispute raised by the revenue originally in its appeal. The dispute originally raised can be understood as follows: The assessee had taken three different loans in foreign currency of US $ 45 million, Japanese Yen 5 billion and US $ 30 million on different dates. For the purposes of expressing the liability in respect of such loans outstanding at the end of the year, the assessee applied the relevant foreign currency exchange rate prevailing on that date and the difference between such rate and the rate of exchange at the time the loan was originally contracted, was claimed as an enhancement in the liability or in other words, as a loss. Such a system of accounting has been followed by assessee hitherto also. This system is termed by the assessee as accrual system. In terms of such system, the assessee calculated the fluctuation in foreign exchange rates with respect to the foreign currency loans utilized for its working capital requirements. The difference in the liability of such loans as it stood originally and on the year end as a consequence of exchange rate variation amounted to Rs. 24.75 crores which have been claimed as a loss by way of debit to the profit and loss account. We find from the discussion made by the Assessing Officer in para (vi) at page 4 of the assessment order that the assessee was asked to explain the nature and purpose on account of which the above loss on account of Exchange rate variation has been claimed by the assessee. The Assessing Officer further notes that the matter was discussed in detail with the assessee and that the assessee also filed a written reply dated 18-3-1994. A copy of such reply has been placed in the Assessee’s Paper Book at page 64. The reply of the assessee is reproduced below:-
(iv) Regarding the allowability of loss on account of exchange fluctuation in foreign currency, we have to submit that out of the total loss resulting from depreciation of foreign currency amounting to Rs. 26.82 crores, Rs. 24.75 crores pertains to loss on foreign currency loans utilized for the purpose of meeting working capital requirements of the company and balance Rs. 2.07 crores was due to day to day fluctuation of payments in foreign currency for import of components, royalty, fee for technical services etc. paid/payable in foreign currency. The loss of Rs. 24.75 crores arising on account of foreign currency loans was arrived at as follows:-
_____________________________________________________________
Loan in Conversion Loan in Conversion Loan in Exchange
Foreign rate for Rupees rate for Rupees Variation
Currency Rs. 100 (Millions) Rs. 100 (Millions) (Rs. in
as on as on millions)
31-3-1990 31-31991
____________________________________________________________
US $ 5.8075 774.9 5.11 880.6 105.7
Millions
J. Yen 5 848.50 589.2 707.75 706.5 117.3
Billions
US $ 30
Millions - - 5.11 587.0 24.5
Taken in
December,
1990 - - - - -
1364.1 2174.1 247.5
___________________________________________________________
Resulting from date of Loan and 31-3-1991 exchange rate.
According to Section 145 of the Income-tax Act, 1961 ‘Income chargeable under the head Profit & Gains of Business or profession shall be computed in accordance with the method of accounting regularly employed by the assessee’. The accounting method followed by the company for translating foreign currency loan into Indian rupees was with the foreign loan was translated at the rate of exchange prevailing at the year end and exchange loss due to depreciation of foreign currency were charged to profit of the year. The company is following the abovesaid accounting method consistently and this accounting method is also in conformity with accounting standard-11 issued by the Institute of Chartered Accountants of India in June, 1989 on Accounting for the effect of change in foreign exchange rates. Hence, were satisfying the condition as laid down under Section 145 as stated above.
Therefore, the loss resulting from depreciation of foreign currency is a trading loss and allowable for deriving a taxable income. We request you to kindly allow the above stated trading loss in our case also. It is also verifiable on record that similar exchange loss arising from normal trading transactions have never been disallowed in any of the earlier assessments of Maruti Udyog Ltd.
18. Further, the Assessing Officer specifically records the submission of the assessee that “Rs. 24.75 crores pertains to loss on foreign currency utilized for the purpose of meeting working capital requirements….” Nowhere in the course of the entire discussion in the assessment order, as would be evident later, has the Assessing Officer contested or controverted the aspect relating to utilization of foreign currency loans for working capital needs. In fact, the entire subsequent discussion in the assessment order which brings out the objections of the Assessing Officer, proceeds on the basis that the foreign currency loans have been utilized for meeting the working capital requirements. The following portion of the order of assessment is worthy of notice in this regard:-
The additional liability cast upon the assessee on account of fluctuation in exchange rate is only a notional liability determined at the end of the financial year by the assessee. Under the accrual system of accounting, liabilities which can be allowed are those which have either been paid during the year or which have crystallized and become ascertained during the year. For a liability to become ascertained, there should exist a certainty that it will arise, there should be some time frame by which it will become payable and further it should be quantifiable. The liability debited by the assessee on account of exchange rate fluctuation does not possess these features. It remains only a notional liability since there is no certainty that the liability will ultimately be borne by the assessee for the simple reason that the value of the rupee vis-a-vis any foreign currency at some future date cannot be known as at present. Due to constant fluctuation in the international market, the value of the rupee could decrease or increase in future and the exact liability, if at all there is any, can be known only at the time of payment of that liability. Secondly, since the loans are payable at some future date, there is no certainty as to when the liability would ultimately fall on the assessee. Thus, neither the certainty of the existence of the liability is there nor the time when it will have an impact on the assessee is known. Thirdly and more importantly, the liability is not quantifiable because the ultimate liability will devolve on the assessee only when the loan is actually repaid and any loss due to fluctuation in exchange rate at any intermediate stage cannot be taken into account for quantifying the same. Such quantification at any time prior to actual payment would only give a notional artificial figure which cannot be taken into account for allowing a deduction in the hands of the assessee. In view of the foregoing, it would be clear that the liability being referred to is only notional and contingent upon various factors and not an ascertained liability. Under the circumstances discussed herewith, it would have been a proper course of action to create a provision in the books of account and the same should have been credited to the extent the assessee envisages a loss on account of such fluctuations. Thereafter as and when at the time of repayment, the loss is actually suffered by the assessee due to exchange rate fluctuation, the same could be drawn from such provision and claimed as a revenue expenditure. Thus, the principle of accounting followed by the assessee i.e. quantifying the loss as on 31-3-1991 and claiming the same as revenue expenditure cannot be allowed since the liability under discussion is only a contingent liability which would remain so and convert itself into ascertained liability only at the time of repayment of the loan, and would therefore, be allowable at that point of time.
The perusal of the above discussion by the Assessing Officer clearly shows that the Assessing Officer proceeded on the footing that the additional liability on account of foreign currency rate variation was revenue in nature and the claim of the assessee was primarily disallowed on the ground that it was notional, unascertained and contingent in nature. The reasons, in detail, which weighed with the Assessing Officer in rejecting the claim of the assessee have already been noted by us in the earlier part of our order. The Assessing Officer deemed it fit to allow deduction for loss on account of exchange rate variation loss only at the time of actual repayment of loan. It will suffice to deduce here that the aspect of ‘nature and purpose’ of the loss was enquired by the Assessing Officer in consequence to which it was brought out by the assessee that the loans were utilized for working capital requirements and that such a fact situation has been impliedly accepted by the Assessing Officer as no objection or fault has been found by the Assessing Officer in this regard. In fact, the conclusion of the Assessing Officer that such a liability was allowable as a revenue deduction in the year of actual payment, itself demonstrates that, in his view, the liability was of a revenue nature. In these premises, the question for consideration is whether assessee is entitled to deduction of Rs. 24.74 crores being the loss on account exchange rate fluctuation on accrual basis or not?
19. On this aspect, the dispute has been resolved by the Special Bench of the Tribunal in the case of ONGC Ltd. (supra) wherein it has been held that such a loss was neither a notional loss and nor was it a contingent liability. The following para of the decision of the Special Bench of the Tribunal in the case of ONGC Ltd. (supra) is worthy of notice:-
Before concluding, we would like to point out that the assessee’s claim for loss arising as a result of fluctuation in foreign exchange rates on the closing day of the year, has been disallowed by the Assessing Officer, inter alia, on the ground that this liability was a contingent liability and the loss was a notional one. The main ingredient of a contingent liability is that it depends upon happening of a certain event. We are of the considered opinion that in the case of the assessee, the ‘event’ i.e. the change in the value of foreign currency in relation to Indian currency has already taken place in the current year. Therefore, the loss incurred by the assessee is a fait accompli and not a notional one.
20. The above view was expressed by the Tribunal after following the decision of the Apex Court in the case of Sutlej Cotton Mills Ltd. (supra). Further, the Hon’ble Jurisdictional High Court of Delhi in the case of CIT v. Bharat Heavy Electricals Ltd. has also relied upon the principles laid down by the Apex Court in the case of Sutlej Cotton Mills Ltd. (supra) to hold that the additional liability incurred by the assessee on account of variation in foreign exchange rate was an allowable trading liability where the foreign exchange loans have been utilized on revenue account. In the present case, it is the stand of the assessee that loan obtained in foreign currency was utilized to meet the working capital requirements. The Assessing Officer has also impliedly accepted this stand of assessee as he proceeded only on that footing. The method of accounting adopted by the assessee was consistent. Therefore, the decision of Special Bench of the Tribunal is squarely applicable to the present case. Accordingly, following the said decision, the order of CIT(A) is upheld on this issue.
21. Now, we come to the additional grounds preferred by the revenue. The said additional ground is to the effect that the additional liability resulting on account of foreign exchange fluctuation in the instant case should be taken as a capital loss. In view of the discussion made in the preceding paras, this ground of revenue is liable to be rejected. In view of the judgment of Supreme Court in the case of NTPC Ltd. (supra), the additional ground is to be admitted only when no investigation of facts is involved. That means that additional ground is to be adjudicated keeping in view the facts on record. Having considered the facts of the case, we have already observed that consistent stand of assessee was that borrowed foreign currency was utilized to meet the need of working capital and Assessing Officer himself had proceeded on that footing. Therefore, in the absence of any adverse material on record, it cannot be said that loss was on capital account. Therefore, in our considered view, the Tribunal, at this stage, cannot venture to take into consideration an aspect which has not been disputed by the Assessing Officer. Therefore, the plea of the Id. Special Counsel for the revenue that the loss in question was a capital loss cannot be accepted.
22. The Id. Special Counsel for the revenue has tried to make out a case on the basis of the agreement between the assessee and the bank which provides the loan was required for purchase of goods for the manufacture of motor vehicle. In our opinion, the mere agreement is not enough to conclude that the loans in question were obtained for acquiring any capital asset. The expression “goods for manufacture of Motor Vehicle”, in the agreement in our opinion, prima facie means raw material for manufacture of motor vehicle. Apart from this, there is nothing on record to prove that loan was actually utilized for acquisition of capital goods. On the contrary, the stand of assessee before Assessing Officer was that loan was actually utilized to meet the needs of working capital of business. Assessing Officer also proceeded on the same footing. Therefore, on the basis of facts and material available on record, we are unable to find merit in the submissions of the Id. Special Counsel for the Revenue inasmuch as it is the actual utilization of funds which is relevant in deciding the issue before us and not the mere agreement. This view is fortified by the judgment of the Apex Court in the case of Sutlej Cotton Mills Ltd. (supra).
23. We may also mention here that the plea advanced on behalf of the revenue that the nature of the additional liability of loan on account of foreign exchange rate fluctuation was a capital loss by relying on the decision of High Court of Calcutta in the case of Bestobell (India) Ltd. (supra) is also not acceptable. We have perused the decision of the Calcutta High Court in the case of Bestobell (India) Ltd. (supra). The assessee therein had borrowed loan in foreign currency for carrying out its business activity which was repayable within a specified period. The repayment was not made in time. Subsequently, on account of rupee devaluation, the assessee therein had to pay an extra amount due to foreign exchange fluctuation. Such extra expenditure was claimed as a loss by way of debit in the profit & loss account. The revenue disallowed the loss as being in the nature of capital loss, which was upheld by the Hon’ble High Court of Calcutta. The relevant discussion of the order of the High Court is as follows:-
The question which in our view is of real importance in the instant case is whether the loss or expenditure of the assessee as a result of the devaluation is of a capital nature or of a revenue nature…. This extra expenditure, deemed or otherwise, or this loss, is inextricably connected with the assessee’s indebtedness and did not arise de hors the indebtedness nor was it incurred for the purposes of the loan and it was, as if, from the date of the devaluation the dues from the assessee to its creditors in rupees were
increased…. If there would have been a devaluation in favour of the rupee as a result of which the assessee had to pay less to its creditors, the surplus arising would have been of capital nature and could not have been assessed in the hands of the assessee as a business profit. Conversely as a result of the exchange rate going against the assessee, the loss which the assessee incurred cannot be held to be a revenue loss.
24. Indeed, the aforesaid decision of the Hon’ble Calcutta High Court support the point of view canvassed by the Id. Special Counsel for the Revenue. However, it would be appropriate to refer to the decision of the Apex Court in the case of Sutlej Cotton Mills Ltd. (supra) wherein ratio has been enunciated for determining whether the loss on account of foreign exchange fluctuation is to be treated as revenue or capital in nature. According to the Apex Court, if the profit or loss arises to an assessee on account of variation in the value of foreign currency held by it on conversion into another currency, such profit or loss would be on revenue account if the foreign currency is held by the assessee on revenue account or as a trading account or as a part of the working capital of the business. Of course, the conclusion would be to the contrary if the foreign currency is held as a capital asset or as a part of fixed capital. The Hon’ble Apex Court further held as follows:-
…The question whether the loss suffered by the assessee was a trading loss or a capital loss cannot, therefore, be answered unless it is first determined whether these two amounts were held by the assessee on capital account or on revenue account or, to put it differently, as part of fixed capital or of circulating capital….
25. Therefore, the point of view brought out by the Calcutta High Court in the case of Bestobell (India) Ltd. (supra) stands overruled by the decision of the Supreme Court in the case of Sutlej Cotton Mills Ltd. (supra). Therefore, the said decision does not help the stand of the revenue at this juncture. On this issue therefore, we do not find any merit in the additional grounds raised by the Revenue.
26. In view of the aforesaid discussion, in our view, the ground No. (ii) of the Revenue as also the additional grounds raised on this aspect are liable to be dismissed, both on facts and in law. We hold so.
27. Ground No. (iii) reads as follows:-
The CIT(A) has erred in holding that income of 22.85 crores earned as interest on advances received from customers, qualifies for deduction under Section 80-I.
28. The broad issue in the impugned ground relates to the decision of the CIT(A) in holding that the interest income of Rs. 22,85,31,015 is includible in the profits and gains of the industrial undertaking so as to qualify for deduction under Section 80-I of the Act. In brief, the facts are as follows. The assessee in its return of income had claimed deduction under Section 80-I amounting to Rs. 9,76,03,328. The entire deduction was denied by the Assessing Officer by excluding from the profits and gains of the industrial undertaking certain items of income on the ground that the same could not be said to have been derived from the industrial undertaking. The dispute presently canvassed by the revenue by way of the above stated ground of appeal relates to the incomes by way of interest earned on inter corporate deposits, from banks and others. Such amount is computed at Rs. 22,85,31,015 as under:-
OTHER INCOME
(a) Interest on deposits : Rs. 32,11,23,791
(b) Banks Rs. 3,75,74,489
(c) Others Rs. 3,71,64,189
Rs. 39,58,62,469
Less : Interest paid as per Schedule 16 of Relatable heads:-
(a) Vehicle deposits : Rs. 7,27,13,368
(b) Advance from
Dealers: Rs. 7,03,16,570
(c) Others: Rs. 2,43,01,516
Rs. 16,73,31,454
_________________
Rs. 22,85,31,015
29. The Assessing Officer was of the view that the above income is not derived from the industrial activity and, therefore, the same cannot constitute profits and gains derived from the industrial undertaking for the purposes of computing deduction under Section 80-I of the Act. The stand of the assessee before the CIT(A) was that the provisions of Section 80-I refers to profits and gains derived from the business of an industrial undertaking and not the incomes derived from industrial activity. It was contended that the aforesaid income by way of interest was earned on deposits and funds received by way of booking advances from customers and its dealers. The advances were directly related to the business of the industrial undertaking. Similarly, it was explained that the assessee had to bear interest burden on the advances received from its customers which is ultimately adjusted against the sale price of the vehicles sold by the assessee. It was thus contended, on facts, that the net income earned on account of interest of Rs. 22,85,31,015 has to be included as profits and gains of the industrial undertaking since it had a direct relationship with the sale of vehicles made by the assessee. The CIT(A) has since held that the interest of Rs. 22,85,31,015 qualifies for deduction under Section 80-I of the Act. The following discussion in the order of the CIT(A) is relevant:-
I have carefully considered the submissions made before me as well as the observations made by the Assessing Officer as well as the judicial position in this regard. A perusal of Section 80-I shows that it refers to profits and gains derived from industrial undertaking and not from industrial activity. I am inclined to agree with the contention of the appellant that as the sale of Maruti cars by the appellant company cannot be made otherwise than by way of the system of receiving booking advance from customers and deposits from dealers, the interest earned on such deposits or advances is nothing but profits and gains derived from the business of industrial undertaking itself. The net income, therefore, earned from such interest of Rs. 22,85,31,015, qualifies for deduction under Section 80-I of the Income-tax Act.
30. Against the aforesaid background we have heard the submissions of the rival counsels. The Id. Special counsel for the Revenue has argued that the CIT(A) has failed to appreciate that for an income to be eligible for deduction under Section 80-I, there must exist a nexus between such income and the industrial undertaking. In the instant case, the argument of the Id. Special counsel is that the source of income is the interest earned on investments made on inter-corporate deposits, PSU Bonds, etc. and not the industrial undertaking. Ld. Special Counsel argued that as long as the source of an income was not the industrial undertaking directly, such an income cannot be held to be eligible for relief under Section 80-I of the Act. In this regard, reliance was placed on the decision of the Delhi Bench of the Tribunal in the case of Dy. CIT v. Metro Tyres Ltd. [2001] 79 ITD 557 and also the decisions of the Hon’ble High Court of Madras in the case of CIT v. N.S.C. Shoes and also CIT v. Jameel Leathers & Uppers . The Id. Special Counsel submitted that the impugned incomes may constitute business income, being from an activity which is incidental to business but cannot be said to have been derived from industrial undertaking, which was a condition precedent for allowability of relief under Section 80-I of the Act. Reliance was placed on the analogy of reasoning enunciated in the case of CIT v. Kunwar Trivikram Narain Singh and CIT v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325 (PC). Ld. Special Counsel also submitted that the funds utilized by the assessee to earn the interest incomes in question were surplus funds of business and such funds did not carry any condition or obligation on the assessee for being utilized in the manner so did by the assessee. Ld. Special Counsel also placed reliance on the decision of Ahmedabad Bench of the Tribunal in the case of Dy. CIT v. Mira Industries [2003] 87 ITD 475 and also the decision of the Apex Court in the case of Pandian Chemicals Ltd. v. CIT .
31. On the other hand, the Id. Counsel appearing on behalf of the respondent assessee has defended the orders of the first appellate authority. The submissions of the respondent assessee are on similar lines as were taken before the first appellate au thority. Ld. Counsel at the outset submitted that the funds invested, which have yielded the impugned interest income were received as advances from customers towards booking of vehicles and from dealers. That such advances had a direct nexus to the sale of vehicles manufactured by the assessee and it is on this basis that the CIT(A) had regarded the income from such investment as an income derived from the industrial undertaking. According to the assessee, the moneys so received from its customers and dealers have been kept in deposits and other investments without keeping the same idle on prudent business considerations and, therefore the income has to be classified as being in the nature of business income alone.
32. At the time of hearing, in response to a query from the Bench as to whether there was a compulsion or requirement to invest the advances received from customers in a particular manner, the ld. Counsel sought leave for admission of ‘Guidelines issued by the Government of India’ to support his contention that the assessee was required to deposit the advances received from its customers in the manner specified in the guidelines. A copy of the said guidelines is placed at pages 90-91 in the supplementary paper book filed by the assessee. The ld. Special Counsel for the Revenue did not have any objection to consideration of the aforesaid evidence while disposing of the present appeal.
33. We have considered the rival arguments, perused the orders of the lower authorities as also the material on record and proceed to dispose of the issue on the fol1 owing lines. The provisions of Section 80-I provide that the profits and gains derived from an industrial undertaking, as are included in the gross total income of an assessee are eligible for deduction at the specified rate while computing the taxable income. The crucial expression in the section is “derived from”. The said expression provides the boundaries within which the income must fall so as to constitute profits and gains of an undertaking, which are eligible for deduction under Section 80-I. The Hon’ble Apex Court in CIT v. Sterling Foods and Pandian Chemicals Ltd. v. CIT had considered the import of said expression. The decisions were rendered in the context of Section 80HH wherein also the presence of the expression “derived from” makes the said section stand on similar footing to that of Section 80-I which is presently before us. The Hon’ble Apex Court opined that in order to apply the words “derived from” with respect to a particular income, there must exist a direct nexus between such income and the industrial undertaking. In the case of Sterling Foods (supra), the Hon’ble Apex Court was dealing with the income earned by way sale of import entitlements. The industrial undertaking therein was exporting processed sea foods. The sale consideration on the sale of import entitlement was held not constituting the profit and gain derived from the assessee’s industrial undertaking for the purposes of computing relief under Section 80HH of the Act. The reasoning advanced was an absence of a direct nexus between such income and the industrial undertaking. To similar effect is the decision of the Apex Court in the case of Pandian Chemicals Ltd. (supra). The income in question therein was interest on deposits made with the electricity board by the industrial undertaking for obtaining the electricity. The Hon’ble Apex Court held that although electricity may be required for the purposes of industrial undertaking, yet the deposit which had yielded the interest income, was a step removed from the industrial undertaking. The deriving of income on the deposit made with the electricity board was held not to have a direct nexus with the industrial undertaking itself and, therefore, such income was held not to be eligible for 80HH benefit. The incomes has to be such which establishes a direct nexus with the industrial undertaking. The presence of a direct and immediate nexus being the source of income is critical so as to make an income eligible under Section 80-I benefits.
34. In the instant case before us, the assessee is in the business of manufacture and sale of vehicles. The assessee receives advances from its customers and dealers which are adjusted against the sale price of the vehicles ultimately sold by the assessee. In the interregnum such funds are utilized by the assessee for earning of interest income. The assessee is also required to pay interest on the advances received by it from its customers. The net income earned on account of such interest is sought to be included as a profit and gains derived from the industrial undertaking by the assessee for the purposes of computing relief under Section 80-I of the Act. In our view, applying the tests laid down by the Apex Court, the impugned income cannot be said to have a direct nexus with the industrial undertaking of the assessee. The immediate and the direct source of such income is the investment made in the bank deposits or the inter-corporate deposits, bonds etc. The activity of making the aforesaid investment is a step away from the industrial undertaking of the assessee. Therefore, in our view, the same cannot constitute incomes eligible for relief under Section 80-I of the Act. The CIT(A) has however held that since the sale of vehicles by the assessee could not be made otherwise than by way of receiving advance from customers and dealers, the interest earned on such advances was nothing but profits and gains derived from the industrial undertaking itself. In our view, the CIT(A) has misdirected himself in attempting to go into the source of funds which have resulted into impugned incomes. What is required to be appreciated is the source of the income generated and not merely the source of funds for making investments which have generated such income. In the instant case, it is the investments by itself which is the source of income, which is distinct from the industrial undertaking. Therefore, in our view, the order of the CIT(A) is required to be reversed on this count. The order of the CIT(A) on this ground is thus set aside and that of the Assessing Officer is restored.
35. The Revenue by way of an application dated 23-9-2003 has prayed for admission of following additional ground of appeal which reads as under:-
That the Id. CIT(A) erred in allowing relief under Section 80-I on a sum of Rs. 6,51,93,675 being ‘cash subsidy on Exports’.
36. The Id. Special Counsel for the Revenue submitted that it is a legal plea which can be adjudicated on the basis of the facts and evidence available on record and therefore should be admitted and considered for adjudication by the Tribunal. According to him, the income by way of ‘cash subsidy on Exports’ was earned by the assessee on account of Export Promotion Policy of the Government and it cannot be said to have been derived from the industrial undertaking, thereby rendering such income ineligible for deduction under Section 80-I of the Act. It is contended by the Id. Special Counsel for the Revenue that the additional ground raised does not require any investigation of facts as it is quite patent from Schedule 11 of the Annual accounts of the assessee company which is placed at page 44 of the Assessee’s Paper Book.
37. It is an admitted position that in the order of assessment, the Assessing Officer did not exclude the receipts by way of ‘Cash Subsidy on Exports’ while computing relief under Section 80-I and this point therefore did not come up for consideration before the CIT(A) in the order passed by him and impugned by the department in appeal before us. In this backdrop, the learned special counsel for the Revenue strongly urged that the question whether the assessee is entitled to relief under Section 80-I in respect of ‘Cash Subsidy on Exports’ is a pure question of law and as the facts are already on record and no fresh evidence is needed, they are entitled to raise this question by way of additional grounds and has prayed that it be admitted in view of the decision of the Apex Court in NTPC Ltd. v. CIT .
38. On the other hand, the Id. Counsel for the respondent equally strongly contends that the grant of relief under Section 80-I in respect to ‘Cash Subsidy on Export’ was never an issue before the CIT(A) and was never considered by him and so this issue does not arise out of the order of the CIT(A). As it does not arise out of the order of the CIT(A), the department cannot be aggrieved by the order of the CIT(A) and so the additional ground is not maintainable at all. Assuming but not admitting that the additional ground raised is only a pure question of law on the fact already on record, it is submitted that as this matter was never considered by the Assessing Officer, its acceptance by the Tribunal by holding on merits that relief under Section 80-I is not allowable on ‘Cash Subsidy on Export’ income, may result in an enhancement of the income which is not permissible under Section 254(1) of the Act. The legislature has granted the power of enhancement to the CIT(A) but this power has not been granted to the Tribunal and so it is urged that even if the said ground is admitted, it could only be of academic importance for the reason that the Tribunal has no power of enhancement which may result if such ground is ultimately decided against the assessee in appeal. Reliance has been placed on various decisions, viz., Motor Union Insurance Co. Ltd. v. CIT [1945] 13 ITR 272 (Bom.); Puranmal Radhakishan & Co. v. CIT ; V. Ramaswamy Iyengarv. CIT [1960] 40 ITR 377 (Mad.); G. Vijayaranga Mudaliar v. CIT [1963] 47 ITR 853 (Mad.); F.Y. Khambhaty v. CIT ; Hukum Chand Mills Ltd v. CIT and Pathikonda Balasubba Setty v. CIT . In the circumstance, it is submitted that the only question before the Tribunal is the grant of relief under Section 80-I in respect of the interest income and all other issues fall outside the “subject matter” of the appeal. It is contended that the Tribunal cannot, therefore, seek to reverse the order of the Assessing Officer to the extent it is favourable to the assessee. It is further argued that in case the revenue finds that the Assessing Officer wrongly allowed relief on any point, then it has recourse to provisions of Section 148/154/263 to rectify or amend the purported wrong. The CIT(A) being a Departmental Officer also has power to enhance the assessment so as to correct the wrong while the appeal is pending before the CIT(A). Before the Tribunal, the Revenue cannot seek to withdraw the relief allowed by the Assessing Officer by raising such ground either in the original memorandum of appeal or by way of additional ground. Thus, the appeal before the Tribunal cannot be converted into a departmental process to remedy the alleged wrongdoing of the Assessing Officer, to the detriment of the assessee. Before concluding, the Id. Counsel also submitted that enhancement of income has to be understood on the basis of each issue and not with respect to the overall assessed income.
39. The law on the question of admissibility of additional grounds before the Tribunal can be taken as settled by the classic decision of the Apex Court in the case of NTPC Ltd (supra). It is now a settled proposition that a question of law can always be raised by the appellant for the first time at any stage up to the level of the Tribunal provided the facts relating to the issue have been brought on record and it is necessary to consider that question in order to correctly assess the tax liability of the assessee. The following portion of the decision of the Apex Court is relevant to notice:-
3. Under Section 254 of the Income-tax Act the Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit. The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction denied, we do not see any reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of that item. We do not see any reason to restrict the power of the Tribunal under Section 254 only to decide the grounds which arise from the order of the CIT(A). Both the assessee as well as the Department have a right to file an appeal/cross-objections before the Tribunal. We fail to see why the Tribunal should be prevented from considering questions of law arising in assessment proceedings although not raised earlier.
…Undoubtedly, the Tribunal will have the discretion to allow or not allow a new ground to be raised. But where the Tribunal is only required to consider a question of law arising from the facts which are on record in the assessment proceedings we fail to see why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee.
6. The reframed question, therefore, is answered in the affirmative, i.e., the Tribunal has jurisdiction to examine a question of law which arises from the facts as found by the authorities below and having a bearing on the tax liability of the assessee.
40. In the case of National Thermal Power Co. Ltd. (supra), a question arose as to whether the assessee could challenge the taxability of an income, which was not disputed either before the Assessing Officer or before the CIT(A). The Hon’ble Supreme Court of India has held that the entire assessment was open and, therefore, if any income was not taxable in law then the same could be challenged before the Tribunal even for the first time and the appellant could raise the additional ground in that respect. The Hon’ble Court has made it clear that such additional ground could be raised by the appellant, whether may it be assessee or Revenue. Therefore, in view of the decision of the Apex Court, it is immaterial that the question of law now posed before the Tribunal had not been raised earlier at any stage; the only point is that the question of law raised must be a live issue requiring no further investigation or calling for further evidence and is not a pretence.
41. In the matter before us, the question is a pure question of law and does not require investigation of facts. Therefore, following the aforesaid decision of the Apex Court, the additional ground raised by the revenue is admitted. The rival contentions with respect to the merit of the dispute are on similar lines as noted by us while disposing of ground no. (iii) in the earlier paras. Following the parity of reasoning enunciated by the Apex Court in the cases of Sterling Foods (supra) and Pandian Chemicals Ltd. (supra), the income on account of ‘Cash Subsidy on Exports’ cannot constitute income derived from the industrial undertaking and is thus not eligible for relief under Section 80-I of the Act.
42. Since, on merits, the additional ground raised by the Revenue is decided against the assessee, can it be said to be a case of enhancement of assessment. Therefore, the next question which arises for our consideration is whether the assessee can be put in a position, which is worst than the position in the original assessment proceedings. The answer to this question has to be given according to the rules of contextual interpretation. The scheme of the Act shows that an assessment made by the Assessing Officer is final unless disturbed by an appropriate authority under various provisions of the Act. If any wrong is committed by the Assessing Officer, which is prejudicial to the Revenue, it can be corrected either under Section 263 by the CIT or in the rectification proceedings under Section 154 or under the provisions of Section 147 by the Assessing Officer himself, as the case may be. If any wrong is committed, which is prejudicial to the assessee, the right of appeal has been conferred on the assessee by virtue of Section 246. Apart from this, the assessee can also invoke the provisions of Section 154 or of Section 264, as the case may be. The right of appeal against the assessment is only for the benefit of the assessee but even under these proceedings, special provisions have been enacted which confer power of enhancement on the CIT(A) but similar powers have not been conferred by the Legislature on the Income-tax Appellate Tribunal. This is also apparent from the fact that the power of enhancement has been conferred on the Tribunal under the Wealth-tax Act. This is clear from the comparative study of Sub-section (5) of Section 24 of the Wealth-tax Act, 1957, and Section 254(1) of the Income-tax Act, 1961. Section 24(5) of Wealth-tax Act provides as under:-
The Appellate Tribunal may, after giving both parties, to the appeal, an opportunity of being heard, pass such order thereon, as it thinks fit and any such orders may include an order enhancing the assessment or penalty.
43. On the other hand, Section 254(1) of the Income-tax Act, 1961, provides as under:-
254(1) The Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit.
44. The comparative study of above provisions shows that there is a deliberate departure by the Legislature vis-a-vis, the powers of the Appellate Tribunal under the Income-tax Act, 1961 and the Wealth-tax Act, 1957. The Legislature was well aware of powers of enhancement under the Wealth-tax Act, 1957, while enacting the Income-tax Act, 1961. Had the legislature intended to confer power of enhancement under the Income-tax Act, 1961, it could easily confer the same. Thus, omissions to confer such power was deliberate. Therefore, by implication, it means that the order of the Tribunal cannot enhance the income originally assessed.
45. In the case of Hukamchand Mills Ltd. (supra), the Hon’ble Supreme Court of India had held (i) that powers of the Tribunal are limited to the subject-matter of appeal and (ii) that powers of Tribunal are that of Appellate Assistant Commissioner (except the provisions of enhancement). The relevant portion of judgment reads as under:-
The word ‘thereon’, of course, restricts the jurisdiction of the Tribunal to the subject-matter of the appeal. The words ‘pass such orders as the Tribunal thinks fit’ include all the powers (except possibly the power of enhancement) which are conferred upon the Appellate Assistant Commissioner by Section 41 of the Act.
The above observations clearly indicate that the Tribunal does not have the power of enhancement. No doubt, the Hon’ble Court used the word ‘possibly’ but no judgment of the Apex Court has been brought to our notice to take the contrary view.
46. At this stage, it would be appropriate to refer to the judgment of the Hon’ble Supreme Court of India in the case of CIT v. Sun Engg. Works(P.) Ltd. ,wherein the Apex Court had to consider the powers of an Assessing Officer under Section 147. The Hon’ble Court held the powers of the Assessing Officer were limited to the assessment of escaped income and such powers could not be extended in respect of the claims, which had already been disallowed by the Assessing Officer. According to the Court, the provision of Section 147 are for the benefit of the Revenue and therefore, the assessee could not agitate any matter which was concluded against him in the original assessment. It would be appropriate to refer to the relevant observations of the Apex Court, which are being reproduced as under:-
Keeping in view the object and purpose of the proceedings under Section 147 of the Act which are for the benefit of the Revenue and not an assessee, an assessee cannot be permitted to convert the reassessment proceedings as his appeal or revision, in disguise, and seek relief in respect of items earlier rejected or claim relief in respect of items not claimed in the original assessment proceedings, unless relatable to ‘escaped income’, and reagitate the concluded matters. Even in cases where the claims of the assessee during the course of reassessment proceedings relating to the escaped assessment are accepted, still the allowance of such claims has to be limited to the extent to which they reduce the income to that original assessed. The income for purposes of ‘reassessment’ cannot be reduced beyond the income originally assessed.
From the above observations, following legal position emerges:-
1. The provisions of Section 147 are for the benefit of the Revenue and not to an assessec.
2. In such proceedings, assessee cannot be permitted to seek relief in respect of item earlier rejected or in respect of items not claimed in original assessment, unless
elatable to the escaped income.
3. If any relief is claimed in respect of items relatable to escaped income and such claim is accepted, then relief is to be limited to the extent it reduces the income to that originally assessed.
If we apply the same analogy to the appeal proceedings, which are for the benefit of assessee, then, in our opinion, it has to be held that in the course of appeal proceedings, which are intended for the benefit of the assessee, the assessee cannot be put to worst position than the one in the original assessment proceedings except as provided in Section 251 of the Act. Therefore, if any additional ground raised by the department before the Tribunal, which docs not directly arise from the order of CIT(A), is accepted, then relief to the Revenue cannot be extended beyond the assessed income. Drawing analogy from the decision of the Apex Court in the case of Sun Engg. Works (P.) Ltd. (supra), the assessed income is to be understood as the amount of income originally assessed by the Assessing Officer.
47. In the instant case, the question is whether adjudication of additional ground amounts to enhancement of assessed income. Since the assessee has got substantial relief in the appeal proceedings, it is not a case of enhanced assessment as the relief to assessee is much more than the relief allowed to revenue qua the additional ground. Hence, the objection of assessee in this regard does not have any merit.
48. As a result, the additional ground stand allowed, as above.
49. In the result, the appeal of the revenue is partly allowed.