- (1.) In this reference under Sec. 256 (1) of the Income Tax Act, 1961, for the year assessment year 1969-70 for which the event previous year ended on 31st March, 1969 the following questions been referred to this Court :- 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that assessee's right to acquire foreign change by entering into forward contracts with the State of bank India was not a capital asset within the meaning of section 2(14) of the Income Tax Act, 1961. 2. If the answer to question No. 1 is in the negative, then whether on the facts and in the circumstances of the case, the Tribunal was right in holding that though there was a relinquishment or extinguishment of the said right amounting to a transfer within the meaning of Section 2(47) of the Income Tax Act, 1961, no capital gains arose therefrom which was chargeable under Section 45 of the said Act ??
(2.) The assessee is engaged in the manufacture of jute goods. It wanted to import certain machinery for the production of carpet backing. An import licence was also granted to it on the 8th October, 1964 which was valid for a period of two years from the date of its issue. The import was to be made from M/s. James Mackie & Sons Ltd. of U. K. On the 27th January, 1966, the assessee also placed orders with the above U. K. Exporter for supply f machinery. In order to safeguard the financial deal the assessee entered into a forward contract with the State Bank of India, Calcutta for the purchase of ? 7201-7-3 being roughly equivalent to the cost of the machinery for which the assessee was required to make the payment in sterling. The Indian Rupee was devalued on 6th June, 1966 and as a result of this devaluation the cost of the import machinery increased by about 57 per cent. After the devaluation the Bank informed the assessee that the Reserve Bank of India has raised certain objections regarding the booking of the foreign exchange. The Reserve Bank of India finally approved the foreign exchange contract in May, 1967 but by the time the import licence granted to the assessee by the Government has expired on the 7th October, 1966. The assessee requested the State Bank of India to permit it to utilize the foreign exchange contracted for import of another machinery for which the licence was expected to be issued in the near future. It appears that nothing tangible materialized and the State Bank of India on the 16th December, 1968 cancelled the outstanding balances of the contracts and credited the assesse's account with a sum of Rs. 3,13,651 being the difference in exchange rate, viz. contract rate and current TT buying rate less charges on the periodical extension of the contracts arranged by its foreign department. It should be clarified here that the assessee did not advance nay sum to the Bank against the above contracts. The assessee showed the aforesaid amount in Part IV of its report submitted to the Income tax Department but claimed that it did not constitute the assessee's income. It was contended before the Income Tax Officer that the transaction arose in respect of a capital item and therefore the amount should not be treated as a revenue receipt. The Income Tax Officer rejected the contention. He was of the opinion that the profit had arisen to the assessee during the course of its business and, therefore, it was taxable. He accordingly taxed the entire amount of Rs. 3,13,651. He treated it as a revenue receipt arising out of the transaction of the assessee in carrying out its business.
(3.) The assessee appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that the surplus received at the trading activities of the assessee company and the surplus was not on account of the business carried on by the assessee company or an excess realised by the company from the stack-in-trade. Accordingly, the Appellate Assistant Commissioner held that it was not a business Profit. The Appellate Assistant Commissioner, however, examined the question from another point of view. He was of the opinion that the assessee by virtue of the sanction of the import licence on 8th October, 1966 strengthened by entering into a forward contract with the State Bank to finance funds towards the purchase of the machinery and it was a valuable right and could be characterised as intangible asset or an actionable claim. He, therefore, held that such a right was a capital asset within the definition of the term laid down under Section 2(14) of the Income Tax Act, 1961. The Appellate Assistant commissioner, However, held that the assessee in canceling the forward contract and surrendering the import licence had relinquished an asset and had also extinguished the right contained therein which amounted to transfer within the meaning of Section 2(47) of the Act. He, therefore, confirmed the addition of the amount in question in the assessment of the assessee as capital gains. He also discussed certain authorities relating to the taxability of the various amount as also dealing with casual and non recurring nature of a receipt and held that the amount which the assessee was to receive on account of devaluation was forseen and anticipated and hence was not casual in nature.;