2016 (12) TMI 363 - HC - Income Tax

Sum received in excess on account of exchange gain - revenue receipt or capital receipt - Held that - There can be no doubt that the project receivables as on 31st March, 1991 remained blocked for about 11 years. There was no chance of its recovery. Therefore, the project receivables, bearing the character of revenue, lost their character and became a capital investment. Only thing that happened during the period between 31st March, 1991 and the current year is that during the assessment year 1995-96 the assesse wrote off the debt. By writing off the debt the assesse did not cease to be a creditor of the Iraq Government. Therefore, when the money was realised it partook the character of a capital receipt. We are, as such of the opinion that the view taken by the learned Tribunal is a correct view in deleting the addition with regard to the gain on account of exchange fluctuation in relation to foreign projects receivable from Iraq treating it, as Capital receipts and not revenue receipts as assessed by the assessing officer - Decided in favour of assessee Capital receipt liable to capital gains - Held that - The assesse continued to remain a creditor in a sum of ₹ 45 crores approximately though the cost of acquisition in his books of accounts had become zero by virtue of writing off the debt. The right to recover was transferred as a consequence whereof profit to the tune of ₹ 38 crores accrued. In the circumstances, all that he had to do was to refund, the benefit of bad debt received by him, under Section 41(4) of the Income Tax Act and to offer the balance sum on account of long term capital gain. In this case, the income could not have accrued to the assesse if the debt was not due from the Iraqi Government. We are, as such of the opinion that the entire balance sum of ₹ 38 crores approximately are taxable as long term capital gain without deduction of any cost of acquisition because the cost of acquisition had become zero by having been written off. The accounting entry which the assesse might have made is altogether irrelevant.

Issues Involved:
1. Whether the sum of ?37,91,32,586/- received in excess on account of exchange gain is a revenue receipt or a capital receipt.
2. Whether the long-term capital loss of ?75,85,592/- was computed in accordance with law.
3. Whether there was any cost of acquisition in the facts and circumstances of the case; if so, what was it.
4. Whether the Tribunal was justified in upholding the deletion of the addition on account of bad debt amounting to ?14,22,98,000/-.
5. Whether the Tribunal misdirected itself in law by holding that the deduction under section 80HHB was not available to the assessee in respect of ?63,25,667/- realised in the form of Government of India Compensation Bonds.
6. Whether the findings of the Tribunal regarding the non-compliance with conditions laid down in section 80HHB(3)(i) & (iii) were against the facts and evidence on record.

Detailed Analysis:

Issue 1: Revenue Receipt vs. Capital Receipt
The Tribunal held that the excess sum of ?37,91,32,586/- received by the assessee was a capital gain and not a revenue receipt. The Tribunal did not examine the reasoning of the Assessing Officer, who argued that the indexation carried out by the assessee while computing the Long Term Capital Loss was without basis. The Tribunal's decision was influenced by the fact that the project receivables were blocked and sterilized, thus changing their character from revenue to capital. The High Court upheld this view, stating that the blocked receivables lost their revenue character and became a capital investment.

Issue 2: Computation of Long-Term Capital Loss
The assessee contended that after indexation, there was a long-term capital loss of ?75,85,592/-. The Assessing Officer did not accept this computation, arguing that the cost of acquisition could not be zero. The Tribunal did not examine this issue thoroughly. The High Court held that the cost of acquisition became zero when the debt was written off, and upon recovery, the entire amount should be taxed as long-term capital gain without deduction of any cost of acquisition.

Issue 3: Cost of Acquisition
The High Court discussed the concept of cost of acquisition, stating that the historical cost plus indexed value should be considered. However, it concluded that the cost of acquisition became zero when the debt was written off. The assessee's argument that the historical cost revived upon recovery was not accepted. The High Court held that the entire amount of ?38 crores approximately should be taxed as long-term capital gain.

Issue 4: Bad Debt Deduction
The Tribunal upheld the claim for bad debt of ?14,22,98,000/-. The revenue contended that the assessee failed to establish that it was engaged in the business of money lending and did not fulfill the conditions specified under Section 36(2). The High Court found that the assessee had provided interest year after year on the loans advanced and that the debts written off were taken over by the assessee in the ordinary course of its money lending business. The High Court upheld the Tribunal's decision, stating that the alternative condition under Section 36(2) was satisfied.

Issue 5: Deduction under Section 80HHB
The Tribunal disallowed the deduction under Section 80HHB, stating that the bonds issued by the Reserve Bank of India did not constitute convertible foreign exchange and that the assessee did not comply with the conditions laid down in Section 80HHB (3)(i) and (iii). The High Court disagreed, stating that the circular issued by the CBDT covered the RBI Bonds and that the conditions under Section 80HHB (3)(i) were fulfilled. The High Court held that the deduction under Section 80HHB was admissible.

Issue 6: Compliance with Section 80HHB(3)(i) & (iii)
The High Court found that the Tribunal's finding that the assessee did not comply with the conditions laid down in Section 80HHB(3)(i) & (iii) was incorrect. The High Court noted that the assessee maintained separate project accounts, and there was no finding that the auditor's report verifying such project accounts was not furnished. The High Court held that the conditions were fulfilled, and the deduction under Section 80HHB was allowed.

Conclusion:
The High Court partly allowed the revenue's appeal and fully allowed the assessee's cross-objection. The sum of ?37,91,32,586/- was held to be a capital receipt liable to tax as long-term capital gain. The claim for bad debt of ?14,22,98,000/- was upheld, and the deduction under Section 80HHB was allowed. The High Court found that the cost of acquisition became zero when the debt was written off, and the entire amount should be taxed as long-term capital gain without deduction.

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