2020 (10) TMI 135 - AT - Income Tax

Deduction u/s 80HHB - amount credited to the profit and loss account of the year ending 31.03.1995 under the head Compensation from Government of India/ECGC - issuance of bond on assignment of assessee s due from Government of India as settlement in lieu of foreign exchange loans extended to assessee through Exim Bank and SBI by Government of India to enable assessee to make off with contracts in Iraq following the deferment of its contract under Deferred Payment Agreement (DPA) - whether settlement-cum-compensation can be termed as profit of business activity? - HELD THAT - Income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount. Only then can it be said that for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee. In the present case, the income has not accrued to the assessee, therefore, it cannot be termed as the business income. From the perusal of these case laws and from the submissions of the assessee, it is clear that the settlement received from the Government of India is not coming under the purview of the business income as there was no business during the period. Besides, the contracts between the assessee and the Government of Iraq was not completed due to war situation and UN Sanctions. There was no hope for the assessee to conduct any business, but foreign exchange loans extended to assessee through Exim Bank and SBI by Government of India was a liability to the assessee. Thus, the settlement received in lieu of this will not form the revenue receipt. Thus, the contentions of the assessee that the receipt are not revenue in nature is sustained and Ground Nos. 1 to 4 of assessee s appeal are allowed. Disallowance of prior period expenses - CIT(A) held that the assessee has not given any evidence as to expenditure was booked in present assessment year? - HELD THAT - There is no evidence that expenses have been crystallized during the year, even though they pertained to earlier years. Thus, in absence of evidence, the CIT(A) confirmed this addition correctly. Before us as well the assessee could not demonstrate the same as to how the expenditure was booked in present assessment year. Therefore, Ground No. 5 of the assessee s appeal is dismissed. Interest on fixed deposits with the bank - Income from other sources OR Business income - HELD THAT - After hearing both the parties, it can be seen that the interest was received on the fixed deposits with the bank and thus it cannot be termed as business income. Ground No. 6 and 7 of the assessee s appeal is allowed. Expenses on transit accommodation and mess located in remote areas where the benefit of hotel was unavailable - CIT(A) followed the Apex Court decision in case of Britannia India Ltd. 2005 (10) TMI 30 - SUPREME COURT and upheld the addition - HELD THAT - CIT(A) was rightly confirmed this addition as there was no evidence shown by the assessee at the time of the assessment proceedings as well as at the time of the Appellate proceedings. - Decided against assessee. Relief u/s 220(7) - Assessee in default for amount non received in India - Compensation received by the assessee company from United Nations Compensation Commission (UNCC) for loss of assets suffered by it due to UN led war against Iraq after the Iraq s invasion occupation of Kuwait in the year 1990, by virtue of which assessee company was forced to abandon its assets and leave Iraq to save its human assets - A.Y. 2001-02 - HELD THAT - The compensation is in respect of the loss incurred by the assessee in respect of the contracts which were unable to be completed since the invasion of Iraq in Kuwait in year 1990. The assessee company treated the said sum as capital receipt, accounted on receipt basis, not exigible to tax, being in the nature of compensation of capital nature and against forced abandoned capital assets due to war. The returned total income included a sum on account of interest accrued on sums receivables from Iraq in terms of deferred payment agreement between Govt. of Iraq Govt. of India. Thus, the treatment given by the assessee company is just and proper. From the point of view of the commercial aspect of the receipt it can be seen that the assessee received the amount from the United Nations Compensation Commission and not from the Government of Iraq. From the perusal of the records it can be seen that the compensation is not coming under the purview of the business income as there was no business during the period. Thus, compensation received in lieu of the losses of the contract which was supposed to be executed in the year 1991 will not form the receipt of revenue in nature, but capital in nature. Therefore, Ground No. 1 to 3 of the assessee s appeal are allowed. Employee s contribution to P.F. - assessee company has deposited sums received from employees towards contribution to provident fund after the due date including grace period of 5 days - HELD THAT -Assessee company has deposited employer s contribution to the P.F. after the due date mentioned in schedule but deposited before the due date of filing of return of income. Thus AO was not right in disallowing these expenses claimed by the assessee company for the employer s contribution to the P.F. as per the provisions of Sec 43B if the same is deposited prior to the due date mentioned in the respective statute as held by the Hon ble Apex Court in case of CIT v. Vinay Cement Ltd. 2007 (3) TMI 346 - SC ORDER and CIT v. Alom Extrusions Ltd. 2009 (11) TMI 27 - SUPREME COURT - Ground No. 7 of the Assessee s appeal is allowed.

Summary

Issues Involved:
1. Treatment of compensation received by way of bonds as income or capital receipt.
2. Treatment of prior period expenses.
3. Classification of interest income.
4. Disallowance of guest house expenses.
5. Treatment of compensation from the UN.
6. Benefit under Section 220(7) of the Income Tax Act.
7. Disallowance of employees' contribution to Provident Fund (PF).
8. Treatment of remission of liabilities.
9. Disallowance of contribution to a political party.

Issue-wise Detailed Analysis:

1. Treatment of Compensation Received by Way of Bonds:
The primary issue was whether the compensation of ?297.47 crores received by the assessee by way of bonds issued by RBI on behalf of the Government of India should be treated as income or capital receipt. The assessee argued that it was a capital receipt not eligible for tax, as it was a voluntary and gratuitous action by the Government of India to discharge the loan liability. The Assessing Officer (AO) treated it as business receipts, citing CBDT Circular No. 711, which considers such bonds as deemed receipts of convertible foreign exchange for taxable income purposes. The ITAT concluded that the compensation was not a business receipt but a settlement for a loan given in foreign exchange by Exim Bank and SBI, thus, it should be treated as a capital receipt and not taxable as business income.

2. Treatment of Prior Period Expenses:
The assessee claimed certain expenses as prior period expenses amounting to ?8,90,796/-. The CIT(A) disallowed these expenses due to lack of evidence showing that the expenses were booked in the current assessment year. The ITAT upheld this disallowance, as the assessee could not demonstrate the booking of these expenses in the present assessment year.

3. Classification of Interest Income:
The AO treated the interest income of ?7,29,95,567/- as income from other sources instead of business income. The CIT(A) relied on the decision of the Hon’ble Delhi High Court in the case of CIT vs. Shri Ram Honda Power Equip (2007) and held that interest on fixed deposits with the bank is income from other sources. The ITAT upheld this classification.

4. Disallowance of Guest House Expenses:
The AO disallowed transit and mess expenses classified under guest house expenses amounting to ?183,894/-. The CIT(A) upheld this disallowance, citing the lack of evidence to suggest that the expenses pertained to transit accommodation and mess located in remote areas. The ITAT agreed with the CIT(A)'s decision.

5. Treatment of Compensation from the UN:
The assessee received compensation from the United Nations Compensation Commission (UNCC) for losses incurred during the UN-led war against Iraq. The AO treated the entire amount of ?76.18 crores as accruing during the relevant previous year. The ITAT concluded that the compensation was not business income but a capital receipt for the loss incurred due to the war. The compensation did not result from any business activity, and thus, it should not be taxed as business income.

6. Benefit Under Section 220(7) of the Income Tax Act:
The assessee claimed the benefit of Section 220(7) for interest receivable amounting to ?8,21,49,466/-, arguing that the interest had not actually accrued due to the UN embargo. The ITAT found that this issue became redundant in light of the compensation being treated as a capital receipt.

7. Disallowance of Employees' Contribution to PF:
The AO disallowed employees' contribution to PF amounting to ?32,88,338/- deposited after the due date. The ITAT allowed the assessee's appeal, citing the Hon’ble Supreme Court's decisions in CIT v. Vinay Cement Ltd. and CIT v. Alom Extrusions Ltd., which held that contributions deposited before the due date of filing the return are allowable.

8. Treatment of Remission of Liabilities:
The AO added ?42,56,979/- to the total income as remission of liabilities. The CIT(A) deleted this addition, and the ITAT upheld the CIT(A)'s decision, finding no need to interfere with the detailed reasoning provided.

9. Disallowance of Contribution to a Political Party:
The AO disallowed ?21,000/- contributed to a political party, which was upheld by the CIT(A). The ITAT agreed with this disallowance, as it was not allowable under the provisions of Section 37(2B) of the Income Tax Act.

Conclusion:
The ITAT partly allowed the appeals for both A.Y. 1995-96 and 2001-02 filed by the assessee and partly allowed the appeal for A.Y. 2001-02 filed by the Revenue. The compensation received by the assessee was treated as a capital receipt, not taxable as business income. The disallowances regarding prior period expenses, guest house expenses, and contribution to a political party were upheld, while the disallowance of employees' contribution to PF was overturned.