2021 (7) TMI 1151 - HC - Income Tax

Disallowance of loss on revaluation of bonds and sale of RBI Bonds - capital or current asset - Tribunal recorded a finding that the entry of government bonds cannot come within the purview of stock-in-trade and however committed serious error by including RBI bonds under the head 'current asset' and notional loss, at any rate, should not have been computed and allowance granted to assessee - HELD THAT - Tribunal observed that the assessee had not made a conscious decision in investing in bonds, but the assessee was forced to accept the bonds in place of receivables and rightly held that the option could not be refused by the assessee. Otherwise the assessee would have to forego entire receivable amount. The assessee, in our view, gets cash only upon sale of the bonds. Till such time the bonds cannot be treated as capital asset, and as rightly held by the Tribunal, not even stock-in-trade. The assessee is recording notional loss or profit on revaluation of the earlier years as well. The same procedure is followed in the subject assessment year as well. There is consistency in the pattern followed by the assessee and considering the nature of business the assessee has been doing, the bonds are rightly treated as current assets in the facts and circumstances of the case. The finding of fact recorded by the Tribunal is proper and correct The option of treating the receivables converted as bonds realisable at a future point of time is tenable. In the facts of the case running out of cash reserves, the decision to treat bonds also as receivable has been taken. As correctly observed by the Tribunal, the treatment of an entry in a particular method needs to be appreciated in the peculiar facts of the case. In view of the above consideration, the questions of law cannot be decided in isolation to the circumstances of the case - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of loss on revaluation of bonds.
2. Disallowance of loss on sale of RBI bonds.

Issue-Wise Detailed Analysis:

1. Disallowance of Loss on Revaluation of Bonds:
The primary issue pertains to whether the Tribunal was correct in law and fact in interfering with the disallowance of ?6,04,75,000/- as a loss on revaluation of bonds. The assessee, a subcontractor for M/s. Indian Railway Construction Company Ltd. (Ircon), undertook projects in Iraq and received RBI and ECGC bonds as deferred payments for the work executed. The assessee treated these bonds as current assets and claimed a loss on their revaluation.

The Revenue argued that these bonds should be considered capital assets, not current assets, and thus, the notional loss should not be allowed. The Tribunal, however, noted that the bonds were received in lieu of receivables from work executed in Iraq and were realizable at a future date. The Tribunal held that the bonds were correctly treated as current assets, allowing the assessee to claim the loss on revaluation. The Tribunal's decision was based on the fact that the assessee had no choice but to accept the bonds due to the circumstances, and the bonds substituted the receivables.

2. Disallowance of Loss on Sale of RBI Bonds:
The second issue involves the disallowance of ?43,30,000/- claimed as a loss on the sale of RBI bonds. The Revenue contended that the bonds should be treated as capital assets, and any loss on their sale should be considered a capital loss, not a business loss. The assessee argued that the bonds were received as business receipts and treated as current assets in their books of accounts.

The Tribunal, after examining the facts and circumstances, concluded that the bonds were not investments but were received as a substitute for receivables. The Tribunal noted that the assessee was not in the business of buying and selling securities or bonds, and the bonds were sold to augment working capital requirements. Therefore, the Tribunal held that the loss on the sale of bonds should be treated as a business loss, not a capital loss.

Judgment:
The High Court agreed with the Tribunal's findings, stating that the bonds were rightly treated as current assets given the peculiar facts and circumstances of the case. The Court noted that the assessee had consistently followed the same accounting method in previous years and that the bonds were received as a substitute for receivables, not as an investment. The Court dismissed the Revenue's appeal, affirming the Tribunal's decision to allow the assessee's claims for losses on revaluation and sale of bonds. The questions of law were answered in favor of the assessee and against the Revenue.