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TMI Blog1999 (4) TMI 117X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 26/98-99 dated 18658.91 IRCON/ Ltd.1-7-1998in ITAT regarding TAX/App. disallowance of (i) Capital28-9-1998v. loss arising on transfer of Iraqi Debts in lieu of Bonds Deptt. of Revenue issued by Government of India (ii)(CBDT) deduction under section 80HHB of the I.T. Act on exchange fluctuation gain arising on discharge of Iraqi Bonds (iii) claim for deduction of bad debts (iv) notional interest provided in Books on debts, for the assessment year 1995-96. The Committee, having regard to the fact that there were important questions of law involved, with respect to the issues listed at (i), (ii) (iv) above, permitted IRCON International Ltd. to pursue the appeal in ITAT with respect to these aspects only." 2. The first issue as raised in grounds of appeal Nos. 1(a), 1(b), 1(c) and 1(a) relates to nature of Iraqi debts at Rs. 1,23,42,79,007. Shri D.B. Desai who appeared on behalf of the assessee submitted that the assessee is engaged in the execution of turn-key projects in various countries includingIraq. The assessee had entered into a contract withIraqsince 1979 and after 1982 the payments were being made by the Government of Iraq on cash payment terms. In 1983 Gove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xchange fluctuation reserve account (FEFR), pertaining to the debts lying till 31-3-1995 which were not credited to the Profit Loss account worked out to 1,234,279,007. As per note 10 of the audited account (page 154 of the Paper Book) reference was made to the decision of the directors whereby the retrieval of the foreign exchange fluctuation reserve pertaining to Iraq projects was defer-red to a future date linked with the realisation of deferred dues and bonds. In the wake of the events blocking the amount the assessee referred the matter to CBDT vide letter dated31-8-1995(page 90 of the Paper Book'. The CBDT vide F.No. 225/161/95-IT-II issued instructions to the Chief Commissioners (appearing on pages 143 to 145 of the Paper Book). Reference was made to the liquidity related problems of Indian Project Exporters and lending banks arising out of the stoppage of payments against the project receivable fromIraq. After stating that the issue of taxation is mainly regarding foreign exchange fluctuation gain which has been earned by the Project Exporters due to delayed payments of dues it was opined that the right to receive the income/ bond had arisen on the date i.e. the date of N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the term capital asset includes movable and immovable assets tangible as well as intangible and also rights in property or interest in property. With the help of various decisions as cited in the Paper Book it is submitted that the debt constitutes a capital asset. The revenue authorities have wrongly relied on the decision of the Hon'ble Delhi High Court in the case of CIT v. J. Dalmia [1984] 149 ITR 215/[1985] 20 Taxman 86, where the facts are distinguishable. In the aforesaid case the party gave up the claim for specific performance and only retained the right to claim damages. TheHon'ble Courtheld that as the mere right to sue cannot be transferred, the same may not be a property but it certainly cannot be transferred. The aforesaid decision never dealt with the right to recover money as is the case of the assessee. The claim to a debt constitutes action of the claim in terms of definition given in section 3 of the Transfer of the Properties Act and has been assigned in view of section 130 of the Property Act. In the case of the assessee what is required to be seen is whether a debt constitutes capital asset and whether there has been any transfer of the same or not. The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17, 1993. As would be evident from clause 4 of the Deed of Assignment, the cash payments earned were converted into deferred payment contracts with the agreement of the assessee. The amounts were not receivable in lump sum and therefore, constituted circulating capital. Clause (A) para 7 of the Salient Features of the Agreed Minutes dated 14th March, 1990 between Government of India and Iraq (Page 84 of the Paper Book) reflected the mode of receipts, para 8 on page 85 clearly shows that the Government of India stepped in to rescue the assessee from the difficulties it got into. Vide this agreement part of amount came to be received in the form of crude oil. The issue under consideration relates to the nature of gain or loss arising on account of fluctuations in the foreign exchange rate. This being closely and directly connected with the sundry debts would have the same characteristics as that of sundry debtors. Since the bad debts are allowable as a deduction under the provisions of Income-tax Act any gain or loss inextricably connected with the same would carry the same characteristics. The fluctuations due to foreign exchange are embeded in the project receivable from abroad. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature." Thus any profit/loss arising in the course of business of the assessee or incidental to such business is a trading profit or loss. Any factor or circumstance causing the loss is not material for determining its character. What constitutes a trading transaction is dependent on facts of each case. There could be no set formula for the same. Transactions can be of innumerable variety. Broadly put any profit or loss arising from trading asset would be a trading profit or loss. In the case of assessee it had undertaken to execute a project inIraqas a business transaction. The amounts receivable were as a result of project so executed. The amount has arisen directly from carrying on the aforesaid business. But for the UN sanction as imposed, the amount would have been repatriat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, they sell this surplus stock of dollars; and it seems to me quite impossible to say that the dollars have lost the revenue characteristic which attached to them when they were originally bought, and in some mysterious way have acquired a capital character. In my opinion, it does not make any difference that the contemplated purchases were stopped by the operation of Treasury or governmental orders, if that were the case; nor is the case affected by the fact that the purchase was under a Treasury requisition and was not a voluntary one. It would be a fantastic result, supposing the company had been able voluntarily, at its own free will, to sell those surplus, dollars, if in that case the resulting profit should be regarded as income, whereas if the sale were a compulsory one the resulting profit would be capital. That is a distinction which, in my opinion, cannot possibly be made." Accordingly the transaction as executed by the assessee could not be termed to be on capital account. 6. This finding of ours is also supported by the accounting entries made by the assessee in its books of account. It is true that the way in which entries are made by the assessee in its books of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same is of revenue nature. This is also evident from the treatment given to it under the Act. 8. In the result, in our considered view the gain or loss arising to the assessee is on revenue account and has been rightly treated as such. 9. The second issue permitted to be raised before the Tribunal relates to the assessee's claim in respect of deduction under section 80HHB of the Income-tax Act on exchange fluctuations gain arising on account of Iraqi projects. The learned AR submitted that the assessee's claim for deduction under section 80HHB of the Act was denied by the Assessing Officer on the ground that the conditions laid down in the aforesaid section were not fully satisfied by the assessee. The reasons given for rejection of the claim were that the assessee had sufficient time to create reserve which could have been done in the revised return, it was not so done. Further the assessee did not apply for extention of time for bringing convertible foreign exchange intoIndia. Not only the assessee's explanation rendered in this regard was rejected the decision of the ITAT for assessment year 1984-85 in the case of assessee on the issue was not followed. The learned CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant assessment year nor could show the amount in the revised return. Thus there were bona fide reasons for not doing so and in view of the decisions of the various courts namely Sterling Foods' case the assessee's claim should not have been rejected. The circular being beneficial to the assessee was binding on the officers as held in the case of Navnitlal C Javeriv. K.K. Sen AAC [1965] 56 ITR 198 (SC), CIT v. Sriram Agrawal [1986] 161 ITR 302/28 Taxman 81 (Pat.) ABC India Ltd. v. Dy. CIT [1996] 217 ITR 255/86 Taxman 267 (Gauhati). Even the earlier decision of the Tribunal for assessment year 1983-84 which was on the same issue was not followed. As regards the objection of the learned CIT(A) that the profits and gains accruing to the assessee were not derived from the business of execution of a foreign project the same does not hold good. By now the distinction between expression derived an attributable is well established. There is a close nexus with the profit and gains arising on account of fluctuation in foreign exchange with the project receivable. The latter have arisen from the execution of projects in the course of business as held by the learned CIT himself in an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the extension of period of six months the same was directed to be construed liberally in so far it related to section 80HHB of the Act. In the circumstances, we fail to understand as to how in not applying for extension of time the assessee's claim could have been denied. The amounts were receivable somewhere in future and that too in a period of years. Regarding gain and loss having not arisen from the project executed has no logic. A gain or loss has arisen on account of the amount receivable in foreign exchange which is the result of execution of a project in the course of business. It has close and direct nexus with the project executed and as such it could not be said that on this account the claim of the assessee could be rejected. As regards non-creation of reserve there were bona fide reasons as were explained and in view of the decision of the jurisdictional High Court in the case of Continental Construction Co. v. CIT[1990] 185 ITR 178 (Delhi) as well that of the Supreme Court in the case of the same Continental Construction Ltd. v. CIT [1992] 195 ITR 81/60 Taxman 429 the claim is allowable. Otherwise too as held in the case of Navnitlal C Javeri ; and Sriram Agrawal, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14th March, 1990 for the years 1989 1990. Thereafter no protocol was signed by Government of India and the Iraqi Government. In clause No. 10 of the protocol dated14th March, 1990it was provided that arrangements for 1990 would be discussed by the Government of India andIraqbefore the end of 1990 and that in the event of delay payment for the intervening period from January, 1991 toJanuary 31, 1991will be covered by the terms of agreement. For payment of interest for the outstanding balance there was no protocol from1-2-1991for the remaining period between the Government of India and Government of Iraq. Despite that the assessee provided interest in respect of its different projects in the financial year 1991-92 to 1994-95. For the financial year 1994-95 the interest was included in Schedule M of the printed accounts under the head Other interest of Rs. 7,45,07,166. In their note No. 9 of the notes the auditors mentioned as under : "Sundry debtors include interest receivable cumulative upto 31-3-1995 Rs. 2740.30 lakhs (Rs. 3,001.33 lakhs), for the year Rs. 25.23 lakhs (Rs. 793.33 lakhs), on the deferred dues for the Iraq projects provided on the LIBOR rate on the basis of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tical income, which does not materialise." Thus the real question for decision is whether the income has really accrued or not. The question whether there is a real accrual of income to the assessee would be dependent on the facts of the case. In the case of the assessee the circumstances under which the Government of India and Government of Iraq entered into protocol have been referred to in the paras preceding. The first protocol was signed between Governments Of India andIraqon15th March, 1984in respect of foreign currency portion and subsequently in 1985, 1986, 1987, 1988, 1989 and 1990. Thereafter no protocol was signed by the Government of India. Clause No. 10 of the Protocol dated 14th March, 1990 only provided for interest for the intervening period from January 1, 1991 to January 31, 1991. After this there was no protocol for the remaining period. As stated by the assessee's counsel and not controverted by the learned DR, till date no interest has been paid. Even in the deed of assignment under which the bonds were issued by the Government of India in payment of Iraqi dues the interest was paid for the period till31-1-1991as determined. Thus there was no real accrual of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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