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TMI Blog2015 (5) TMI 553X X X X Extracts X X X X X X X X Extracts X X X X ..... ngement for its payment through bonds that were to mature in future - with interest did not in any way alter their character or convert them into capital assets as the assessee argues. Rather, this Court is also of the opinion that the analogy of bad debts and their reduction from the revenue receipts in a given year and its converse treatment - by virtue of Section 36(1)(vii) is apt to the circumstance of the case. The assessee’s claim of capital loss, based on indexed treatment of capital gain is therefore insubstantial and unfounded on any principle. - Decided in favour of the Revenue - ITA 37/2000 - - - Dated:- 15-5-2015 - S. Ravindra Bhat And R. K. Gauba,JJ. For the Appellant : Mr. V. Giri, Sr. Advocate with Mr. Tanmay Mehta, Advocate. For the Respondent : Mr. Kamal Sawhney, Sr. Standing Counsel with Mr. Basabraj Chakraborty and Mr. Shikhar Garg, Advocates. JUDGMENT Justice S. Ravindra Bhat 1. The question of law which arises in this appeal, under Section 260A of the Income Tax Act, 1961 (hereafter the Act ) is: - Whether the assessee s claim that there was a loss and/or it was a capital loss is legally tenable 2. The order impugned in this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our of the Central Government entitled the assessee to receive the value in the form of Compensation Bonds in 2001 and was not considered properly. It was argued that the Iraqi Government s debts, recoverable by the assessee, were in the nature of blocked/sterilized debts or money. In terms of the Government to Government protocol agreements, the banking arrangements between the Exim Bank of India and the Central Bank of Iraq and the relative developments vis-a-vis the debts detailed in the Deed of Assignment, had to be determined under the Act. The assessee was not entitled to and was in fact barred from using the receivables from the Iraqi Government in any manner, much less in the course of, or in carrying on its business activities. This was due to the supervening impossibility caused by entirely extraneous circumstances. The effect, however, was that the amounts could never be said to have been the main part of its entitlement. The acceptance of compensation bonds under these circumstances upon assigning of the Iraqi debts (to the Central Government) was not a part of the appellant‟s business or trading activities. Counsel, therefore, faulted the ITAT s findings on this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company was not treated as income and the Court had then noticed and followed its previous rulings in Canara Bank (supra). 8. Learned senior counsel argued that the amount received upon debt assignment could not be treated as income under Section 2(24) but was receipt in value, in consideration of assignment, in the form of compensation bond. The receipt was the consideration in transfer of a capital asset under Section 2(47) of the Income Tax Act. Learned counsel relied upon the decision of the Supreme Court in Karanpura Development Co. v. Commissioner of Income Tax (1962) 44 ITR 362 to say that income is derived through a periodical monetary receipt not in the nature of a windfall but coming in with some sort of regularity or expected regularity. Such amount, however, would not include fixed capital or realization of fixed capital but earning into other form of capital or money. So stating learned counsel submitted that the assessee s contentions were well founded and could not have been rejected by the ITAT. 9. Learned counsel for the Revenue argued that ITAT s impugned order should not be disturbed. He submitted that the assessee claimed capital loss of ₹ 1,48,22,66 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure, and the business income to the extent of those debts is reduced. Conversely, if debts are recovered above the book value, such amount would have to be taxed as income. Analogically, exchange gain in respect of debts would fall in the same category, and would be liable to be taxed as business income. It was argued by learned counsel for the Revenue that the intervening development of the Central Government taking over the debt and issuing bonds for a particular value did not in any way disturb the character of the amounts received or receivable from the Iraqi Government which would have also shown exchange gain. Learned counsel further submitted that debts were not the assessee s investment as understood in common parlance in the sense that a profit was intended to be earned on their sale or transfer. 12. Learned counsel lastly highlighted that the debt in the present case due from the Iraqi Government was an incident of the assessee s business and its settlement by the Central Government, (which allotted compensation bonds) could not on the date of such transfer, result in transfer of capital asset. Consequently, the assessee s claim for entitlement to the benefit of indexa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther banks. In terms of this MoU, ECGC started settlement of claims due to the assessee and other contractors. As a result, the assessee received some cash payment which was adjusted by the Exim Bank against rupee loan availed to the Exim Bank. The amounts ultimately paid were in the form of bonds issued and guaranteed by the Central Government, maturing in 2001 and carrying 12.08% interest per annum (they were entitled the 12.08 Government of India Compensation (Project Exports to Iraq) Bonds, 2001 ). The value of the bonds so issued to the assessee included a foreign exchange fluctuation gain of ₹ 1,234,279,007/-. The assessee treated the currency fluctuation gain in its books of account for AY 1996-97. The assessee accepted the year of accrual of income or loss as AY 1995-96 based on a board circular and claimed capital loss by refusing its return of income and sought to carry forward loss which according to it was unabsorbed. The income or gain on assignment of the debt - to the Central Government - in view of the bonds, was computed under the head capital gain . The assessee contended that the Iraqi debt was a capital asset which was transferred and that the full value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing account or part of circulating account. However, the exception is that if such currency is held as capital account, such profit or loss would be of capital nature. The ITAT then held as follows: .....................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 repatriated to India as was the case before UN sanction and employed in the trading operation of the business. In such a situation it would constitute a circulating capital as it is intended to be utilized in the course of business or for trading purpose or for effecting a transaction on revenue account. The amount retained abroad was on account of factor beyond the assessee s power. The latter is however, not material for determining the character of the receipt. The amount as retained was not for utilising it for purchase of any capital asset. XXXXXX XXXXXX XXXXXX 6. This finding of ours is also supported by the accounting entries made by the assessee in its books of accounts. It is true that the way in which entries are made by the assessee in its books of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue nature. This is also evident from the treatment given to it under the Act. 15. In the present case, the assessee s submissions hinge almost entirely on the two decisions of the Supreme Court in Canara Bank (supra) and Universal Radiators (supra). In the first case, the issue was the inability of a foreign branch of an Indian bank to repatriate amounts to India due to difficulties faced on account of delayed valuation of currency. The subsequent currency valuation and the bank s ultimate successes in repatriating the amount to its headquarters, was with an exchange gain. This exchange gain was held to not be income. Unlike in the present case, the amount always belonged to the bank - its foreign branch was not a separate incorporated entity but was in fact integral to its operation. Also, the amount was not profit, but part of its general stock in trade. The event which intervened and injected temporary blockage of the funds was the partition of India. It was in these circumstances that the amounts lying in the foreign branch - which were part of its stock in trade, were treated as such; they never lost their character. Likewise, in the case of Universal Radiators (supra), t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xternal factors and economic sanctions. 17. A fact which did not go unnoticed by the Revenue is that the assessee s statutory auditors in note 6 of their debt report dated 28.06.1995 commented adversely that the credit balance appearing in the Foreign Exchange Fluctuation Reserve Account (FEFR A/c) relating to the debts released till 31.03.1995 - a sum of ₹ 1,261,252/-was not credited to the P L account thereby understating the profit to the said extent. This was sought to be explained by the assessee that income, if any, due on account of FEFR on discharge of the Iraqi debts would accrue only in the year in which the bonds would be paid by the Central Government. The assessee further sought to elaborate by stating that the deed of assignment dated 10.03.1995 resulted in the Central Government purchasing its right to realize the amount in hard currency from the Iraqi Government. The bond amount was to mature in 2001. Consequently, the assessee contended that the income would be shown when the bonds mature. However, the lower authorities rejected that explanation. During the pendency of the assessment proceedings, on 7.5.1996, the CBDT had issued a circular that income, if ..... X X X X Extracts X X X X X X X X Extracts X X X X
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