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TMI Blog2016 (12) TMI 363X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - ITA No. 233 of 2009 - - - Dated:- 29-11-2016 - Hon ble Chief Justice Girish Chandra Gupta And Hon ble Justice Arindam Sinha For the Appellant : Md. Nizamuddin, Adv. Ms. Smita Da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assesse in favour of the President of India by and under two several Deeds of Assignment both dated 6th May, 2002. Consequent to such assignment, the Government of India issued and/or agreed to issue bonds for US Dollars $87,53,051.62 as certified by the Rafidain Bank, Iraq with respect to Hilla Water Supply Scheme and bonds for US Dollars $146,15,102.50 as certified by the Rafidain Bank, Iraq in respect of Left Bank Mosul Water Supply System. Rafidain Bank had certified in both the cases that the aforesaid sum in US dollars were payable to the assesse as on 30th September, 2001. The total sum of US Dollars $2,33,68,154.12 (87,53,051.62+146,15,102.50) included a sum of US Dollars $27,78,033.79 on account of interest according to the settlement of dues evidenced by the document appearing at page no. 49 of Volume 2 of the paper book which appears to have been issued by the Exim Bank, Mumbai. From the Deeds of Assignment it appears that the assesse had originally agreed to accept the payment on deferred payment basis from the Iraq Govt. The agreements between the assesse and the foreign employer are not, however on the record. It has already been noticed that as on 31st March, 1991 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... follows:- COMPUTATION OF CAPITAL LOSS Rs. Rs. Exchange Fluctuation Gain 37,91,32,5 87 Add: Amount accounted for as contract receipt in the year under appeal including 63,25,667 6246 63,31,913 Rounding ----------- ---------- ---------- --------- 38,54,64,5 00 Amount converted in US Dollars @47.86= (38,54,64,500/47.86) 80,54,001 Value of US$ 80,54,001 as on 31.3.91 in Rupee(80,54,001 X 19.55= 15,74,55,724) INDEX VALUE 15,74,55,724 182 x 447 38,67,18,1 79 Less: Exchange Fluctuation Gain 37,91,32,5 87 Lon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r and also failed to fulfil the condition specified under Section 36(2) of the said Act? The assessee has filed a cross-objection and raised the following substantial questions of law:- I. Whether the learned Tribunal misdirected itself in law and adopted a wholly erroneous approach in holding that the deduction under section 80HHB of the said Act, was not available to the Respondent/Assessee Company in respect of ₹ 63,25,667/- realised by it in the form of Government of India Compensation Bonds, 2008 during the year under appeal? II. Whether the findings of the learned Tribunal to the effect that the Assessee Company did not comply with all the conditions laid down in Section 80HHB(3)(i) (iii) of the said Act, are against the facts and evidences on record, based on irrelevant considerations, unreasonable and/or otherwise perverse? The learned Tribunal allowed the contention of the assessee that the excess sum received was a capital gain but did not examine the reasoning advanced by the assessing officer which was as follows:- Without prejudice to the above, it may also be remarked here that the indexation carried out by the assesse while computing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 80HHB of the said Act, was not available to the Respondent/Assessee Company in respect of ₹ 63,25,667/- realised by it in the form of Government of India Compensation Bonds, 2008 during the year under appeal? (f) Whether the findings of the learned Tribunal to the effect that the Assessee Company did not comply with all the conditions laid down in section 80HHB(3) (i) (iii) of the said Act, are against the facts and evidences on record, based on irrelevant considerations, unreasonable and/or otherwise perverse? The reasons assigned by the learned Tribunal for disallowing deduction under Section 80HHB are as follows:- (A) The bonds issued by the Reserve Bank of India did not constitute convertible foreign exchange. (B) Circular No.711 dated 24th July, 1995 issued by the CBDT does not cover the instant case and separate circular was required in respect of these bonds. (C) The assessee did not comply with the conditions laid down in Section 80HHB (3)(i) and (iii). The view that the conditions laid down in Sub-Section 3(i) of Section 80HHB were not fulfilled is belied by the observation made by the Tribunal that the assessee maintained separate project ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the concurrent views of the CIT and the learned Tribunal allowing the claim for bad debt is that the loan had been advanced to the sister concerns. The sister concerns in their turn had advanced moneys to various parties. When the former failed to recover the same they assigned the same in favour of the assessee. The assessee did not provide for any interest in its books of accounts on the loans which were assigned to it by its debtors who are no other than the sister concerns. Paragraph 83 of the impugned judgement has been relied upon by Mr. Poddar which reads as follows:- As regards the contention of ld. CIT DR to the effect that the Assessee did not provide any interest in its books of accounts on the debts taken over by it from the loanee companies in terms of the Deeds of Assignments appearing at pages 14-29 of Volume II of the Paper Book filed on behalf of the Assessee before us, we find that the assessee had provided interest year after year on the loans advanced by it in course of its money lending business to each of the three companies viz. Som Datt Enterprise Ltd., Datt Enterprise Ltd. And Khaneja Consolidated Co. Ltd. The interest on all these loans had be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lending carried on by the assesse. In this case, admittedly the assignment took place in the earlier years namely viz. 1998 to 2000 . The order of the learned Tribunal for the assessment year 1997-98 passed on 27th December, 2002 contains the following finding:- From the record, we find that in addition to the construction activity, the assesse-company was also engaged in the business of money lending which comprises of loans against shares, L.C. Discounting and other financial transactions. This money lending division of the assesse company was also earning huge revenue over the last several years and the interest income arising from the money lending business during the relevant assessment year under consideration was ₹ 6.02 crores as against interest income of ₹ 12.24 crores in the immediately preceding year. It appears, that between the assessment years 1998-99 and 2003-04 the assesse had shown the following income from interest, from paragraph 18 of the impugned judgement which we have quoted above. Assessment Year Interest Income included in Column II (Amount in Thousand) 1998-1999 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the profits and gains of a year account must necessarily be taken of all losses incurred, otherwise you would not arrive at the true profits and gains. The next judgement relied upon by him is in the case of Ramchandar Shivnarayan Vs- CIT reported in (1978) 111 ITR 263 wherein the following views were expressed:- Under section 10(1) of the Indian Income-tax Act, 1922, hereinafter called the 1922 Act, the assesse was required to pay tax in respect of the profits or gains of any business carried on by him. The corresponding provision in the 1961 Act is to be found in section 28. Sub-section (2) of Section 10 of the 1922 Act prescribed the method for computation of profits or gains after making the allowances enumerated in the various clauses of that sub-section. The corresponding section 29 of the 1961 act says: The income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43A. In terms no specific provision is to be found in either of the two Acts for allowing deduction of a trading loss of the kind we are concerned with in this case. But it has been uniformly laid down that a trading loss not being a capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reof in Indian currency during the current year was ₹ 83,59,80,000/- in the Indian currency. The question is whether the differential amount of ₹ 37.91 crores after offering ₹ 63,25,667/- for taxation on account of project receivables is a revenue receipt or a capital receipt. In the case of CIT Vs- Canara Bank Ltd. reported in (1967) 63 ITR 328(SC) an identical question arose. The facts and circumstances of the case were as follows:- The respondent-bank had opened a branch in Karachi on November 15, 1946. After the partition of India in 1947, the currencies of the two Dominions of India and Pakistan continued to be at par until there was a devaluation of the Indian rupee on September 18, 1949. On that date the respondent had a sum of ₹ 3,97,221 at the Karachi branch belonging to its head office. As Pakistan did not devalue its currency the parity between the Indian rupee and the Pakistan rupee ceased to exist. The exchange ratio between the two countries was not determined until February 27, 1951. The bank did not carry on any business in foreign currency - and even after it was permitted to carry on business in Pakistan currency on April 3, 1951, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 1,68,97,232 converted at the then prevailing rate of exchange of 100 Pakistani rupees to 144 Indian rupees. On August 8, 1955, Pakistan devalued its rupee restoring the parity between the Indian rupee and the Pakistani rupee. Thereafter, during the accounting periods relevant to the assessment years 1957-68 and 1959-60, the appellant obtained permission of the Reserve Bank of Pakistan and remitted to India ₹ 25 lakhs and ₹ 12 lakhs, respectively. The appellant claimed that on remittance the appellant suffered respectively a loss of ₹ 11 lakhs and ₹ 5 lakhs but the claim was rejected by the department and the Tribunal sustained the disallowance. On a reference, the High Court held that no loss was sustained by the appellant on remittance of the amounts from West Pakistan and that, in any event, the loss could not be said to be a business loss because it was not a loss arising in the course of the business of the appellant but was one caused by devaluation which was an act of State. Their Lordships answered the question as follows:- What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it makes no difference that it is occasioned by devaluation brought about by an act of State. It is not the factor or circumstance which causes the loss that is material in determining the true nature and character of the loss, but whether the loss has occurred in the course of carrying on the business or is incidental to it. If there is loss in a trading asset, it would be a trading loss, whatever be its cause, because it would be a loss in the course of carrying on the business. Take for example the stock-in-trade of a business which is sold at a loss. There can be little doubt that the loss in such a case would clearly be a trading loss. But the loss may also arise by reason of the stock-in-trade being stolen or burnt and such a loss, though occasioned by external agency or act of God, would equally be a trading loss. The cause which occasions the loss would be immaterial: the loss, being in respect of a trading asset, would be a trading loss. Consequently, we find it impossible to agree with the High Court that since the loss in the present case arose on account of devaluation of the Pakistani rupee and the act of devaluation was an act of sovereign power extrinsic to the busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bros. of the U.K. was resident in India. It was incorporated at a time when Burma was part of India. It owned oil fields in Burma and carried on the business of prospecting for, winning and trading in oil. The oil fields were destroyed during the war. In 1950, it received the sterling equivalent of ₹ 97,01,124 from the Govt. of U.K. by way of ex gratia grant for the rehabilitation of its war-damaged industry. This amount was credited by the company to its capital reserve account. This reserve, subject to certain subsequent adjustments, had been permanently reflected in the company s investments in U.K. Govt. securities, Burma Oil Co. (1954) shares and U.K. Municipal Corporation deposits. These amounts lying in the U.K. were not easily encashable nor could they be utilised by the assesse except with the permission of the Reserve Bank of India (RBI). In 1956, the company entered into an arrangement with Steel Bros. for prospecting for oil in the U.K. and for this the company obtained the Reserve Bank s approval to retain a sum of $1,50,000 in the U.K. As the company s total funds in the U.K. was much higher, the RBI from time to time instructed the assesse to repatriate funds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an error which resulted in an erroneous finding, which can be properly described as a perverse finding in law. In the premises, question No. 1 must be answered in the affirmative and in favour of the assessee. But this finding by itself would be of little academic interest. This finding or this question is really a step into the other main question, viz., question No. 3, that is to say, whether the sum of ₹ 1,68,157 had been correctly taxed as part of the assessee's trading profits? We now proceed to deal with this aspect of the matter. We have set out the reasons and the basis on which the Tribunal came to the finding that the amount in question was taxable. We have also set out the origin of this amount. On behalf of the assessee, it was contended that the Tribunal proceeded on the basis that as the said amount had been held to be circulating capital, any profit or accretion resulting therefrom would be in the nature of a revenue transaction and if profit accrued out of such transaction, such profit would be taxable on revenue account. The distinction, as we have mentioned before, between circulating capital and fixed capital is well known in law and in econom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case and the High Court was right in reaching the conclusion that the exchange difference of ₹ 1,70,746 was not assessable to income-tax. Incidentally, it may be mentioned that this was a decision rendered by a Bench composed of three learned judges of the Supreme Court and it was held, as it was necessary to hold in that case, that the fact of appreciation of the money did not arise in the course of any trading operation and assuming the amount, with which the Supreme Court was concerned, was originally the stock- in-trade, when it was blocked and sterilised by the bank, the assessee was unable to deal with that amount. It ceased to be the stock-in-trade and the increase in its value, because of the fluctuation in the rate of exchange, was a capital receipt. It was further observed that if by virtue of exchange operations profits were made during the course of the business and in connection with business transactions, the excess receipts on account of conversion of one currency to another would be revenue receipts, but if the profit arises by virtue of exchange operations, and not by way of business of the assessee, it would be a capital receipt. If that ratio is appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e contracts of the type with which we are concerned, payments were capital receipts or not would depend upon the facts and circumstances of the case. In this connection it is important to bear in mind that normally in trade there are two types of capital, one circulating capital and the other fixed capital. Fixed capital is what the owner turns to profit by keeping it in his own possession; circulating capital is what he makes profit of by parting with it and letting it change hands. Therefore, circulating capital is capital which is turned over and in the process of being turned over, yields profits or loss. It is well settled as the High Court observed in the judgment under appeal that what is capital assets in the hands of one person may be trading assets in the hands of the other. The determining factor is the nature of the trade in which the asset was employed. Compensation received for immobilisation, sterilisation, destruction or loss, total or partial of a capital asset would be capital receipt. If a sum represented profit in a new form then that was income but where the agreement related to the structure of assessee's profit making apparatus and affected the conduct of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain as is being urged here. All that was said was that the isolated transactions in both cases, i.e Canara Bank (supra), the exchange fluctuation resulting in gain on account of devaluation of Pakistani Rupee-was an intrinsic part of the bank's operation; and in Universal Radiators (supra), the settlement of the insurance claim as compensation, the receipts were in the true sense not real income but capital and unintended accruals. Here, however, the debts payable were not on account of any advances given to the Iraqi Government by the assessee but rather as consideration for the services provided. In fact, for some of the years, part consideration was paid through Iraqi Dinars. It was the balance - payable in hard currency which could not be repatriated due to external 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 accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon a judgement in the case of Calcutta Jute Agency Pvt. Ltd. Vs- CIT, West Bengal reported in 117 ITR 741 (Cal) wherein it was held that the fact that the fund became frozen or immobilised does not make any difference. This judgement was rendered without considering the views expressed by the Apex Court in the case of Canara Bank (supra). We are, as such of the opinion that this judgement is of no assistance to the revenue. This question No. (a) is answered, accordingly, in favour of the assesse. The next question which arises for determination is whether the capital receipt of a sum of ₹ 37.91 crores is liable to capital gains. The assesse himself admitted that the same is liable to taxation by way of capital gains. The assesse however has contended that it is not liable to pay any capital gain tax on the basis that if the aggregate of the excess project receivables amounting to ₹ 38,54,64,500/- are divided by a sum of ₹ 47.86/- which was the exchange rate of Dollars in the current year, the same would work out to 80,54,000 US Dollars, which at the prevailing exchange rate as on 31st March, 1991 would have fetched a sum of ₹ 15,74,55,724/-. The ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n asset within the terms of Section 45 and, therefore, if transferred is not subject to Income Tax under the head capital gains. The aforesaid view was taken on the following basis:- This inference flows from the general arrangement of the provisions in the Income-tax act, where under each head of income the charging provision is accompanied by a set of provisions for computing the income subject to that charge. The character of the computation provisions in each case bears a relationship to the nature of charge. Thus the charging section and the computation provisions together constitute an integrated Code. There may not be any quarrel with the proposition that the charging Section and the computation provisions together constituted an integrated Code. But, in this case the facts and circumstances are not the same as that of goodwill. At the relevant point of time when the aforesaid judgement was rendered profit arising out of transfer of goodwill was not taxable which is now taxable. The second judgement relied upon by Mr. Poddar is in the case of CIT, Calcutta Vs- Satya Paul reported in (1984) 148 ITR 21 (Cal) a Division Bench of this Court in that case held as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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