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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 ..... Mosul Water Supply Scheme on deferred payment basis. While execution of the aforesaid projects was in progress, remittances from Iraq on account of project receivables were suddenly stopped since June, 1990 due to Gulf Crisis and sanctions, imposed by the United Nations against Iraq as on 31st March, 1991. US Dollars $86,69,772.20 in respect of Hilla Water Supply Scheme and US Dollars $1,43,74,818.40 in respect of Left Bank Mosul Water Supply Scheme aggregating to US Dollars $230,44,590.60 correspondingly a sum of Rs. 45,05,21,747/- in Indian Currency were receivable by the assesse but nothing was recovered. The assesse wrote off the said sum of Rs. 45,05,21,747/- during the assessment year 1995-96. The stoppage of remittance from Iraq had not only affected the Indian Project Exporters but Exim Bank and other commercial banks, who had advanced credit facilities to the Indian Project Exporters against policies/counter-guarantees furnished by ECGC, were also affected. In order to resolve the deadlock, a group was constituted by the Government of India on 12th September, 2001 consisting of the representatives of Reserve Bank, Exim bank and ECGC to work out the modalities for the imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llows:- "Further, there is also no dispute with regard to the balance project receivables in the aggregate sum of US $3,23,563.52 equivalent to Rs. 63,25,667, which represented untaxed project receivables, and were not known to the assesse company earlier, on account of sudden abandonment of project activity in due to gulf war, and came to its notice only during the year under appeal on receipt of relevant information through the ECGC/Exim Bank/Rafidain Bank. The said sum of Rs. 63,25,667 had also been shown by the assesse as its business income in the return filed for the assessment year 2003-04. The same has also been duly taxed by the AO, as business income, in the year under appeal." The case of the assesse was as follows:- (A) The sum of Rs. 45,05,21,747/- written off on 31st March, 1995 was restored to the profit and loss account of the current year. (B) US Dollars $3,23,563.52 received in excess were offered for taxation as a business receipt. (C) The US Dollars $2,33,68,154.12 upon conversion in Indian Currency fetched a sum of Rs. 83,59,80,000/-. After giving credit for a sum of Rs. 45,05,21,747/- on account of money written of and a sum of Rs. 63,25,667/- (equivalen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,98,000/- was upheld. The revenue has come up in appeal. The following substantial questions of law were suggested on 7th January, 2010 when the appeal was admitted. "(a) Whether on the facts and in the circumstances of the case the Tribunal was justified in law in deleting the addition of Rs. 37,91,32,586/- with regard to the gain on account of exchange fluctuation in relation to foreign projects receivable from Iraq treating it, as Capital receipts and not revenue receipts as assessed by the assessing officer? (b) Whether on the facts and in the circumstances of the case the Tribunal was justified in law in deleting the addition on account of Bad Debt disallowed Rs. 14,22,98,000/- despite the fact that the assessee failed to establish that it was engaged in the business of money lending during the year 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital loss of Rs. 75,85,592/- was computed in accordance with law? (c) Whether in the facts and circumstances of the case there was any cost of acquisition? If so what was that? (d) Whether in the facts and circumstances of the case the Tribunal was justified in law in upholding deletion of the addition on account of Bad Debt amounting to Rs. 14,22,98,000/- despite the fact that the assesse, according to the revenue, had failed to establish that it was engaged in the business of money lending during the year and also, according to revenue, failed to fulfil the condition specified under Section 36(2) of the said Act? (e) 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 Rs. 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 evid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... projects in Iraq will be treated as convertible foreign exchange brought into India for the purposes of section 80HHB. The request for extension of the period of six months for bringing in convertible foreign exchange into India may be liberally allowed by the Chief Commissioner/Commissioner of Income-tax." We are, as such, of the opinion that the deduction under Section 80HHB is admissible in this case. The question No. (e) is thus answered in favour of the assessee. In that view of the matter, the question No. (f) need not be answered. We now take up the question as regards the allowability of the deduction on account of bad debt of a sum of Rs. 14,22,98,000/-. The submission advanced by Mr. Nizamuddin assailing 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 sist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich provides as follows:- "no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assesse of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assesse;" It would appear that charging of interest in the previous year is not the only pre-condition. This is one of the pre-conditions. There are alternatives. The alternative condition is that the amount sought to be written off represents money lent in the ordinary course of business of banking or money 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relied upon a judgement in the case of Badridas Daga -Vs- Commissioner of Income Tax reported in (1958) 34 ITR 10 wherein the following views were taken:- "Although the Act nowhere in terms authorises the deduction of bad debts of a business, such a deduction is necessarily allowable. What are chargeable to income-tax in respect of a business are the profits and gains of a year; and in assessing the amount 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 cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year 1995-96. The RBI Bonds of 2008 were received by the assesse for the US Dollars $2,33,68,154.12 in the current year out of which US Dollars $3,23,563.52 have already been offered for the taxation leaving thereby balance US Dollars $2,30,44,590.60. At the time when the write off was claimed and allowed, the value of the aforesaid Dollars was Rs. 45,05,21,747/- whereas value thereof in Indian currency during the current year was Rs. 83,59,80,000/- in the Indian currency. The question is whether the differential amount of Rs. 37.91 crores after offering Rs. 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 Rs. 3,97,221 at the Karachi branch belonging to its head off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces of the case were as follows:- "The appellant company, which had its head office in Calcutta, had a cotton mill situated in West Pakistan where it manufactured and sold cotton fabrics. During the financial year ending March 31, 1954, relevant to the assessment year 1954-55, the appellant made large profits amounting to Indian Rs. 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 Rs. 25 lakhs and Rs. 12 ½ lakhs, respectively. The appellant claimed that on remittance the appellant suffered respectively a loss of Rs. 11 lakhs and Rs. 5 ½ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of conversion of foreign currency which is part of trading asset of the assesse, such loss cannot be regarded as a trading loss because the change in the rate of exchange which occasions such loss is due to an act of the sovereign power. The loss is as much a trading loss as any other and 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l asset, loss arising from depreciation would be a capital loss." In the case of Indo-Burma Petroleum Co. Ltd. -Vs- CIT reported in (1982) 136 ITR 251 (Cal) an identical question arose in the facts and circumstances of the case as follows:- "The assesse-company, a subsidiary of Steel 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 Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Sutlej Cotton Mills Ltd. v. CIT, [1979] 116 ITR 1 (SC), a decision with which we shall have to deal in greater detail later on; on various aspects. For the reasons, as we have indicated before, in our opinion, the Tribunal committed an error of law in its finding, 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 Rs. 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anking operations within Pakistan and it is hence not possible to draw an inference that the bank realised any profit in the carrying out of its business. We accordingly hold that Mr. Hazarnavis is unable to make good his argument on this aspect of the case and the High Court was right in reaching the conclusion that the exchange difference of Rs. 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 exces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y stock-in-trade and payments were made for taking over the stock-in-trade, then no question of capital receipt comes. The sum would represent payments of revenue nature or trading receipts. Whether in a particular case, for the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter of the amount receivable. The analogy drawn on the basis of the two decisions is neither sound nor appropriate. In neither case did the Supreme Court hold that the increase in value of the Indian Rupee, amounts to a gain 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " We are of the opinion that the view taken in the aforesaid judgement is patently contrary to the view taken by the Supreme Court and this Court which we have discussed above. Mr. Nizamuddin also relied 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 Rs. 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 Rs. 38,54,64,500/- are divided by a sum of Rs. 47.86/- which was the exchange rate of Dollars ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C. Srinivasa Setty reported in AIR 1981 SC 972 wherein it was held that goodwill generated in a newly commenced business could not be described as an 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. Podd ..... X X X X Extracts X X X X X X X X Extracts X X X X
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