TaxTMI 
TaxTMI 
2015 (5) TMI 553
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the Iraqi Government. 3. The brief facts are that in the year 1983-84, the Government of Iraq expressed inability to pay the US Dollar Component to the assessee and other project exporters who had provided services under contract to it, under those contracts due to its involvement in war with Iran. Protocol Agreements were signed between the Union (Indian) Government and Government of Iraq. Banking arrangements were also worked out between Exim Bank of India and Central Bank of Iraq. In consideration of the appellant assigning debt receivables for the work done in US$ entered in the books of Central Bank of Iraq by executing Deed of Assignment dated 10.3.1995, the Central Government of India, pursuant to its notification dated 24.3.1995 issued Compensation Bonds-2001 governed by the provisions of the Public Debts Act, 1944 and the Public Debt Rules, 1945. 4. By computing the value of such bonds, on indexed cost of acquisition the assessee claimed loss in its return for Assessment Year 1995-96. The loss under the head "Capital Gains" was stated at Rs. 1,48,22,66,649/-. By Assessment Order dated 6.3.1998 under Section 143(3) of the Income Tax Act, the Assessing Officer (AO) wa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rs. Circulating capital consequently means amounts employed in trading operations of the business and dealings with it comprise "trading receipts" and "trading disbursements". It was also submitted that Sutlej is an authority for the further propositions that it can never be stated with certainty that a trader‟s assets be placed in two compartments only, and that the character of the deposits is to be determined to see if it is employed in trading operations. 7. Learned senior counsel also relied upon the judgment of the Supreme Court in Commissioner of Income Tax, Mysore v. Canara Bank Ltd., AIR 1967 SC 417. In that case, the question that the Supreme Court had to deal with related to the foreign exchange fluctuation difference which had accrued to the assessee on account of an embargo placed due to difficulties in remittances from the foreign branch of an Indian Bank. The devaluation of the foreign currency led to an increase in the value of the Indian Rupee and enhanced the amounts lying in the assessee's account at its overseas branch. The Court upheld the High Court's decision that the increment which arises in such eventuality was not due to trading operations in the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on of capital loss was furnished in the revised return; Note 6 of the said return stated that Rs. 12,61,252 lakhs was not credited to the profit and loss account as it pertained to debts realized till 31.3.1995 and that the correct amount finally worked-out on this account was Rs. 1,23,42,79,007. The assessee had contended that income, if any, due on account of FEFR on discharge of Iraqi debts would accrue in the year in which the bonds were to be paid by the Central Government. The bonds were received by the company during AY 1996-97. 10. Learned counsel for the Revenue submitted that the amount shown as receivable from the Iraqi Government was under the head of "sundry debtors" and could by no stretch of imagination be termed as a "capital asset". It was highlighted that the assessee was like any other project exporter to Iraq who had suffered a blockage of its debt receipts, (due to extraneous factors such as US sanctions), and was the recipient of the hardship mitigation measures by the Central Government, which took over such debts and issued equivalent rupee bonds. It was argued that there was no profit element due to the taking-over of the debts by the Central Government ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt given by the assessee established that the gain on account of exchange fluctuation was a business receipt. Analysis and conclusions 13. The appellant in its return for AY 1995-96 claimed a capital loss of Rs. 1,48,22,66,649/-. It was a project exporter entitled to receive amounts as part of its consideration from the Iraqi Government for a number of years. The unpaid dues were on account of the Iraqi Government's inability to repatriate any amounts due to economic blockage and the consequent sanctions imposed upon it. When the assessee had entered into the contracts, for a short duration, the Iraqi Government paid part-consideration in Iraqi Dinars and the rest in US$. The payments receivable in respect of executed work up to accounting year 1991-92, but not paid aggregated to US$ 59,967,085/. Whilst entering into the contracts with the Iraqi Government, the assessee had procured a policy from Export Credit Guarantee Corporation (hereinafter "ECGC"), which covered risk to the extent of 80% of the contracted amount. The inability of the Iraqi Government to pay the consideration agreed for the execution of the work resulted in the Central Government stepping in, and after ne....
X X X X Extracts X X X X
X X X X Extracts X X X X
....941 1986-87 2,463,774 259/140 4,557,982 1987-88 1,820,390 259/150 3,143,207 1988-89 10,209,575 259/161 16,424,099 1989-90 15,319,151 259/172 23,067,791 1990-91 2,617,221 259/182 3,724,507 1991-92 632,139 259/199 822,733 59,967,085 107,173,029 (ii) Computation of capital loss: Full value of consideration of Iraqi Debts being the amount of debt converted into bonds. US $ 5,99,67,085 Less : Indexed cost of acquisition of Iraqi Debts as per (i) above US $ 10,71,73,029 Loss under the head Capital Gains US $ 4,72,05,944 Loss in Rs. (converted @ 1 US $ = Rs. 31.40 Rs. 148,22,66,649 14. As is evident, all the revenue authorities and the ITAT negatived the assessee's contentions. Its submission is that whatever be the initial character of the amounts of dues owed by the Iraqi Government, on account of the intervening developments of their impossibility of repatriation or payment, they were "blocked" or rendered "sterile." Strong reliance is placed upon the decision of the Supreme Court in Canara Bank (supra) and Universal Radiators (supra). The ITAT in its impu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bles are held to be on capital account. This would also include the arguments relating to the computation of capital gain. 7. Having come to the conclusion that the gain as received constitutes a revenue receipt, now we would like to revert to the arguments of the learned counsel. Shri Desai has started with the proposition that as the debt assigned falls under the expression "capital asset‟ as defined in sec.2(14) of the Act, any gain or loss arising on account of fluctuation in foreign exchange would constitute a capital asset. It is something like first assuming the nature of receipt and then trying to prove as to how it is so. Starting with the definition of capital asset under sec.2(14) of the Act and assignment of debt under the provisions of Transfer of Property Act with the help of the judicial pronouncement he has gone to show that the project receivables were on capital account. In this process he has lost sight of the fact that the first step is to determine the nature of the amount receivable. The real question is not whether the later stage of the operation, i.e. assignment of debt is in the course of trading transaction but whether the first step towards the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... The Iraqi debts were appropriately part of the profits which arose or accrued to the assessee. Concededly, the assessee follows a mercantile method. The fact that it could not realise those amounts for a considerable period which resulted in the Indian Government intervening and negotiating protocols and eventually taking over the debts and issuing bonds instead, did not in any manner transform or alter the nature or character 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 assess....