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TaxTMI 
TaxTMI 
2016 (12) TMI 363
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....t of Hilla Water Supply Scheme and Left Bank 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 a....
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.... views expressed by the learned Tribunal are as follows:- "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 ac....
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....ved by the assessee was a capital gain and not a revenue receipt. The claim for deduction under Section 80HHB was rejected and the order allowing bad debt of a sum of Rs. 14,22,98,000/- 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 la....
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....e, the questions for consideration are formulated as follows:- (a) Whether the sum of Rs. 37,91,32,586/- received in excess on account of exchange gain is a revenue receipt or a capital receipt? (b) Whether the long term capital 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 yea....
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....f bonds are in lieu of foreign exchange realisation from the project exports and the foreign exchange will eventually be repatriated into India by the EXIM Bank after the lifting of the U. N. sanction, the RBI/ECGC bonds issued by way of settlement of claims of 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 m....
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....bunal was that the assesse is unable to show that any such interest was charged. Mr. Nizamuddin has also reiterated the point before us. For a satisfactory answer we need to notice the requirement contained in Clause - (i) of Sub- Section 2 of Section 36 of the Income Tax Act, 1961, which 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 ....
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....loan had charged interest against the debts assigned to the assesse. On that basis the first condition appearing in Clause - I of Sub-Section 2 of Section 36 of the Income Tax Act stood satisfied. An alternative argument was also advanced on the basis of Section 29 of the Income Tax Act drawing an analogy with Section 10(1) of the 1922 Act. Mr. Poddar 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,....
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.... as to whether the excess sum of Rs. 37.91 crores approximately received by the assessee consequent to exchange gain is a revenue receipt or a capital receipt. As on 31st March, 1991 an aggregate sum of Dollars $2,30,44,590.60 equivalent to Rs. 45,05,21,747/- was receivable by the assesse in Indian currency which was written off on 31st March, 1995, that is to say during the assessment 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 ....
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....s 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." In the case of Sutlej Cotton Mills Ltd. -Vs- CIT reported in (1979) 116 ITR 1 (SC) an identical issue arose, though in that case consequent to fluctuation in the rate of exchange the assessee had suffered a loss. The facts and circumstances 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....
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.... or incidental to such business. This argument is plainly erroneous and cannot stand scrutiny even for a moment. It is true that a loss in order to be a trading loss must spring directly from the carrying on of business or be incidental to it as pointed out by Venkatarama Aiyar J., speaking on behalf of this court in Badri Das Daga v. CIT [1958] 34 ITR 10 (SC), but it would not be correct to say that where a loss arises in the process 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....
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....f fixed capital on account of alteration in exchange rate would be a capital loss. Putting it differently, if the amount in foreign currency is utilised or intended to be utilised in the course of business or for a trading purpose or for effecting a transaction on revenue account, loss arising from depreciation in its value on account of alteration in the rate of exchange would be a trading loss, but if the amount is held as a capital 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 capi....
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....inbefore, then the fact that the assessee had treated this amount as current assets on revenue account or the fact that the assessee offered a part of the amount on revenue account for assessment would not be decisive or conclusive. In support of this proposition reliance may be placed on the observations of the Supreme Court in the case of CIT v. India Discount Co. Ltd., [1970] 75 ITR 191 (SC), and on the observations of Bhagawati J. in the decision in the 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 o....
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....and the bank was unable to deal with that amount or use it for any banking purpose between September, 1949, and July, 1953, when it was finally remitted to India. In our opinion, the money changed its character of 'stock-in-trade' when it was 'blocked' and 'sterilised' and the increment in its value owing to the exchange fluctuation must be treated as a capital receipt. It has also been found by the Appellate Tribunal that the said amount of Rs. 3,97,221 was not utilised for internal banking 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 am....
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....igh Court, it is well to bear in mind the basic principles. These are: if there was any capital asset, and if there was any payment made for the acquisition of that capital asset, such payment would amount to a capital payment in the hand of the payee. Secondly, if any payment was made for sterilisation of the very source of profit making apparatus of the assessee, or a capital asset, then that would also amount to a capital receipt in the hand of the recipient. On the other hand if forest leases were merely 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 a....
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.... "16.This Court is of the opinion that both the cases are of no assistance to the assessee. 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, howe....
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....t 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." 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 N....
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....al reserve. He contended that the historical cost plus indexed value thereof is the cost of acquisition. We need not take notice of this argument of Mr. Poddar. Because this was not the case presented by him before the assessing officer. The case presented by him before the assessing officer has already been discussed by us. Realising his difficulty he has now come up with a new case which was not there before the assessing officer or the CIT or even the learned Trial Court. He cited the following judgements in support of his contentions: CIT -Vs- B. 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 bea....