TaxTMI 
TaxTMI 
2020 (10) TMI 135
X X X X Extracts X X X X
X X X X Extracts X X X X
....of appellant's loan liability. 2. On facts and circumstances of the case and in law, the lower authorities have erred and were not justified in rejecting the claim of appellant that the compensation of Rs. 297.47 crores was a Capital Receipt, not eligible to tax, being a voluntary & gratuitous action on behalf of Government of India, meant only to discharge the loan liability, which inter alia is capital in nature and thus such discharge of loan shall have same colour and nature as a loan liability. 3. On facts & circumstances of the case, the lower authorities have erred and were not justified in rejecting the claim of appellant that the aforesaid compensation of Rs. 297.47 crores by way of RBI bonds directly issued by RBI to Banks towards discharge of loan liability of the appellant, as Capital receipt, if at all considered as Income, to be being against 'Sterlised assets' and does not form part of business income. 4. On facts & circumstances of the case, the lower authorities have erred and were not justified in rejecting the alternative claim of the aforesaid compensation of Rs. 297.47 crores by way of RBI bonds directly issued by RBI to Banks towards....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ring the relevant previous year, where a sum of Rs. 52.86 crores was actually received during the subsequent year and thus the same cannot be said to have accrued during the relevant previous year in accordance with the appellant's accounting policy & the generally accepted accounting practices. 2. On facts & circumstances of the case, the lower authorities have erred and were not justified in treating a part of compensation for loss, towards Retention Money of Karkh project and Ashter'89 Project in Iraq, amounting in aggregate to Rs. 19,98,66,841/- as business income instead of Capital Receipt, not eligible to tax, as per provisions of the Income Tax Act, 1961 3. On facts & circumstances of the case, the lower authorities have erred and were not justified in rejecting the alternative claim in respect of part of compensation received towards Retention Money of Karkh project and Ashter'89 Project in Iraq, if at all considered as 'Income', to be chargeable under the head 'Capital Gains'. Relief 220(7): 4. The lower authorities have erred and were not justified in refusing the benefit of section 220(7) of the Act on the interest of Rs. 8,21,49,466/- included in th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.....I.T. (A) has erred in deleting the addition of Rs. 36,17,430/- made on account of Employees Contribution to PF U/s 36(1)(va) to Rs. 32,88,638/-." 4. On the facts and circumstances of the case as well as in law Ld. C.I.T. (A) has erred in deleting the addition of Rs. 24,33,055/- made on account of Employees Contribution to PF U/s 43 B". 5. On the facts and circumstances of the case as well as in law Ld. C.I.T. (A) has erred in deleting the addition of Rs. 27,52,297/- made on account of prior period expenses". 6. On the facts and circumstances of the case as well as in law Ld. C.I.T. (A) has erred in deleting the addition of Rs. 21,000/- made on account of contribution to political party". The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal." 3. Firstly we are taking up facts of A.Y. 1995-96: A.Y.1995-96 3.1 The assessee company is engaged in the business of civil engineering construction. During the year under consideration, the assessee company filed return of income on 30.11.1995 declaring a loss of Rs. 117,31,50,063/-.....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the sum of Rs. 297.46 crores received in settlement by the Government of India/ECGC against default receivable from Government of Iraq as exempt from tax. The reason given by the assessee for such exemption is that it is not a business receipts from execution of contracts from Government of Iraq, but is only a financial assistance from the Government of India and is capital receipt. The Assessing Officer observed that the assessee has been paid the said sum of Rs. 297.46 crores on account of deferred contract receipt which are pure business receipts. The Assessing Officer further noted that the Government of India has through CBDT issued Circular No.711 dated 24.07.1995 whereby the value of the bonds received as a deemed receipt of convertible of foreign exchange for the purpose of taxable income and grant of deduction is in respect to foreign projects u/s 80HHB of the Act. Apparently the Government of India has the intention of treating the value of receipts from execution of foreign projects. Accordingly, the receipt of Rs. 297.46 crores was treated as business receipts from execution of foreign projects by the Assessing Officer. The expenditure related to the foreign projects o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t more apparent as per the Assessment Order wherein the Assessing Officer treated the value of receipts as business income. 5. The Ld. AR submitted that the Assessing Officer proceeded to tax the receipt of Rs. 297,46,41,205/- as the business income of the assessee. The Ld. AR submitted that the CIT(A) held that a debt has been created in favour of the assessee. This is enforceable right of the assessee and therefore, he has right to receive the income. The assessee also follows the mercantile system of accounting. For more than 15 years, the said facility provided to assessee has not been returned to the Government of India. Plus the assessee laid a claim of deduction u/s 80HHB. The CIT(A) further held that CBDT has given deep thinking to the entire matter and has even allowed the benefit of Section 80HHB to those project exporters. In other words, the CBDT also construes the same as income eligible for taxation and the consequent deduction under Section 80HHB. Thus, the CIT(A) finally held that the contention of assessee as to the receipt of bonds was not an income and therefore, not taxable is based on an incorrect appreciation of facts and law. Thus, the CIT(A) held that the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ee company for the fulfillment of the contractual obligations. Also it was agreed by the Government that the amounts due to the Indian contractors from the Govt. of Iraq under the DPAs, be settled by the Export Credit Guarantee Corporation of India Ltd. (ECGC)/Govt. of India by way of cash payments and issuance of bonds for value dated 01.04.1994. Thus, the Assessee company's dues receivable from Iraq under the DPA amounting to USD 110,269,316/- equivalent to Rs. 346,24,78,123/- were settled by Govt. of India during the A.Y. 1995-96. This amount was credited in the books of account of the assessee company and included an amount of Rs. 297,46,41,205/- which was credited to the P&L account for the year ending 31.03.1995 as income of the Company under the head 'compensation from the Government of India/ECGC in settlement of deferral dues from Iraq'. However, in his computation for purpose of 'computation of taxable income', the assessee company reduced the amount from its taxable income. By this act, the assessee company wrongly did not treat the deferred dues received from Iraq as taxable income. This claim of exemption has been wrongly made and does not fall within the ambit of a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... DPA compensation bonds will be issued in favour of lending banks and Indian Project exporters. The compensation bonds will bear interest at the rate of 12.08% per annum. The value of the investment in the compensation bonds and the interest thereon will be governed by the provisions of tax laws as applicable from time to time. The investment in the compensation bonds would not be considered as an eligible investment by the lending banks and the project exporters eligible to receive the compensation. As per letter of DS Govt. of India dated 11.03.1994, to enable ECGC to settle the claims they would issue bond for the amount of the claims under Deferred Payment Agreement. The bond will be guaranteed by the Govt. of India and redeemed over a period of time and will carry on-going interest of 12% per annum. RBI would also issue bonds as an agent of Govt. of India in favour of banks for the unadjusted loan amount in EXIM bank's book payable over a period the RBI would also issue similar bonds to exporters who have no loans to repay. Government would also settle the claims under guarantees issued to banks. As regards to letter of SBI dated 15.05.1995, settlement of Iraqi outstanding due....
X X X X Extracts X X X X
X X X X Extracts X X X X
....siness losses incurred by the assessee due to war in Iraq. By no stretch of imagination can this receipt be treated as capital receipt. 6.4 The Ld. DR submitted that the following benefits were pursued by the assessee company: i) Deferred Dues received from Govt. of India amounting to USD 110,269,316/- equivalent to Rs. 346,24,78,123/- ii) The dues so received treated as receipt in foreign exchange for the purpose of Section 80HHB and claim allowed by Revenue iii) Bridge loans given for fulfillment of contracts by Govt. of India to assessee company yet to be repaid. The CIT(A) concluded that this facility given for more than 15 years. iv) Bonds in the nature of interest bearing bonds carrying interest of 12.08% issued to Assessee Company against outstanding dues. v) Variation in foreign exchange value of Rs. 211.06 crore claimed by assessee company and allowed. The assessee company has thus claimed and been given all benefits by the Govt. of India and benefits allowable under the Income Tax Act but when it comes to payment of taxes, the assessee company claims the contract receipts are not exigible to tax. The assessee company has ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....reated the amount as its own money the same would be its income. The decision of the Tribunal, Delhi in case of MCM Services Pvt. Ltd. vs. DCIT in ITA No. 3485/Del/2011 and 1911/Del/2012 dated 17.07.2012 relied upon by the assessee cannot be applied to this case since the same pertains to retention money, the nature of which is totally different from the nature of compensation received by the assessee. Retention money is an amount held back from a payment made under a construction contract. It is generally held to ensure that a contractor performs all of its obligations under the contract, and is then released subsequently on practical completion of the contract. On the other hand, the amount received by the assessee is its business dues which the Govt. of Iraq unable to pay and were consequently arranged to be paid by the Govt. of India through issue of bonds. Circular 711 of 1995 also clearly indicates the intent of the legislature in respect of the treatment of proceeds of projects executed in Iraq, and covered by RBI/ECGC bonds. 7. We have heard both the parties and perused all the relevant material available on record. The Government of India granted settlement of such dues....
X X X X Extracts X X X X
X X X X Extracts X X X X
....certainly it is not called as profit/loss from business activity as it is a settlement for loan given on foreign exchange by Exim Bank and SBI on behalf of the Government of India. As per the decision of Universal Radiators vs. CIT (1993) 201 ITR 800 (SC), the Hon'ble Apex Court held that the compensation paid to the assessee was not for any trading or business activity, but just equivalent in money of the goods lost by the assessee which it was prevented from using. The excess arose on such payment in respect of goods in which the assessee did not carry on any business, due to fortuitous circumstances of devaluation of currency, but not due to any business or trading activity, the amount could not be brought to tax. Thus, the Hon'ble Apex Court answered the question whether the excess amount paid to the assessee due to fluctuation in exchange rate was taxable either because the payment being related to trading activity it could not be excluded under Section 10(3) of the Act, even if it was casual and non-recurring in nature or it was stock-in-trade and therefore, taxable as revenue receipt or in any case the compensation for the loss of goods could not be deemed anything but profi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ment year. There is no evidence that expenses have been crystallized during the year, even though they pertained to earlier years. Thus, in absence of evidence, the CIT(A) confirmed this addition. After hearing both the parties it can be seen that the CIT(A) rightly confirmed this addition as there was no evidence shown by the assessee at the time of the assessment proceedings as well as at the time of the Appellate proceedings. Before us as well the assessee could not demonstrate the same as to how the expenditure was booked in present assessment year. Therefore, Ground No. 5 of the assessee's appeal is dismissed. 9. As regards to Ground Nos. 6 & 7, the CIT(A) relied upon the decision of the Hon'ble Delhi High Court in case of CIT vs. Shri Ram Honda Power Equip (2007) 289 ITR 475 (Del), held that the interest on fixed deposits with the bank is Income from other sources instead of Business income. After hearing both the parties, it can be seen that the interest was received on the fixed deposits with the bank and thus it cannot be termed as business income. Ground No. 6 and 7 of the assessee's appeal is allowed. 10. As regards to Ground No. 8, the CIT(A) held that no evide....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gly. The assessee company paid legal fees for representation before UNCC, amounting to Rs. 5.28 crores, pertaining to that part of compensation that is accounted for in subsequent year on receipt basis, which has not been allowed by the Assessing Officer as expense on treating the entire amount of compensation as taxable in the relevant previous year under consideration. The assessee company treated the said sum as capital receipt, accounted on receipt basis, not exigible to tax, being in the nature of compensation of capital nature and against forced abandoned capital assets due to war. The assessee also submitted as alternative plea that though there was no transfer of assets and thus there cannot be any capital gains tax, but if at all the same is considered to be taxable, the income should be computed as long term capital gains u/s 50B. The Assessing Officer treated a part of the said receipt as business income and a part as short term capital gains u/s 50 of the Act. Further, the returned total income included a sum of Rs. 8,21,49,466/- on account of interest accrued on sums receivables from Iraq in terms of deferred payment agreement between Govt. of Iraq & Govt. of Ind....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ration, paid an amount of US $ 5 million equivalent to Rs. 23,32,22,502/- as part of the indemnity or compensation against the losses suffered by the company on account of its action on Iraq. The company has incurred legal action and professional fees of Rs. 2,33,22,900/- for pursuing the claim before the UN. Thus, it has received a net sum of Rs. 20,98,99,602/-. The assessee has written off the following assets lying in its books, as no longer recoverable: 1. Retention money recoverable in Iraq Accounted as income in the past Rs. 8,34,23,525/- 2. Contract dues recoverable in Iraq also accounted as income in the past Rs. 1,33,81,216/- Rs. 9,68,04,741/- 3. Current assets in Iraq Rs. 3,19,67,866/- 4. Fixed assets (Inventories) in Iraq with a wdv of Rs. under Company's Act. The company has not been claiming depreciation on these Assets since 1991-92 onwards. Rs. 2,11,68,472/- Rs. 5,31,36,338/- The WDV under IT Act is much higher Rs. 14,99,41,079/- The net sum of Rs. 5,99,58,523/- (Rs. 20,98,99,602/- less Rs. 14,99,41,079/-) has been credited to the Profit & Loss account. Since, the sum of Rs. 20....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tuted to evaluate and recommend compensation allowable to the affected parties of unlawful invasion of Kuwait by Iraq. It is clear from the resolution that the responsibility of meeting the obligation and to compensate the losses is that of Iraq. In its report and recommendation, United Nations Compensation Commission Governing Council interpreted the various clauses in the resolution govern their applicability to various claims filed by the affected parties. The Council decided that the debts and obligations of Iraq arising to 2nd August, 1990 are to be excluded from the jurisdiction of the Commission and such dues are to be addressed through normal mechanism. In the case of the assessee company, Commission recommended following compensation: S.No. Particulars Amount awarded by UNCC 1 Retention Money of Karkh Project US $ 3841142 2 Ashtar - 89 Project Work Completed US $ 592271 3 Loss of Property and Equipment US $ 11583862.91 Total US $ 16017275.91 Amounts received by the assessee company as follows: 1st Installment US $ 25,000.00 Rs. 10,89,500/- F.Y. 2000-01 2nd Installment US $ 49,75,000.00 Rs. 23....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mpensation awarded by UNCC on account of retention money amounting to Rs. US $ 3841142 (equivalent to INR 18,26,96,656/- on avg.) is in respect of Karkh Water Supply project at Iraq. As part of all major civil construction projects, clients withheld a part of the bills as retention money as security for performance and which is payable on successful conclusion of the contract. This retention money is part of revenue receipt accounted by the assessee company on accrual basis and the amount of retention money which is withheld by the client is shown as receivables in the balance sheet. Therefore, the aforesaid amount of US $ 3.84 mn. Equivalent to INR 83.42 mn. At exchange rate prevalent in the year of accrual, is already accounted for as income by the assessee. The surplus of Rs. 8,82,73,132/- (INR 182696656 - INR 83423524), broadly represent exchange difference on retention money shown as receivables. The retention money represent contract receipt as per discussion on UNCC in para 193. Retention money was already accounted for as contract receipt in the year of accrual. Further such retention money was to be released by the client on issuance of final certificate and the lapse o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y compensable by this commission. In response to the query regarding the taxability of this receipt the assessee company stated that out of the said amount it had already accounted for Rs. 1,33,81,216 as income, the difference of Rs. 1,47,88,969 represents foreign exchange fluctuation and thus is a capital receipt. It further stated that as UNCC was not under any contractual obligation to pay the said amount and therefore, it does not fall under Section 28 of the Income Tax Act and hence is not taxable. 21. The Assessing Officer observed that there is no doubt about the source of the receipt which is the business of the assessee company. The source is linked to the performance of work on Ashtar-89 project in Iraq and the payment of retention money withheld by the clients in Iraq as per the contract agreement. Both represented the contract receipts taxable in the hands of the assessee company. Further, even if there is an element of foreign exchange fluctuation in the proceeds received by the assessee company on account of its business, the same is taxable as revenue receipt. The claim of the assessee that the receipt is not taxable as the recommending body, i.e., UNCC was not....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... compensation for retention money in Ashtar - 89 project. The assessee company was asked to substantiate its claim and to produce evidentiary proof of the value of the assets lost/confiscated. On the basis of details filed by the assessee company and the earlier years records available in this office, it has been seen that the total value of block of assets relinquished/taken over by the Iraqi authorities during the war was at Rs. 1,23,60,483/- instead at Rs. 2,11,68,472/- claimed by the assessee company as on 31.03.1992. From the assessment records of A.Y. 93-94. It has been found that the assessee company has claimed depreciation on the block of assets taken over by the Iraqi authorities upto 31.03.1992. In the A.Y. 93-94, the assessee company has reduced the value of block of assets pertaining to the projects taken over by the Iraqi authorities. The block of assets of these projects has been taken at nil thereafter and no depreciation was claimed by the assessee company. Any consideration, compensation or claims received by the assessee in excess of the w.d.v. of the block of assets against sale, extinguishment, relinquishment or acquisition of the block of assets is to be tr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....329,356 02.09.2000 4 August, 2000 305,421 13.10.2000 5 October, 2000 318,726 24.11.2000 6 November, 2000 355,085 22.03.2001 7 December, 2000 332,431 22.03.2001 8 January, 2001 350,613 22.03.2001 9 February, 2001 330,792 22.03.2001 10 March, 2001 610,024 11.07.2001 11 6,385 08.06.2001 Total 3,619,130 The assessee company deposited the sums received from the employees towards contribution to the P.F. covered in the Section 2(24)(x) has been paid after the due date and therefore, no expense on account of these sums amounting to Rs. 36,19,430/- is not allowable as per the provisions of Section 36(1)(va). 25. As regards to employer's contribution to the P.F., from perusal of the Tax Audit Report and Annexure - 12 annexed with it, it has been found that the assessee company has deposited employer's contribution to the P.F. after the due date mentioned in schedule amounting to Rs. 24,33,055/-. Month-wise detail with the date of deposit of the contribution is as under: S.No. Month Amount of Contribution Actual date of deposit 1 April....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d out by the Auditor in the Tax Audit Report amounting to Rs. 27,52,297/- is being disallowed and is being added back to the total income of the assessee company. 27. In the Tax Audit Report, the Auditor has pointed out in Clause 17(c) of the Report that the assessee company has contributed Rs. 21,000/- to a political party. This expense is not allowable as per the provisions of Section 37(2B) of Income Tax Act, 1961 and therefore disallowed. 28. During the assessment proceedings, the assessee company stated that it has credited Rs. 8,21,49,466/- in the P&L accounts as interest receivable from Iraq has not received by it due to prohibition on the remittance from Iraq. It stated that the tax payable on interest receivable amounting to Rs. 8,21,49,466/- shall be kept in abeyance under Section 220(7) of the Income Tax Act, 1961. The Assessing Officer observed that the proceeding u/s 220(7) are different from the assessment proceeding to decide the matter in view of the provisions laid down in the Income Tax Act. Thus, the total income was assessed at Rs. 51,94,31,415/- by the Assessing Officer vide order dated 19.03.2004. 29. The Ld. AR further submitted that the issues conce....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... works like Dams, Canals, Water Supply systems, tunnels etc. Assessee had undertaken various projects at Iraq since 1975, including Karkh Water Supply & Diwnaniyah Sewerage Scheme. Subsequently it also received new contract called Ashter'89 which was commenced by the assessee in June, 1990. As per terms of these contracts, Iraq was to make payment against the contract dues in Local Currency and US $. However, the clients (Govt. of Iraq) started defaulting in payments form 1992 consequent to severe financial crises due to long continued war by Iraq. Assessee had obtained a comprehensive insurance policy called 'Construction Works Policy' (CWP) insuring all risks & payments due under the contract. Such policy was issued by Export Credit Guarantee Corporation Ltd. (ECGC), a body set up by Govt. of India under Ministry of Commerce. As per terms of CWP, delay in payment by more than 120 days of contractual dues by Iraq, the same shall be made good by ECGC. Therefore, upon default by Iraq, assessee as well other contractors working in Iraq approached ECGC for settlement of their claim. Considering the enormity of the claims and quantum of amount due from Govt. of Iraq, ECGC was fin....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the recommendations vide its sanction dated 3rd July 1998, and thus the amount of compensation was released in the following manner: Sl. No Particulars Amount Awarded by UNCC 1 Retention Money of Karkh Unit US$ 38,41,142.00 2 Ashtar'89 - Project Works Completed US$ 5,92,271.00 3 Loss of Property and equipment US$ 1,15,83,862.91 TOTAL US$ 1,60,17,275.91 1st Installment US$ 25,000.00 Rs. 10,89,500/- 10.04.2000 2nd Installment US$ 49,75,000.00 Rs. 23,21,33,002/- 08.01.2001 3rd Installment US$1,10,17,275.91 Rs. 52,86,08,899/- 27.12.2001 TOTAL US$1,60,17,275.91 Rs. 76,18,31,401/- 29.2 The concept of accrual is an accounting fiction on the principle of Going Concern concept and to match the revenues earned with the costs incurred, on the basis of stage of completion of performance, whether or not the same is actually realized. On the other hand the concept of cash system envisages accounting of revenue, when the same is actually/physically or constructively realized. It is also settled principle of accountancy to recognize revenues adopting prudence ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.....4.2000 stipulates compensations from Insurers for loss/ destruction of assets is to be brought to tax in the year of actual receipt. Though said section is not equally applicable in case of the assessee but a reasonable parallel can easily be drawn on same facts & circumstances. Similarly according to provisions of sub-section (1) of section 45, capital gains is chargeable to tax in the previous year in which transfer took place. 29.3 The Ld. AR submitted that impugned receipt of compensation is a capital receipt not exigible to tax under the provisions of the Act. Compensation is gratuitous on compassionate ground for loss sustained by the assessee due to UN led war against Iraq. As the name suggest it is against the loss suffered and therefore cannot partake the character of income. Income denotes a source of a regular nature, though it may not actually result in regularly. Compensation for loss caused by UN war against Iraq, conceptually does not have any element of income. The Ld. AR relied upon the decision of the Hon'ble Apex Court in case of Universal Radiators vs. CIT (1993) 68 Taxman 45/201 (SC) wherein it is held that devaluation of rupee giving rise to gain is onl....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... as taxable: i) Mesne profit is compensation towards rental value of property for the period a tenant occupies the property during eviction proceedings. ii) Compensation for accidental injury/ death, where compensation is awarded in relation to earning capacity/ salary of the injured/ dead. iii) Compensation, as consideration of a divorce, to a divorcee in relation to his/her earning capacity or social status. iv) Compensation determined in relation to loss of interest/ profit, in a case where there is a delay in execution of part of obligation of one party. a) The fact that compensation is based on assessee's profit is not decisive of the nature of receipt. - Associated Oil Mills Ltd. vs. CIT (1960) 40 ITR 118 (Mad.) b) Compensation for dissolution of profit making apparatus is capital receipt. - CIT vs. South India Flour Mills (P) Ltd. (1970) 75 ITR 147 (Mad.) 29.5 Section 45 provides that any profit & gains from transfer of a capital asset effected in the previous year shall, save as otherwise provided in the Act be chargeable to income tax under the head Capital Gains and shall be deemed to be the income of the previous y....
X X X X Extracts X X X X
X X X X Extracts X X X X
....olution sanctioning Compensation was subsequent to abandonment and thus there was no profit motive at the time of triggering event giving rise to make claim for the compensation and thus gain is not arising out of any activity of trading nature. iv) Compensation was granted by UN only for Direct Loss and for not any other obligations which the assessee was otherwise entitled to. v) Compensation was granted by UN, an independent political organization, rather than by Iraq authorities. UN did not acted as an agent of Iraq or an insurer. vi) It is a receipt against assets sterilized, freezed and rendered useless due to war and thus such receipts are not from trading assets. These debts were not trading assets as the same could not longer be churned for business activity. vii) It is a receipt for the damage & injury and was a direct loss of UN action, demolishing the whole of structure of the assessee company in Iraq which comprised of huge manpower, equipments and establishments, and many ongoing contracts. Thus compensation is attributable to profit making apparatus of the assessee in Iraq, being a capital asset and not a trading asset. vi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on cash system, the Assessing Officer cannot now proceed to assume that entire amount has accrued during AY 2001-02, merely because a part of compensation was received during the relevant previous year. This view is also supported by the fact that Section 45(1A), inserted w.e.f. 1.4.2000 stipulates compensations from Insurers for loss/ destruction of assets is to be brought to tax in the year of actual receipt. Though said section is not equally applicable in case of the assessee but a reasonable parallel can easily be drawn on same facts & circumstances. Similarly according to provisions of sub-section (1) of section 45, capital gains is chargeable to tax in the previous year in which transfer took place. Thus, the Revenue authorities at one point accepted the stand of the assessee in part and on the contrary to its own stand took a different stand that of treating a part of the said receipt as business income and a part as short term capital gains u/s 50 of the Act. As held in the A.Y. 1995-96 by us, the same analogy will apply herein as well. The compensation is in respect of the loss incurred by the assessee in respect of the contracts which were unable to be completed....