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2015 (5) TMI 553 - DELHI HIGH COURT

2015 (5) TMI 553 - DELHI HIGH COURT - [2015] 377 ITR 503 (Del) - Computation of capital loss - Whether the assessee’s claim that there was a loss and/or it was a capital loss is legally tenable? - amounts accruing, during the assessment year, to the assessee from bonds issued to it, by the Central Government, in lieu of the debt amounts payable to it for services under contract to the Iraqi Government - Held that:- Holding of amounts in foreign currency for diverse reasons by itself cannot be de .....

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The Iraqi Government’s inability to pay due to sanctions imposed by it and the subsequent Central Government’s negotiating an arrangement for its payment 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 .....

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. JUDGMENT Justice S. Ravindra Bhat 1. The question of law which arises in this appeal, under Section 260A of the Income Tax Act, 1961 (hereafter the Act ) is: - Whether the assessee s claim that there was a loss and/or it was a capital loss is legally tenable 2. The order impugned in this case was made by the Income Tax Appellate Tribunal ( ITAT ) on 19.04.1999, dismissing ITA 4486/Del/1998. The impugned order upheld the concurrent findings of the AO and the CIT (A) with respect to the amounts .....

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ere 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 De .....

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or Assessment Year (AY) 1995-96. The AO held the amount to be taxable under the head Income from business and profession . In the appeal against said order, the learned CIT (A) by order dated 1.7.1998 was of the view that since the Government of India issued compensation bonds to the assessee in lieu of debts due from Government of Iraq, this receipt was nothing but Profit & Gain of business taxable under Section 28 of the Income Tax Act. The assessee s appeal to ITAT was unsuccessful. It co .....

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nt protocol agreements, the banking arrangements between the Exim Bank of India and the Central Bank of Iraq and the relative developments vis-a-vis the debts detailed in the Deed of Assignment, had to be determined under the Act. The assessee was not entitled to and was in fact barred from using the receivables from the Iraqi Government in any manner, much less in the course of, or in carrying on its business activities. This was due to the supervening impossibility caused by entirely extraneou .....

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T, West Bengal, 116 ITR 1 (SC) and highlighted the distinction between fixed capital and circulating capital. The former is what the owner turns into profit by keeping it in his possession and the latter is what makes profit by parting with and letting it change masters. 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 f .....

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ifference 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 carrying on of banking business and t .....

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Income Tax 1993 (2) SCC 629 to say that the casual and non-recurring income arising to the account of or derived by the assessee cannot be treated as income. In that case too, the change in valuation of surplus due to settlement of a claim by the insurance company was not treated as income and the Court had then noticed and followed its previous rulings in Canara Bank (supra). 8. Learned senior counsel argued that the amount received upon debt assignment could not be treated as income under Sect .....

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ted regularity. Such amount, however, would not include fixed capital or realization of fixed capital but earning into other form of capital or money. So stating learned counsel submitted that the assessee s contentions were well founded and could not have been rejected by the ITAT. 9. Learned counsel for the Revenue argued that ITAT s impugned order should not be disturbed. He submitted that the assessee claimed capital loss of ₹ 1,48,22,66,649/- in its revised return on account of assign .....

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loss account as it pertained to debts realized till 31.3.1995 and that the correct amount finally worked-out on this account was ₹ 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 Govern .....

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king-over of the debts by the Central Government and issuing bonds in return. In fact, no profit accrued to the assessee from the Central Government. On the other hand, profit was an intrinsic element of the debts which would have accrued in the event the Iraqi Government was capable and permitted to discharge its debt obligations. That the assessee was able to realize its debts through a third agency, i.e. the Central Government did not mean that the character of the amount transformed and the .....

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xed as income. Analogically, exchange gain in respect of debts would fall in the same category, and would be liable to be taxed as business income. It was argued by learned counsel for the Revenue that the intervening development of the Central Government taking over the debt and issuing bonds for a particular value did not in any way disturb the character of the amounts received or receivable from the Iraqi Government which would have also shown exchange gain. Learned counsel further submitted .....

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or entitlement to the benefit of indexation on the compensation bonds received (for which the value of the bonds at US$ 59,967,085/- was shown to be - after indexing at US$ 107,173,029/-) and a corresponding rupee equivalent loss upon conversion claimed at ₹ 1,48,22,66,649/- was unacceptable either in the commercial sense of the term or based upon application of any legal principle. Learned counsel highlighted that the accounting treatment given by the assessee established that the gain on .....

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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 .....

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porters, including the assessee and corresponding debt was raised by the commercial bank against the Central Bank of Iraq. Since the Iraqi Government failed to pay the amounts due within the stipulated period, and the amount payable by ECGC was beyond its means, the Central Government constituted a Task Force comprising of various experts. This resulted in an execution of MoU between ECGC and exporters and countersigned by the other banks. In terms of this MoU, ECGC started settlement of claims .....

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foreign exchange fluctuation gain of ₹ 1,234,279,007/-. The assessee treated the currency fluctuation gain in its books of account for AY 1996-97. The assessee accepted the year of accrual of income or loss as AY 1995-96 based on a board circular and claimed capital loss by refusing its return of income and sought to carry forward loss which according to it was unabsorbed. The income or gain on assignment of the debt - to the Central Government - in view of the bonds, was computed under th .....

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133 4,907,941 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 C .....

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Court in Canara Bank (supra) and Universal Radiators (supra). The ITAT in its impugned order relied on Sutlej Cotton (supra) to hold that appreciation or depreciation in foreign currency value upon its conversion would ordinarily be trading profit or loss if currency is held in revenue account or in a trading account or part of circulating account. However, the exception is that if such currency is held as capital account, such profit or loss would be of capital nature. The ITAT then held as fol .....

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transaction on revenue account. The amount retained abroad was on account of factor beyond the assessee s power. The latter is however, not material for determining the character of the receipt. The amount as retained was not for utilising it for purchase of any capital asset. XXXXXX XXXXXX XXXXXX 6. This finding of ours is also supported by the accounting entries made by the assessee in its books of accounts. It is true that the way in which entries are made by the assessee in its books of acco .....

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y bad debt has been specifically allowed under clause (vii) of sub-sec. (1) of Sec. 36 of the Act. Under the aforesaid section the deductions have been provided for items which are of revenue nature. Deductions in respect of the items of capital nature have been specified as such as is the case in sec. 35(A). 35 AAB in distinction to sec. 35AB of the Act. In the circumstances, the arguments of the learned AR in this regard are relevant only in case the project receivables are held to be on capit .....

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pital 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. Th .....

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assessee s submissions hinge almost entirely on the two decisions of the Supreme Court in Canara Bank (supra) and Universal Radiators (supra). In the first case, the issue was the inability of a foreign branch of an Indian bank to repatriate amounts to India due to difficulties faced on account of delayed valuation of currency. The subsequent currency valuation and the bank s ultimate successes in repatriating the amount to its headquarters, was with an exchange gain. This exchange gain was hel .....

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they never lost their character. Likewise, in the case of Universal Radiators (supra), the amount sought to be taxed by the Revenue was an insurance claim settled by the American insurer due to loss of goods at high seas, when hostilities broke out between India and Pakistan. The Rupee devaluation resulted in an increment in the ultimate payment made by the insurer as against equivalent foreign exchange value originally claimed. The Revenue had contended that this amount was income . It was in .....

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on 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 a .....

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, 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 a .....

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that income, if any, due on account of FEFR on discharge of the Iraqi debts would accrue only in the year in which the bonds would be paid by the Central Government. The assessee further sought to elaborate by stating that the deed of assignment dated 10.03.1995 resulted in the Central Government purchasing its right to realize the amount in hard currency from the Iraqi Government. The bond amount was to mature in 2001. Consequently, the assessee contended that the income would be shown when the .....

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