Miss Moksh Mahajan, A.M. - (1.) THE assessee is a Government of India undertaking under the administrative control of Ministry of Railways. Assessment for asst. yr. 1995-96 was framed by the Dy. CIT, Special Range-2, New Delhi, and a demand of Rs. 1,002.18 crores was raised. THE assessee filed an appeal before the first appellate authority and the learned CIT(A) passed order on 1st July, 1998. Aggrieved against the order the assessee came in appeal before the Tribunal and raised as many as eight grounds of appeal. Ground Nos. 4, 6 and 7 were not pressed and hence dismissed having become infructuous. Regarding the remaining grounds the assessee moved the committee of disputes and the aforesaid committee vide its Minutes of Meeting held on 26th November, 1998, allowed the assessee to contest the following grounds before the Tribunal : "Item No. 13 IRCON International Appeal No. 26/1998-99 dt. 18958.91 Ltd. vs. Deptt. of 1st July, 1998, in Tribunal IRCON/TAX/App Revenue (CBDT) regarding disallowance of (i) 28/9/1998 capital loss arising on transfer of Iraqi Debts in lieu of Bonds issued by Government of India, (ii) deduction under s. 80HHB of the IT Act on exchange fluctuation gain arising on discharge of Iraqi Bonds, (iii) claim for deduction of bad debts, (iv) national interest provided in books on debts. For the asst. yr. 1995-96. THE committee, having regard to the fact that there were important questions of law involved, with respect to the issues listed at (i), (ii) and (iv) above, permitted IRCON International Ltd. to pursue the appeal in Tribunal with respect of these aspects only."
(2.) The first issue as raised in grounds of appeal No. 1(a), 1(b), 1(c) and 1(d) relates to nature of Iraqi debts at Rs. 1,23,42,79,007. Shri D. B. Desai who appeared on behalf of the assessee submitted that the assessee is engaged in the execution of turnkey projects in various countries including Iraq. The assessee had entered into a contract with Iraq since 1979 and after 1982 the payments were being made by the Government of Iraq on cash payment terms. In 1983 Government of Iraq expressed certain difficulties for releasing the payments to the Indian contractors including the assessee on account of Iraq's involvement in war with Iran. As a result of agreement on behalf of the Indian contractors there was a Government to Government agreement for realisation of the dues on deferred payment basis. Protocol agreements were signed between the Government of India and the Government of Iraq as also banking agreements between Exim Bank of India and Central Bank of Iraq. Based on these agreements Iraqi authorities released payments through supply of oil and the amounts were received by the assessee from time to time. In 1990 due to Iraq's invasion in Kuwait and the consequent UN embargo against Iraq payments were held up and were not forthcoming. When approached the Government of India constituted a task force and on recommendation of the same, Government of India issued bonds for the amounts certified and credited in the account of Exim Bank with Central Bank of Iraq as on 17th November, 1993, (paper book p. 90). These bonds were for a period of 7 years from 1st April, 1994, wherein interest was @ 12.08 per cent per annum was payable. As on 17th November, 1993, a sum of USD 92,212.795 (equivalent to Rs. 289,54,61,767) was due to the company. The US dollars were converted into Indian rupees at the exchange rate of one US dollar to Rs. 31.40. The deferred dues were reflected in the books of account of the assessee. These had been translated at the exchange rate as prevailed at the end of each year's closing of accounts. The difference arising due to fluctuations in currency rates was transferred to foreign exchange fluctuation account. As per the accounting policy of the company, any difference on account of exchange rate during the completion of the project was to be credited to Foreign Exchange Fluctuation Reserve (FEFR) Account and on completion of the project, the balance lying in FEFR account pertaining to a particular project was transferred to the P&L a/c. This practice was accepted by the IT Department. The assessee vide deed of assignment transferred the aforesaid debts to Government of India for bonds of equivalent value. In the computation of income the assessee claimed long-term capital loss at Rs. 1,48,22,66,649 (p. 2A of the paper book). As per the auditor's note six on p. 2E of the paper book the credit balance appearing in foreign exchange fluctuation reserve account (FEFR), pertaining to the debts lying till 31st March, 1995, which were not credited to the P&L a/c worked out to 1,234,279,007. As per note 10 of the audited account (p. 154 of the paper book) reference was made to the decision of the directors whereby the retrieval of the foreign exchange fluctuation reserve pertaining to Iraq projects was deferred to a future date linked with the realisation of deferred dues and bonds. In the wake of the events blocking the amount the assessee referred the matter to CBDT vide letter dt. 31st August, 1995, (p. 90 of the paper book). The CBDT vide F. No. 225/161/95-IT-II issued instructions to the Chief Commissioners (appearing on pp. 143 to 145 of the paper book). Reference was made to the liquidity related problems of Indian Project Exporters and lending banks arising out of the stoppage of payments against the project receivable from Iraq. After stating that the issue of taxation is mainly regarding foreign exchange fluctuation gain which has been earned by the project exporters due to delayed payments of dues it was opined that the right to receive the income/bond had arisen on the date i.e., the date of Notification of issue of bonds which is 24th March, 1995. The assessee's plea that the bond should be assessed at the discounted value stood rejected on the ground that the bonds are not stock-in-trade of project exporters. Interest income is stated to be taxable every year as per system of accounting followed by the taxpayer. The profit or loss, if any, arising out of the sale of bonds at any time before the same are redeemed is held to be taxable in the year in which the transaction takes place and would be given a treatment as per the provision relating to capital gains. Undisputedly the assessee has accounted for project receipts in its P&L a/c for purposes of taxation. It is only the assessee's right to receive the amount which is to be considered, argued the learned authorised representative. This constitutes a debt appearing on the credit side of the balance sheet. The same is a capital asset to be subjected to the treatment given under the head 'Capital gain'. The debt in turn as defined in the Concise Oxford Dictionary Eighth Edition (1990) (p. 298) is "something that is owed, specially money." Similarly Law Laxicon-Digest By N. M. Mulchand (1990) Edn. (p. 472) defines debt as a 'liability owing from one person to another whether in cash or kind, assured or insecured, whether ascertained or ascertainable, arising out of an obligation, express or implied'. It is a capital asset and falls in the definition of the same as given in s. 2(14) of the Act. As per the aforesaid definition property of any kind whether or not connected with the business or profession constitutes capital asset. Exception is provided only in respect of five categories as defined in sub-ss. (i) to (iv) of s. 2(14) of the Act. As held in the case of CIT vs. Mohan Bhai Pamma Bhai (1973) 91 ITR 393 (Guj) and approved by the Hon'ble Supreme Court in the case of Addl. CIT vs. Mohan Bhai Pamma Bhai (1987) 165 ITR 166 (SC), every kind of property held by an assessee whatever be its nature or character is within the connotation of the expression 'capital asset' except as specified in cls. (i) to (iv). Similar view has been taken in the case of Syndicate Bank Ltd. vs. Addl. CIT (1988) 155 ITR 681 (Kar) and CIT vs. Tata Services Ltd. (1980) 122 ITR 594 (Bom). From the judicial pronouncements in the context of the capital asset as defined in s. 2(14) of the Act it is clear that the term capital asset includes movable and immovable assets tangible as well as intangible and also rights in property or interest in property. With the help of various decisions as cited in the paper book it is submitted that the debt constitutes a capital asset. The Revenue authorities have wrongly relied on the decision of the Hon'ble Delhi High Court in the case of CIT vs. J. Dalmia (1984) 149 ITR 215 (Del), where the facts are distinguishable. In the aforesaid case the party gave up the claim for specific performance and only retained the right to claim damages. The Hon'ble Court held that as the mere right to sue cannot be transferred, the same may not be a property but it certainly cannot be transferred. The aforesaid decision never dealt with the right to recover money as is the case of the assessee. The claim to a debt constitutes action of the claim in terms of definition given in s. 3 of the Transfer of the Properties Act and has been assigned in view of s. 130 of the Property Act. In the case of the assessee what is required to be seen is whether a debt constitutes capital asset and whether there has been any transfer of the same or not. The AO has wrongly held that the profit is inherent in the value of debts due to exchange fluctuation rate. The assessee has transferred its accountable claim to Government of India and has not merely realised its debts as held by the AO. As regards the treatment of bad debt as a revenue expense under s. 36(1)(vii) of the Act it is submitted that in case the provisions of ss. 32 to 36 of the Act are read, it would be clear that many items of capital expenditure are being allowed as is the case under s. 35AB of the Act. These are specific categories of deductions which have been given separate treatment. This is in contradistinction to the provisions of s. 37 of the Act which deals with the expenditure of revenue nature. The mere fact that the assessee has not raised the issue regarding the nature of the receipt before the CBDT would not disentitle it for raising the same before the appellate authorities before whom the character of the receipt is under consideration. One cannot ignore the fact that the assessee has not carried out business for the last 10 years and the assessee's business does not consist in assigning of debts. The treatment given to a particular income in its books of accounts is not determinative of its real nature as held in the case of CIT vs. India Discount Co. Ltd. (1970) 75 ITR 191 (SC) and Sutlej Cotton Mills Ltd. vs. CIT (1979) 116 ITR 1 (SC). It is the nature of transaction and not accounting entry which is material. It was vehemently argued that the conclusion drawn by the Revenue authorities is not based on sound reasons. The gain having arisen on capital account the income or loss is to be computed under the head 'capital gain'. In regard to the cost of acquisition reliance was placed on the decision of the Supreme Court in the case of Miss Dhun Dadabhoy Kapadia vs. CIT (1967) 63 ITR 651 (SC).
(3.) THE learned Departmental Representative on the other hand, submitted that there are various gaps in the facts which are required to be filled in before effective arguments could be advanced. Referring to the deed of assignment attention was drawn to cl. 1 on p. 103 of the paper book wherein it was mentioned that the project receivable assigned to the Government were represented by sums of money lying to the credit of exporter in the accounts of Exim Bank with Central Bank as had been certified by the Central Bank on 17th November, 1993. As would be evident from cl. 4 of the deed of assignment, the cash payments earned were covered into deferred payment contracts with the agreement of the assessee. THE amounts were not receivable in lumpsum and, therefore, constituted circulating capital. Clause (A) para 7 of the salient features of the agreed minutes dt. 14th March, 1990, between Government of India and Iraq (p. 84 of the paper book) reflected the mode of receipts, para 8 on page 85 clearly shows that the Government of India stepped in to rescue the assessee from the difficulties it got into. Vide this agreement part of amount came to be received in the form of crude oil. THE issue under consideration relates to the nature of gain or loss arising on account of fluctuations in the foreign exchange rate. This being closely and directly connected with the sundry debts would have the same characteristics as that of sundry debtors. Since the bad debts are allowable as a deduction under the provisions of IT Act any gain or loss inextricably connected with the same would carry the same characteristics. THE fluctuations due to foreign exchange are embedded in the project receivable from abroad. THE assessee has itself accounted for the receipts as that of revenue nature. If it were not so the assessee would have raised the issue before the CBDT before whom the issue was taken up by the Indian contractors. Even as per Accounting Standard No. 2 it is to be accounted for as income. This is also reflected as such in the balance sheet. As held in the case of Sutlej Cotton Mills Ltd. (supra), any profit or loss arising on account of appreciation or depreciation in the value of foreign currency would ordinarily be trading profit or loss in case the foreign currency is held by the assessee on revenue account or as a trading asset. Similarly in the case of CIT vs. V.S. Dempo & Co. (P) Ltd. (1994) 206 ITR 291 (Bom) it was held that the extra amount payable on account of devaluation in respect of the amount utilised as circulating capital is to be treated as business loss. Accordingly the amount has been rightly brought to tax as revenue receipt. In the circumstances, the question of working out the cost of the capital asset as given by the assessee does not arise.;