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 :IRCON International Appeal No. 26/1998-99 dt. 18958.91Ltd. vs. Deptt. of 1st July, 1998, in TribunalIRCON/TAX/App Revenue (CBDT) 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.
3. 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).
4. 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.
5. We have carefully considered the rival submissions and have also gone through the material to which our specific attention was invited as well the judicial pronouncements relied upon on both sides. The issue before us is confined to the gain arising on account of fluctuations in foreign exchange rate. This is in respect of project receivable lying in the bank in Iraq. Fluctuations have arisen on account of an amount payable in foreign currency. By virtue of change in the conversion debts there is bound to be change in the amount receivable in Indian currency at a particular point of time. As the fluctuations are integrally and inextricably linked with the payments receivable resultantly its nature would be dependent on the nature of the project receivable. Accordingly its nature whether it is capital or revenue would be dependent on the nature of the project receivable.
This would bring us to the question whether the project receivable are of revenue or capital nature. In this context we can usefully refer to the observations of their Lordships of Hon'ble Supreme Court in the case of Sutlej Cotton Mills Ltd. vs. CIT (supra) (p. 13 of the decision) : "The law may, therefore, now be taken to be well settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature." 6. Thus any profit/loss arising in the course of business of the assessee or incidental to such business is a trading profit or loss.
Any factor or circumstance causing the loss is not material for determining its character. What constitutes a trading transaction is dependent on facts of each case. There would be no set formula for the same. Transactions can be of innumerable variety. Broadly put any profit or loss arising from trading asset would be a trading profit or loss. In the case of assessee it had undertaken to execute a project in Iraq as a business transaction. The amounts receivable were as a result of project so executed. The amount has arisen directly from carrying on the aforesaid business. But for the UN sanction as imposed, the amount would have been repatriated to India as was the case before UN sanction and employed in the trading operation of the business. In such a situation it would constitute a circulating capital as it is intended to be utilised in the course of business or for trading purpose or for effecting a 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. In this context, it would be worthwhile to refer to the decision of Court of Appeal in Imperial Tobacco Co. vs. Kelly (1943) 25 Tax Cases 292 (CA) as referred to by their Lordships of Supreme Court in the case of Sutlej Cotton Mills Ltd. (supra). In the aforesaid case the company in accordance with its practice brought American dollars for the purpose of purchasing, in the United States, tobacco leaf. Before tobacco leaf could be purchased there was a outbreak of war. The company had to stop the purchases of tobacco leaf in the United States.
As a result the company was required to sell to the Treasury and owing to the rise which in the meantime had occurred in the dollar exchange, the sale resulted in a profit for the company. The question was whether the exchange profit thus made on the dollars purchased by the company was a trading profit or not. The Court of Appeal held that it was a trading profit includible in the assessment of the company under Case I of Schedule D and Lord Greene, Master of the Rolls, delivering the main judgment, said (p. 300) : "The purchase of the dollars was the first step in carrying out an intended commercial transaction, namely, the purchase of tobacco leaf. The dollars were bought in contemplation of that and nothing else. The purchase on the facts found was, as I say, a first step in the carrying out of a commercial transaction .......
The appellant company having provided themselves with this particular commodity, namely, dollars which they proposed to exchange for leaf tobacco, their contemplated transactions became impossible of performance, or were not in fact performed. They then realised the commodity which had become surplus to their requirements. When I say 'surplus to their requirement'. I mean surplus to their requirements for the purpose and the only purpose for which the dollars were acquired.
In these circumstances, they sell this surplus stock of dollars; and it seems to me quite impossible to say that the dollars have lost the revenue characteristic which attached to them when they were originally bought, and in some mysterious way have acquired a capital character. In my opinion, it does not make any difference that the contemplated purchases were stopped by the operation of Treasury of governmental orders, if that were the case; nor is the case affected by the fact that the purchase was under a Treasury requisition and was not a voluntary one. It would be a fantastic result, supposing the company had been able voluntarily, at its own free will, to sell those surplus, dollars, if in that case the resulting profit should be regarded as income, whereas if the sale were a compulsory one the resulting profit would be capital. That is a distinction which, in my opinion, cannot possibly be made." 7. Accordingly the transaction as executed by the assessee could not be termed to be on capital account.
8. 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 accounts is not determinative of the character of the income which has to be determined on the facts and the circumstances of each case.
Nevertheless the conduct of the assessee cannot be completely ignored.
The accounting entries as made have relevance while deciding the issue.
At this juncture it would be relevant to mention that even before the Board of Direct Taxes this has never been the stand of the assessee. We would also like to mention that under s. 36 of the Act deduction in respect of any bad debt has been specifically allowed under cl. (vii) of sub-s. (1) of s. 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 item of capital nature have been specified as such as is the case in s. 35(A), 35AB is distinction to s. 35AB of the Act. In the circumstances the arguments of the learned authorised representative in this regard are relevant only in case the project receivables are held to be on capital account. This would also include the arguments relating to the computation of capital gains.
9. 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 s. 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 s. 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 operation i.e., assignment of debt is in the course of trading transaction but whether the first step towards the transaction is in the course of business. This cannot be delinked with the first stage. It is the nature of the debt assigned which is relevant. Since the debt as assigned is on account of trading transaction, the same is of revenue nature. This is also evident from the treatment given to it under the Act.
10. In the result, in our considered view the gain or loss arising to the assessee is on revenue account and has been rightly treated as such.
11. The second issue permitted to be raised before the Tribunal relates to the assessee's claim in respect of deduction under s. 80HHB of the IT Act on exchange fluctuations gain arising on account of Iraqi projects. The learned authorised representative submitted that the assessee's claim for deduction under s. 80HHB of the Act was denied by the AO on the ground that the conditions laid down in the aforesaid section were not fully satisfied by the assessee. The reasons given for rejection of the claim were that the assessee had sufficient time to create reserve which could have been done in the revised return, it was not so done. Further, the assessee did not apply for extension of time for bringing convertible foreign exchange into India. Not only the assessee's explanation rendered in this regard was rejected the decision of the Tribunal for asst. yr. 1984-85 in the case of assessee on the issue was not followed. The learned CIT(A), on the other hand confirmed the finding of the AO on the ground that the gain on account of exchange fluctuation though assessable as business income could not be termed as a profit derived from the execution of the foreign contract as specified in s. 80HHB of the Act. Distinction was made between the expression derived from and attributable to. Reference was made to the various decisions of the Courts, namely, Sterling Foods vs.
CIT (1984) 150 ITR 292 (Kar), CIT vs. Siddaganga Oil Extractions (P) Ltd. (1993) 201 ITR 968 (Kar) and that of the jurisdictional High Court in the case of CIT vs. Cement Distributors Ltd. (1994) 208 ITR 355 (Del).
12. The learned authorised representative submitted that the assessee's accounts were finalised on 28th June, 1995, as is evident from the P&L a/c and report of the auditors which is dt. 28th June, 1995 (pp. 148 & 149 of the paper book). It was only vide letter dt. 31st August, 1995 (p. 90 of the paper book) that the assessee raised the question in regard to the nature of receipt of Rs. 100.37 crores accruing on account of retrival of foreign exchange reserve to the credit of P&L a/c. In addition to the question as raised in respect of the year in which the same is taxable, the assessee requested that the tax if any payable be accepted in bonds. The Board responded and issued instructions under letter F. No. 225/161/95/dITA-(ii) dt. 7th May, 1996, to all the Chief Commissioners/Director General of Income-tax mentioning that while the year of assessability of income would be 1995-96, profit or loss arising out of sale of bonds at any time before the same are redeemed would be taxable in the year in which the transaction takes place and would be treated as per the provisions relating to capital gains. Reference was made to Circular No. 711, dt.
14th July, 1995, where it was clarified that the bonds issued by way of settlement of claims of project in Iraq would be treated as convertible foreign exchange brought into India for the purposes of s. 80HHB of the Act. It was mentioned that the Chief CIT/CITs should liberally allow the request for extension of period of six months for bringing convertible foreign exchange into India (p. 143 of the paper book). The assessee's accounts are subjected to audit by CAG. Since the accounts were completed prior to the instructions the assessee could neither create reserve in the relevant assessment year nor could show the amount in the revised return. Thus there were bona fide reasons for not doing so and in view of the decisions of the various Courts, namely, Sterling Foods vs. CIT (supra) and others the assessee's claim should not have been rejected. The circular being beneficial to the assessee was binding on the officers as held in the case of Navneet Lal C.Javeri vs. K. K. Sen, AAC (1965) 56 ITR 198 (SC), CIT vs. Sreeram Aggarwal (1986) 161 ITR 302 (Pat) and ABC India Ltd. vs. Dy. CIT (1996) 217 ITR 255 (Gau). Even the earlier decision of the Tribunal for asst.
yr. 1983-84 which was on the same issue was not followed. As regards the objection of the learned CIT(A) that the profits and gains accruing to the assessee were not derived from the business of execution of a foreign project, the same does not hold good. By now the distinction between expression derived and attributable is well established. There is a close nexus with the profit and gains arising on account of fluctuation in foreign exchange with the project receivable. The latter have arisen from the execution of projects in the course of business as held by the learned CIT(A) himself in another part of his appellate order. The learned CIT(A) has adopted clearly a contradictory stand inasmuch as while on one side the profit or gain has been held to be arising on revenue account, on the other hand, it is held that the same has no nexus with the project receivables which are a result of project executed. In case of Cambay Electric Supply Industrial Co. Ltd. vs. CIT (1978) 113 ITR 84 (SC) as relied upon by the learned CIT(A) the question before their Lordships was whether the balancing charge arising as a result of sale of old machinery and buildings as worked out under s. 41(2) of the Act has to be taken into account before computing the deduction under s. 80E of the Act or not. It was held that legal fiction under s. 41(2) and the grant of special deduction under s. 80E in the case of specified industries are so closely connected with each other that taking into account the balancing charge before computing 8 per cent deduction under s. 80E(i) would amount to extending legal fiction within the limits of the purpose for which the fiction has been created. It is not so. The facts in the case of the assessee are otherwise. The learned Departmental Representative on the other hand, fully supported the order of the learned CIT(A). It was submitted that the Board's circulars as issued from time to time have to be read in the context they were issued. As held in the case of Novopan India Ltd. vs. Collector of Central Excise & Customs, Hyderabad 1994 (73) ELT 769 (SC), the beneficial provisions have to be read strictly. In the circumstances, the claim of the assessee was rightly disallowed.
13. We have carefully considered the rival submissions as well the material specifically referred to on both sides. Undeniably the assessee was caught in a situation where the Government had to bail it out. Even then what the assessee got is bonds which are redeemable at future date. The amounts were not received in physical sense. It was in these circumstances that the circulars as referred to above were issued by the CBDT. These circulars as issued are specific to the situation as well to the parties to whom they related. In the circumstances the parties were placed, the CBDT in its wisdom issued instructions that the bonds as issued by way of settlement of claims of projects in Iraq to be treated as convertible foreign exchange brought into India for the purpose of s. 80HHB. In regard to the extension of period of six months the same was directed to be construed liberally in so far it related to s. 80HHB of the Act. In the circumstances, we fail to understand as to how in not applying for extension of time the assessee's claim could have been denied. The amounts were receivable somewhere in future and that too in a period of years. Regarding gain and loss having not arisen from the project executed has no logic. A gain or loss has arisen on account of the amount receivable in foreign exchange which is the result of execution of a project in the course of business. It has close and direct nexus with the project executed and as such it could not be said that on this account the claim of the assessee could be rejected. As regards non-creation of reserve there were bona fide reasons as were explained and in view of the decision of jurisdictional High Court in the case of Continental Construction Co.
vs. CIT (1990) 185 ITR 230 (Del) as well that of the Supreme Court in the case of the same Continental Construction Ltd. vs. CIT (1992) 195 ITR 81 (SC) the claim is allowable. Otherwise too as held in the case of Navneet Lal C. Javeri (supra); and Sreeram Aggarwal (supra), the circulars which are binding on the officers need to be followed. As regards decision in the case of Novopan India Ltd. vs. Collector of Central Excise & Customs (supra), there the issue related to whether Melamine faced particle boards classified under Item 68 of erstwhile Central Excise Tariff is entitled to exemption available to unveneered particle boards under Notification No. 55/79-C.E. or not. It was held that the principle that in case of ambiguity, a taxing statute should be construed in favour of the assessee does not apply to the construction of an exception or an exempting provision which have to be construed strictly. It was held by their Lordships that the onus is on the person invoking an exception or an exemption provision to establish that he is covered by the aforesaid provision. The facts in the case of the assessee are distinguishable. In its case the CBDT have directed the officer to consider the claim of the assessee liberally and that too after satisfying that the conditions as laid down in the section are fulfilled. The directions as given are in view of peculiar circumstances faced by the assessee. Therefore, the ratio of the aforesaid judgment is not applicable to the case of the assessee. In the result, the ITO is directed to allow an opportunity to the assessee to create necessary reserve and subject to the fulfilment of the conditions the claim of the assessee be allowed.
14. The next contention relates to taxability of interest receivable on deferred payment from Iraq amounting to Rs. 26.23 lakhs. It was submitted that the assessee entered into a contract in the financial year 1981-82 and upto financial year 1983-84 the payments were made by Iraqi Government. It is only in financial year 1984-85 and thereafter that the contract bills were certified for payment. While the Dinar portion of the payment was made by the Iraqi Government the Dollar portion of the payment could not be made due to uneconomical conditions prevailing in Iraq. In 1983 the first protocol was signed between the Government of India and Government of Iraq on 15th March, 1984, in respect of foreign currency portion of certified bills raised or to be raised in 1984. Subsequently other protocols were signed in respect of subsequent financial years which were 9th January, 1985, for the year 1985, 15th July, 1986, for the year 1986, 16th April, 1987, for the year 1987, 17th February, 1988, for the year 1988 and 14th March, 1990, for the years 1989 and 1990. Thereafter no protocol was signed by Government of India and the Iraqi Government. In clause No. 10 of the protocol dt. 14th March, 1990, it was provided that arrangements for 1990 would be discussed by the Government of India and Iraq before the end of 1990 and that in the event of delay payment for the intervening period from 1st January, 1991, to 31st January, 1991, will be covered by the terms of agreement. For payment of interest for the outstanding balance there was no protocol from 1st February, 1991, for the remaining period between the Government of India and Government of Iraq. Despite that the assessee provided interest in respect of its different projects in the financial years 1991-92 to 1994-95. For the financial year 1994-95 the interest was included in Schedule M of the printed accounts under the head 'Other' interest of Rs. 7,45,07,166. In their note No. 9 of the notes the auditors mentioned as under : "Sundry debtors include interest receivable cumulative upto 31st March, 1995, Rs. 2,740.30 lakhs (Rs. 3,001.33 lakhs), for the year Rs. 25.23 lakhs (Rs. 793.33 lakhs), on the deferred dues for the Iraq projects provided on the LIBOR rate on the basis of the agreement between Governments of India & Iraq which is pending renewal after January, 1991. Of the above interest recoverable.
Company has to pay its sub-contractors interest on back to back basis cumulative upto 31st March 1995, Rs. 1,071.12 lakhs (Rs. 1,071 lakhs), for the year Rs. Nil (Rs. 258.90 lakhs), which is shown under the head "Current liabilities". Further, of the total amount of Rs. 7,260.89 lakhs appearing under deferred dues an amount of Rs. 4,156.08 lakhs representing dues against IRAQ Project which is pending confirmation by EXIM Bank." 15. The aforesaid interest was at Rs. 26.23 lakhs. As the interest had not accrued to the assessee, in view of the above position the same should have been excluded in computing the tax in view of the decision of the Supreme Court in the case of Godhra Electricity Co. Ltd. vs. CIT (1997) 225 ITR 746 (SC). The learned CIT(A) wrongly held that the facts of the case available in Modi Rubber Ltd. bear no relevance to the facts of the present case. Since no right to receive the amount had accrued to the assessee, the same could not been brought to tax as done by the AO and as confirmed by the learned CIT(A). The learned Departmental Representative on the other hand, fully supported the orders of the Revenue authorities. It was submitted that the protocol between the two parties was to implement banking arrangements and once income had accrued the same had to be brought to tax.
16. We have carefully considered the rival submissions. We have also gone through the material which was specifically referred to. The issue in question is whether the income in the form of interest had accrued or arisen to the assessee. The income accrues or arises when the assessee acquires the right to receive the income. This is of course in distinction to receipt of income which is when it reaches the assessee's hand. The income may accrue or arise without its being received. As held by their Lordships of Supreme Court in the case of CIT vs. Shoorji Vallabhdas & Co. (1962) 46 ITR 144, 148 (SC) : "Income-tax is a levy on income. No doubt, the IT Act takes into account two points of the time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book keeping an entry is made about a hypothetical income, which does not materialise." 17. Thus, the real question for decision is whether the income has really accrued or not. The question whether there is a real accrual of income to the assessee would be dependent on the facts of the case. In the case of the assessee the circumstances under which the Government of India and Government of Iraq entered into protocol have been referred to in the paras preceding. The first protocol was signed between Governments of India and Iraq on 15th March, 1984, in respect of foreign currency portion and subsequently in 1985, 1986, 1987, 1988, 1989 and 1990. Thereafter no protocol was signed by the Government of India. Clause No. 10 of the Protocol dt. 14th March, 1990, only provided for interest for the intervening period from 1st January, 1991, to 31st January, 1991. After this there was no protocol for the remaining period. As stated by the assessee's counsel and not controverted by the learned Departmental Representative, till date no interest has been paid. Even in the deed of assignment under which the bonds were issued by the Government of India in payment of Iraqi dues the interest was paid for the period till 31st January, 1991, as determined. Thus, there was no real accrual of income to the assessee for which the assessee could be taxed. As regards amount being credited by the assessee in its P&L a/c, the same could not be taken as a determining factor for assessability of the income. The principle of real income has to be applied to the accounting entries also. Entries made in the books of accounts would not justify the assessability of income. On the facts themselves it is difficult to uphold the finding of the learned CIT(A) in regard to the taxability of interest.
18. Coming to the various decisions cited we find that the facts as available in the case of State Bank of Travancore vs. CIT (1986) 158 ITR 102 (SC) are distinguishable. In the aforesaid case the tax was payable by the debtor which has been accordingly charged as per the agreement and the mere possibility of non-recovery or delayed recovery was not considered sufficient for non-taxability of the amount. On the other hand, the ratio available in the case of Godhra Electricity Co.
Ltd. vs. CIT (supra) is applicable to the case of the assessee. In the aforesaid case the then State Government of Bombay had granted a licence to the LSC Company authorising it to generate and supply electricity to the consumers in Godhra area. The State Government had fixed charges for supply of electricity. After amendment of the Electricity (Supply) Act, 1948, the company increased the rates for electricity supply for lights and fans. Unilateral increase was challenged by the consumers. The suits as filed were decided in favour of the consumers by the trial Court but the High Court upheld the stand of the company. The decision of the Gujarat High Court was affirmed by the Supreme Court by judgment dt. 26th February, 1969. Subsequently the under secretary to the Government of Gujarat in the industries, Mines the power department addressed a letter to the assessee-company suggesting that the company may be advised to maintain status quo for the rates to the consumers. The assessee-company did not effect the recovery and on the facts it was held by the High Court that the assessee-company being a licensee could not ignore the directions of the State Government which was couched in the form of an advice. This decision was upheld by the Hon'ble Supreme Court wherein it was held that the entries made represented only hypothetical income and the amounts in question brought to tax did not represent income which had really accrued to the assessee-company during the relevant previous years. In the case of the assessee in absence of any protocol no income actually accrued to the assessee.
19. The assessee's case is on better footing than that available in the case of Godhra Electricity Co. (supra). Accordingly, we would uphold the assessee's stand and delete the addition made on account of interest. As and when interest is received, the same could be brought to tax.