Case Law Details
Brief of the Case: In the cited case, Delhi High Court held that 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. The assessee’s claim of capital loss, based on indexed treatment of capital gain is therefore insubstantial and unfounded on any principle.
Facts of the Case: In the year 1983-84, the Government of Iraq expressed inability to pay the US Dollar Component to the assessee who had provided services under contract to it due to its involvement in war with Iran. Protocol Agreements were signed between the Government of India 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 Government of India, pursuant to its notification dated 24.3.1995 issued Compensation Bonds-2001 governed by the provisions of the Public Debts Act, 1944 and the Public Debt Rules, 1945.
By computing the value of such bonds, on indexed cost of acquisition the assessee claimed loss in its return for A.Y. 1995-96. The loss under the head “Capital Gains” was stated at Rs.1,48,22,66,649/-. The Assessing Officer (AO) was of the view that the head “Capital Gains” was not attracted to the deduction claimed by the assessee for AY 1995-96. The AO held the said amount to be taxable under the head “Income from business and profession”.
The Assessee preferred appeal to the High Court questioning the correctness of the view taken by the ITAT. The question of law arose for consideration was “Whether the assessee’s claim that there was a loss and/or it was a capital loss is legally tenable”.
Contention of the Assessee: Assessee submitted that the terms and stipulations contained in the Deed of Assignment executed in favour of the Government of India entitled the assessee to receive the value in the form of Compensation Bonds in 2001 and was not considered properly. The Iraqi Government’s debts, recoverable by the assessee, were in the nature of blocked/sterilized debts or money. In terms of the Government to Government 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 IT 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 extraneous circumstances. The effect, however, was that the amounts could never be said to have been the main part of its entitlement. The acceptance of compensation bonds under these circumstances upon assigning of the Iraqi debts (to the Central Government) was not a part of the assessee’s business or trading activities. Therefore, faulted the ITAT’s findings on this aspect.
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