Continental Construction Ltd. Vs ACIT (ITAT Delhi)
Conclusion: Settlement received from the Government of India was not coming under the purview of the business income as there was no business during the period and income which had not accrued to assessee could not be termed as business income.
Held: Assessee-company claimed 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 as it was not a business receipts from execution of contracts from Government of Iraq, but was only a financial assistance from the Government of India and was capital receipt. AO treated the sum as business receipts from execution of foreign project sand taxed as profits. It was held that income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount. Only then can it be said that for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee. In the present case, the income had not accrued to assessee, therefore, it could not be termed as the business income. From the perusal of these case laws and from the submissions of the assessee, it was clear that the settlement received from the Government of India was not coming under the purview of the business income as there was no business during the period. Besides, the contracts between assessee and the Government of Iraq was not completed due to war situation and UN Sanctions. There was no hope for the assessee to conduct any business, but foreign exchange loans extended to assessee through Exim Bank and SBI by Government of India was a liability to the assessee. Thus, the settlement received in lieu of this would not form the revenue receipt.
FULL TEXT OF THE ORDER OF ITAT DELHI
These three appeals are filed by the assessee and revenue against the orders dated 23.08.20 10 and 14.02.2005 passed by the CIT(A)-IV, New Delhi for Assessment Years 1995-96 and 200 1-02 respectively.
2. The Grounds of appeal are as under :-
ITA No. 4710/Del/2010 (A.Y. 1995-96) (Assessee’s appeal)
Compensation by way of Bonds: Rs 297.47 crores.
1. “On facts and circumstances of the case and in law, the lower authorities have erred and were not justified in treating the compensation of Rs. 297.47 crores as ‘Income’, by way of Bonds directly issued by RBI to the lending banks of the company, on behalf of the Government of India / ECGC, in discharge 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 discharge of loan liability of the appellant, if at all considered as ‘Income’, to be chargeable under the head ‘Capital Gains’.
Prior Period Expenses: Rs 8,90,796/-
5. On facts and circumstances of the case and in law, the lower authorities have erred on disallowing the certain expenses, classified as prior period expenses in the tax Audit Report amounting to Rs8, 90,796/- without appreciating the fact that the company’s liability accrued in the year under assessment on the basis of ‘Sanction & Acceptance’ and these have been accounted by appellant consistently over the years in the same manner.
Interest income: Income From Other sources or Business Income:
6. On the facts and circumstances of the case and in law, lower authorities have erred in treating the interest income of Rs. 7,29,95,567/- as income from Other Sources instead of Business Income.
7. Lower authorities have failed and erred to apply the decision of hon’ble ITAT in AY 1998-99 in ITA no., where under the same facts & circumstances of the case, interest income was held to be Business Income.
Guest House Expenses: Rs 183,894/-
8. On facts & circumstances of the case and in law, lower authorities have erred in disallowing the transit and mess expenses merely on the basis of its accounting head as ‘Guest House Expenses’ on the basis of Tax Audit Report, in total disregard to the submissions of the assessee.
General:
9. The lower authorities have acted arbitrarily in haste and has failed to fully appreciate the facts, circumstances and written submissions of the appellant on record and were not justified by not sharing their opinions or points of contentions so that the same could have been properly met by the appellant.
10. The above grounds of appeal are independent without prejudice to each other.
11. The appellant craves to add, modify any ground of appeal or to adduce new evidence during the course of hearing of appeal, as may be necessary for discharge of due justice.”
ITA No. 2199/Del/2005 (A.Y. 2001-02) Assessee’s appeal
Compensation from UN:
1. On facts & circumstances of the case, the lower authorities have erred and were not justified in treating the entire amount of the compensation received from UN, towards loss sustained/ incurred during the UN lead war against Iraq in 1991, as accruing during 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 Rs19,98,66,841/- 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 the total income, but which is prohibited for remittance by virtue of UN embargo, which was made along with the return as well as during the assessment proceedings, ignoring the findings in earlier years.
5. On facts & circumstances of the case, the lower authorities have erred and were not justified in rejecting the alternative claim made during the assessment proceedings, that such interest on receivables, under deferred payment agreements between Govt of Iraq & Govt of India, has not actually accrued to the assessee to be taxed on the basis of real income concept and the fact that no DPA has been renewed since 1991 between the two sovereign states.
6. On facts & circumstances of the case, the Lower Authorities have erred and were not justified in concluding that for the purpose of appropriate relief u/s 220(7) of the IT Act, the prerequisite of the existing tax default is necessary, meaning thereby that interest chargeable u/s 220(2) shall be leviable. If such is the interpretation of the law, it would amount to deliberate denial of justice which has been exclusively provided in the Act.
PF Dues u/s 43B:
7. On the facts & circumstances of the case, the lower authorities have erred in making the disallowance of Rs 32,88,338/-, in so far as the said sum relate to Employees Contribution to Provident Fund Scheme, as per provisions Act. The ‘due date’ for the purpose of the Act, has to be reckoned with the date of actual payment of salary instead of the last date of the relevant month.
7. The above grounds of appeal are independent without prejudice to each other.
8. The appellant craves to add, modify any ground of appeal or to adduce new evidence during the course of hearing of appeal, as may be considered necessary for discharge of due justice to the appellant.”
ITA No. 2200/Del/2005 (A.Y. 2001-02) Revenue’s appeal
“1. 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. 39,14,14,418/- made on account of compensation received from UN on account of loss property and equipment.
2. 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. 42,56,979/- made on account of remission of liabilities”
3. 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.36, 1 7,430/- 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. 199 5-96
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/-.
The assessee-company was entitled to certain dues from the Government of Iraq on account of contracts executed which were deferred from payment under Deferred payment Agreement (DPA) between the Governments of Iraq and India from 01.01.1983 as well as interest due on the deferred dues of contracts executed and retention money retained from contract receipts. The Government of Iraq was not in a position to pay such deferred dues till the year 1995-96 and the chances had further receded with the trade sanctions placed on Iraq by the United Nations, following the war between Iraq and Kuwait in August, 1990. The Government of India had extended foreign exchange loans to the assessee through Exim Bank and SBI to enable it to make off with contracts in Iraq following the deferment of its contracts under DPA. The assessee-company and other similarly placed Indian contractors approached the Government of India to help them out to this situation. The Government of India granted settlement of such dues from Iraq Government by issuance of bond on assignment of their dues from the Government of Iraq to Government of India. The bonds issued were handed over to the Exim Bank and SBI for being adjusted towards the foreign exchange loans due to them from the Indian Contractors working in Iraq. The assessee company received the following sums from the Government of India under such settlement:
