Ita/301/2009 Of The Commissioner Income Tax v. M/S. Bhageeratha Engineering Ltd

IN THE HIGH COURT OF KERALA AT ERNAKULAMPRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR. JUSTICE BECHU KURIAN THOMASMONDAY, THE 5 DAY OF JULY 2021 / 14TH ASHADHA, 1943 ITA NO. 301 OF 2009 AGAINST THE ORDER IN ITA 47/2000 OF I.T.A.TRIBUNAL,COCHIN BENCH, ERNAKULAM APPELLANT/S: THE COMMISSIONER INCOME TAX,COCHIN. BY ADVS.SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES)SRI.JOSE JOSEPH, SC, FOR INCOME TAXSRI.CHRISTOPHER ABRAHAM, INCOME TAX DEPARTMENT RESPONDENT/S: M/S. BHAGEERATHA ENGINEERING LTD.,132, PANAMPILLY AVENUE, COCHIN-682 036. BY ADVS.SMT.P.ANITHASMT.P.ANITHASMT.R.S.GEETHASRI.T.M.SREEDHARAN SR.SRI.V.B.UNNIRAJ THIS INCOME TAX APPEAL HAVING COME UP FOR HEARING ON 05.07.2021,THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: J U D G M E N T S.V. Bhatti, J. The Commissioner of Income Tax, Cochin (for short ‘Revenue’) is the appellant. M/s.Bhageeratha Engineering Ltd. (for short ‘Asseessee’) is the respondent. The Revenue, aggrieved by the order of the Income Tax Appellate Tribunal(ITAT) Cochin Bench, in I.T.A. No.47/Coch/2000 dated17.06.2003 is in appeal under Section 260A of the Income TaxAct, 1961 (for short ‘the Act’). The controversies in the appealrelate to Assessment Year 1996-97. The appeal deals with claimand dis-allowance of loss on revaluation and sale of RBI bonds. 2.The Assessing Officer for the Assessment Year 1996-97 completed assessment under Section 143(3) on 11.03.1999, I.T.A. No.301/2009 disallowing the claim of loss on revaluation and sale of RBIbonds, amounting to Rs.6,04,75,315/- and Rs.43,30,000/-respectively. The circumstances relevant for appreciating thecontroversy, admittedly, are that the assessee had undertaken afew projects in Iraq as subcontractor of M/s. Indian RailwayConstruction Company Ltd. (Ircon). The assessee in theAssessment Year 1986-87, 1987-88 claims to have completed aportion of the construction work. The works were also certifiedand the assessee has not received the full consideration for thecertified work in the corresponding previous years. Theassessee for the Assessment Year 1986-97 adopted completedcontract method and the receipts of the work executed in Iraqhave not been reflected for consideration in the books ofaccounts. The Revenue insisted that mercantile system was theprocedure followed by the assessee in the previous assessmentyears and change of accounting system for one project to I.T.A. No.301/2009 completed contract accounting system is not acceptable andmade the assessment order. 2.1The assessee challenged the decision of the Revenuein this behalf and contended that the assessee has discretion toadopt an accounting standard commensurate to its businessexigencies as is available in standard accountancy practices.However, such option ought not to be with a view to avoid orevade tax payable in the year of accounting. It is contextual torefer to the view we have taken in the accompanying order onthe same issue before us in I.T.R .No.264/1997, wherein we haveupheld on the discretion available to the assessee, particularlyin the facts and circumstances of this case, to adopt completedcontract method of accounting. It is stated by the assessee thatthe assessee entered into supplemental agreement with Irconwhich facilitated deferred payment of receivable towards workexecuted by the assessee in Iraq. Towards the receivables in I.T.A. No.301/2009 the works executed in Iraq in the previous year ending31.03.1996, the assessee has received RBI and ECGC bondsamounting to Rs.27,67,95,395/-, including interest. The saidrecovery represents Rs.22,10,00,000/- as RBI bond and ECGCbond of Rs.5,57,95,595/-. The assessee for the Assessment Yearclaimed Rs.6,04,75,315/- as loss on revaluation and sale of RBIbonds of Rs.43,30,000/-. I.T.A. No.301/2009 the works executed in Iraq in the previous year ending31.03.1996, the assessee has received RBI and ECGC bondsamounting to Rs.27,67,95,395/-, including interest. The saidrecovery represents Rs.22,10,00,000/- as RBI bond and ECGCbond of Rs.5,57,95,595/-. The assessee for the Assessment Yearclaimed Rs.6,04,75,315/- as loss on revaluation and sale of RBIbonds of Rs.43,30,000/-. 2.2The assessee treated the RBI/ECGC bonds as deferredrealization and treated them as current asset, claimed loss onactual sale of bonds and loss on revaluation of bonds. The twoitems form subject matter of appeal before the Income TaxOfficer, as noted above, made the order under Section 143(3) ofthe Act. The assessee filed I.T.A. No. 21/JC/Ekm/CIT-II/99-2000before CIT (Appeals) Kochi. The Commissioner upheld theaddition made by the Assessing Officer. On appeal to the ITATin I.T.A. No.47/Coch/2000, the Tribunal accepted the claim of I.T.A. No.301/2009 assessee that, in the facts and circumstances of this case, the assessee has shown receivables from the work executed in Iraq,and the assessee has not received cash but received bondsunder an arrangement made by the Government of India, Irconetc, again payable at a future date. Therefore, the assessee iscorrect in treating bonds as current asset and by taking note ofvaluation adopted in respect of current assets, actualrevaluation is recognized and the assessee is entitled to claimloss on revaluation of bonds and sale of RBI bonds. Hence theinstant appeal. 3.Following questions are framed for consideration: “1.Whether, on the facts and in the circumstances of the case,the Tribunal is right in law and fact in interfering with thedisallowance of Rs.6,04,75,000/- being disallowance of loss onrevaluation of bonds. 2.Whether, on the facts and in the circumstances of the case,the Tribunal is right in law and fact in interfering with thedisallowance of Rs.43,30,000/- being disallownce of loss on sale ofRBI Bonds?” I.T.A. No.301/2009 4. Learned Senior Standing Counsel Mr.Christopher Abraham argues that the assessee, in lieu of receivables for thework executed in Iraq, has realized the bonds from RBI/ECGC.Upon the receipt of bonds, the bonds have to be treated ascapital asset and not current asset. The Tribunal recorded afinding that the entry of government bonds cannot come withinthe purview of stock-in-trade and however committed seriouserror by including RBI bonds under the head ‘current asset’.The notional loss, at any rate, should not have been computedand allowance granted to assessee. Therefore, he argued thatthe order of the Tribunal to the said extent is illegal andsubstantial questions framed fall within the jurisdiction of thisCourt under Section 260A of the Act and prays to allow theappeal. 5.Per contra, learned Senior Advocate Mr. Sreedharan contends that the assessee has been showing notional profit or I.T.A. No.301/2009 loss in all the previous Assessment Years. The assessee wasentitled to receive from Ircon consideration for the workexecuted by the assessee in Iraq. The circumstances of the caseare very unusual and the revenue of assessee was stuck up in awar ravaged country. Under an arrangement made by theGovernment of India and in terms of deferred paymentmechanism entered into by the assessee, the assessee hasreceived the RBI bonds. The bonds are realizable or payable at afuture date. Had the assessee received straight transfer ofconsideration to its bank account, then receivable in assessee'saccount is transferred into cash balance in account. But theassessee has received bonds payable in future i.e., after fiveyears. Therefore, in the books of accounts one form ofreceivable is substituted by another form of receivable. Thesale of a few bonds at the current rate, firstly suffered actualloss, and secondly, the other receivables at hand as on the last I.T.A. No.301/2009 I.T.A. No.301/2009 date of accounting year are to be revalued according to thepresent market rate. The assessee has revalued the bondsretained by it and notional loss has been booked. 5.1He argues that receivables can be treated under thehead ‘current asset’. The bond substituted the receivable andthe bonds are realizable at a future point of time. Therefore,the bonds substitute the existing entry and the assessee has notincluded it in stock-in-trade and did not treat it as a capitalasset. The case of the Department is not that the assessee is notentitled to claim revaluation and book notional loss thereon.But, the objection is that bonds are to be treated as capitalassets. For the said purpose, he reiterates the very argumentwhich was considered by the Tribunal while dealing withSection 2(14)- what ‘capital asset’ means, and submits that oncethe definition by itself does not attract bonds, the assessee ishaving discretion to treat the bonds as current asset. He argues that receivables can be treated under the I.T.A. No.301/2009 5.2He further argues that the Act does not, in itself, deal with and/or define current asset. There is no prohibition inany of the standard formats of accountancy system forincluding a receivable/bond, under current assets. Thenotional loss recorded in one year will be the valuation for thenext year; as and when the transactions take place in that year,the actual profit or loss of the assessee is determined dependingupon the rate at which the transaction takes place. He submitsthat the Revenue once is unable to establish that bonds can beincluded within the hold of capital asset, the substantialquestions of law now framed are without merit and do not comewithin the scope of this Court’s jurisdiction and prays to dismissthe appeal. 5.3He further argues that the bonds are not investmentmade by the assessee and assessee is not in the business of saleand purchase of securities, bonds etc. the assessee is in I.T.A. No.301/2009 -11- possession of bonds as a consequence of inevitable optionoffered by the Government of India. The assessee treated it ascurrent asset depending upon the business exigencies forselling and realizing the amount from the sale of bond. 6.The Tribunal in detail considered the case ofRevenue, referred to the definition of 'capital asset' and that thegovernment bonds attract the nature of capital asset and brieflynoted as follows: “A reading of the Section 2(14) of the IT Act would show thatunless specifically excluded, property of any kind held by theassessee would be capital asset. The authorised representativehas admitted that it is a part of circulating capital and acurrent asset. The Goverment had also agreed to redeem it atpar. These have been continued to be held and interest incomeaccrued thereon. His other contention that it constitutesstock-in-trade is also not borne out by the facts of the case.The appellant is engaged in the business of civil construction,such as that of dams, bridges, canal, earth work etc. Thebusiness of the appellant is not that of purchase and sale ofsecurities or bonds. Admittedly, the bonds were sold to “A reading of the Section 2(14) of the IT Act would show thatunless specifically excluded, property of any kind held by theassessee would be capital asset. The authorised representativehas admitted that it is a part of circulating capital and acurrent asset. The Goverment had also agreed to redeem it atpar. These have been continued to be held and interest incomeaccrued thereon. His other contention that it constitutesstock-in-trade is also not borne out by the facts of the case.The appellant is engaged in the business of civil construction,such as that of dams, bridges, canal, earth work etc. Thebusiness of the appellant is not that of purchase and sale ofsecurities or bonds. Admittedly, the bonds were sold to augment the working capital requirements and not to purchasefurther securities. These bonds are in lieu of realisation ofdebts and would constitute capital asset within the meaning ofsection 2(14) of the IT Act. Its subsequent conversion intomoney another current asset would give rise to capitalgains/loss only. Under the circumstances, the action of theAssessing Officer in disallowing Rs.6,04,75,315/- being thenotional loss on revaluation of bonds is upheld. In thisconnection, it may be pointed out that even the so-calledrevaluation loss has not been currently worked out by theappellant, as the bonds have been sold at the rate of Rs.89/- toRs.90/-, as per letter dated 9.2.96 of LIC of India filed by theappellant. In this connection, reliance is placed on the decisionof the Hon'ble Supreme Court in the case of Vijaya BankLimited, reported in 187 ITR 541. Similarly, the action of theAssessing Officer in treating a sum of Rs.43,30,000/- as shortterm capital loss is upheld. Accordingly, ground Nos.2 and 3 ofthe appellant are rejected. Aggrieved, the assessee is in appeal before the Tribunal. 6.The learned counsel for the assessee, Shri Sarangan madethe following written submissions: "The appellant was executing contracts in Iraq assub contractor of IRCON and was receiving periodicalpayments from Govt. of Iraq through IRCON and these receivables were accounted for as business receipts in thetrading account in the respective years. The contractsprovided for deferred payments, and these deferredpayments also, as and when receivable/received wereaccounted for as business receipts. There was default bythe Iraqi Government in making payments to IndianContractors who executed work in Iraq including M/sIRCON and M/s IRCON in turn defaulted in making thepayment to the appellant. Government of India offeredthe bonds to all Indian contractors including M/s IRCON inlieu of the money receivable from Iraq on the execution ofthe contracts. Having regard to the fact that the bondswere issued in lieu of amounts due i.e. Business receipts,and having regard to unavailability of any other option forrealisation of such amounts due; the bonds were liable tobe considered as business receipts. It is thus clear that thebonds were liable to be considered as business receiptsand any shortfall either by revaluation or on actualrealisation was liable to be considered as a business loss. The bonds are normal current asset in the hands ofthe appellant in the same way, as the receivables inrespect of the contracts executed would be current assets. Money receivable could not be treated as capitalassets such as Plant & Machinery or investments. The appellant being in need of money for the purpose ofcarrying on the business continued to treat the bonds ascurrent assets and sell them as and when necessary evenat a loss of replenishing the cash bill. Thus both from thepoint of Income Tax Law and the ordinary commercialaccounting procedure the loss sustained on valuing thebonds as at 31.03.96 at cost or market price whichever islower is on sound accounting principles approved by theSupreme Court in the case of British Paints v CIT (188 ITR44 SC). The bonds are normal current asset in the hands ofthe appellant in the same way, as the receivables inrespect of the contracts executed would be current assets. Money receivable could not be treated as capitalassets such as Plant & Machinery or investments. The appellant being in need of money for the purpose ofcarrying on the business continued to treat the bonds ascurrent assets and sell them as and when necessary evenat a loss of replenishing the cash bill. Thus both from thepoint of Income Tax Law and the ordinary commercialaccounting procedure the loss sustained on valuing thebonds as at 31.03.96 at cost or market price whichever islower is on sound accounting principles approved by theSupreme Court in the case of British Paints v CIT (188 ITR44 SC). These RBI/ECGC bonds cannot be treated asinvestment. In the first place, the appellant should havesurplus money in its hands and take conscious decision asto how the money should be deployed. If the Board ofDirectors of the Company takes a conscious decision thatthe money should be used for purchase of any specifiedasset, such asset would be classified as investment. It maybe appreciated that in the appellant's case, money was dueby way of business receivables from Iraqi Govermentthrough IRCON and that money was not paid by the saidGovernment. On the basis of an Indo-Iraqi GovernmentAgreement, the dues to Indian contractors were deferredand acknowledging their responsibility the Government ofIndia issued the said bonds to M/s IRCON who in turn transferred the bonds at a face value of Rs.27.68 crores tothe appellant. Thus it is clear that the bonds came to theappellant in substitution to the receivables. The appellanthad no choice, option or freedom to take money andthereafter invest, in Government of India Bonds. Thebonds were accepted in lieu of the receipts. It therefore,cannot be comprehended as to how the said Bonds can betreated as investment. Accepting the RBI/ECGC bond by the appellant, as in the present case became obligatory on the part of theappellant since there were no options to realise thereceivables in any other form or manner. This is not acase where the assessee opted for settlement of hisreeivables in the form of bonds. The appellant was forcedto accept the bonds purely on business consideration as atthat point of time the appellant knew or fully aware thatnon acceptance of the bonds means non realisation of thereceivables for an uncertain period. At the time ofacceptance the bonds, the appellant was aware that thesebonds having maturity period of over five years can betraded only at a much less price than the face value anddecided to accept the said loss purely on commercialconsideration. The CIT(A) has build up his case for confirming the disallowance of the loss on revaluation amount ofRs.6,04,75,316/- and for treating Rs.43,30,000/- as capitalloss, by wrong interpretation of Sec.2(14) of the Act. If theinterpretation of Sec.2(14) as given by the CIT(A) isapplied, bills,receivables, cash in hand, cash with banks,sundry debtors and such other assets, will have to beclassified as capital assets. By any stretch of imagination,these assets forming part of circulating capital of anybusiness cannot be termed as capital assets within themeaning of Section 2(14). It is also relevant to observethat where a particular word is defined with the clause"unless the context otherwise requires". (As is the case inSec.2 of the Act), it is not mandatory that one shouldmechanically attribute to the said word the meaningassigned to it in the definition clause. Ordinarily that isso. But where the context does not permit or where thecontext requires otherwise the meaning assigned to it inthe definition clause need not apply. (Printers (Mysore)Ltd. v Asst.CTO (1994) 2 Sec. 434, 444(SC). Therefore CIT(A)was wrong in holding the bonds received by the companyin lieu of receivables and held by it as current assets, ascapital assets." I.T.A. No.301/2009 the circumstances, examined the bonds, whether as capitalasset or current asset. The Tribunal noted that this dependsupon the facts and circumstances of the case. Adverting tocircumstances of the case, the Tribunal observed that theassessee had not made a conscious decision in investing inbonds, but the assessee was forced to accept the bonds in placeof receivables and rightly held that the option could not berefused by the assessee. Otherwise the assessee would have toforego entire receivable amount. The assessee, in our view, getscash only upon sale of the bonds. Till such time the bondscannot be treated as capital asset, and as rightly held by theTribunal, not even stock-in-trade. The assessee is recordingnotional loss or profit on revaluation of the earlier years aswell. The same procedure is followed in the subject assessmentyear as well. There is consistency in the pattern followed by theassessee and considering the nature of business the assessee has I.T.A. No.301/2009 been doing, the bonds are rightly treated as current assets inthe facts and circumstances of the case. The finding of factrecorded by the Tribunal is proper and correct. In the totalityof circumstances the assessee enjoyed consensusad idem whenentering into contract with Ircon. Thereafter, the assessee hasno option except to accept circumstances unfurling before itand accept the offer of Government Of India/Ircon. The optionexercised is to treat the receivable as a current asset. Theoption of treating the receivables converted as bonds realisableat a future point of time is tenable. In the facts of the caserunning out of cash reserves, the decision to treat bonds also asreceivable has been taken. As correctly observed by theTribunal, the treatment of an entry in a particular methodneeds to be appreciated in the peculiar facts of the case. In viewof the above consideration, the questions of law cannot bedecided in isolation to the circumstances of the case and we I.T.A. No.301/2009 express our agreement with the findings recorded by theTribunal and answer the question in favour of assessee andagainst the Revenue. I.T.A. No.301/2009 is dismissed. Sd/-S.V.BHATTIJUDGE Sd/- BECHU KURIAN THOMASJUDGE jjj I.T.A. No.301/2009 APPENDIX OF ITA 301/2009 PETITIONER ANNEXURE ANNEXURE A COPY OF ORIGINAL ASSESSMENT ORDER U/S.143(3) DATED 11/03/1999 ISSUED BY THE ASSESSING OFFICER FOR THE ASST. YEAR 1996-97. ANNEXURE B COPY OF THE ORDER DATED 27/12/1999 OF THE COMMISSIONER OF INCOME TAX (APPEALS). ANNEXURE CCOPY OF THE CIRCULAR IN F.NO.225/161/95/ITA-11 DATED 07/05/1996 ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES. ANNEXURE D COPY OF THE ORDER DATED 17/06/2003 OF THE INCOME TAX APPELLATE TRIBUNAL IN ITA NO.147/COCH/2000.