INCOME TAX ACT, 1961

Section 4

Income - Capital or revenue receipt - Following war between Iraq and Kuwait Government of India had extended foreign exchange loans to assessee through Exim Bank and SBI -

Assessee-company was engaged in civil engineering construction. It was entitled to certain dues from Government of Iraq on account of contracts executed which were deferred from payment under Deferred Payment Agreement (DPA) between Governments of Iraq and India from 1-1-1983 as well as interest due on deferred dues of contracts executed and retention money retained from contract receipts. Government of Iraq was not in a position to pay such deferred dues till the year 1995-96 and chances had further receded with trade sanctions placed on Iraq by the United Nations, following the war between Iraq and Kuwait in August, 1990. Government of India had extended foreign exchange loans to assessee through Exim Bank and SBI to enable it to make off with contracts in Iraq following the deferment of its contracts under DPA. Assessee-company and other similarly placed Indian contractors approached 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 Government of Iraq to Government of India. The bonds issued were handed over to Exim Bank and SBI for being adjusted towards the foreign exchange loans due to them from the Indian Contractors working in Iraq. Assessee-company received the following sums from Government of India under such settlement. Retention of money default account Interest receivable account and sum of Rs. 97 crores received in settlement by the Government of India/ECGS against defult receivable from Government of Iraq. AO treated receipt of Rs. 297 crores as business receipts from execution of foreign projects and thus taxed the same. Held: Settlement received from Government of India was not coming under the purview of business income as there was no business during the period. Besides, contracts between assessee and Government of Iraq was not completed due to war situation and UN Sanctions. There was no hope for 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 assessee. Thus, settlement received in lieu of this could not form revenue receipt and there could be no taxation.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 1995-96 & 2001-02

INCOME TAX ACT, 1961

Section 37(1)

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