Income Tax Appellate Tribunal - Bangalore
Syndicate Bank vs Asstt. Cit on 2 March, 1994
Equivalent citations: [2006]7SOT51(BANG)
ORDER
Deepak R. Shah, A.M. This appeal by assessee is directed against the order of learned Commissioner (Appeals), Mangalore dated 31-12-2001.
2. The appellant is a nationalised bank, having regard to the inadequacy of total income computed under the provision of the Act being less than 30 per cent of its book profits, the appellant became liable to tax with reference to its book profit under section 115JA of the Income Tax Act, 1961 (hereinafter referred to as 'the Act). While so computing, the assessing officer did not exclude the income by way of interest on zero coupon bonds accounted by assessee in its profit and loss account. An appeal is being preferred to the Tribunal which are (1) allocation of expenditure against income which is otherwise exempt and thereby disallowing the allocated expenditure; and (2) add back of interest on zero coupon bonds amounting to Rs. 33,78,94,141 in arriving at the book profit for levy of tax under section 115JA. Having found that the total income computed under the Act was less than 30 per cent of the book profit and as such attracting the provision of section 115JA warranting levy of tax on deemed income equal to 30 per cent of the book profit, the appellant computed the book profit by commencing the exercise with the net profits as shown in its profit and loss account prepared in accordance with the provisions of the Companies Act. The Board having authoritatively clarified that interest on zero coupon bonds would not be liable to income-tax, the appellant excluded the same while making adjustments to the net profit to arrive at the book profit. The amount of interest so adjusted was Rs. 33,78,94,141. The assessing officer however, disagreed with the appellant and added it back for which he drew support from the decision given by the Commissioner (Appeals) while disposing of the appellant's appeal against the intimation for the year in issue. In the appeal there against, the appellant contended that when any income is exempt altogether, the same has to be adjusted appropriately in arriving at the book profit. By considering the Board Circular and the context in which it clarified that the interest on zero coupon bonds would not be income chargeable to tax, the Commissioner (Appeals) came to the conclusion that while it may not be taxable 'per se' under the conventional method, it cannot qualify/merit for deduction or exclusion in arriving at the book profit.
3. Learned counsel for assessee Shri K.P. Kumar submitted that though the appellant has accounted the interest on zero coupon bonds in its profit and loss account, the same is only a notional income and not actual receipt of income. The assessee acquired certain zero coupon bonds at a discount as per the scheme of allotment. In its books of account, the assessee declared the investment at its book value and the difference between book value and acquisition price was shown by way of interest being interest on zero coupon bonds. The assessee is not otherwise to receive any interest on such bonds. The CBDT by its Circular F. No. 225/56/94-ITA-II dated (sic) March, 1994 clarified the position in respect of zero coupon bonds and taxability of interest thereon, wherein it was opined as under :
"XIX. Zero coupon bondsTaxability of interestRegardingWe are considering furnishing a clarification to the department of Economic Affairs on certain issues raised by them regarding the tax liability arising out of the investments in Zero Coupon Bonds announced by the Government on 7-1-1994. A copy of the Scheme is enclosed. The salient features of the scheme are that the bonds can be purchased by any person by bidding for the same in an auction, No interest will be payable in respect of the bonds, The bonds will be repaid at par after 5 years. The bonds are transferable.
2. The questions for clarifications are as under :
(i) whether the difference between the purchase price and the amount of money received on redemption of the bonds will be treated as income under the Income Tax Act or it will be treated as capital gains;
(ii) if the discount is treated as income, will be same be taxable on accrual basis for each accounting period for the 5 years or the total discount shall be treated as income of the year of redemption, at the option of the investor.
(iii) will tax have to be deducted at source on the discount element when the Zero Coupon Bonds are repaid at maturity.
3. The matter was considered by the TPL section and they have opined that the discount is in the nature of interest. They have placed reliance upon a similar scheme of Indira Vikas Patras wherein, under the scheme itself, the difference between the issue price and the redemption price is deemed to be interest income. A copy of the TPL's noting is enclosed.
4. it is felt that a different opinion is possible on the subject. According to section 2(28A) of the Income Tax Act, interest means interest payable in any manner in respect of any monies borrowed or debt in current including a deposit claim or other similar right or obligation and includes any service fee or other charges in respect of the monies borrowed or the debts incurred. It is felt, that the discount under consideration may not fit into this definition for being treated as interest. Also section 2(28B) of the Income Tax Act states that interest on securities means interest on any security of the Central Government or a State Government. Here again by virtue of clause 15 of the Scheme which states that no interest will be payable on the bonds, any payment in the nature of interest is ruled out. Comparison with Indira Vikas Patras may also be not correct as, under the provisions of Indira Vikas Patra Rules, 1986, interest at a specified rate is deemed to have accrued at the end of each year and also such interest payable has been kept specifically outside the provisions of TDS under section 194A of the Act. Inasmuch as similar provisions are absent in the present Zero Coupon Bonds Scheme it cannot be said that the gain in respect of such bonds is in the nature of interest.
5. It is felt that the correct interpretation to be given is that what is obtained in an auction by an investor is the right to receive a fixed sum of money after a period of 5 years. The present market value of such right gets determined in the course of the auction and the right is purchased for that market price. Thereafter, at the end of the specified 5 years, such right is converted into money, represented by the face value of the bonds and hence will amount to an enhancement in the value of the capital asset. When such bonds are traded in the market during the relevant period of 5 years, there may be gains or losses which may have to be treated as capital gains or losses under the provisions of section 45 of the Income Tax Act. When the ultimate holder converts the assetintomoney at the end of 5 years a question may arise whether there is any transfer of a capital asset and whether any gains or losses will arise.
6. In this connection it may be noted that the concept of transfer as defined in the Act, includes an exchange as well as the extinguishments of right in an asset and by paying cash for the cancelled bond we may attempt to categorise it as an exchange. Bond in this case takes the same character as a debenture, and the issue whether on final redemption of a debenture whether there is any transfer is already under reference to the Ministry of Law in F.No. 207/4/93-ITA-II. The final opinion in this regard is yet to be obtained.
7. In the result the questions raised by the Department of Economic Affairs may be answered as under :
(i) the discount will not be treated as interest under the Income Tax Act. However, whether the amount paid at redemption gives rise to any capital gains will be clarified in due course;
(ii) in the light of answer to question (i) this not arise."
Shri Kumar accordingly submitted that the entire scheme of deemed income under section 115JA and the manner of arriving at deemed income do not permit even consideration momentarily of income which is otherwise exempt from tax. The CBDT having settled that the interest on zero coupon bonds would be being income and as such not liable to income-tax, there is no warrant for reckoning or including it in book profit for purposes of section 115JA. Assessability as capital gain will arise, if at all, in the year of redemption and such redemption not having occurred in the subject year, exclusion of the interest from book profit of the subject is unassailable. Concluding his arguments, Shri Kumar submitted that the Circular issued by CBDT are binding upon the officers working under it. Since the credit is by way of notional income recorded in books of account, the same has to be excluded even while computing book profit under section 115JA.
4. Learned senior counsel Dr. Krishna strongly relied upon the appellate order. He further submitted that as per section 115JA of the Act, profit has to be computed as per Part II and Part III of Schedule VI to the Companies Act, 1956. The assessee has computed the income accordingly. The accounts are certified to be depicting true and fair view of the profits of the year. Thus, there is no room for any addition or deletions except as permitted under section 115JA itself. Since the interest on zero coupon bonds has been accounted as income by the assessee, the assessee cannot have on its own version saying that it is not an income or otherwise required to be excluded while computing book profits.
5. We have carefully considered the relevant facts and arguments advanced. The CBDT by its circular aforesaid opined that interest on zero coupon bonds is not an interest in strict sense as it encompasses over certain period of time. The circular issued by CBDT are binding upon the authorities working under it. Similar view has been adopted by Hon'ble Supreme Court in the case of UCO Bank v. Commissioner of Income Tax (1999) 237 ITR 889 (SC), in the case of CCE v. Dhiren Chemical Industries (2002) 254 ITR 554 (SC) and in the case of Commissioner of Customs v. Indian Oil Corpn. Ltd. 267 ITR 272 (SC). The entry by way of crediting the profit and loss account in respect of interest on zero coupon bonds is of notional credit and not in respect of interest accruing during the year. The bonds are maturing over long period of time and the entire income by way of difference between acquisition price and redemption price do not accrue to the assessee during the financial year. Thus, though the assessee has credited the income, the same is not strictly in accordance with Part II and Part III of Schedule VI to the Companies Act, 1956. Hon'ble Supreme Court iii the case of Apollo Tyres Ltd. v. Commissioner of Income Tax (2002) 255 ITR 273 (SC) held that the assessing officer has no power to rework the book profit if the profits are computed in accordance with Part II and Part III of Schedule VI to the Companies Act, 1956. Hon'ble Bombay High Court in the case of Commissioner of Income Tax v. Veekaylal Investment Co. (P) Ltd. (2001) 249 ITR 597 (Bom) held that if the profit is not computed in accordance with Part II and Part III of Schedule VI to the Companies Act, 1956, the assessing officer has power to recompute such book profits. Thus, it can be held that if the assessing officer can amend the book profit if it is not in accordance with Part II and Part III of Schedule VI to the Companies Act, 1956, likewise, the assessee also can recompute the book profit for the purpose of section 115JA. Since in the present case, the entire income by way of interest on zero coupon bond has not accrued during the year, the same cannot be considered as "to disclose the result of working of the company during the financial year" as provided under Part II and Part III of Schedule VI to the Companies Act, 1956. We accordingly hold that the notional income by way of interest on zero coupon bonds has to be excluded while computing book profits as per section 115JA of the Act.
6. The other ground relating to allocation of expenditure against dividend income was specifically denied by Committee on Disputes to be agitated before this Tribunal. The said ground is dismissed for want of necessary approval.
In the result, the appeal is partly allowed.