Income Tax Appellate Tribunal - Ahmedabad
Hirenbhai Karsanbhai Patel, Ahmedabad vs Assessee on 13 June, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL,
" A " BENCH, AHMEDABAD
Before Shri D. K. TYAGI, JUDICIAL MEMBER
and Shri A. K. GARODIA, ACCOUNTANT MEMBER
I.T.A. No. 1255/ Ahd/2006
(Assessment year 2002-03)
Smt Punitaben K. Patel, Vs. ACIT, CC-1(1),
Nirma House, Ahmedabad
Ashram Road,
Ahmedabad
PAN/GIR No. : AAVPP9688G
I.T.A.No. 1258/Ahd/2006 (assessment year 2002-03)
Shri Karsanbhai K Patel, Vs. ACIT, Circle 1(1),
Nirma House, Ashram Road, Ahmedabad
Ahmedabad
PAN: AGGPP2909K
I.T.A.No. 3133/Ahd/2007
(assessment year 2003-04)
Shri Hiren K Patel, Vs. ACIT, Circle V,
Nirma House, Ashram Road, Ahmedabad
Ahmedabad
PAN: AGGPP2907H
I.T.A.No. 1082/Ahd/2010
(assessment year 2003-04)
ACIT, Circle V, Vs Shri Hiren K Patel,
Ahmedabad Nirma House,
Ashram Road,
Ahmedabad
PAN AGGPP2907H
(APPELLANT) .. (RESPONDENT)
Appellant by: Shri S N Soparkar,
Ms. Urvashi Shodhan, ARs
Respondent by: Shelley jindal, CIT DR
Shri Rahul Kumar, Sr. DR
Date of hearing: 13.06.2013
Date of pronouncement: 21.06.2013
2 I.T.A.Nos.1255,1258 /Ahd/2006
I.T.A.No. 3133/Ahd/2007
I.T.A.No. 1082/Ahd/2010
ORDER
PER BENCH:-
Out of this bunch of four appeals, there are two appeals of two different assessee's for assessment year 2002-03, in the case of Smt Punitaben K Patel and in the case of Shri Karsanbhai K Patel and these appeals are directed against two separate orders of Ld. CIT(A) I, Ahmedabad dated 06.03.2006 in the case of Shri Karsanbhai K Patel and dated 09.03.2013 in the case of Smt. Punitaben K Patel. The remaining two appeals are cross appeals filed by the assessee and the revenue in the case of Shri Hirenbhai K Patel directed against the order of CIT(A) II, Ahmedabad dated 08.05.2007. Since some common issues are involved, all these appeals were heard together and are being disposed off by way of this common order for the sake of convenience.
2. First, we take up the appeal in the case of Smt. Punitaben K Patel for the assessment year 2002-03 in I.T.A.No. 1255/Ahd/2006. 2.1 Ground No.1 is general.
2.2 Grounds No.2 & 3 are interconnected as reproduced below:
"2. In law and in facts and circumstances of the Appellant's case, the Ld. Commissioner of Income Tax (Appeals) has erred in upholding the action of Id. Assessing Officer in considering the long term capital gain of Rs.8,79,320/- on sale of 40 Deep Discount Bonds of Nirma Limited as short term capital gain.
3. In law and in facts and circumstances of the Appellant's case, the Ld. Commissioner of Income Tax (Appeals) has erred in upholding the action of Id. Assessing Officer in not allowing claim of deduction u/s.54EC of the Act on long term capital gain referred to in ground no. 2 above."
2.2.1 The brief facts of the case are that it is noted by the A.O. in para 4 of the assessment order that the assessee has shown long term capital gain (LTCG) of Rs.8,79,320/- in respect of purchase and sale of deep discount 3 I.T.A.Nos.1255,1258 /Ahd/2006 I.T.A.No. 3133/Ahd/2007 I.T.A.No. 1082/Ahd/2010 bonds (DDBs) of Nirma Ltd. He has also noted that the purchase cost of the same have been shown at Rs.40 lacs and sale consideration has been declared at Rs.48,79,320/-. He has further noted that these DDBs were allotted to the assessee on 28.07.2000 and the allotment letter was issued to the assessee dated 23.09.2000. He has further noted that the debenture certificate has been issued to the assessee dated 05.10.2001. Thereafter, it is noted that DDBs of Series A of Nirma Industries Ltd. were listed in National Stock Exchange (NSE) on 20.09.2001 and was made available for dematerialization as on 19.09.2001. Thereafter, he has noted that these DDBs of Nirma Ltd were sold by the assessee on18.03.2002. The assessee has claimed it as long term capital asset by counting the holding period starting form the date of allotment i.e. 28.07.2000 but the A.O. was of the view that these are short term capital assets on the basis of counting of holding period from the date of listing of the same in NSE i.e. 20.09.2001. On the basis of this, the A.O. held that this capital gain of Rs.8,79,320/- is assessable as short term capital gain and he taxed the same accordingly. Moreover, the A.O. disallowed the claim of the assessee for deduction u/s 54EC of the Income tax Act, 1961 also for the same reason that such deduction is allowable against LTCG only and not against STCG. Being aggrieved, the assessee carried the matter in appeal before Ld. CIT(A) but without success and now, the assessee is in further appeal before us.
2.2.2 It was submitted by the Ld. A.R. before us that in the case of Shri Karsanbhai P Patel (HUF) for the same assessment year i.e. assessment year 2002-03, this issue was decided in favour of the assessee in I.T.A.No. 1042/A/2006 dated 09.10.2009. He submitted that this decision is available on pages 62-87 of the paper book and the relevant 4 I.T.A.Nos.1255,1258 /Ahd/2006 I.T.A.No. 3133/Ahd/2007 I.T.A.No. 1082/Ahd/2010 para is para 26 of this Tribunal decision on page 85 of the paper book. Ld. D.R. supported the orders of authorities below. 2.2.3 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the Tribunal decision cited by Ld. A.R. From the facts noted by the tribunal in that case, we find that the dispute before the tribunal was regarding the same DDBs of Nirma Ltd. for which letter of allotment was issued by Nirma Ltd. on 23.09.2000 and debenture certificate was issued on 05.10.2001 and the same was listed in NSE only on 20.09.2001. Hence, the facts in the present case are identical. This issue was decided by the tribunal as per para 26 of the tribunal decision and for the sake of ready reference, the same is reproduced below:
"For the aforesaid reasons, we are of the view that the assessee is right in claiming that the capital gains arising on the sale of the deep discount bonds should be assessed as long term capital gains on the footing that he held them for a period of more than 12 months starting form 23.09.2000 before they were sold on 2.03.2002. Consequently, we also hold that the assessee is entitled to the exemption u/s 54EC as claimed. Thus both grounds Nos. 2 and 3 are allowed."
2.2.4 From the above para of the Tribunal order, we find that it was held by the tribunal that the holding period has to be counted form the date of allotment till the date of sale and if the same is more than 12 months then, it has to be accepted that it is a LTCG and the assessee is entitled to deduction u/s 54EC also. Hence, in the present case also, by respectfully following the Tribunal decision, we decide both these issues in favour of the assessee and it is held that since period of holding was more than 12 months from the date of allotment i.e. 23.09.2000 till the date of sale i.e. 18.03.2002, the resulting gain has to be assessed as LTCG and the assessee should be held as eligible for deduction u/s 54EC also because 5 I.T.A.Nos.1255,1258 /Ahd/2006 I.T.A.No. 3133/Ahd/2007 I.T.A.No. 1082/Ahd/2010 there is no other objection of the revenue regarding allowability of deduction u/s 54EC except that the income in question is not a LTCG. Both these grounds no.2 & 3 are allowed.
2.3 Grounds No.4 & 5 are interconnected which read as under:
"4. In Jaw and in facts and circumstances of the Appellant's case, the Ld. Commissioner of Income Tax (Appeals) has erred in upholding the action of Id. Assessing Officer in considering the long term capital gain of Rs.53,49,000/- arising on sale of principal strip part A of Tata finance Ltd. NCDs as short term capital gain.
5. In law and in facts and circumstances of the Appellant's case, the Ld. Commissioner of Income Tax (Appeals) has erred in upholding the action of Id. Assessing Officer in not allowing claim of deduction u/s.54EC of the Act on long term capital gain referred to in ground no. 4 above."
2.3.1 The brief facts regarding these issues are that it is noted by the A.O. in the same para 4 of the assessment order that the assessee has shown LTCG of Rs.53.49 lacs from the transaction of NCD principle strip, Part A Series I of Tata Finance Ltd. having purchase cost of Rs.495.51 lacs and sale consideration being Rs.549 lacs. In respect of this capital gain also, the assessee claimed deduction u/s 54EC of the Income tax Act, 1961 because the assessee had made investment in the bonds of Rural Electricity Corporation (REC) of Rs.62.20 lacs and the LTCG of only Rs.8320 had been offered by the assessee. The A.O. has further noted that the assessee has purchased 9 principle strips of Part A Series I of Tata Finance Ltd. of Rs.1 crores (face value) for a consideration of Rs.495.41 lacs on 23.10.2000 from Nirma Industries Ltd., which is a group concern of Nirma group and the same was sold by the assessee on 20.03.2002 at Rs.549 lacs to Nirma Industries Ltd. i.e. the same concern from which the assessee purchased these strips. The A.O. issued show cause notice to the assessee as to why the Board's Circular 6 I.T.A.Nos.1255,1258 /Ahd/2006 I.T.A.No. 3133/Ahd/2007 I.T.A.No. 1082/Ahd/2010 No.2 of 2002 dated 15.02.2002 is not applicable and why this capital gain should not be considered as STCG in the light of this Board's Circular. In reply, it was submitted by the assessee before the A.O. that the letter of board dated 12.03.1996 was applicable in the present case and therefore, the gain is LTCG. It was further submitted by the assessee before the A.O. that as per the press release of the Board dated 20.03.2002, the applicability of the circular is prospective and not retrospective and for this reason also, the gain in question is LTCG and the same cannot be considered to be STCG. The A.O. was not satisfied and he held that this gain of Rs.53.49 lacs is STSCG and the assessee is not eligible for deduction u/s 54EC also. Being aggrieved, the assessee carried the matter in appeal before Ld. CIT(A) but without success and now, the assessee is in further appeal before us.
2.3.2 It was submitted by the Ld. A.R. that this issue is also covered in favour of the assessee by the tribunal decision rendered in the case of ITO Vs Kulgam Holdings Pvt. Ltd. in I.T.A.No. 3785 and 2574/Ahd/2004 dated 25.04.2007, copy of which is available on page 136-140 of the paper book II. He further submitted that on the same issue, another tribunal decision rendered in the case of Navin Associates Vs ACIT and Others in I.T.A.No. 1248, 1256 & 1266/Ahd/2006 is also in favour of the assessee and a copy of this Tribunal decision is available on pages 196- 199 of the paper book II. Ld. D.R. supported the orders of authorities below.
2.3.3 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the Tribunal decisions cited by Ld. A.R. We find that in the case of Navin Associates (supra), the issue involved was, whether the Board's Circular No.2 of 2002 dated 15.02.2002 can be applied ignoring the press note 7 I.T.A.Nos.1255,1258 /Ahd/2006 I.T.A.No. 3133/Ahd/2007 I.T.A.No. 1082/Ahd/2010 dated 20.03.2002 issued in this regard by CBDT. The Tribunal in that case has decided this issue in favour of the assessee by following the Tribunal decision rendered by the Mumbai Bench of the Tribunal rendered in the case of ITO Vs Kulgam Holdings Pvt. Ltd. (Supra). The tribunal has also followed SMC Bench decision of Ahmedabad Bench of the tribunal rendered in the case of Navin Associates in I.T.A.No. 1621/Ahd/2007 dated 04.04.2008. We find that in the case of ITO Vs Kulgam Associates (supra), it was held by Ld. CIT(A) that since the Bonds were acquired by the assessee prior to the date of Board's Circular No.2 dated 15.02.2002, such Board's circular cannot be made applicable because the bonds in question were acquired prior to this date and as per subsequent press release dated 20.03.2002, it was made clear that this Board's circular No.2 will be applicable only for bonds which are acquired after this date. This decision of Ld. CIT(A) was approved by the tribunal in that case. Similarly in the case of Navin Associates (supra), similar issue was decided by the tribunal in favour of the assessee and while deciding this issue in that case, the Tribunal has followed a decision of SMC Bench of Ahmedabad Bench of the Tribunal rendered in the case of Navin associates (supra). This SMC Bench decision of the tribunal has followed a division bench decision of Ahmedabad Bench of the tribunal rendered in the case of Kisan Discretion Family Trust in I.T.A.No. 1850/Ahd/2007 dated 02.11.2007. This Tribunal decision is also available in the paper book-II on pages 141-195. In para 57 of this tribunal decision on page 194 (backside), it was held by the Accountant Member in that case that this Board's Circular dated 15.02.2002 is applicable only to DDBs acquired on or after 15.05.2002 and since Judicial Member in that case was also having the same view, the matter was decided in favour of the assessee without referring the same to the 8 I.T.A.Nos.1255,1258 /Ahd/2006 I.T.A.No. 3133/Ahd/2007 I.T.A.No. 1082/Ahd/2010 Third Member although the Accountant Member was having some reservations about the view of the Judicial Member on some other aspects. Be that as it may but this is admitted position that on this aspect, i.e. Board's Circular No.2 dated 15.02.2002 is applicable only on those bonds which were acquired on or after 15.02.2002, there are several Tribunal decisions in favour of the assessee and no contrary decision was brought to our notice by the Ld. D.R. and since in the present case, the strip of TATA Finance Ltd. were acquired by the assessee on 23.03.2000 i.e. much prior to 15.02.2002, it has to be accepted that in the facts of the present case, this board's Circular No.2 dated 15.02.2002 is not applicable and therefore, the gain in question has to be assessed as LTCG and the assessee has to be allowed deduction u/s 54EC also. We hold accordingly. Grounds No.4 & 5 of the assessee are also allowed. 2.4 Ground No.6 is as under:
"6. In law and in the facts and circumstances of the Appellant's case, the Ld. Commissioner of Income Tax (Appeals) erred in confirming the Assessing Officer's action in levying interest u/s. 234B of IT. Act."
2.4.1 This issue is regarding chargeability of interest u/s 234B which is consequential and held accordingly.
2.5 Ground No.7 is regarding initiation of penalty proceedings u/s 271(1)(c) of the Income tax Act, 1961 and this ground is rejected because the same is premature.
2.6 In the result, appeal of the assessee is partly allowed.
3. Now, we take up the appeal of the assessee in the case of Karsanbhai K Patel in I.T.A.No. 1258/Ahd/2006 for the assessment year 2002-03.
3.1 Grounds No.1 is general 3.2 Ground No.2 is as under:
9 I.T.A.Nos.1255,1258 /Ahd/2006 I.T.A.No. 3133/Ahd/2007 I.T.A.No. 1082/Ahd/2010"2. In law and in facts and circumstances of the Appellant's case, the Ld. Commissioner of Income Tax (Appeals) has erred in confirming the action of Id. Assessing Officer holding that the method of accounting as mercantile as against cash method of accounting regularly followed by the appellant."
3.2.1 Brief facts of the case are that it is noted by the A.O. in para 3 of the assessment order that the assessee filed a letter dated 11.08.2004 in which assessee offered accrued interest on OFCPN of Nirma Industries Ltd., the assessee stated that as per Circular No.2 dated 15.02.2002, the income is offered although as per the assessee, this circular is not applicable in the case of Optionally Fully Convertible Premium Notes (OFCPN) since the same was related to DDBs. It was also stated by the assessee that because of abundant precaution, the income is offered. It is further noted by the A.O. that assessee has purchased 16528 OFCPN of Nirma Industries Ltd. on 25.03.2002 of Rs.4132 lacs and the interest accrued on the same amounting to Rs.4,90,220/- was offered by the assessee as income by way of this letter dated 11.08.2004. The A.O. has not accepted the claim of the assessee that this Board's circular No.2 dated 15.02.2002 is not applicable in the case of the assessee because the same is related to DDBs only. The A.O. held that the nature of OFCPN is similar as that of DDBs and this Board's Circular is applicable to OFCPN also. Before Ld. CIT(A), the assessee raised an issue that the method of accounting adopted by the assessee is cash method of accounting and not mercantile method of accounting as has been held by the A.O. in the assessment order. But Ld. CIT(A) did not accept this contention and held that the method of accounting is rightly adopted by the A.O. as mercantile method of accounting and now, the assessee is in further appeal before us. 3.2.2 It was submitted by the Ld. A.R. before us that the assessee is following cash method of accounting. He further submitted that the 10 I.T.A.Nos.1255,1258 /Ahd/2006 I.T.A.No. 3133/Ahd/2007 I.T.A.No. 1082/Ahd/2010 method of accounting was taken as cash based on assessment year 2005-
06. He further submitted that in I.T.A.No. 1291/Ahd/2009 dated 08.04.2011 for assessment year 2005-06, in the Tribunal decision of departmental appeal, it was held that method of accounting followed by the assessee is cash method. He submitted copy of the Tribunal decision before us. He further submitted that the A.O. in assessee's own case for the assessment year 2004-05 has held that the method of accounting followed by the assessee is cash method of accounting and has submitted a copy of assessment order for the assessment year 2004-05. At this juncture, the bench wanted to see the balance sheet and P & L account along with computation of income of the present year to find out the method of accounting being followed by the assessee in the present year because the facts of the present year may be different than that of the facts in assessment year 2005-06 and 2004-05. The same were submitted by the Ld. A.R. Ld. D.R. supported the orders of authorities below. 3.2.3 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. From the perusal of the balance sheet, P & L account and computation of income filed by the assessee for the present year, we find that the method of accounting is cash method and not mercantile method. Accordingly this ground is allowed.
3.3 Grounds No.3 & 4 are interconnected which read as under:
3. In law and in facts and circumstances of the Appellant's case, the Ld. Commissioner of Income Tax (Appeals) has erred in upholding the action of Id. Assessing Officer in considering the long term capital gain of Rs.7,47,35,955/- on sale of 3385 Deep Discount Bonds of Nirma Limited as short term capital gain.
4. In law and in facts and circumstances of the Appellant's case, the Ld. Commissioner of Income Tax (Appeals) has erred in upholding the action of Id. Assessing Officer in not allowing claim 11 I.T.A.Nos.1255,1258 /Ahd/2006 I.T.A.No. 3133/Ahd/2007 I.T.A.No. 1082/Ahd/2010 of deduction u/s.54EC of the Act on long term capital gain referred to in ground no.3 above.
3.3.1 It was submitted by the Ld. A.R. that this issue is identical to grounds No.2 & 3 in the case Ms. Punitaben K Patel for the same assessment year and the same can be decided on similar lines. Ld. D.R. supported the orders of authorities below.
3.3.2 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. We find that similar issue is decided by us in the case of Ms. Punitaben K Patel as per para 2.2.3 & 2.2.4 above and it is held by us that the period of holding has to be counted from the date of allotment and not from the date of listing in NSE. In the present case also, the DDBs were sold by the assessee on 19.03.2002 and hence, the period of holding is more than 12 months when the same is worked out from the date of allotment i.e. 23.09.2000 and hence, in the present case also, this issue is decided in favour of the assessee on the same lines of our decision in the case of Ms. P K Patel as per para 2.2.3 & 2.2.4 above. In the present case also, we hold that the gain in question of Rs.7,47,35,955/- on sale of 3385 DDBs of Nirma Ltd. is taxable as LTCG and not STCG and the assessee is eligible for deduction u/s 54EC of the Income tax Act, 1961 to the extent of entire amount of such LTCG on sale of DDBs of Nirma Ltd. because the assessee has claimed to have made eligible investment of Rs.747.40 lacs u/s 54EC of the Income tax Act, 1961. We hold accordingly. Grounds No.3 & 4 are allowed.
3.4 Ground No.5 is regarding charging of interest of Rs.92,53,728/- u/s 234B of the Income tax Act, 1961. This ground is consequential and held accordingly.12 I.T.A.Nos.1255,1258 /Ahd/2006 I.T.A.No. 3133/Ahd/2007 I.T.A.No. 1082/Ahd/2010
3.5 Ground No.6 is regarding initiation of penalty proceedings u/s 271(1)(c) of the Act. This ground is rejected because the same is premature.
3.6 Ground No.7 is general.
3.7 The assessee has raised on additional ground which reads as under:
"In law and in the facts of the appellants case, the addition of Rs.4,90,220/- being notional accrued interest on optionally fully convertible premium notes (OFCPNs) of Nirma Industries Ltd. miscellaneous application be deleted."
3.7.1 It was submitted by the Ld. A.R. that the decision on this ground is depending on the outcome of ground No.2 of the assessee's appeal and if it is held that the assessee is following cash system of accounting then this income of Rs.4,90,220/- of OFCPNs of Nirma Industries Ltd. cannot be taxed in the present year because the income of the assessee has to be assessed on cash basis only. Since we have decided ground No.2 in favour of the assessee as per para 3.2.3 above and it is held by us that the assessee is following cash system of accounting, the additional ground raised by the assessee has to be allowed because once it is held that the assessee is following cash system of accounting, no income on account of interest of OFCPNs can be taxed in the present year on accrual basis and this is admitted fact that no such interest income was received by the assessee in the present year. Therefore, this additional ground is also allowed with the rider that the interest income should be taxed in the year in which the same is received by the assessee.
3.7.2 In the result, appeal of the assessee is partly allowed.
4. Now, we take up the appeal of the assessee in the case of Hirenbhai K Patel in I.T.A.No. 3133/Ahd/2007.
4.1 Ground No.1 is general.
4.2 Ground No.2 to 5 is as under:
13 I.T.A.Nos.1255,1258 /Ahd/2006 I.T.A.No. 3133/Ahd/2007 I.T.A.No. 1082/Ahd/2010"2) In law and in facts and circumstances of the Appellant's case, the learned CIT(A) has grossly erred in confirming addition of accrued interest Rs.8,94,601 on investment in the Bonds of Rural Electrification Corporation Ltd."
3) In law and in facts and circumstances of the Appellant's case, the learned CIT(A) has grossly erred in confirming addition of accrued interest Rs. 1,21,11,114 on investment in Deep Discount Bonds Series B of Nirma Ltd.
4) In law and in facts and circumstances of the Appellant's case, the learned CIT(A) has grossly erred in confirming addition of accrued interest Rs.59,05,216 on investment in Optionally Fully Convertible Premium Notes (OFCPNs) of Nirma Industries Ltd.
5) In law and in facts and circumstances of the Appellant's case, the learned CIT(A) has grossly-erred in not dealing with following ground of appeal No.2:
"2. In law and in facts and circumstances of the Appellant's case, the learned Assessing Officer has grossly erred in considering the method of accounting as mercantile as against cash method of accounting regularly followed by appellant".
4.2.1 It was submitted by the Ld. A.R. that ground no.5 should be decided first as per which, it is the claim of the assessee that the assessee is following cash system of accounting. He submitted that although this issue is not decided by Ld. CIT(A) and, therefore, this may be an argument that this issue should go back to the file of Ld. CIT(A) for a decision but since all other issues as per grounds no.2, 3 & 4 are depending on the decision on this aspect and the relevant facts beings the audited balance sheet and P & L account etc. are being furnished, this issue may be decided here itself. He also submitted that as per the computation of the total income filed by the assessee along with the return of income which is made available before the bench, it is submitted by the assessee on page 2 of the computation that the assessee is following cash method of accounting. He also submitted that as per the balance sheet and P & L account of the assessee, made available before 14 I.T.A.Nos.1255,1258 /Ahd/2006 I.T.A.No. 3133/Ahd/2007 I.T.A.No. 1082/Ahd/2010 the Bench, it cannot be seen that the assessee is maintaining its accounts on cash basis and not on mercantile basis. He submitted that merely because in assessment year 2001-02, no appeal was filed by the assessee against the assessment order as per which the A.O. held that the assessee is following mercantile system of accounting, it cannot be accepted that the assessee is in fact following mercantile system of accounting in that year i.e. assessment year 2001-02 because in spite of holding that the assessee is following mercantile system of accounting, the return of income was accepted by the A.O. and, therefore, no appeal was filed in that year. He also submitted that in assessment year 1999-2000 and 2000-01 also, the return of income was accepted by the A.O. by way of intimation u/s 143(1). Regarding the assessment for the assessment years 1995-96 to 1998-99, it was submitted that in those years, the assessment was made by the A.O. by holding that the assessee is following mercantile method of accounting but since there was no addition and the return of income was accepted, no appeal was filed. He submitted that under these facts, this issue should be decided on the basis of computation of income, audited P & L account and balance sheet of the present year. He also submitted that if it is held and decided that the assessee is following cash system of accounting then, grounds 2, 3 & 4 are to be allowed in favour of the assessee because these additions were made by the A.O. on the basis that the assessee is following mercantile method of accounting and if it is accepted that the assessee is following cash method of accounting then these additions cannot be made. Ld. D.R. supported the orders of authorities below.
4.2.2 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. Admittedly, this issue was raised by the assessee before Ld. CIT(A) that 15 I.T.A.Nos.1255,1258 /Ahd/2006 I.T.A.No. 3133/Ahd/2007 I.T.A.No. 1082/Ahd/2010 the assessee is following cash method of accounting and the A.O. is not correct in holding that the assessee is following mercantile system of account. This issue was not decided by Ld. CIT(A). Under these facts, generally, we restore back the issue to the file of Ld. CIT(A) for a decision on such undecided ground but considering these facts that the relevant material is available on record before us being the audited balance sheet and P & L account as well as computation of income filed by the assessee along with the return of income and the order passed by the A.O. is not a speaking order regarding method of accounting being followed by the assessee, we feel it proper that we should decide this aspect of the matter in the facts of the present case. We, therefore, proceed to decide this issue after examining the computation of income and the audited accounts made available before us. In the computation of income, it is specifically stated by the assessee as per note that assessee is following cash method of accounting. This was submitted by the assessee before the A.O. as per the submissions dated 08.11.2005 also as has been reproduced by the A.O. in para 5.1 on page 3 of the assessment order. Thereafter, in para 5.13 of the assessment order, it is stated by the A.O. that the method of accounting in respect of DDBs has been defined by CBDT u/s 145(2) of the Income tax Act, 1961 and as per the provisions of Section 145(2) read with Circular No.2 of 2002, the assessee is not allowed to return the income from DDBs/NCD on cash basis. Hence, as per this finding of the A.O. in para 5.13 of the assessment order, it is seen that this is not a case of the A.O. that assessee is not following cash system of accounting and is following mercantile method of account but the case of the A.O. is this that in respect of declaring income from DDBs/NCD, there is a restriction on the assessee as per Circular No.2 of 2002 and Section 145(2) of the Income tax Act, 16 I.T.A.Nos.1255,1258 /Ahd/2006 I.T.A.No. 3133/Ahd/2007 I.T.A.No. 1082/Ahd/2010 1961 that the same cannot be declared on cash basis. We are not satisfied with this contention of the A.O. because as per the provisions of Seciton145(2) of the Act, the Central Government may notify in the official gazette from time to time, the accounting standards to be followed by any class of the assessees and in respect of any class of the income but this Board's circular No.2 of 2002 does not amount to any accounting standard notified by the Central Government in the official gazette and, therefore there is no merit in this contention of the A.O. that as per the provisions of Section 145(2) of the Income tax Act, 1961 read with circular NO.2 of 2002, the assessee cannot return the income from DDBs/NCD on cash basis. From the audited accounts and computation of income filed by the assessee along with the return of income, copies of which are made available to us also, we find that the method of accounting being followed by the assessee is cash and not mercantile. As per sub-section (1) of Section 145, the assessee can follow either cash or mercantile system of accounting regularly in respect of determination of income chargeable under the head 'profits & gains of the business and profession' or 'income from other sources' and, therefore, the assessee can very much follow cash method of accounting for the purpose of declaring income in respect of DDBs/NCD if the assessee is regularly following cash method of accounting. No Board's circular can override the provisions of the Act and since the Board's circular is not an accounting standard notified by the Central Government in the official gazette as required u/s 145(2) of the Income tax Act, 1961 to make out an exception in respect of Section 145(1), we do not find any merit in this contention of the A.O. that even if the assessee is following cash method of accounting, the assessee is bound to follow mercantile method of accounting for the purpose of declaring income from DDBs/NCD.
17 I.T.A.Nos.1255,1258 /Ahd/2006 I.T.A.No. 3133/Ahd/2007 I.T.A.No. 1082/Ahd/2010Hence, we hold that the assessee is following cash method of accounting in the facts of the present case in the present year and accordingly, ground no.5 of the assessee is allowed. Since this issue is decided in favour of the assessee and we have held that the assessee is following cash method of accounting, remaining grounds No.2, 3 & 4 are also to be allowed because the income of the assessee cannot be assessed on the basis of hybrid method of accounting by following mercantile method for assessing income in respect of DDBs/NCD and the remaining income on the basis of cash method of accounting. Hence, grounds No.2, 3 & 4 are also allowed.
4.3 Ground No.6 is as under:
"6) In law and in facts and circumstances of the Appellant's case, the learned (Tf(A) has grossly erred in not dealing with following additional ground of appeal:
''In law and in the facts and circumstances of the Appellant's ease, it is submitted that if addition of Rs.8,94,601 on REC Bonds. Rs. 1.21.11.114 on DDBs of Nirma Limited and Rs.59,05,216 on OFCPNs of Nirma Industries Ltd. being made as notional interest, is accepted partially or completely, it is prayed that the same should not be taxed in the subsequent year."
4.3.1 It was submitted by the Ld. A.R. that this ground is an alternative argument if the assessee fails in respect of grounds No.2, 3 & 4. Since, we have already allowed the assessee's grounds No.2, 3 & 4, this ground of the assessee is rejected being redundant.
4.4 Grounds no.7, 8 & 9 are regarding charging of interest u/s 234A, 234B and 234C of the Act and the same are consequential and held accordingly.
4.5 Ground No.10 is regarding charging of interest u/s 234D of the Income tax Act, 1961. Regarding this issue, it was submitted by the Ld. A.R. that interest u/s 234D of the Income tax Act, 1961 cannot be charged because the law was amended by Finance Act 2003. He place 18 I.T.A.Nos.1255,1258 /Ahd/2006 I.T.A.No. 3133/Ahd/2007 I.T.A.No. 1082/Ahd/2010 reliance on the decision of Special bench of the Tribunal rendered in the case of ITO Vs Ekta Promoters (P) Ltd. as reported in 113 ITD 719. Respectfully following the same, this issue is decided in favour of the assessee and this ground is allowed because as per this decision of Special bench of the Tribunal, Section 234D can be applied w.e.f. assessment year 2004-05 and not prior to that.
4.6 Ground No.11 is regarding initiation of penalty proceedings u/s 271(1)(c) and the same is rejected as premature.
4.7 Ground No.12 is general.
4.8 In the result, appeal of the assessee stands partly allowed.
5. Now, we take up the remaining appeal in the case of the same assessee Shri Hiren Karsanbhai Patel in respect of penalty proceedings u/s 271(1)(c) of the Income tax Act, 1961 in I.T.A.No. 1082/Ahd/2010. 5.1 The grounds raised by the revenue are as under:
"1. The Ld. Commissioner of Income tax (A)-Xl , Ahmedabad has erred in law and on facts erred in canceling the penalty of u/s 271(1)(C ) amounting to Rs.42,91,900/-.
2. On the facts and in the circumstances of the case, the Ld. Commissioner of Income tax (A) -XI Ahmedabad ought to have upheld the order of the Assessing Officer.
3 It is therefore prayed that the order of the Ld. Commissioner of Income tax (A) - XI, Ahmedabad may be set aside and that of the Assessing Officer be restored."
5.2 Ld. D.R. supported the penalty order whereas the Ld. A.R. supported the order of Ld. CIT(A).
5.3 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. We find that this penalty of Rs.42,91,900/- was imposed by the A.O. in respect of addition made by him of Rs.1,21,11,114/- regarding interest accrued on DDBs of Nirma Industries Ltd. and interest income of Rs.8,94,601/- in respect of bonds of REC Ltd. Both these additions have been deleted by 19 I.T.A.Nos.1255,1258 /Ahd/2006 I.T.A.No. 3133/Ahd/2007 I.T.A.No. 1082/Ahd/2010 us while deciding the grounds of appeal of the assessee in para 4/2/2 above by way of allowing grounds No.2, 3 and 4 of the assessee's appeal in quantum proceedings. Since the quantum addition itself has been deleted by us, the penalty has no legs to stand and, therefore, we decline to interfere in the order of Ld. CIT(A) regarding deletion of penalty by him.
5.4 In the result, appeal of the revenue is dismissed.
6. In the combined result, all appeals of the assessee are partly allowed and that of the Revenue in penalty proceedings is dismissed.
7. Order pronounced in the open court on the date mentioned hereinabove.
Sd./- Sd./-
(D. K. TYAGI) (A. K. GARODIA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Sp
Copy of the Order forwarded to:
1. The applicant
2. The Respondent
3. The CIT Concerned
4. The Ld. CIT (Appeals)
5. The DR, Ahmedabad By order
6. The Guard File
AR,ITAT,Ahmedabad
1. Date of dictation...18/06/2013
2. Date on which the typed draft is placed before the Dictating Member 19/06/2013.Other Member ............
3. Date on which the approved draft comes to the Sr. P.S./P.S.
4. Date on which the fair order is placed before the Dictating Member for pronouncement 21/6/2013
5. Date on which the fair order comes back to the Sr. P.S./P.S.21/6
6. Date on which the file goes to the Bench Clerk 21/06/2013
7. Date on which the file goes to the Head Clerk .......................
8. The date on which the file goes to the Assistant Registrar for signature on the order .........................
9. Date of Despatch of the order. ......................