Income Tax Appellate Tribunal - Ahmedabad
Maulikkumar M. Patel, Mehsana vs Acit, Mehsana Circle , Mehsana on 30 November, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD "A" BENCH AHMEDABAD
BEFORE, SHRI S. S. GODARA, JUDICIAL MEMBER
AND SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER
ITA No. 1558 & 1702/Ahd/2013
(Assessment Year: 2009-10)
Manankumar M. Patel
Opp. Umiya Complex, Apollo Compound
Highways, Mehsana - 384002 Appellant
Vs.
Asstt. Commissioner of Income Tax,
Mehsana Circle, Mehsana,
2nd Floor, Apollo Enclave, Highway,
Mehsana - 384002 Respondent/ Cross appellant
PAN: ABXPP3019N
&
ITA No. 1559 & 1703/Ahd/2013
(Assessment Year: 2009-10)
Shri Maulikkumar M. Patel
Opp. Umiya Complex, Apollo Compound,
Highway, Mehsana - 384002 Appellant
Vs.
Asstt. Commissioner of Income Tax,
Mehsana Circle, Mehsana,
2nd Floor, Apollo Enclave, Highway,
Mehsana - 384002 Respondent/ Cross appellant
PAN: ABXPP3020D
ITA Nos. 1558,1559, 1702 & 1703 & /Ahd/2013 (Manankumar M. Patel &
Maulik kumar M. Patel) A.Y. 2009-10 -2-
राज व क ओर से/By Revenue : Shri K. Madhusudan, Sr. D.R.
आवेदक क ओर से/By Assessee : Shri U. S. Bhati, A.R.
सन
ु वाई क तार ख/Date of Hearing : 29.11.2016
घोषणा क तार ख/Date of
Pronouncement : 30.11.2016
ORDER
PER S. S. GODARA, JUDICIAL MEMBER
This set of four appeals arises in case of two different assessees for assessment year 2009-10. First assessee Shri Manankumar M. Patel has filed ITA No.1558/Ahd/2013 followed by Revenue's cross appeal ITA No.1702/Ahd/2013 against CIT(A), Gandhinagar's order dated 04.03.2013 in appeal no. CIT(A)/GNR/270/2011-12. The latter assessee Shri Maulikkumar M. Patel and the department have instituted latter set of cross appeals ITA Nos. 1559 & 1703/Ahd/2013 respectively against the very CIT(A)'s order in appeal no. CIT(A)/GNR/269/2011-12. Relevant proceedings in both sets of cases are u/s.143(3) of the Income Tax Act, 1961; in short 'the Act'.
2. Both the learned representatives state at the outset that these four appeals raise a common issue of taxation of assessees' profits arising from redemption of 400 Deep Discount Bonds of Sardar Sarovar Nigam Ltd. purchase @3600 per bond on 11.01.1994 and redeem at a price of Rs.50,000/- each on 10.01.2009. We thus treat former assessee Manankumar M. Patel appeal ITA No.1558/Ahd/2013 along with Revenue's cross appeal ITA No.1702/Ahd/2013 as the lead cases. ITA Nos. 1558,1559, 1702 & 1703 & /Ahd/2013 (Manankumar M. Patel & Maulik kumar M. Patel) A.Y. 2009-10 -3-
3. We come to relevant facts first. There is no dispute that the assessee acquired and redeemed the above Deep Discount Bonds on the dates and prices stated in the preceding paragraph. The assessee at the first instance claimed that these profits arising from the above redemption were in the nature of long term capital gains u/s.10(38) of the Act. The Assessing Officer sought to know as to whether the same had been subjected to the Securities Transaction Tax or not. The reply came was in negative. The Assessing Officer observed in assessment order dated 24.12.2011 that assessees' above claim u/s.10(38) of the Act was not admissible since its capital assets was not in the nature of an equity share in a company or a unit of an equity orient fund subject to various other stipulations therein. The Assessing Officer thereafter went on to treat assessee's redemption income as interest on securities to make the impugned addition of Rs.1,85,60,000/- u/s. 10(38) of the Act.
4. The assessee preferred appeal. The CIT(A) decides the issue as follows:
" 6. The next ground of appeal is on the issue of taxation of income arising out of redemption of 400 Deep Discount Bonds of SSNNL purchased @ 3600/- per Bond on 11/1/1994, The bonds were redeemed prematurely on 10/1/2009 at a value of Rs.50,000/- per bond. The appellant had claimed that the bonds were held as capital asset and the income is taxable as long term capital gain. It further claimed that its income was exempt u/s 10(38) of the IT Act. The AO disallowed the claim of the appellant u/s 10(38) saying that it is not an equity share or unit of an equity related fund and no STT has been deducted. The AO further observed that SSNNL has treated the differential between the redemption value and the purchase value as Interest on Securities and deducted TDS and therefore, the income was never of the nature of capital gain for which exemption u/s 10(38) could have been available. He held the income as interest on securities and taxed the differential between the redemption value and the purchase value as Interest on Securities.
6.1 The appellant submitted the following detailed submissions on the issue:
ITA Nos. 1558,1559, 1702 & 1703 & /Ahd/2013 (Manankumar M. Patel & Maulik kumar M. Patel) A.Y. 2009-10 -4- ". These bonds were held by the appellant being "Long Term Investment", hence in the books of accounts they are shown as such and the same are reflected as 'asset' in the final balance sheet submitted to the department alongwith returns of income, year after year. Not only this, but the same have been shown as such in Wealth Tax, returns of the appellant which have been accepted by the department, in the past Wealth Tax assessments.
Subsequently, in 2008 the State of Gujarat passed necessary law to repay Rs.50,000/- per bond towards 'Early Redemption' and published official notice dated 3/11/2009, for the interest of all the holders of such bonds. Thereupon, the appellant opted to go for pre- matured redemption of investment made in these bonds, since these bonds were held as "Long Term Investment" without any income/yield from such money invested. Accordingly, the appellant received Rs.2,00,00,000/- towards sale proceeds of such bonds. The appellant having received the sum on surrendering those bonds which fell in the accounting year relevant to A.Y. 2009-10. Since the said bonds in question were 'Capital Assets' of the appellant, the surplus earned by the appellant on the surrender of the bonds was disclosed by the appellant as 'Long Term Capital Gains' and claimed as exempt from taxation by virtue of provisions of section 10(38) of the Act.
4.2 In the course of the assessment proceedings, the A.O. has rejected the claim of the appellant, and has taxed the surplus arising as 'Interest on Securities' relying upon a letter of Sardar Sarovar Narmada Nigam Ltd. (purportedly relying upon CBDT circular by the latter), and has denied benefit of exemption u/s 10(38) of the Act.
4.3 As submitted in para 3 above, the A.O. has neither supplied a copy of alleged letter of Sardar Sarovar Narmada Nigam Ltd. to the appellant nor specified date and number of particular circular of CBDT. The Courts have held, time and again, that when evidence/material/statements are collected at the back of the appellant and are used in the assessment proceedings, the Principle of natural justice requires that the appellant should be given a fair opportunity, providing copy of material being used against the appellant, to enable him to defend his case. The appellant is obviously, deprived of such opportunity before passing impugned order.
4.4 Without prejudice to the above, it is respectfully submitted that as may be verified from the records, the appellant maintains regular books of accounts on mercantile basis, since beginning. The investment in 'bonds' have been made on 11/1/1994 relevant to A.Y. ITA Nos. 1558,1559, 1702 & 1703 & /Ahd/2013 (Manankumar M. Patel & Maulik kumar M. Patel) A.Y. 2009-10 -5-
1994-95 and are shown under the head "Investment" in the appellant's balance sheet as at 31/3/1994 and thereafter in subsequent years balance sheets, as filed with the returns of income of respective years, these bonds are reflected as "Investment" being a Capital Asset. The A.O has accepted the figures of realization on redemption as well as cost of investment as may be perused from para 6.1 of his order. The A.O has not disputed that the bonds in question were the capital asset of the appellant as well as they being specified Government Securities. It is however observed by him in para 6.2 that following the CBDT circular, the redemption value is treated as "interest on securities" and he has taxed the entire surplus in the hands of the appellant. So far as denial of exemption u/s 10(38) of the Act by the A.O. is concerned, it may kindly be appreciated that when the appellant invested in the F.Y. 93-94 the provisions of STT were not in operation. So also, in the previous year Sardar Sarovar Narmada Nigam Ltd. itself having purchased the DD Bonds from the appellant under the law pronounced by the State of Gujarat and transaction being not routed through Stock Exchange, question of payment of STT doesn't arise only. The appellant has, therefore, rightly calculated and claimed exemption u/s 10(38) of the Act. 4.5 In this context, it is submitted that there are many iudicial pronouncement on this issue in favour of the appellant, few of them being relied upon by the appellant are as under.
(1) Madhya Pradesh Financial Corporation Vs.CIT 132 ITR 884 (M.P).
FACTS:
The appellant invested certain amount in State Government Bonds. The excess amount received by appellant on surrendering those bonds was taxed by the I.T.O. as Business Income. On second appeal, the appellant before the Tribunal contended that the transaction of surrender of bonds didn't amount to relinquishment of any asset and hence the excess amount received by the appellant was not liable to be taxed as Business Income. On reference, the High Court held that it was not disputed by the appellant before the Tribunal that the bonds in question, which is surrender, resulted in a gain to the appellant. In view of such findings, the profit earned by the appellant on the surrender of the bonds was rightly held by the Tribunal as liable to be taxed as Capital Gains.
The Facts of this case are applicable to the appellant's case in as much as in the books of accounts of the appellant these bonds are being shown as Capital assets and they are surrendered, resulting in a gain lease to be taxed as long as Long Term Capital Gain but for exemption provided u/s 10(38) of the Act.
ITA Nos. 1558,1559, 1702 & 1703 & /Ahd/2013 (Manankumar M. Patel & Maulik kumar M. Patel) A.Y. 2009-10 -6- (2) Perviz Wang Chuk Basi Vs. 3CIT [20061102ITD 123 (Mumbai) Facts:
The appellant claimed long term capital loss on redemption of bonds matured in the year. According to the CIT(A) there was not a transfer and hence he confirmed the decision of the A.O. of non- allowance of long term capital loss. On the appeal, the Tribunal held that redemption of these bonds does give raise to capital gain/loss and the appellant deserves to succeed. (In case, the Tribunal has dismissed and analyzed other land mark cases of Hon'ble SC) In the appellant's case when the capital bonds are redeemed, then after the date of redemption, they have not remained as bonds, but certainly what remained is an asset with the appellant. There was appellant's right in asset which has been later encashed by surrender to the competent authority and receiving cash thereon. The appellant's case is therefore, on much better footings and is quite justified being in tune with the provisions of the Act.
In the light of the above ratio and in view of the entirely, the claim of the appellant deserves to be allowed.
4.5 Without prejudice to the above, so far as circular of CBDT being referred by the A.O., without its number and date of issuance by the authority, it is submitted that circulars issued be the CBDT, against judicial pronouncement are not acceptable or binding. In this context there are many reported decisions, few of them are as follows:
(1). Kerala Financial Corporation v. CIT [1994] 210 ITR 129 (SC) What section 119 has empowered is to issue orders, instructions or directions for the 'proper administration' of the Act or for such other purposes specified in Section 119(2). Such an order, instruction or direction cannot override the provisions of the Act;
that would be destructive of all the known principles of law as the same would really amount to giving power to a delegated authority to even amend the provisions of law by the parliament.
(2). Stump, Schule & Somappa Ltd. v.CIT 190 ITR 152 (Kar) Only the circulars issued by authorized authorities of the Income Tax department are binding on the Assessing Officers, Circulars & Instructions issued by authorities other than those empowered to issue directions u/s 119 are not of a binding nature.
(3). Keshavji Ravji & Co. v. CIT [1990] 183 ITR 1 (SC). ITA Nos. 1558,1559, 1702 & 1703 & /Ahd/2013 (Manankumar M. Patel & Maulik kumar M. Patel) A.Y. 2009-10 -7- The Board cannot pre-empt a judicial interpretation on the scope and ambit of a provision of the Act by issuing circulars on the subject.
(4). CIT v. Hero Cycles (P) Ltd. [1997] 94 Taxman
271/228ITR463 (SC).
It is well settled that circulars can bind the ITO but will not bind the appellate authority or the Tribunal or the Court or even the assessee.
(5). All Gujarat Federation of Tax Consultants v.
CBDT[1994] 76 Taxman 307 (Guj).
Board's circulars are not binding on High Court/ITAT.
(6) CIT v. Swadesh East Asia Co. Ltd. [1981] 127 ITR 148 (Cal).
A Board's circular which disallows a benefit/curtails benefit to the assessee otherwise admissible under the Act, is not binding.
(7). Bhartia Industries Ltd. v. CIT [2011] 201 Taxman 180/12 Taxman.com 409 (Cal).
On a plain reading of the provision of section 119, it is clear that the circular issued by the Board under the aforesaid provision is meant for guiding the officers of the revenue for administrative purpose of enforcing the provisions of the Act. But when an authority under the Act is required to perform quasi-judicial functions, such authorities should be guided by the law of the land as enunciated by various judicial authorities which has a binding effect. If an existing circular is a conflict with the law of the land laid down by Supreme Court, the revenue authorities, while acting quasi-judicially, should ignore such circulars in discharge of their quasi-judicial functions.
5. In the view of the above stated facts and submissions made in the preceding paragraphs, your Honour may kindly appreciate that the disallowance made by the A.O. in regard to the claim of the appellant is completely unjustified both on facts as well as in law and the appellant craves that the addition be deleted."
6.2 The issues, the judicial decisions and the Circular of the CBDT regarding taxability of bonds, issues like taxability u/s 112 and application of proviso (3) to section 48 etc., were discussed with the ITA Nos. 1558,1559, 1702 & 1703 & /Ahd/2013 (Manankumar M. Patel & Maulik kumar M. Patel) A.Y. 2009-10 -8- appellant at length. Subsequently, the appellant filed the following written submissions:
3. Regarding Taxation of income under the head "Interest Income"
vis -a-vis Mercantile System of Accounting.
3.1 As may be verified from the records, it is undisputed fact, that the Ld. A.O. has taxed the surplus arising on the surrender of the deep discount bonds of Sardar Sarovar Narmada Nigam Ltd. as "Interest Income" in the hands of the appellant.
3.2 At the cost of repetition, it is submitted that the appellant had made the 'investment in bonds' on 11/1/1994 relevant to the A.Y. 1994-95 out of unutilized funds available with the appellant. The same had been shown under the head "Investment" in the appellant's balance sheet as at 31/3/1994 and thereafter subsequent years' balance sheets. As may be verified from the returns of income of respective years, these bonds are reflected as "Investment" being a non- trading one. The Ld. A.O. has accepted the figures of cost of investment, as well as realization of redemption as may be perused from para 6 of the Order.
3.3 It is also undisputed fact on record that the appellant follows mercantile system of accounting since inception. While passing the impugned order also the Ld. A.O. has recorded a finding of fact as revealed from assessment order itself. It may kindly be appreciated that the appellant has been earning interest income out of money invested as well as expending towards interest in the appellant's ordinary course of business, which has been shown in the books of account on mercantile basis and the same has been accepted by the department as such. According to the provisions of section 145(1) of the Act, income chargeable under the head "Profits & Gains of business or profession" OR "Income from other sources" shall be computed in accordance with either "cash" or "Mercantile" system of accounting regularly by the assessee. That is, if the system of accounting regularly employed is 'cash', then it is chargeable on 'cash basis' and if it is 'mercantile' then it is chargeable on "accrual basis".
3.4 Us submitted earlier, it is undisputedly proved on record that the department accepted the 'mercantile method' of accounting being regularly employed by the appellant, in earlier years on the same set of facts and circumstances of the case of the appellant. It is well settled that the principle of res-judicial doesn't apply to I.T, Proceedings, but the principle of consistency shall have to be followed by the revenue department while making the assessment. ITA Nos. 1558,1559, 1702 & 1703 & /Ahd/2013 (Manankumar M. Patel & Maulik kumar M. Patel) A.Y. 2009-10 -9- 3.5 i In may kindly be appreciated that in relation to deep discount bonds the difference between the market valuations as on two successive valuation dates will represent the accretion to the value of the bond, during the relevant financial years and will be taxable as 'interest' income where the bonds are held as investments or business income where the bonds are held as trading assets. Similarly, where the bond is redeemed by the original subscriber, the interest income will be proportionately taxed on accrual basis in that year. Therefore, in the case of the appellant, the appellant having regularly employed 'mercantile system' of accounting, the interest income attributed to the investment in bonds will be required to be taxed in the year under appeal as calculated on accrued basis in the manner as stated above. It may kindly be appreciated that taxing of the entire income received from bond in the year of the redemption ,as interest income as has been done in the impugned order would amount to sheer abuse in the process of law. The appellant therefore, requests your honour to hold that the appellant is entitled to be taxed on the accrued income of interest in accordance with the mercantile method of accounting regularly and consistently employed by the appellant and accepted by the department as evident from Page No.l; column No.8 of assessment order appealed against.
3.6 In view of the above stated facts and peculiar circumstances of the case of the appellant, it may kindly be held that the interest portion attributed and pertaining to A.Y. 2009-10 on the deep discount bonds under consideration is liable to be taxed as interest income calculated on accrued basis only i.e. proportionate income accrued in the F.Y. 2008-09, may kindly be taxed in the A.Y. 2009-10. Accordingly, the balance of such interest may be deleted in full from the addition made of Rs. 1,85,60,000/-. Therefore, the A.O. may be directed to delete the balance addition of income in the hands of the appellant.
4. Regarding taxation of gain U/s. 112 of the Act.
In addition to the appellant's aforesaid submissions, in the alternative, the appellant respectively bags to submit as follows. 4.1 It is undisputed facts from the records that the A.O. has sought to tax the income from redemption of DD Bonds under the head "Interest from Securities". Expression "Securities" is defined to have meaning assigned to it in section 2 (h) of the Act Securities Contracts (Regulation) Act, 1956. As per section 2(4) of the said Act, "Securities" include Shaves, Scrips, stocks, bonds, debentures stock or other marketable securities of a like nature in or of any incorporated company or other body corporate, Government ITA Nos. 1558,1559, 1702 & 1703 & /Ahd/2013 (Manankumar M. Patel & Maulik kumar M. Patel) A.Y. 2009-10 - 10 -
Security, such other instruments as may be declared by the Government to be securities and rights or interest in securities. Listed securities are defined to mean securities which are listed on any recognized Stock Exchange in India. Accordingly, Deep Discount Bonds of Sardar Sarovar Narmada Nigam Ltd. are placed under the category of "listed securities".
4.2 As is evident from the records, the appellant had invested out of his unutilized surplus funds in DD bonds way back in F.Y. 1993-94 and the same being held as investment in all these years and stood accepted as such in the wealth tax return, the surplus on redemption thereof should be taxed as Long term capital gains. The factum of the bonds being held as investment is not disputed by the A.O. as no adverse remark is passed in the assessment order though it was specifically brought on record by the letter dated 15.12.2011 filed with the A.O. and as noted in Para 5.1 of the assessment order coupled with the finding of the A.O.(though contested as taxed in one year) that the income arising out of investment made in such bonds is taxed as "interest on securities". Further, under the proviso to section 112(1), rate of income tax on long term capital gains arising from transfer of listed securities or unit or bonds will be 10% of the gain so computed. Thus, the appellant is eligible to be charged the tax at the flat rate of tax u/s. 112 of the Act. Besides, since no security transaction tax paid by the "Nigam", the benefit of indexation will be available to the appellant. Therefore, it may kindly be held, that the surplus is liable to be taxed as long term capital gain u/s. 112 of the Act, with benefit of appropriate indexation. Since the income tax on long term capital gains on listed securities or unit or bond requires to be computed u/s 112 i.e. after indexation of cost acquisition under the 2nd Proviso to section 48 of the Act.
4.3 In the above context, the appellant respectfully relies upon the following judicial pronouncements: (Copies enclosed) CIT V. Anuj A. Sheth (HUF [20101 324 ITR 191 (Bom.) The opening words of sub section (1) of section 112 contemplated a situation where the total income of an a ssessee includes any income arising from the transfer of a 'long term capital asset'. This would be indicative of the fact that in computing income for the purposes of capital gains, the assessee would be entitled to benefit of the normal provisions of the Act, inter alia, in regard to a set off under section 70. The effect of the proviso to section 112 is that in the event that the tax which (s payable in respect of income arising from the transfer of listed ^securities which is a long term capital asset, exceeds 10 percent of the amount of capital gains ITA Nos. 1558,1559, 1702 & 1703 & /Ahd/2013 (Manankumar M. Patel & Maulik kumar M. Patel) A.Y. 2009-10 - 11 -
before giving effect to indexation as provided in the second proviso to section 70 the tax would be liable to be capped at 10 percent, by ignoring the excess beyond 10 percent.
For the purposes of working out the application of the proviso to section 112, there is nothing in the section which would derive an assessee of indexation claimed on sale of shares where there is a resultant loss. What the proviso to section 112 essentially requires is that where the tax payable in respect of income arising from a listed security, being a long term capital gain asset, exceeds 10 percent of the capital gains before indexation, such excess beyond 10 percent is liable to be ignored. The proviso to section 112 requires a comparison to be made between the tax payable in respect of income arising from the of listed securities, computed at 10 percent and the tax payable at the rate of 10 percent on the capital gains before giving effect to indexation. There is nothing in the provisions of section 112 what would lead to the acceptance of the contention of the revenue that the assessee would be entitled to set off the loss under section 70, nut without the benefit of indexation. No such requirement is legislated upon by the Parliament either under section 70 or in section 112.
During the relevant assessment year the assessee entered into eight sale transactions of shares. In one transaction shares being bonus shares their cost acquisition was nil and, therefore, the entire sale consideration was considered as a long term capital gain. Out of the remaining seven transactions, one sale result in long term capital gain with indexation whereas in the remaining transaction the assessee reported a loss with indexation. The assessee set off long term capital gain loss from long term capital gains and paid a tax of 10 percent on net long term capital gain.
Held that during the relevant assessment year the assessee entered into eight sale transaction of shares. In one transaction, share being bonus shares their cost acquisition was nil and, therefore, the entire sale consideration was considered as a long term capital gain. Out of the remaining seven transactions, one sale result in long term capital gain with indexation whereas in the remaining transaction the assessee reported a loss with indexation. The assessee set off long term capital gain loss from long term capital gains and paid a tax of 10 percent on net long term capital gain. The assessee's claim of computation of long term capital gains on sale of shares other than the bonus shares after giving the benefit of indexation whereas in consonance with proviso to section 112(1). ITA Nos. 1558,1559, 1702 & 1703 & /Ahd/2013 (Manankumar M. Patel & Maulik kumar M. Patel) A.Y. 2009-10 - 12 -
2. Girish Haribhai Trivedi v. ACIT in I.T Appeal No. CIT fAVXIV/AC. CIR.7/302/ 10-11 dated 26.09.2011 of CIT (A)- XIV, AMD. Relevant portion is reproduced as below :
" It is observed from the statement of account of the policy which has been enclosed to the assessment order by the A.O. that the appellant initially opted for investment in protector fund and later on is switched certain part to max/miser fund. At the time of surrender i.e. on 21.08.2007, the full value of policy was Rs. 32,74,492.91 for which the cheque was issued to the appellant. The A.O. was not justified in treating the entire receipts as income of the appellant as only the surplus could have been considered for the purpose of taxation. As evident from above, the investment by the appellant was in a\ unit linked insurance policy in which major portion was invested\in mutual funds and accordingly the surplus on maturity of the policy should be treated as capital gain. Since no security transaction tax has been deducted at the time of transaction by the fund, the benefit of indexation will be available to the appellant. The last payment in the fund was made by the appellant on 25.08.2005 and the policy has been surrendered on 22.08,2007 which shows that the investment was for more than three years for the overall policy and more than one year from the date of last investment. The surplus will, therefore, be treated as long term capital gain on investment in mutual funds. The A.O. is, therefore, directed to take the sale consideration of units as the amount received on account of maturity of the policy and the cost of investment as the amount invested by the appellant during the span of 2-3 years i.e. Rs. 18,00,000/- and accordingly work out the long term capital gain and tax payable thereon, if any. The ground of appeal is accordingly partly allowed."
4.4 Having regard to the factual matrix and the legal position as stated above, your honour may kindly be pleased to direct the A.O. to work out the long term capital gain with the benefit of indexation and work out tax payable at the flat rate of 10% and Surcharge etc. if any, u/s. 112 of the Act."
6.3 I have carefully gone through the facts of the case, the assessment order, the submissions, the circulars issued by the CBDT, the case law on the issue. The following pertinent observations/decisions are made after thorough consideration of all material facts:
(i) Undisputedly, the investment in SSNNL Bonds have been made on 11/1/1994 relevant to A.Y. 1994-95. These were called Deep Discount Bonds of Rs.3600/- each and would have matured on 11/01/2014 as per the Certificate issued. These carried fixed maturity value. The appellant since then had not shown any ITA Nos. 1558,1559, 1702 & 1703 & /Ahd/2013 (Manankumar M. Patel & Maulik kumar M. Patel) A.Y. 2009-10 - 13 -
interest income in the returns filed. The appellant has shown capital gains on these in the current year and claimed the same exempt u/s 10(38) of the Act.
(ii) Therefore, the applicants clearly were applying for Bonds maturing in 2014 when they made the applications.
(iii) However, the Government of Gujarat passed the Sardar Sarovar Narmada Nigam Limited (Conferment of Power to Redeem Bonds) Act, 2008 (hereinafter referred to as the "Act"). The Act amends the financial covenants and conditions for DDBs by providing an option to Nigam to redeem the DDBs earlier on such date and with such deemed face value as Nigam may determine by payment of the amount so determined as stipulated in the Act. The Board of Directors of Nigam at their meeting held on 3rd November 2008, in terms of the Act, decided to redeem the DDBs earlier and have determined the date for such redemption as 10th January 2009 with deemed face value of Rs. 50,000/- per bond (redemption amount). Accordingly, all outstanding DDBs were redeemed on 10th January 2009.
(iv) The CBDT had issued Circular No.2 of 2002 dated 15/2/2002 on this issue. It talks of the earlier clarifications issued by the Board in this regard as follows:
1. A review of the tax treatment of income arising from Deep Discount Bonds has been under consideration in the Board for some time. The Board had earlier clarified by way of certain letters issued to the Reserve Bank of India and others that the difference between the bid price (subscription price) and the redemption price (face value) of such bonds will be treated as interest income assessable under the Income-tax Act. On transfer of the bonds before maturity, the difference between the sale consideration and the cost of acquisition would be taxed as income from capital gains where the bonds were held as investment, and as business income where the bonds were held as trading assets. On final redemption, however, no capital gains will arise. It was further clarified that tax would be deducted at source on the difference between the bid price and the redemption price at the time of maturity."
(v) The same circular gives directions/guidelines for the tax treatment of such Deep Discount Bonds subsequent to the issue of the circular. The Board has later clarified by Press Note i.e. PIB Press Release (254 ITR 302) dated 20th March, 2002 regarding the circular dated February 15, 2002 not having retrospective effect in the following words:
ITA Nos. 1558,1559, 1702 & 1703 & /Ahd/2013 (Manankumar M. Patel & Maulik kumar M. Patel) A.Y. 2009-10 - 14 -
"It is also an established principle that a circular issued by the Central Board of Direct Taxes cannot have a retrospective tax effect. The present circular on deep discount bonds, therefore, specifies the tax treatment in respect of bonds which are issued after the issue of the circular, and does not seek to impose the modified treatment on existing bond holders."
Clearly, this circular dated 15th February, 2002 would not be applicable to the appellant's case as the Bonds were issued much earlier.
(vi) The background part of Circular No.2 of 2002 dated 15/2/2002 clearly shows that there were no clear circulars before that and there were only letters written to RBI etc., conveying that the entire income would be taxed as interest income in the year of redemption on maturity but in case of transfer before maturity these would be taxed as capital gains if held as investments. Because there is no circular on this issue, the letters would only be having at the most guidance value and would not be binding.
(vii) Clearly, all the bond holders were forced to take the amount offered by the SSNNL after the Gujarat Government Act. The Bonds did not mature on the maturity date in 2014 as initially contemplated in the offer which was accepted by the applicants.
(viii) The forced redemption/payment would not amount to payment received on maturity and in my considered opinion amounts to transfer of a capital asset as defined in section 2(47) of the Act. I would rely on the decisions of Hon'ble Madhya Pradesh High Court in M.P. Financial Corpn. v. CIT [1981] 132.UR 884, according to which, bonds are held to be capital asset and any surplus resulted on sale of bonds is liable to capital gains tax and that of Hon'ble ITAT, Mumbai Bench 'G' in the case of Mrs. Perviz Wang Chuk Basi [102 ITD 123 (2006)].
After considering all the facts and observations as above, it is clear that if it was normal maturity of bond, then the entire interest income would be taxable in the last year i.e. the assessment year under consideration (as per the Board's letters to RBI etc.) and also as per the decision of Hon'ble IT AT Bangalore Bench 'A' in the case of K. Nagendrasa 12 Taxmann.com 438; particularly where the appellant himself has not offered the interest from year to year.
ITA Nos. 1558,1559, 1702 & 1703 & /Ahd/2013 (Manankumar M. Patel & Maulik kumar M. Patel) A.Y. 2009-10 - 15 -
However, in the present case, in view of the judgments relied on and referred at point (viii), above, in the present case it is held taxable as capital gains. I have also noted that the jurisdictional ITAT, Bench 'A' in the case of Areez P. Khambatta 17 Taxmann.com 51, the UTI MIP-99 carrying fixed amount of interest if payment is received on maturity; has been held as Bonds and taxable as capital gains in case of premature withdrawal. Following the same decision, I also hold that these being the Bonds, no benefit of indexation would be available because the case is hit by 3rd proviso to section 48 of the Act.
As far as the claim of appellant of its income being exempt u/s 10(38) is concerned, I agree with the AO that the claim is totally wrong, nowhere even near to the provisions of the law and is frivolous to say the least. The provision is applicable to the equity shares and units of equity oriented fund. These bonds do not give any share holding and are therefore not equity and neither are meant to invest 65% in equity shares nor set up under a scheme of mutual funds under clause 10(23D). The claim is rejected.
The AO is therefore, directed to compute capital gains on the transactions in Bonds without giving benefit of indexation. The ground of appeal is decided accordingly."
5. The CIT(A) accordingly treats assessee's redemption income to be in the nature of capital gains. This leaves both the parties aggrieved. The assessee pleads in its appeal that the CIT(A) has erred in not adjudicating its preliminary contention seeking assessment of its redemption income as interest income in view of the fact that it followed mercantile system. Its further case is that the lower appellate authority ought to have granted it indexation benefit u/s.48 of the Act. It further raises an alternative plea seeking assessment of its capital gain at a flat rate of 10% after indexation. The Revenue's sole substantive ground on the other hand avers that the CIT(A) has wrongly treated assessee's redemption income hereinabove as capital gains instead of interest on securities as assessed in the course of above regular assessment.
We have heard both the parties. Case file perused.
ITA Nos. 1558,1559, 1702 & 1703 & /Ahd/2013 (Manankumar M. Patel & Maulik kumar M. Patel) A.Y. 2009-10 - 16 -
6. We first come to common issue raised in both the appeals as to whether the impugned redemption income is to be treated as capital gains or interest income from securities. There is no dispute that assessee had acquired the Deep Discount Bonds in question way back on 11.01.1994. It has come on record that the CBDT Circular dated 15.02.2002 applicable from prospective effect only has directed the field authorities to treat such bonds redemption income as interest income. The CIT(A) relied upon the Board's press note dated 20.03.2002 that the above circular would have prospective effect only. We further notice that a co-ordinate bench decision in C. S. Goslla vs. ITO (2008) 15 DTR (Mumbai-trib) 271 holds the very Deep Discount Bonds as capital assets. We thus find no force in Revenue's argument that the impugned redemption income has been wrongly treated as capital gains in the lower appellate's proceedings. We further observe that the assessee's corresponding first argument seeking to assess his redemption income as interest income on mercantile basis also has not merit since the above Deep Discount Bonds have been declared in the original return as capital assets only. The assessee claimed redemption income therefrom as capital gains u/s.10(38) of the Act in his return filed. We thus find no reason to accept his first argument adopting a different stand at this stage without any tangible basis. The Revenue's only argument as well as its appeal ITA No.1702/Ahd/2013 fails. So is the outcome of assessee's first corresponding substantive ground.
7. The assessee's second argument is that the CIT(A) has erred in not granting him cost indexation benefit qua the above Deep Discount Bonds whilst treating income therefrom as capital gains. We notice that the lower appellate authority has placed reliance on Section 48 third proviso stipulating that second proviso thereto regarding indexed cost of acquisition shall apply to long term capital gains arising from transfer of a long term capital asset ITA Nos. 1558,1559, 1702 & 1703 & /Ahd/2013 (Manankumar M. Patel & Maulik kumar M. Patel) A.Y. 2009-10 - 17 -
being bond or debenture------ and so on. Ld. counsel fails to dispute the application of this proviso restricting the ambit and scope of the other proviso regarding indexation cost computation. This assessee's argument also meets the same outcome.
8. The assessee lastly argues that he is entitled for assessment of his capital gains arising from redemption of Deep Discount Bonds at a flat rate of 10% u/s.112 of the Act. Ld. counsel refers to Section 112(1)(proviso) in support of this plea. We find no reason to concur with the same as this proviso itself stipulates that where the tax payable in respect of any income arising from the transfer of a long term capital asset in the nature of listed security other than a unit or zero coupon bond exceeds 10% of the amount of capital gains before giving effect to provisions of second proviso to Section 48, then, such excess shall be ignored for the purpose of computing the tax payable by the assessee. It has already come on record that second proviso to Section 48 of the Act is itself not applicable as per third proviso discussed hereinabove. We thus observe that this assessee's last argument also deserves to be declined since the above proviso to Section 112 applies before giving effect to the provisions of second proviso to Section 48 which admittedly is not the case here. The assessee fails in its all substantive arguments as well as appeal ITA No.1558/Ahd/2013.
9 Same order to follow in latter set of appeals ITA Nos. 1559 & 1703/Ahd/2013 in case of Shri Maulikkumar M. Patel as the parties have already indicated that there is no distinction on facts or on the sole issue of assessment of redemption income arising from Deep Discount Bonds hereinabove is involved in these two cases. We thus decline these two ITA Nos. 1558,1559, 1702 & 1703 & /Ahd/2013 (Manankumar M. Patel & Maulik kumar M. Patel) A.Y. 2009-10 - 18 -
appeals as well. We find no reason to interfere with well reasoned CIT(A)'s order under challenge.
10. These four appeals are dismissed.
[Pronounced in the open Court on this the 30th day of November, 2016.] Sd/- Sd/-
(PRADIP KUMAR KEDIA) (S. S. GODARA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Ahmedabad: Dated 30/11/2016
True Copy
S.K.SINHA
आदे श क त ल
प अ े
षत / Copy of Order Forwarded to:-
1. राज व / Revenue
2. आवेदक / Assessee
3. संबं धत आयकर आयु!त / Concerned CIT
4. आयकर आयु!त- अपील / CIT (A)
5. )वभागीय ,-त-न ध, आयकर अपील य अ धकरण, अहमदाबाद /
DR, ITAT, Ahmedabad
6. गाड3 फाइल / Guard file.
By order/आदे श से,
उप/सहायक पंजीकार
आयकर अपील य अ धकरण, अहमदाबाद ।