TMI Blog2009 (5) TMI 582X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal is by the assessee against the order of the learned CIT(A), Gandhinagar, dt. 3rd Oct., 2006. The first ground of assessee's appeal reads as under: "(1) The learned CIT(A) has erred in rejecting the claim of the appellant that the order passed by the learned AO is bad in law as the said order has been passed against Vadodara Halol Toll Road Co. Ltd. which was not in existence on the date of passing of the order, i.e., 23rd March, 2006. On the facts and circumstances of the case the appellant submit that the assessment order passed by the learned AO is bad in law and may be cancelled." 2. At the time of the hearing, the learned Authorized Representative of the assessee submitted that he is not pressing this ground of appeal. Hence, the same is dismissed as not pressed. 3. The remaining ground Nos. 2, 3 and 4 read as under: "(2) The learned CIT(A) has erred in confirming the disallowance of interest of Rs. 6,08,03,230. On the facts and circumstances of the case, the appellant submit that provisions of s. 43B are not applicable in respect of the interest payable on Deep Discount Bonds and the disallowance of the interest of Rs. 6,08,03,230 is not justified. (3) The lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on regarding treatment of Deep Discount Bonds and STRIPS (Separate Trading of Registered Interest and Principal of Securities). In subsequent Circular No. 4 of 2002, dt. 15th July, 2002 [(2002) 175 CTR (St) 49], the CBDT had clarified that no tax was due to be deducted on interest accrued. The tax was liable to be deducted only on payment of interest. The assessee submitted that the interest accrued on Deep Discount Bonds was liable to be deducted on accrual basis as per s. 37(1) of the Act. The assessee also pointed out that as per the circulars issued by the CBDT, the claim made was correct. 7. The assessee also submitted that the interest payable in respect of the Deep Discount Bonds was not covered by the provisions of s. 43B of the Act. He pointed out that as per provisions of s. 43B applicable to asst. yr. 2003-04, the interest on any loan or borrowing from public financial institutions or State Financial Corporation, was only covered. He also referred to cl. (e) of s. 438, which was amended w.e.f. 1st April, 2002, wherein the term "term loan" was substituted by "loans or advances in respect of scheduled bank". Till 31st March, 2004, the interest on term loans from schedule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A) observed that the circulars cited by the assessee speak about the incidence of tax on the recipients of interest and not in any way clarify the deductibility of expenses by the payer. Accordingly, these circulars do not support the claim of the assessee. The learned CIT(A) also observed that the decisions cited by the assessee are also not relevant to the issue. It is shown that the interest claimed on Deep Discount Bonds was not paid. As such, it is to be considered whether the interest liability had accrued. As per the scheme of Deep Discount Bonds interest was payable only on maturity. As such, interest is due and payable only on maturity. The learned CIT(A) held that once the liability has not accrued, the claim of interest is not justified especially when the same was not paid. The disallowance made is, therefore, upheld. 10. The learned Authorized Representative of the assessee submitted that this is not the first year of claiming deduction on interest accrued on Deep Discount Bonds. The deduction was claimed in earlier asst. yrs. 2001-02 and 2002-03 which was accepted and allowed by the Department under s. 143(1) of the Act. He further submitted that in asst. yr. 2003 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f s. 43B is concerned the assessee submits that the provisions of s. 43B are not applicable on the facts of the case. Assessee had issued Deep Discount Bonds and the terms of the issue of bonds are given on pp. 21 to 32 of the paper book. Assessee had not borrowed any money by way of a loan from the bond holders. These bonds are transferable at the discretion of the bond holder. The assessee issued the securities and the bond holders had invested in the securities. Assessee submits that there is a distinction between the amount taken on loan or on borrowing and the amount which is represented by bonds. Assessee has never borrowed any money by way of loan. Sec. 43B(d) or 43B(e) refers to interest on loans or borrowings. The assessee relies upon the decision of the Hon'ble Supreme Court in the case of CIT vs. Corporation Bank (2008) 214 CTR (SC) 302 : (2007) 295 ITR 193 (SC), wherein it has been held that the interest earned by the Corporation Bank on their investments in securities cannot be treated as interest earned on loans and advances and the said interest was not subjected to interest-tax. The Hon'ble Supreme Court has affirmed the view of the Calcutta (sic-Karnataka) High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above, it was further submitted that the provisions of s. 43B are not applicable to the payments to be made to the mutual funds and scheduled banks for asst. yr. 2003-04. The bond holders can be classified into three categories viz., mutual funds, scheduled banks and public financial institutions, the details of the bond holders are given on p. 20 of paper book: Mutual funds (1) Mutual funds-Cholamangalam Cazenoye Mutual Fund Rs. 61,66,726 Public financial institutions (2) Unit Trust of India Rs. 2,05,55,749 (3) Life Insurance Corporation Rs. 94,14,998 Scheduled banks (4) Bank of Maharashtra Rs. 71,94,512 (5) Bank of Baroda Rs. 1,02,77,874 (6) Indian Bank Rs. 41,11,150 (7) Banaras State Bank Rs. 30,82,222 Rs. 2,46,65,758 --------------- --------------- Total Rs. 6,08,03,230 --------------- 20. In view of the analysis given above the assessee submitted that even if the provisions of s. 43B are applicable to the discount on bonds, then also it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee is not allowable under s. 43B of the IT Act, 1961. The learned CIT(A) confirmed the above disallowance, however, on a different ground, i.e., in his opinion, as the interest was due for payment only on maturity of the bonds, no interest expenditure accrued during the year and, therefore, the same is not allowable to the assessee. We find that it is not in dispute that the assessee is consistently following mercantile system of accounting. Therefore, in our considered opinion, if any expenditure has not fallen due for payment, but for which a liability has been accrued is to be allowed in computing the income of the assessee. In the instant case, it is not in dispute that Deep Discount Bonds were issued for a period of more than one year. The difference amount payable on maturity is nothing but interest for the full period, i.e., from the date of the issue of the bond to the date of the maturity of the bond. Above view also finds support from the view expressed by the CBDT in its Circular No. 2 of 2002, dt. 16th Feb., 2002. Thus, it cannot be held that no interest was accrued for the year under consideration on bonds as the year under consideration is a year between ..... X X X X Extracts X X X X X X X X Extracts X X X X
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