TMI Blog2012 (8) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... he securities - DTAA between India and Cyprus - the appellant's case is that the respondent's case does not fall within Article 14(4) only because it falls within Article 11(4) - Held that:- The governing provision of Article 11(4) is that interest means income from a debt-claim of every kind and a debt-claim arises on account of a transaction that creates a debtor-creditor relationship and the consideration received by the respondent in respect of the sale of the said securities is a capital gain - rejecting the submission that the gain from the sale of the said securities falls under Article 11(4), it follows that the same falls under Article 14(4). - IT APPEAL NO. 1026 OF 2011 - - - Dated:- 9-7-2012 - S.J. VAZIFDAR AND M.S. SANKLECHA, JJ. JUDGMENT S.J. Vazifdar, J This is an appeal under section 260-A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal (ITAT) dismissing the appellant's appeal and allowing, in part, the respondent's cross objections. The appeal is admitted and, with the consent of the parties, heard finally on the following substantial questions of law : (I). Whether interest can be said to have accrued to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f these securities constituted capital gains which falls within Article 14(4) and is, therefore, exempt from tax in India. Rs. 5,94,28,493/- was offered by the respondent for tax as interest from the securities. (C). The Commissioner of Income Tax (Appeals) [CIT(A)] deleted both the additions. The ITAT upheld the order. The appellant challenged the same before the Tribunal on grounds similar to those raised before us. 5. Before proceeding further, we must note two aspects which are not clear although they are of no consequence to either the basis of this judgment or the result of this appeal. (A)( i ) Firstly, the precise period for which the interest has been calculated by the Assessing Officer is not clear from the record. It appears that the Assessing Officer deemed the interest as having accrued for the proportionate period, both upto the end of the financial year on 31st March, 2001, when the due date for payment of interest had not arisen under the security as well as the period thereafter and upto the date of the sale thereof on which date also the due date for payment of interest as per the securities had not arisen. ( ii ) It is, however, sufficient to note tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appearing on behalf of the appellant reiterated the reasoning of the Assessing Officer in paragraph 4.3 and 6.2 of the assessment order, the relevant part whereof reads as under :- "4.3 Income accrues, as and when the assessee acquires a right to receive such income or the right becomes vested in it. In the case of Government securities etc. although interest becomes due for payment only at six monthly intervals, such interest certainly accrues from day to day. When the assessee purchases certain securities it pays not only cost of securities, but also the interest which has accrued, on day to day basis, from the last date of payment of interest to the date of purchase. Similarly, when the assessee sells the securities it receives not only sale value, but also the broken period interest which has accrued on the securities till the date of sale. Thus the interest not only accrues from day to day, but the quantum of interest accruing is also known, for the assessee bank to determine the amount of interest accrued till the date of transfer, which is to be added to the cost of securities to be paid by the purchaser. Thus, since the right to receive such interest is vested with the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that he must have acquired a right to receive the same or that a right to the income, profits or gains has become vested in him though its valuation may be postponed or though its materialisation may depend on the contingency that the making up of the accounts would show income, profits or gains." 8. The question, therefore, is whether interest accrues to the holder of a security on a date other than the one stipulated in the instrument to be the date on which interest is payable. The answer to the question would be the same in respect of any transaction where interest is payable only on a particular date. 9. It is not disputed that the securities in this case expressly provided for payment of interest in respect thereof only on the dates specified therein at six monthly intervals. It is also admitted that such dates did not fall on the last date of the respondent's financial year viz. 31st March. 10. The appellant's submission is entirely unfounded and is based on the erroneous premise that the amount received upon the sale of a security in excess of the face value thereof includes the interest for the proportionate period upto the date of the sale. The erroneous presu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty crisis or a slow down in the market and/or if he is in dire need of funds for any reason whatsoever. Market forces also play a significant part. For instance, if the rate of interest is expected to rise, the securities may well be sold at a discount and conversely if the interest rates are expected to fall, the securities may well earn a premium. This, in turn, would also depend upon the period of validity of the security and various other factors such as the financial position and commercial reputation of the debtor. 13. The appellant's contention is also based on the erroneous presumption that what is paid for is the face value of the security and the interest to be paid for the broken period from the last date of payment of interest till the date of purchase. What, in fact, is purchased is the possibility of recovering interest on the date stipulated in the security. It is not unknown for issuers of securities, debentures and bonds, to default in payment of interest as well as the principal. The purchaser therefore hopes that on the due date he will receive the interest and the principal. The purchaser therefore, purchases merely the possibility of recovery of such intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t a profit. It is significant to note that it was in that case admitted, that a part of the profit was on account of capital accretion. The balance profit had been brought into charge to income tax against the company as untaxed interest. The figure was arrived at by calculating interest payable on the stock from 1st December, 1923 i.e. the date of the last payment of dividend upto the 10th April, 1923 i.e. the date of sale of the stock. The Revenue contended that if a security is sold between two dates of payment of interest, the interest must be deemed to have been received by the vendor upto the date of sale inasmuch as the purchase money of the security includes an amount of interest accrued that can be definitely ascertained and the purchaser must be assessed in respect of the income between that date and the date when he receives the interest or sells the security, whichever first happens. In other words, the Revenue contended that there must be an apportionment between the seller and the purchaser for broken periods. Rejecting the contention, it was held as under :- "It must be appreciated that the point turns upon this : that it is because the thing is sold and the intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest"." We are in respectful agreement with the judgment for the reasons already stated. 16. The judgment was followed by a Division Bench of the Karnataka High Court in The Additional Commissioner of Income Tax, Mysore, Bangalore v. The Vijaya Bank Limited, Mangalore 1976 (1) Indian Law Reports, 490 . The stand of the parties in that case were reversed - the Revenue's stand there correspondents to the assessee's stand before us and the assessee's stand there correspondents to the stand of the Revenue before us. In that case, the respondent entered into an agreement with Jayalakshmi Bank Limited whereby it took over the liabilities of Jayalakshmi Bank Limited towards its depositors and creditors in consideration, inter-alia , of that bank transferring certain assets to the respondent. One of the assets specified in the schedule to the agreement was an amount of Rs. 1,37,523/- shown as "interest accrued on investments and deposits". According to the respondent, out of this amount, a sum of Rs. 58,568/- related to interest accrued on Government securities held by Jayalakshmi Bank Limited for the broken period upto the date of transfer of such securities to the respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issible deductions as are provided under the specific provisions governing such computation. On behalf of the assessee the very same contentions which found favour with the Appellate Tribunal were reiterated." The Division Bench cited with approval, the judgment in Wigmore v. Thomas Summerson Sons ( supra ), set out the ratio of the judgment of the Supreme Court in E.D. Sassoon's case and held as under : "21. In our opinion, the above enunciations would be equally applicable to the facts of the present case. Viewed in the light of the said enunciations, it would be clear that the amount paid and separately specified as representing interest, that might be attributable to the broken period, prior to the purchase of securities, is only an amount paid for the acquisition of an income bearing asset forming part and parcel of the total consideration paid for the purchase, of the securities, and therefore, cannot at all be termed as 'interest' as such or as an amount spent for acquiring it is as an independent asset. It is also clear that such interest for the broken period had not accrued or crystalised into a debt, and thus had not become due and payable, to be characterise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment of the High Court in Vijaya Bank Limited ( supra ). 19. The right to receive interest on the Government securities vested in the respondent only on the due date mentioned in the securities. Consequently, interest accrued on the securities only on the due dates and cannot be said to have accrued to the respondent on any date other than the date stipulated therein. The contention that interest accrues for broken periods between two consecutive dates stipulated in the agreement/instrument for payment of interest is without any basis in law. If the respondent held the security upto 31st March, 2001 and sold the same thereafter, but before the date on which interest was payable as stipulated in the security, interest cannot be said to have accrued to the respondent. It is not disputed that in respect of the securities held by the respondent on 31st March, 2001, the due date for payment of interest thereon had not arrived on 31st March, 2001 and that the respondent sold some of such securities prior to the next due date for payment of interest. It is only the holder of the security on such date to whom interest can be said to have accrued. In any event interest did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a debtor-creditor relationship. Clause 4 relates to interest "from" debt-claims. In other words, the income must arise out of, on account of a debt-claim. It is important to note the difference between the debt-claim itself and any accretion thereto, such as interest. Once this distinction is noted, it is easy to appreciate that the price realised upon the sale of the debt-claim itself is not interest. Interest arises from and on the terms of the debt-claim/security and would be on revenue account. The sale proceeds upon a transfer or assignment of the security arise not from but on account of and represents the debt claim/security itself. 26. The words in clause 4 "whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits" appear after the opening words "The term interest as used in this Article means income from debt-claims of every kind" and, therefore, clearly relate to income from debt-claims. Thus, if and only if the transaction is a debt-claim, it matters not whether it is secured by a mortgage and whether or not it carries a right to participate in the debtor's profits. 27. The subsequent words in Article 11(4) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icle 11(3) thereof is identical to Article 11(4) of the DTAA. It is not necessary, therefore, to set it out. Paragraph 11-22 of the Commentary reads as under :- "11-22 20. As regards, more particularly, government securities, and bonds and debentures, the text specifies that premiums or prizes attaching thereto constitute interest. Generally speaking, what constitutes interest yielded by a loan security, and may properly be taxed as such in the State of source, is all that the institution issuing the loan pays over and above the amount paid by the subscriber, that is to say, the interest accruing plus any premium paid at redemption or at issue. It follows that when a bond or debenture has been issued at a premium, the excess of the amount paid by the subscriber over that repaid to him may constitute negative interest which should be deducted from the interest that is taxable. On the other hand, any profit or loss which a holder of such a security realises by the sale thereof to another person does not enter into the concept of interest. Such profit or loss may, depending on the case, constitute either a business profit or a loss, a capital gain or a loss, or income falling under ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
