TMI Blog2016 (11) TMI 1710X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome has been wrongly treated as capital gains in the lower appellate s proceedings. 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 fails. Non 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 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 702/Ahd/2013 as the lead cases. 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 ₹ 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 40 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 mercant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ender 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. (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 nonallowance 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. 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 don ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eof 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. afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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