Harsiddha Specific Family Trust, Ahmedabad V. The ACIT., Cent.Circle-1(1), Ahmedabad

ITA 1041/AHD/2006

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 6506 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-04-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 06-04-2010
• Assessment Year: 2002-2003
• Appeal Filed On: 28-04-2006
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RAJEEV AGARWAL
• Assessee Lawyers: S N SOPARKAR
• Keywords: Capital asset; Business income; Depreciation; Cost of acquisition; Date of conversion; Initiation of penalty proceedings; Block assessment; Notional interest; Revised return; Unabsorbed depreciation; TDS; Set aside; Capital Gains
• Section: 271(1)(c); 69C; 2(14); 234B; 14A; 37(1); 143(1); 69B; 207; 208; 264; 192; 54EC; 64; 32; 147; 69; 145; 148; 54; 132; 12; 144; 139; 63

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'A' [BEFORE SHRI T K SHARMA,JM & SHRI A N PAHUJA,AM] ITA NO.1041/AHD/2006 (ASSESSMENT YEAR:-2002-03) HARSIDDH SPECIFIC FAMILY TRUST, NIRMA HOUSE, ASHRAM ROAD, AHMEDABAD [PAN: AAATH1941D] V/S ASSISTANT COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE- 1(1), AHMEDABAD [APPELLANT] [RESPONDENT] A N D ITA NO.1852/AHD/2007 (ASSESSMENT YEAR:-2003-04) HARSIDDH SPECIFIC FAMILY TRUST, NIRMA HOUSE, ASHRAM ROAD, AHMEDABAD V/S DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-10, AHMEDABAD [APPELLANT] [RESPONDENT] ITA NO.1246/AHD/2006 (ASSESSMENT YEAR:-2002-03) A N D ITA NO.1856/AHD/2007 (ASSESSMENT YEAR:-2003-04) SMT. SHANTABEN K PATEL, NIRMA HOUSE, ASHRAM ROAD, AHMEDABAD [PAN:AGGPP2908J] V/S ACIT, CENTRAL CIRCLE-1(1), / DCIT, CIRCLE-10,AHMEDABAD [APPELLANT] [RESPONDENT] ITA NO.4117/AHD/2008 (ASSESSMENT YEAR:-2002-03) DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-10, AHMEDABAD V/S SMT. SHANTABEN K PATEL, NIRMA HOUSE, ASHRAM ROAD, AHMEDABAD [APPELLANT] [RESPONDENT] ITA NO.1041/AHD/2006& OTHERS 2 ITA NO.1242/AHD/2006 (ASSESSMENT YEAR:-2002-03) SHIVA SPECIFIC FAMILY TRUST, NIRMA HOUSE, ASHRAM ROAD, AHMEDABAD [PAN:AAATJ0260F] V/S ASSISTANT COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE- 1(1), AHMEDABAD [APPELLANT] [RESPONDENT] ITA NO.1251/AHD/2006 (ASSESSMENT YEAR:-2002-03) NIMA SPECIFIC FAMILY TRUST, NIRMA HOUSE, ASHRAM ROAD, AHMEDABAD [PAN:AAATN0269J] V/S THE ASSISTANT COMMISSIONER OF INCOME- TAX, CENTRAL CIRCLE-1(1), AHMEDABAD [APPELLANT] [RESPONDENT] ASSESSEES BY :- SHRI S N SOPARKAR, ADVOCATE AND SHRI HIMANSHU SHAH, CA REVENUE BY:- SHRI RAJEEV AGARWAL, CIT - DR O R D E R A N PAHUJA: SINCE THESE SEVEN APPEALS, INVOLVING SIMILAR ISSUE S RELATE TO THE SAME GROUP OF ASSESSEES, THESE WERE H EARD SIMULTANEOUSLY FOR THE SAKE OF CONVENIENCE AND ARE BEING DISPOSED OF THROUGH THIS COMMON ORDER . 2 GROUND NO.1 IN THE AFORESAID SIX APPEALS FILED BY THE FOUR ASSESSEES BEING GENERAL IN NATURE, DOES NOT R EQUIRE ANY SEPARATE ADJUDICATION AND IS, THEREFORE DISMISSED. 3. GROUND NO.2 IN ITA NOS.1041,1242,1246,1251/A HD/2006 & ITA NOS.1852 & 1856/AHD/2007 RELATES TO METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE. FACTS, IN BRIEF, AS PER R ELEVANT ORDERS IN HARSIDDH SPECIFIC FAMILY TRUST ARE THAT THE AO MEN TIONED ON FIRST PAGE IN THE ASSESSMENT ORDER THAT METHOD OF ACCOUNTING FOL LOWED BY THE ITA NO.1041/AHD/2006& OTHERS 3 ASSESSEE IS MERCANTILE. THERE IS NO DISCUSSION ON T HIS ASPECT IN THE ASSESSMENT ORDER. ON APPEAL, THE ASSESSEE CONTENDED THAT METHOD OF ACCOUNTING REGULARLY FOLLOWED BY THE ASSESSEE IS CASH AND THE AO CAN NOT THRUST MERCANTILE METHOD OF ACCOUNTING O N THE ASSESSEE. RELYING UPON DECISIONS IN CIT VS. MCMILLAN & CO. (1 958)[ 33 ITR 182] & JUGGILAL KAMLAPAT BANKERS VS. CIT (1975) 101 ITR 40 (ALL),IT WAS CONTENDED ON BEHALF OF THE ASSESSEE THAT THE CHOICE OF METH OD OF ACCOUNTING LIES WITH THE ASSESSEE SO LONG AS THE ASSESSEE SHOWS TH AT THE METHOD HAS BEEN FOLLOWED REGULARLY. MOREOVER, THE AO DID NOT GIVE A NY OPPORTUNITY NOR HAS RECORDED ANY REASON AND JUSTIFICATION FOR ADOPTING MERCANTILE METHOD OF ACCOUNTING. AFTER CONSIDERING THESE SUBMISSIONS, TH E LD. CIT(A) CONCLUDED IN HIS ORDER FOR THE AY 2002-03 IN THE CA SE OF HARSIDDH SPECIFIC FAMILY TRUST AS UNDER: I HAVE CONSIDERED THE ABOVE SUBMISSIONS OF THE APP ELLANT. I DO NOT FIND ANY FORCE IN THEM DUE TO THE FOLLOWING REASONS- (I) THE APPELLANT IS NOT CORRECT IN STATING THAT TH E MERE FACT THAT NO APPEAL HAS BEEN FILED IN THE CASE OF THE APPELLANT'S BLOCK PERIOD ASSESSMENT BY THE APPELLANT CHALLENGING THE METHOD OF ACCOUNTING ADOPTED AS MERCANTILE BY THE AO, SHOULD NOT BE A GROUND FOR ADOPTING THE SAME METHOD OF ACCOUNTING BY THE AO IN A.Y. 2002-03 ASSESSMENT ORD ER. FIRSTLY, THE APPELLANT HAVING MISSED THE BUS BY NOT FILING AN AP PEAL AGAINST THE BLOCK PERIOD ASSESSMENT ORDER, CANNOT TAKE ADVANTAGE OF H IS OWN NEGLIGENCE AND THEN BLOW HOT AND COLD LATER. (2) NO DOUBT THE AO CANNOT FORCE THE APPELLANT TO A DOPT A PARTICULAR METHOD OF ACCOUNTING, BUT HERE THE ISSUE IS DIFFERE NT. THE APPELLANT CANNOT HAVE A DIFFERENT METHOD OF ACCOUNTING FOR THE BLOCK PERIOD ASSESSMENT AND FOR THE REGULAR ASSESSMENT PROCEEDINGS. (3) IF SUCH AN INTERPRETATION OF THE APPELLANT IS A CCEPTED, IT WOULD MAKE THE PROVISIONS OF SECTION 145 OF THE I.T. ACT UNWORKABL E. IN THIS REGARD THE NIRMA GROUP HAS TRIED TO INTERPRET THE SECTION 37(1 ) IN SUCH A WAY THAT THE CLAIM OF INTEREST ON THESE DDBS IS AVAILABLE TO NIR MA LTD. ON ACCRUAL BASIS BUT IN CASE OF THE HOLDERS OF THE DDBS THE SAME GRO UP HAS INTERPRETED THE LETTER OF BOARD DATED 12-3-1996, CIRCULAR OF THE BO ARD DATED 15-2-2002 AND PRESS RELEASE DATED 20-3-2002 IN DIFFERENT MANN ER. IN THIS REGARD, THE RELIANCE IS PLACED IN CASE OF CWS (INDIA) LTD. VS. CIT 208 ITR 649 IN WHICH IT HAS BEEN OBSERVED THAT WHEN A LITERAL INTERPRETA TION LEADS TO AN ABSURD OR UNINTENDED RESULT, EVEN THE LANGUAGE OF THE STAT UTE CAN BE MODIFIED TO ACCORD WITH THE INTENT OF LEGISLATION AND TO AVOID ABSURDITY. IN THE CASE OF ITA NO.1041/AHD/2006& OTHERS 4 INDIAN HOTELS LTD. VS. ITO 245 ITR (SC) A SIMILAR V IEW HAS BEEN AFFIRMED. IN THE CASE OF GOVINDAN (K) AND SONS VS. CIT 247 IT R 192 AND OXFORD UNIVERSITY PRESS VS. CIT 247 ITR 658, THE HONBLE S C HAS HELD THAT INTERPRETATION MUST AVOID ABSURDLY AND IF LITERAL C ONSTRUCTION LEADS TO UNREASONABLE OR ABSURD CONSEQUENCES, THE SAME SHOUL D NOT BE ADOPTED. HENCE, THERE IS NO FORCE IN THE GROUND OF APPEAL NO .2 AND IT IS DISMISSED . 3.1 SIMILARLY IN HIS ORDER FOR THE AY 2003-04 IN THE CASE OF HARSIDDH SPECIFIC FAMILY TRUST, THE LD. CIT(A) FOLLOWING HIS ORDER DATED 8.3.2006 FOR THE AY 2002-03 IN THE CASE OF KISAN DISCRETIONARY TRUST HE LD THAT THE ASSESSEE WAS NOT JUSTIFIED IN CLAIMING CASH SYSTEM OF ACCOUNTING. 3.2 IN THE CASE OF SHANTABEN K PATEL IN THE AY S 2002-03 & 2003-04 & NIMA SPECIFIC FAMILY TRUST IN THE AY 2002-03, THE LD. CI T(A) FOLLOWING HIS REASONING IN THE CASE OF HARSIDDH SPECIFIC FAMILY TRUST IN THE AY 2002-03 CONCLUDED THAT THE ASSESSEE WAS NOT JUSTIFIED IN CLAIMING CASH SYSTEM OF ACCOUNTING. 3.3 LIKEWISE IN THE CASE OF SHIVA SPECIFIC FAM ILY TRUST, THE LD. CIT(A) FOLLOWED HIS OWN ORDERS FOR THE AY 2002-03 IN THE C ASE OF HARSIDDH SPECIFIC FAMILY TRUST & KARSANBHAI K PATEL(HUF) AND REJECTE D THE PLEA OF THE ASSESSEE. 4. THESE ASSESSEES ARE NOW IN APPEAL BEFORE US AG AINST THE AFORESAID FINDINGS OF THE LD. CIT(A). IT WAS CONTEN DED IN THEIR WRITTEN SUBMISSIONS ON BEHALF OF THE ASSESSEE M/S HARSIDHH SPECIFIC FAMILY TRUST THAT FOR THE AY 1999-00 THAT THE ASSESSEE FI LED ITS RETURN OF INCOME, MENTIONING METHOD OF ACCOUNTING AS 'CASH'. NO ORDER OF ASSESSMENT HAS BEEN PASSED ON THIS RETURN. FOR ASST . YEAR 2000-01, THE ASSESSEE CONTINUED TO FOLLOW THE 'CASH' METHOD OF ACCOUNTING. THOUGH THE ASSESSMENT WAS COMPLETED U/S. 143(1) OF THE ACT , LATER THE ASSESSMENT WAS REOPENED U/S. 147 OF ACT. THE RE ASSESSMENT WAS COMPLETED, MENTIONING THE METHOD OF ACCOUNTING AS 'MERCANTILE'. ON APPEAL, THE LD. CIT(A) UPHELD THE FINDINGS OF THE AO. SINCE THIS DID NOT HAVE EFFECT ON THE ASSESSMEN T, THE MATTER WAS NOT CARRIED FURTHER. IN THE AY 2001-02 ALSO, TH E ASSESSEE ITA NO.1041/AHD/2006& OTHERS 5 CONTINUED TO FOLLOW THE 'CASH' METHOD OF ACCOUNTING . THOUGH THE ASSESSMENT WAS COMPLETED U/S. 143(1) OF THE ACT , L ATER THE ASSESSMENT WAS REOPENED U/S. 147 OF ACT, WHEREIN IT WAS HELD THAT THE METHOD OF ACCOUNTING OF THE ASSESSEE WAS 'MERCA NTILE'. ON APPEAL, THE LD. CIT(A) DID NOT DEAL WITH THE GROUN D OF APPEAL AND RECTIFICATION APPLICATION U/S.154 OF ACT FILED ON 1 7-11-2008 IS STATED TO BE STILL PENDING WHILE AN ADDITIONAL GROUND HAS BEEN FILED BEFORE THE TRIBUNAL ON 20-11-2008 IN THE AY 2002-03, THE A SSESSEE FOLLOWED THE 'CASH' METHOD OF ACCOUNTING AND THE MA TTER IS NOW BEING AGITATED IN THE PRESENT APPEAL. IT WAS SUBMIT TED THAT THE WHOLE CONTROVERSY AROSE BECAUSE OF A NON-ISSUE IN BLOCK A SSESSMENT PROCEEDINGS, WHEREIN METHOD OF ACCOUNTING MENTIONED BY THE AO WAS MERCANTILE SINCE IN THE RETURN OF INCOME FOR BL OCK PERIOD, METHOD OF ACCOUNTING WAS REQUIRED TO BE STATED. IT WAS FURTHER STATED THAT THE DESCRIPTION 'MERCANTILE' WOULD BE PARTLY CORRECT IN AS MUCH AS UPTO ASST. YEAR: 1998-99, THE ASSESSEE WAS ADMITTEDLY FOLLOWING MERCANTILE METHOD OF ACCOUNTING. IT WAS O NLY FOR THE PERIOD AFTER 1.4.1998 (FROM ASST. YEAR 1999-00) THAT THE A SSESSEE STARTED FOLLOWING CASH METHOD OF ACCOUNTING. IT WAS FURTHER POINTED OUT THAT THEIR APPEAL AGAINST THE FINDINGS OF THE LD. CIT(A) , UPHOLDING METHOD OF ACCOUNTING AS MERCANTILE IN BLOCK ASSESSMENT WAS PE NDING BEFORE THE ITAT WHILE IN THE CASE OF RAJALBEN H. PATEL, TRIBUNAL HELD THE METHOD OF ACCOUNTING AS 'CASH' IN IT(SS)A NO. 108/AHD/2006 DT . 30.01.09. 4.1 LIKEWISE IN THEIR WRITTEN SUBMISSIONS IN THE CASE OF SHANTABEN K PATEL FOR THE AY 2002-03 THE ASSESSEE REITERATED THEIR SUBMISSIONS IN THE CASE OF HARSIDHH SPECIFIC FAMIL Y TRUST AND POINTED OUT THAT THOUGH IN THE AYS 1995-96 TO 2002- 03, THE ASSESSEE FOLLOWED CASH METHOD OF ACCOUNTING , THE ASSESSMENT S FOR THE AYS 1995-96 TO 1998-99 & 2001-02 WERE ACCEPTED ON RETUR NED INCOME WHILE NO INTIMATION HAD BEEN ISSUED FOR THE AY 1999 -2000 & 2000- 01. THUS, THE ISSUE WAS NOT DISPUTED IN APPEAL IN THESE ASSESSMENT YEARS. BEFORE US, BOTH THE PARTIES AGREED THAT THE ISSUE HAS BEEN ITA NO.1041/AHD/2006& OTHERS 6 SETTLED BY THE ITAT IN THEIR ORDER DATED 2.11.2007 IN THE CASE OF SHIVA SPECIFIC FAMILY TRUST IN ITA NO.1853/AHD/2007 & IN NIMA SPECIFIC FAMILY TRUST IN ITA NO. 1854/AHD./2007 FO R AY 2003-04. IN THE OTHER FOUR APPEALS, SINCE THE AO DID NOT RECORD HIS SPECIFIC FINDINGS ON THE ISSUE OF CONSISTENT METHOD OF ACCOU NTING FOLLOWED BY THE ASSESSEES VIZ. M/S HARSIDDH SPECIFIC FAMILY TRU ST & SHANTABEN K PATEL, THE ISSUE MAY BE RESTORED TO THE FILE OF THE AO FOR READJUDICATION, IT WAS PLEADED. 5. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. WE FIND THAT ITAT AHMEDABAD BENCH-A VIDE THEIR ORDER DATED 2.11.2007 IN THE CASE OF SHIVA SPECIFIC FAM ILY TRUST IN ITA NO.1853/AHD/2007 FOR AY 2003-04 WHILE ADJUDICATING A SIMILAR ISSUE CONCLUDED AS UNDER:- 12. SINCE THE FACTS AND CIRCUMSTANCES OF THE PRESE NT CASE AS WELL AS THE ISSUES WHICH RELATE TO THE ASSESSEE'S CLAIM OF HAVI NG FOLLOWED CASH SYSTEM OF ACCOUNTING AND WITH RESPECT TO VALIDITY A ND DATE OF APPLICABILITY OF CIRCULAR NO.2 OF 2002, EXCEPT THE FACTS STATED H EREINAFTER, ARE, ADMITTEDLY, SIMILAR TO THE FACTS AND CIRCUMSTANCES AS WELL AS THE ISSUES AS WERE IN THE CASE OF KISAN DISCRETIONARY FAMILY TRUS T, WE, AFTER FOLLOWING OUR DECISION IN THE CASE OF KISAN DISCRETIONARY FAM ILY TRUST, I.E. ITA NO.1850/AHD/2007 FOR ASST. YEAR 2003-04 RELEVANT PA RT OF WHICH HAS BEEN REPRODUCED HEREINABOVE AND FOR THE FOLLOWING REASON S STATED HEREUNDER, UPHOLD THE ASSESSEE'S PLEA WITH RESPECT TO SYSTEM O F ACCOUNTING FOLLOWED AND TAXABILITY OF INTEREST ON DDBS/OFCPN ON CASH BA SIS AND OUR DECISION IN THE CASE KISAN DISCRETIONARY FAMILY TRUST, APPLY MUTATIS MUTANDIS TO THIS CASE ALSO. 12.1 IN ADDITION TO REASONS GIVEN UNDER PARAGRAPH N O.12 ABOVE FOR UPHOLDING THE ASSESSEES PLEA, THE OTHER REASONS IN SUPPORT OF OUR ABOVE CONCLUSION, ARE THAT SO FAR AS THIS CASE IS CONCERN ED, IT IS FACT THAT THE ASSESSEE'S SYSTEM OF ACCOUNT, WHICH WAS CASH SYSTEM STOOD ACCEPTED BY WAY OF INTIMATION U/S.143(1)(A) OF THE ACT FOR ASST . YEAR 1997-98 AND SINCE THE ASSESSEE HAS BEEN FOLLOWING THE SAME SYSTEM CON SISTENTLY AND HAD NOT CLAIMED ANY CHANGE IN SYSTEM OF ACCOUNTING THER EAFTER, EITHER IN REGULAR RETURNS OF INCOME OR IN THE RETURN OF UNDIS CLOSED INCOME FURNISHED UNDER CHAPTER XIV-B OF THE ACT, THERE WAS NO REASON FOR THE AUTHORITIES TO ADOPT THE SYSTEM OF ACCOUNTING AS 'MERCANTILE SYSTE M' WITHOUT MAKING OUT A CASE THAT EITHER THE ASSESSEE WAS, IN FACT, NOT F OLLOWING THE CASH SYSTEM OF ACCOUNTING OR HAVING FOLLOWED IN ASST. YEAR 1997 -98, HAD NOT FOLLOWING ITA NO.1041/AHD/2006& OTHERS 7 THE SAME CONSISTENTLY M SUBSEQUENT YEARS. FROM TH E FACTS ON RECORDS, WE FIND THAT THE REVENUE HAS NOT BASED ITS DECISION ON THESE GROUNDS. THE REVENUE'S CASE, AS HAS BEEN OBSERVED FROM PARAGRAPH NO.2.1 OF ASSESSMENT ORDER FAR ASST. YEAR 2002-03 AS WELL AS THE ASSESSMENT ORDER FOR ASST. YEAR 2003-04, FOR ADOPTING THE SYSTEM OF ACCOUNTING AS 'MERCANTILE' IN ASST.YEA-2002-03 AND ASST. YEAR 200 3-04 IS THE MENTIONING OF SYSTEM IF ACCOUNTING AS 'MERCANTILE' IN ASSESSMENT FOR BLOCK PERIOD WHICH ADMITTEDLY, WAS FOR THE PERIOD 01-04-1 995 TO 27-09-2001. SINCE MENTIONING OF ACCOUNTING PERIOD IN BLOCK ASSE SSMENT, IN OUR OPINION, (AS HAS BEEN DISCUSSED IN THE CASE OF KISAN DISCRET IONARY FAMILY TRUST COULD NOT BE A REASON FOR ADOPTING SYSTEM OF ACCOUN TING AS 'MERCANTILE* IN SUBSEQUENT ASSESSMENT YEARS AND THAT TOO WITHOUT CO MPLYING WITH THE PROVISIONS OF LAW IN THIS RESPECT, WE UPHOLD THE AS SESSEE'S PLEA THAT THE ASSESSEE WAS CONSISTENTLY FOLLOWING THE CASH SYSTEM OF ACCOUNTING, SINCE ASST. YEAR 1997-98; MEANING THEREBY THAT ASSESSEE'S SYSTEM OF ACCOUNTING FOR ASST. YEAR 2003-04 WAS 'CASH SYSTEM' . 5.1 SIMILARLY THE ITAT AHMEDABAD BENCH-A VIDE TH EIR ORDER DATED 2.11.2007 IN THE CASE OF NIMA SPECIFIC FAMILY TRU ST IN ITA NO.1854/AHD/2007 FOR AY 2003-04 WHILE ADJUDICATING A SIMILAR ISSUE HELD AS UNDER:- 8. SO FAR AS ISSUE RELATING TO ASSESSEES SYSTEM OF ACCOUNTING IS CONCERNED, THE SAME HAD BEEN DEALT WITH BY US IN TH E CASE OF KISAN DISCRETIONARY FAMILY TRUST(SUPRA) AS PER PARAGRAPH NOS.14.1 TO 28 OF THAT ORDER, WHICH ARE IN THE FOLLOWING TERMS:- 14.1. FIRST OF ALL, WE ARE OF THE OPINION THAT REV ENUES STAND FOR ADOPTING THE SYSTEM OF ACCOUNTING AS MERCANTILE BEING SOLE LY ON THE BASIS OF ITS HAVING ADOPTED THE SYSTEM OF ACCOUNTING IN ASSESSEE S BLOCK ASSESSMENT, WHICH WAS FOR THE BLOCK PERIOD 01.04.1995 TO 27.09. 2001, AND ASSESSEES FAILURE TO APPEAL AGAINST THAT ORDER, THE ASSESSEE IS TO BE DECIDED ONLY ON THE BASIS AS TO WHETHER REVENUES THIS STAND IS LEG AL OR NOT, I.E. WHETHER ADOPTION OF SYSTEM OF ACCOUNTING AS MERCANTILE ME NTIONED IN BLOCK ASSESSMENT, WHICH, ADMITTEDLY, WAS UPTO THE PERIOD ENDING ON 27.09.2001, WAS BINDING ON THE ASSESSEE FOR FUTURE TIME TO COME AND IS ALSO BINDING IN REGULAR ASSESSMENT, BUT SINCE DR HAS ADVANCED SOME ARGUMENTS, THOUGH AFTER ADMITTING THAT THE ASSESSEE HAS RIGHT TO CHAN GE THE SYSTEM OF ACCOUNTING AT ANY TIME, WITH RESPECT TO THE CHANGE IN SYSTEM BY SAYING THAT IT WAS ASSESSEE TO ESTABLISH THAT CHANGE WAS BONA F IDE AND WAS BEING FOLLOWED CONSISTENTLY, WE WOULD LIKE TO DEAL WITH T HESE ARGUMENTS ALSO AND, THEREFORE, WE PROCEED TO DECIDE ALL THESE ISSUES. 14.2. TO DECIDE THE AFORESAID ISSUE, WE ARE OF THE OPINION THAT IT IS DESIRABLE FOR US TO CONSIDER THE PROVISIONS OF SECT ION 145 OF THE ACT AS THEY STOOD AT THE RELEVANT TIME AS WELL AS THE PROVISIO N OF BLOCK PERIOD VIS--VIS ITA NO.1041/AHD/2006& OTHERS 8 THE SYSTEM OF ACCOUNTING FOR THAT PURPOSE AND, THE REFORE, THE SAME AS REPRODUCED AS UNDER:- SECTION 145. (1) INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION OR INCOME FROM OTHER SOURCES SHALL, S UBJECT TO THE PROVISIONS OF SUB- SECTION (2), BE COMPUTED IN ACCORDANCE WITH EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. (2) THE CENTRAL GOVERNMENT MAY NOTIFY IN THE OFFICI AL GAZETTE FROM TIME TO TIME ACCOUNTING STANDARDS TO BE FOLLOWED BY ANY CLASS OF ASSESSEES OR IN RESPECT OF ANY CLASS OF INCOME. (3) WHERE THE ASSESSING OFFICER IS NOT SATISFIED AB OUT THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE, OR WHERE THE METHOD O F ACCOUNTING PROVIDED IN SUB-SECTION (1) OR ACCOUNTING STANDARDS AS NOTIFIED UNDER SUB-S ECTION (2), HAVE NOT BEEN REGULARLY FOLLOWED BY THE ASSESSEE, THE ASSESSING OFFICER MAY MAKE AN ASSESSMENT IN THE MANNER PROVIDED IN SECTION 144 .]. COMPUTATION OF UNDISCLOSED INCOME OF THE BLOCK PER IOD SECTION 158BB. (1) THE UNDISCLOSED INCOME OF THE BLOCK PERIOD SHAL L BE THE AGGREGATE OF THE TOTAL INCOME OF THE PREVIOUS YEARS FALLING WITH IN THE BLOCK PERIOD COMPUTED, [IN ACCORDANCE WITH THE PROVISIONS OF THIS ACT, ON THE BASIS OF EVIDENCE FOUND AS A RESULT OF SEARCH OR REQUISITION OF BOOKS OF ACCOUNT OR OTHER DOCUMENTS AND SUCH OTHER MATERIALS OR INFORMATION AS ARE AVAILABLE WITH THE ASSESSING OFF ICER AND RELATABLE TO SUCH EVIDENCE], AS REDUCED BY THE AGGREGATE OF THE TOTAL INCOME, OR AS THE CASE MAY BE, AS INCREASED BY THE AGGREGATE OF THE LOSSES OF SUCH PREVIOUS YEARS, DETERMINED, (A) WHERE ASSESSMENTS UNDER SECTION 143 OR SECTION 144 OR SECTION 147 HAVE BEEN CONCLUDED [PRIOR TO THE DATE OF COMMENCEMENT OF THE SEARCH OR THE DATE OF REQUISITION], ON THE BASIS OF SUCH ASSESSMENTS; (B) WHERE RETURNS OF INCOME HAVE BEEN FILED UNDER SECTION 139 [OR IN RESPONSE TO A NOTICE ISSUED UNDER SUB-SECTION (1) OF SECTION 142 OR SECTION 148 ] BUT ASSESSMENTS HAVE NOT BEEN MADE TILL THE DATE OF SEA RCH OR REQUISITION, ON THE BASIS OF THE INCOME DISCLOSED IN SUCH RETURNS; [(C) WHERE THE DUE DATE FOR FILING A RETURN OF I NCOME HAS EXPIRED, BUT NO RETURN OF INCOME HAS BEEN FILED, (A) ON THE BASIS OF ENTRIES AS RECORDED IN THE BO OKS OF ACCOUNT AND OTHER DOCUMENTS MAINTAINED IN THE NORMAL COURSE ON OR BEF ORE THE DATE OF THE SEARCH OR REQUISITION WHERE SUCH ENTRIES RESULT IN COMPUTATION OF LOSS FOR ANY PREVIOUS YEAR FALLING IN THE BLOCK PERIOD; OR (B) ON THE BASIS OF ENTRIES AS RECORDED IN THE BO OKS OF ACCOUNT AND OTHER DOCUMENTS MAINTAINED IN THE NORMAL COURSE ON OR BEF ORE THE DATE OF THE SEARCH OR REQUISITION WHERE SUCH INCOME DOES NOT EX CEED THE MAXIMUM AMOUNT NOT CHARGEABLE TO TAX FOR ANY PREVIOUS YEAR FALLING IN THE BLOCK PERIOD; (CA) WHERE THE DUE DATE FOR FILING A RETURN OF IN COME HAS EXPIRED, BUT NO RETURN OF INCOME HAS BEEN FILED, AS NIL, IN CASES NOT FALLING UNDER CLAUSE (C);] (D) WHERE THE PREVIOUS YEAR HAS NOT ENDED OR THE D ATE OF FILING THE RETURN OF INCOME UNDER SUB-SECTION (1) OF SECTION 139 HAS NOT EXPIRED, ON THE BASIS OF ENTRIES ITA NO.1041/AHD/2006& OTHERS 9 RELATING TO SUCH INCOME OR TRANSACTIONS AS RECORDED IN THE BOOKS OF ACCOUNT AND OTHER DOCUMENTS MAINTAINED IN THE NORMAL COURSE ON OR BEFORE THE DATE OF THE SEARCH OR REQUISITION RELATING TO SUCH PREVIOUS YEA RS; (E) WHERE ANY ORDER OF SETTLEMENT HAS BEEN MADE UN DER SUB-SECTION (4) OF SECTION 245D , ON THE BASIS OF SUCH ORDER; (F) WHERE AN ASSESSMENT OF UNDISCLOSED INCOME HAD BEEN MADE EARLIER UNDER CLAUSE (C) OF SECTION 158BC , ON THE BASIS OF SUCH ASSESSMENT. EXPLANATION.FOR THE PURPOSES OF DETERMINATION OF U NDISCLOSED INCOME, (A) THE TOTAL INCOME OR LOSS OF EACH PREVIOUS YEAR SHALL, FOR THE PURPOSE OF AGGREGATION, BE TAKEN AS THE TOTAL INCOME OR LOSS C OMPUTED IN ACCORDANCE WITH THE PROVISIONS OF [THIS ACT] WITHOUT GIVING EFFECT TO SET OFF OF BROUGHT FORWARD LOSSES UNDER CHAPTER VI OR UNABSORBED DEPRECIATION UNDER SUB-SECTION (2) OF SECTION 32 : [ PROVIDED THAT IN COMPUTING DEDUCTIONS UNDER CHAPTER VI-A FOR THE PURPOSES OF THE SAID AGGREGATION, EFFECT SHALL BE GIVEN TO SET OFF OF BROUGHT FORWARD LOSSES UNDER CHAPTER VI OR UNABSORBED DEPRECIATION UNDER S UB-SECTION (2) OF SECTION 32 ;] [(B) OF A FIRM, RETURNED INCOME AND TOTAL INCOME ASSESSED FOR EACH OF THE PREVIOUS YEARS FALLING WITHIN THE BLOCK PERIOD SHALL BE THE INCOME DETERMINED BEFORE ALLOWING DEDUCTION OF SALARY, INTEREST, COMMISSION, BONUS OR REMUNERATION BY WHATEVER NAME CALLED [TO ANY PARTNER NOT BEING A WO RKING PARTNER] : PROVIDED THAT UNDISCLOSED INCOME OF THE FIRM SO DETERMINED S HALL NOT BE CHARGEABLE TO TAX IN THE HANDS OF THE PARTNERS, WHE THER ON ALLOCATION OR ON ACCOUNT OF ENHANCEMENT;] (C) ASSESSMENT UNDER SECTION 143 INCLUDES DETERMINATION OF INCOME UNDER SUB- SECTION (1) OR SUB-SECTION (1B) OF SECTION 143 . (2) IN COMPUTING THE UNDISCLOSED INCOME OF THE BLOC K PERIOD, THE PROVISIONS OF SECTIONS 68, 69, 69A, 69B AND 69C SHALL, SO FAR AS MAY BE, A PPLY AND REFERENCES TO FINANCIAL YEAR IN THOSE SECTIONS SHALL BE CONSTRUED AS REFER ENCES TO THE RELEVANT PREVIOUS YEAR FALLING IN THE BLOCK PERIOD INCLUDING THE PREVIOUS YEAR ENDING WITH THE DATE OF SEARCH OR OF THE REQUISITION. (3) THE BURDEN OF PROVING TO THE SATISFACTION OF TH E ASSESSING OFFICER THAT ANY UNDISCLOSED INCOME HAD ALREADY BEEN DISCLOSED IN ANY RETURN OF INCOME FILED BY THE ASSESSEE BEFORE THE COMMENCEMENT OF SEARCH OR OF THE REQUISITION, A S THE CASE MAY BE, SHALL BE ON THE ASSESSEE. (4) FOR THE PURPOSE OF ASSESSMENT UNDER THIS CHAPTE R, LOSSES BROUGHT FORWARD FROM THE PREVIOUS YEAR UNDER CHAPTER VI OR UNABSORBED DEPREC IATION UNDER SUB-SECTION (2) OF SECTION 32 SHALL NOT BE SET OFF AGAINST THE UNDISCLOSED INCOM E DETERMINED IN THE BLOCK ASSESSMENT UNDER THIS CHAPTER, BUT MAY BE CARRIED F ORWARD FOR BEING SET OFF IN THE REGULAR ASSESSMENTS. PROCEDURE FOR BLOCK ASSESSMENT. SECTION 158BC. WHERE ANY SEARCH HAS BEEN CONDUCTED UNDER SECTION 1 32 OR BOOKS OF ACCOUNT, OTHER DOCUMENTS OR ASSETS ARE REQUISITIONE D UNDER SECTION 132A , IN THE CASE OF ANY PERSON, THEN, ITA NO.1041/AHD/2006& OTHERS 10 [(A) THE ASSESSING OFFICER SHALL (I) IN RESPECT OF SEARCH INITIATED OR BOOKS OF ACC OUNT OR OTHER DOCUMENTS OR ANY ASSETS REQUISITIONED AFTER THE 30TH DAY OF JUNE, 19 95, BUT BEFORE THE 1ST DAY OF JANUARY, 1997, SERVE A NOTICE TO SUCH PERSON REQ UIRING HIM TO FURNISH WITHIN SUCH TIME NOT BEING LESS THAN FIFTEEN DAYS; (II) IN RESPECT OF SEARCH INITIATED OR BOOKS OF AC COUNT OR OTHER DOCUMENTS OR ANY ASSETS REQUISITIONED ON OR AFTER THE 1ST DAY OF JAN UARY, 1997, SERVE A NOTICE TO SUCH PERSON REQUIRING HIM TO FURNISH WITHIN SUCH TIME NOT BEING LESS THAN FIFTEEN DAYS BUT NOT MORE THAN FORTY-FIVE DAYS, AS MAY BE SPECIFIED IN THE NOTICE A RETURN IN THE PRESCRIBED FORM AND VERIFIED IN THE SAME MANNER AS A RETURN UNDER CLAUSE (I) OF SUB -SECTION (1) OF SECTION 142 , SETTING FORTH HIS TOTAL INCOME INCLUDING THE UNDISC LOSED INCOME FOR THE BLOCK PERIOD : PROVIDED THAT NO NOTICE UNDER SECTION 148 IS REQUIRED TO BE ISSUED FOR THE PURPOSE OF PROCEEDING UNDER THIS CHAPTER : PROVIDED FURTHER THAT A PERSON WHO HAS FURNISHED A RETURN UNDER THIS CLAUSE SHALL NOT BE ENTITLED TO FILE A REVISED RETURN;] (B) THE ASSESSING OFFICER SHALL PROCEED TO DETERMI NE THE UNDISCLOSED INCOME OF THE BLOCK PERIOD IN THE MANNER LAID DOWN IN SECTION 158 BB AND THE PROVISIONS OF SECTION 142 , SUB-SECTIONS (2) AND (3) OF SECTION 143 [, SECTION 144 AND SECTION 145 ] SHALL, SO FAR AS MAY BE, APPLY; (C) THE ASSESSING OFFICER, ON DETERMINATION OF THE UNDISCLOSED INCOME OF THE BLOCK PERIOD IN ACCORDANCE WITH THIS CHAPTER, SHALL PASS AN ORDER OF ASSESSMENT AND DETERMINE THE TAX PAYABLE BY HIM ON THE BASIS OF SU CH ASSESSMENT; [(D) THE ASSETS SEIZED UNDER SECTION 132 OR REQUISITIONED UNDER SECTION 132A SHALL BE DEALT WITH IN ACCORDANCE WITH THE PROVISIONS OF SEC TION 132B .] 14.3. AFTER HAVING GONE THROUGH THE CHAPTER XIV-B, IT IS OBSERVED THAT THE LEGISLATURE HAS NOT PROVIDED ANY WHERE IN THE PROVI SIONS OF CHAPTER XIV-B AS TO WHICH OF THE SYSTEM OF ACCOUNTING IS TO BE FO LLOWED FOR COMPUTING THE ASSESSEES UNDISCLOSED INCOME FOR THE PURPOSE OF TH IS CHAPTER. HOWEVER, WE ARE OF THE OPINION THAT SOME HELP CAN BE SOUGHT FROM THE PROVISIONS OF SECTION 158BB OF THE ACT WHICH PRESCRIBE THE WAY OU T FOR COMPUTATION OF UNDISCLOSED INCOME OF THE BLOCK PERIOD AND ALSO FOR M PROVISIONS OF SECTION 158BC WHICH PRESCRIBE THE PROCEDURE FOR COMPLETING BLOCK ASSESSMENT AND THAT IS WHY THAT WE HAVE PREFERRED TO REPRODUCE THESE TWO SECTIONS. SECTION 145 OF THE IT ACT, 1961 14.4. AFTER THE ANALYSIS OF PROVISIONS OF SECTION 1 45, REPRODUCED HEREINABOVE, EFFECTIVE FROM ASST.YEAR 1997-98, WE A RE OF THE OPINION THAT THESE PROVISIONS CLEARLY LEAD ONE TO UNDERSTAND TH AT INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PR OFESSION' OR INCOME FROM OTHER SOURCES, SUBJECT HOWEVER, TO THE PROVIS IONS OF SUB-SECTION(2) OF SECTION 145, HAS TO BE COMPUTED IN ACCORDANCE WITH CASH SYSTEM OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY EMPLOY ED BY THE ASSESSEE; ITA NO.1041/AHD/2006& OTHERS 11 MEANING THEREBY THAT CHOICE WITH THE ASSESSEE TO MA INTAIN ITS ACCOUNTS IS ONLY LIMITED; I.E. THE ASSESSEE IS BOUND MAINTAIN ITS ACCOUNTS FOR BUSINESS OR PROFESSION OR FOR INCOME LIABLE TO BE TAXED UND ER THE HEAD INCOME FROM OTHER SOURCES EITHER ON CASH SYSTEM OR ON MERCA NTILE SYSTEM WHICHEVER HE IS REGULARLY EMPLOYING, SUBJECT, HO WEVER, TO THE PROVISIONS OF SUB-SECTION(2) OF SECTION 145 WHICH AUTHORIZES THE CENTRAL GOVERNMENT TO NOTIFY THE ACCOUNTING STANDARDS TO BE FOLLOWED B Y CLASS OF ASSESSEES OR IN RESPECT OF ANY CLASS OF INCOME AND ALSO SUBJECT TO THE PROVISIONS OF SUB- SECTION (3) OF SECTION 145, WHICH AUTHORIZES THE AS SESSING OFFICER, IN CASE OF ASSESSEES FAILURE TO COMPLY WITH SUB-SECTION (2 ) AND/OR (3), TO MAKE THE ASSESSMENT IN THE MANNER AS PROVIDED BY SECTION 144 OF THE ACT. 14.5. SO FAR AS THE QUESTION AS TO WHICH OF THE TW O SYSTEMS; CASH SYSTEM OR MERCANTILE SYSTEM SHOULD BE FOLLOWED IS CONCERNED, THERE IS NO DISPUTE BECAUSE THE LANGUAGE OF THE SUB-SECTION (1) READ WITH SUB- SECTION (3) OF SECTION 145 OF THE ACT CLEARLY GOES TO SHOW THAT IT THE ASSESSEE WHO IS TO FOLLOW ONE OF THE GIVEN TWO METH ODS, WHICH IN TURN MAKES IT CLEAR THAT THE CHOICE OF THE METHOD TO BE ADOPTED FOR MAINTAINING THE ACCOUNTS FOR THE INCOME CHARGEABLE UNDER THE HEAD BUSINESS OR PROFESSION OR FOR THE INCOME CHARGEABLE UNDER THE HEAD OTHER SOURCES LAYS WITH THE ASSESSEE AND THE REVENUE HAS, ABSOLUT ELY, NO PART TO PLAY AND THIS PROPOSITION NOW STANDS SETTLED BY VARIOUS COURTS INCLUDING THE APEX COURT. THE HON'BLE SUPREME COURT IN THE CASE OF INVESTMENT LTD. VS. CIT (77 ITR 533, 537)[SC], IN THE CASE OF CIT VS. A KRISHNASWAMI MUTHALIAR (53 ITR 122, 127)[SC] AND IN THE CASE OF CIT VS. MC MILLAN & CO. (33 ITR 182, 188)[SC] HAS HELD THAT THE CHOICE OF T HE METHOD OF ACCOUNTING LAYS WITH THE ASSESSEE. IN OTHER WORDS, REVENUE CAN NOT ENFORCE ITS CHOICE FOR SYSTEM OF ACCOUNTING TO BE FOLLOWED. 14.6. IT IS ALSO GATHERED FROM THE AFORESAID PROVIS IONS THAT THE METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE (SUBJECT TO THE CONDITION THAT THE SAME IS FOLLOWED REGULARLY) CANNOT BE DISTURBED BY THE REVENUE, I.E. IF AN ASSESSEE ADOPTS CASH SYSTEM INSTEAD OF MERCANTILE , E.G. ASSESSABLE U/S.56; HE CANNOT BE ASSESSED FOR THAT INCOME ON A CCRUAL BASIS (JUBILAL KANALPAT PARTNERS VS. CIT (101 ITR 40)[ALL.]. SIM ILARLY, IF THE ASSESSEE FOLLOWS MERCANTILE SYSTEM OF ACCOUNTING, IT IS NOT OPEN TO THE ASSESSING OFFICER TO MAKE THE ASSESSMENT ON CASH BASIS [M/S .B.N.PINTOO V/S. CIT 85 ITR 448 (MYSORE)]. 14.7. WE ARE, FURTHER OF THE OPINION THAT SINCE CHOICE TO ADOPT A PARTICULAR SYSTEM OF ACCOUNTING ONE OF TWO; IS WITH THE ASSESS EE, THE CHOICE TO CHANGE THE SYSTEM OF ACCEPTING IS ALSO WITH THE ASS ESSEE, BUT THIS CHANGE OVER FROM ONE SYSTEM TO ANOTHER SYSTEM; CHOICE IS S UBJECT TO THE FOLLOWING:- (I) THE CHANGE OVER IS BONA FIDE. ITA NO.1041/AHD/2006& OTHERS 12 (II). THE SECOND CONDITION TO BE SATISFIED IS THAT THE ASSESSEE IS TO ESTABLISH THAT THE METHOD OF ACCOUNTING EMPLOYED (ORIGINALLY OR ON CHANGE) IS BEING FOLLOWED REGULARLY IN THE SUBSEQUE NT YEARS AND THIS FACT CAN BE ESTABLISHED BY SHOWING THE REGULARITY FROM A CCOUNTS OF SUBSEQUENT YEARS. THIS VIEW OF OURS FINDS SUPPORT FROM DECIS ION OF HON'BLE MADRAS HIGH COURT IN THE CASE OF SUNDRAM & CO. VS. CIT (36 ITR 162, 167)[MAD.] 15. SO FAR AS ASSESSING OFFICER IS CONCERNED, WE HA VE ALREADY OBSERVED THAT HE HAS NO POWER EITHER TO CHANGE THE SYSTEM O F ACCOUNTING FOLLOWED OR PREFERRED BY THE ASSESSEE OR TO THRUST UPON THE SYSTEM OF HIS CHOICE. 15.1. THE ONLY POWER GIVEN TO THE ASSESSING OFFICE R IS OF THE NATURE TO THE EXTENT AS PROVIDED BY PROVISIONS OF SUB-SECTION ( 3) OF SECTION 145 OF THE ACT AND IF WE ANALYSIS THESE PROVISIONS, IT WILL B E CLEAR THAT THE ASSESSING OFFICER HAS BEEN CLOTHED WITH THE POWER TO MAKE AN ASSESSMENT IN THE MANNER PROVIDED IN SECTION 144, IF HE IS NOT SATIS FIED ABOUT THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE OR THE ASSESSEE IS NOT EMPLOYING ANY OF THE METHOD OF ACCOUNTING PROVIDED IN SUB-SECTION (1) REGULARLY OR IS NOT FOLLOWING THE ACCOUNTING STANDA RDS, IF ANY, NOTIFIED BY THE GOVERNMENT SUB-SECTION (2) OF SECTION 145 OF THE AC T REGULARLY. 15.2. IN OTHER WORDS, IF THE ASSESSING OFFICER FIN DS THAT THE ASSESSEES ACCOUNTS ARE NOT CORRECT OR COMPLETE OR ASSESSEE IS NOT FOLLOWING EITHER OF THE TWO SYSTEMS, I.E. CASH SYSTEM OR MERCANTILE SYSTEM REGULARLY; OR IS NOT FOLLOWING THE ACCOUNTING STANDARDS NOTIFIED BY THE GOVERNMENT REGULARLY THE ASSESSING OFFICER CAN PROCEED TO COM PUTE THE ASSESSEES INCOME IN THE MANNER PROVIDED U/S.144 OF THE ACT, B UT HE, IN NO CASE, CAN SUBSTITUTE THE ONE SYSTEM BY ANOTHER SYSTEM. 16.1. IN OTHER WORDS, IF THE ASSESSEE HAS COMPLIED WITH THE REQUIREMENT OF PROVISIONS OF SUB-SECTIONS (1) & (2) OF SECTION 145 , THEN ASSESSING OFFICER HAS NO POWER/JURISDICTION TO DISTURB THE METHOD OF ACCOUNTING. SIMILARLY, IF THE ASSESSING OFFICER HAS ACCEPTED THE METHOD OF AC COUNTING IN ONE YEAR AND THE ASSESSEE HAS FOLLOWED THE SAME METHOD IN SU BSEQUENT YEARS, THE ASSESSING OFFICER SHALL NOT BE JUSTIFIED IN REFUSIN G TO ACCEPT SUCH METHOD AS THE BASIS OF ASSESSMENT IN SUBSEQUENT YEAR. TH IS VIEW IS SUPPORTED BY THE DECISION OF HON'BLE HIGH COURT OF GUJARAT IN TH E CASE OF BALAPUR VIBHAG JANGAL KANDAR MANDALI LTD. VS. CIT 9135 ITR 91)[GUJ .]. 17. WE ARE, FURTHER, OF THE OPINION THAT WHILE SUB -SECTION (3) OF SECTION 145 ENABLES THE ASSESSING OFFICER TO COMPUTE THE AS SESSEES INCOME IN THE MANNER PROVIDED U/S.144 IF HE IS OF THE OPINION THAT ACCOUNTS OF THE ASSESSEE ARE NOT CORRECT OR COMPLETE OR THE ASSESSE E HAS NOT FOLLOWED ANY ONE OF THE TWO SYSTEM OF ACCOUNTING [PROVIDED SUB-S ECTION(1) REGULARLY OR HAS NOT FOLLOWED THE ACCOUNTING STANDARD NOTIFIED B Y THE GOVERNMENT ITA NO.1041/AHD/2006& OTHERS 13 REGULARLY], BUT HAS NOT BEEN GIVEN POWER TO IMPOSE HIS OWN METHOD OF ACCOUNTING. HE CAN ONLY COMPUTE THE INCOME IN THE MANNER PROVIDED U/S.144 OF THE ACT. THIS VIEW OF OURS SUPPORTED B Y THE DECISION IN THE CASE OF CIT VS. K.SANKAR PANDYA ASARI & SONS (130 ITR 55 1, 544)[MAD.] 18. IF WE CONSIDER THE CASE OF THE PRESENT ASSESSEE IN THE LIGHT OF ABOVE PROPOSITION OF LAW AND THE PROVISIONS, FIRST OF ALL , WE ARE OF THE OPINION THAT - (I) CHOICE TO EMPLOY ANY ONE OF THE TWO METHODS OF ACCOUNTING, SUBJECT, HOWEVER, TO THE FACT THAT SUCH A METHOD SH OULD BE FOLLOWED REGULARLY IN SUBSEQUENT YEARS, IS WITH THE ASSESSEE. (II) IT IS THE ASSESSEE WHO HAS THE CHOICE EVEN TO CHANGE THE SYSTEM OF ACCOUNTING, BUT AGAIN SUBJECT TO THE FACT THAT IT IS FOR HIM TO ESTABLISH THAT CHANGE WAS BONA FIDE AND CHAN GED SYSTEM WAS BEING FOLLOWED REGULARLY. 19.1. COMING TO THE FACTS OF THE PRESENT CASE, THER E IS NO DISPUTE THAT TILL 28/03/2000, THE ASSESSEE WAS FOLLOWING MERCANTILE S YSTEM OF ACCOUNTING, BUT AT THE SAME TIME THERE IS NO DISPUTE THAT THE A SSESSEE HAD CHANGED THE SYSTEM OF ACCOUNTING FROM MERCANTILE TO CASH W. E.F. ASST.YEAR 2001-02 I.E. W.E.F. 01/04/2000 AND HAD FURNISHED ITS RETURN OF INCOME FOR ASST.YEAR 2001-02 ON 31/07/2001 SHOWING INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES WHICH WAS CONSISTING OF INTEREST ON FDS AND OTHER INTEREST. THE SYSTEM OF ACCOUNTING EMPLOYED WAS CLEARLY STATE D TO BE CASH AGAINST COLUMN 11.A OF FORM 3-CD WHICH WAS REQUIRED TO BE F URNISHED ALONG WITH RETURN UNDER THE STATUTORY PROVISIONS OF SECTION 44 AB OF THE ACT. 19.2. IT IS ALSO AN ADMITTED FACT THAT THE REVENUE HAD NOT FRAMED ASSESSMENT FOR THIS ASSESSMENT YEAR, I.E. NO ASSESS MENT U/S.143(3) OR U/S.147 OF THE ACT HAS BEEN MADE BY THE ASSESSING O FFICER. THIS FACT GOES TO SHOW THAT THE ASSESSEES RETURNED INCOME SHOWN O N THE CASH SYSTEM OF ACCOUNTING WAS ACCEPTED BY VIRTUE OF PROVISIONS OF SECTION 143(1)(A) OF THE ACT AND THAT BEING THE CASE THE ASSESSEES PREFEREN CE TO CHANGE THE SYSTEM OF ACCOUNTING FROM MERCANTILE TO CASH F OR ASST.YEAR 2001-02 STOOD ACCEPTED (THE COPY OF COMPUTATION OF INCOME, ACKNOWLEDGEMENT FOR HAVING FURNISHED THE RETURN OF INCOME FOR ASST. YEAR 2001-02 ON 31/07/2001 AND AUDIT REPORT ALONG WITH FORM NO.3-CB & 3-CD FIND PLACED AT PAGE NOS.168, 167 & 155 TO 1663 OF THE ASSESSEE S PAPER-BOOK RESPECTIVELY). 19.3. (A) COMING TO THE FACTS RELATING TO ASST.YEAR 2002-03 , IT IS AGAIN AN ADMITTED FACT THAT THE RETURN OF INCOME DECLARING I NCOME FROM LONG-TERM CAPITAL GAIN AND INCOME FROM OTHER SOURCES, WHIC H WAS CONSISTING OF INTEREST INCOME ONLY, COMPUTED ON CASH SYSTEM OF AC COUNTING WAS ITA NO.1041/AHD/2006& OTHERS 14 FURNISHED ON 09/08/2002. THE SYSTEM OF ACCOUNTING WAS DULY SPECIFIED IN A NOTE NO.4 OF NOTES FORMING PART OF RETURN OF INCO ME IN THE FOLLOWING LANGUAGE (THESE DETAILS FIND PLACED AT PAGE NOS.17 1, 170 & 172 RESPECTIVELY OF ASSESSEES PAPER-BOOK). THE ASSESSEE-TRUST IS FOLLOWING CASH METHOD OF AC COUNTING. (B) . THE ASSESSMENT FOR ASST.YEAR 2002-03 WAS COMPLETE D U/S.143(3) OF THE ACT ON 24/03/2005, WHEREIN THE SYSTEM OF ACCOUN TING WAS ADOPTED BY THE ASSESSING OFFICER AS MERCANTILE SYSTEM BECAUS E OF THE FOLLOWING TWO REASONS - AS HAVE BEEN GATHERED FROM THE ASSESSING OFFICERS FINDINGS WHICH WILL BE REPRODUCED HEREINAFTER. (I) BECAUSE THE ASSESSEE HAD NOT FILED ANY APPEAL B EFORE THE CIT(APPEALS) AGAINST ASSESSMENT FOR BLOCK PERIOD DA TED 30/06/2000, WHEREIN THE ASSESSING OFFICER HAD TAKEN THE METHOD OF ACCOUNTING AS MERCANTILE. (II) AS PER SECTION 145 OF THE ACT, THE ASSESSEE CA N ADOPT ONLY ONE SYSTEM OF ACCOUNTING ON THE REGULAR BASIS, THE ASSESSEE CANNOT CHANGE THE SAME. ACCORDING TO ASSESSING OF FICER, THE ASSESSEE IS BOUND TO FOLLOW THE SAME SYSTEM OF ACCO UNTING ON CONTINUOUS BASIS AND IS NOT PERMITTED TO CHANGE THE SAME. THE RELEVANT PART OF THE ASSESSMENT ORDER APPEARING AT PAGE NOS.2 & 3 FOR ASST.YEAR 2002-03 PLACED AT PAGE NO.6 5 OF THE ASSESSEES PAPER-BOOK, READ AS UNDER:- FROM THE NOTES FORMING PART OF THE ROI, IT HAS BEE N FOUND THAT THE ASSESSEE HAS MENTIONED THAT HE IS FOLLOWING THE CASH SYSTEM OF ACCOUNTING. BUT FROM THE BLOCK ASSESSMEN T ORDER DATED 30.06.00, IT HAS BEEN FOUND THAT THE A.O. HAS CONSIDERED THE METHOD OF ACCOUNTING IN THE CASE OF THE ASSESSEE AS MERCANTILE. THE ASSESSEE HAS NOT FI LED ANY APPEAL BEFORE LD. CIT(A) AGAINST THIS ORDER. THER EFORE IT IS CLEAR THAT THE ASSESSEE HAS NO OBJECTION WITH THIS FINDING OF THE A.O. AND IT HAS ACCEPTED THAT IT IS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING. THE ASSESSEE WAS GIVEN THE SHOW CAUSE NOTICE DATED 18.03.05 TO EXPLAIN AS TO WHY IN THE LIGHT OF THE SEC.145 OF I.T.ACT THE METHOD OF ACCOUNTING SHO ULD BE CONSIDERED AS MERCANTILE IN THE CASE OF THE ASSES SEE IN THIS YEAR ALSO. THE RELEVANT PORTION OF THIS SHOW CAUS E NOTICE IS PRODUCED AS UNDER: PLEASE REFER TO THE BLOCK ASSESSMENT ORDER DATED 3 0.06.04, IN THIS ORDER THE A.O. HAS DECIDED THAT THE METHOD OF ACCOUNTING IN YOUR CASE IS MERCANTILE; YOU HAVE NOT FILED ANY APPEAL ITA NO.1041/AHD/2006& OTHERS 15 BEFORE LD. CIT(A), THIS MEANS THAT YOU HAVE ACCEPTE D THE SAME. BUT IN THE ROI OF THIS YEAR, ON THE NOTES F ORMING PART OF THE ROI, YOU HAVE STATED THAT THE ASSESSEE IS FOLLO WING THE CASH SYSTEM OF ACCOUNTING. THIS ROI WAS FILED ON 0 9.08.02, AND THEREFORE IT IS CLEAR THAT THE A.O. HAS PASSED THE BLOCK ORDER AFTER THIS DATE. EXPLAIN AS TO WHY AS PER SEC.145 OF I.T.ACT THE SYS TEM OF ACCOUNTING SHOULD NOT BE CONSIDERED AS MERCANTILE S INCE IT HAS TO BE TAKEN ON CONTINUOUS BASIS AND IT CANNOT BE CH ANGED. IN HIS SUBMISSION THE REPRESENTATIVE OF THE ASSESS EE TRIED TO JUSTIFY THAT THE SAME SHOULD BE CONSIDERED AS CASH BUT THE CONTENTION AND THE SUBMISSION OF THE ASSESS EE IS NOT TENABLE SINCE AS PER SEC.145 OF I.T. ACT, THE ASSES SEE CAN ADOPT ONLY ONE SYSTEM OF ACCOUNTING ON THE REGULAR BASIS. THIS SECTION 145 OF THE ACT IS PRODUCED AS UNDER: 145. METHOD OF ACCOUNTING (1) INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION OR INCOME FROM OT HER SOURCES SHALL, SUBJECT TO THE PROVISIONS OF SUB-SE CTION (2), BE COMPUTED IN ACCORDANCE WITH EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. (2) THE CENTRAL GOVERNMENT MAY NOTIFY IN THE OFFICI AL GAZETTE FROM TIME TO TIME ACCOUNTING STANDARDS TO B E FOLLOWED BY ANY CLASS OF ASSESSEES OR IN RESPECT OF ANY CLASS OF INCOME. (3)WHERE THE ASSESSING OFFICER IS NOT SATISFIED ABO UT THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE, OR WHERE THE METHOD OF ACCOUNTING PROVIDE D IN SUB-SECTION (1) OR ACCOUNTING STANDARDS AS NOTIF IED UNDER SUB-SECTION (2), HAVE NOT BEEN REGULARLY FOLL OWED BY THE ASSESSEE, THE ASSESSING OFFICER MAY MAKE AN ASSESSMENT IN THE MANNER PROVIDED IN SECTION 144. SINCE IN THE BLOCK ASSESSMENT ORDER THE A.O. HAS DE CIDED THE METHOD OF ACCOUNTING IN THE CASE OF THE ASSESSEE AS MERCANTILE AND THE ASSESSEE HAS NOT CHALLENGED TH E SAME ON APPEAL, THE LD. CIT(A) HAS ALSO PASSED THE ORDER DA TED 16.12.04, IT IS CONCLUDED THAT AS PER THE PROVISION S OF THE ACT, THE ASSESSEE CANNOT CHANGE THE SAME. THE ASSESSEE IS ITA NO.1041/AHD/2006& OTHERS 16 BOUND TO FOLLOW THE SAME METHOD OF ACCOUNTING ON CO NTINUOUS BASIS AND HE IS NOT PERMITTED TO CHANGE THE SAME. HENCE THE METHOD OF ACCOUNTING IS CONSIDERED IN THE CASE OF T HE ASSESSEE AS MERCANTILE. (III) THE ASSESSEE HAD APPEALED THE ASSESSMENT ORD ER FOR ASST.YEAR 2002-03 AND THE ISSUE RELATING TO ASSESSEES CLAIM OF SYSTEM OF ACCOUNTING WAS REJECTED BY THE CIT(APPEALS) BY OBSE RVING AS UNDER:- I HAVE CONSIDERED THE ABOVE SUBMISSIONS OF THE APP ELLANT AND DO NOT FIND ANY FORCE IN THEM FOR THE FOLLOWING REASON S (I) IT IS, NO DOUBT, TRUE THAT THE METHOD OF ACCOUN TING CANNOT BE THRUST ON THE ASSESSEE BY THE AO. BUT IT IS ALSO I NCORRECT TO STATE THAT THE APPELLANT CAN CHANGE THE METHOD OF A CCOUNTING ARBITRARILY AND WITHOUT PROPER AND ADEQUATE JUSTIFI CATION. IN THE PRESENT CASE, NO REASONS OR ADEQUATE JUSTIFICAT ION FOR ADOPTING THE CASH METHOD OF ACCOUNTING IS GIVEN BY THE APPELLANT. (II) THE AO'S REASONING THAT THE MERCANTILE METHOD OF ACCOUNTING HAS BEEN ADOPTED IN THE BLOCK PERIOD ASSESSMENT PROCEEDINGS AND THE APPELLANT HAS NOT FILED AN APPE AL AGAINST SUCH AN ADOPTION BY THE AO, CANNOT BE FAULTED ON LE GAL OR LOGICAL GROUNDS. THE METHOD OF ACCOUNTING IN BOTH THE BLOCK PERIOD AND REGULAR ASSESSMENT PROCEEDINGS HAS TO BE THE SAME. IF THE APPELLANT HAS MISSED THE BUS BY NOT F ILING AN APPEAL, THE AO S ACTION CANNOT BE FAULTED. (III) IF SUCH AN INTERPRETATION OF THE APPELLANT IS ACCEPTED, IT WOULD MAKE THE PROVISIONS OF SECTION 145 OF THE I.T.ACT U NWORKABLE. IN THIS REGARD THE NIRMA GROUP HAS TRIED TO INTERPR ET THE SECTION 37(1) IN SUCH A WAY THAT THE CLAIM OF INTEREST ON T HESE DDBS IS AVAILABLE TO NIRMA LTD. ON ACCRUAL BASIS BUT IN CAS E OF THE HOLDERS OF THE DDBS THE SAME GROUP HAS INTERPRETED THE LETTER OF BOARD DATED 12-3-1996, CIRCULAR OF THE BOARD DAT ED 15-2- 2002 AND PRESS RELEASE DATED 20-3-2002 IN DIFF ERENT MANNER. IN THIS REGARD, THE RELIANCE IS PLACED IN CASE OF CWS (INDIA) LTD. VS. CIT 208 ITR 649 IN WHICH IT HAS B EEN OBSERVED THAT WHEN A LITERAL INTERPRETATION LEADS T O AN ABSURD OR UNINTENDED RESULT, EVEN THE LANGUAGE OF THE STAT UE CAN BE MODIFIED TO ACCORD WITH THE INTENT OF LEGISLATION A ND TO AVOID ABSURDITY. IN THE CASE OF INDIAN HOTELS LTD. VS. I TO 245 ITR (SC) A SIMILAR VIEW HAS BEEN AFFIRMED. IN THE CAS E OF GOVINDAN (K) AND SONS VS. CIT 247 ITR 192 AND OXFOR D ITA NO.1041/AHD/2006& OTHERS 17 UNIVERSITY PRESS VS. CIT 247 ITR 658, THE HON'BLE S C HAS HELD THAT INTERPRETATION MUST AVOID ABSURDLY AND IF LITE RAL CONSTRUCTION LEADS TO UNREASONABLE OR ABSURD CONSEQ UENCES, THE SAME SHOULD NOT BE ADOPTED. HENCE, THE AO'S ACTION IS UPHELD AND GROUND OF APPE AL NO.2 IS DISMISSED. (IV) ASSESSEES APPEAL AGAINST ORDER OF THE CIT(AP PEALS) IS PENDING BEFORE THE TRIBUNAL. 20 (A) SO FAR AS FACTS RELATING TO ASST.YEAR 2003-04 (UN DER APPEAL) ARE CONCERNED, IT IS AGAIN AN ADMITTED FACT THAT THE AS SESSEE HAD FURNISHED THE RETURN OF INCOME FOR ASST.YEAR 2003-04 DECLARING IN COME FROM CAPITAL GAIN AND OTHER SOURCES COMPUTED ON CASH SYSTEM AND TH E SYSTEM OF ACCOUNTING WAS SPECIFICALLY DISCLOSED AS PER NOTE N O.3 OF THE NOTES FORMING PART OF THE RETURN OF INCOME AND APPENDED J UST BELOW THE COMPUTATION OF INCOME (PAGE NO.54 OF ASSESSEES PAP ER-BOOK). (B) THIS RETURN WAS REVISED BY THE ASSESSEE AND T HE SYSTEM OF ACCOUNTING WAS AGAIN DISCLOSED AS CASH AS PER PARA NO.3 OF NOT ES FORMING THE PART OF THE REVISED RETURN AND APPENDED JUST BELOW THE COMP UTATION (COPY PLACED AT PAGE NO.56 OF THE ASSESSEES PAPER-BOOK). (C) THE ASSESSMENT FOR ASST.YEAR 2003-04 WAS COMPL ETED ON 02/02/2006 AFTER ADOPTING THE METHOD OF ACCOUNTING AS MERCANTI LE ON THE SAME REASONING AS WERE FOR ASST.YEAR 2002-03 AND READS A S UNDER:- 3. METHOD OF ACCOUNTING : FROM THE NOTES FORMING PART OF THE ROI, IT HAS BEEN FOUND THAT THE ASSESSEE HAS MENTIONED THAT IT IS FOLLOWING THE CA SH SYSTEM OF ACCOUNTING. BUT FROM THE BLOCK ASSESSMENT ORDER D ATED 30.06.00, IT HAS BEEN FOUND THAT THE A.O. HAS CONSIDERED THE MET HOD OF ACCOUNTING IN THE CASE OF THE ASSESSEE AS MERCANTI LE. THE ASSESSEE HAS NOT FILED ANY APPEAL BEFORE LD. CIT(A) AGAINST THIS ORDER. IN THE A.Y. 2002-03 THE METHOD OF ACCOUNTI NG WAS CONSIDERED TO BE MERCANTILE DUE TO THE SAME. THE APPEAL OF THE ASSESSEE IS STILL LYING BEFORE LD. CIT(A), IN THIS ISSUE IN A.Y. 2002-03, THEREFORE IN THIS YEAR ALSO ON CONSISTENT BASIS, ME THOD OF ACCOUNTING IS CONSIDERED AS MERCANTILE. 21. IF WE CONSIDER THE ABOVE CASE IN THE LIGHT OF SETTLED PRINCIPLES OF LAW, FIRST OF ALL, WE ARE OF THE OPINION THAT THE ASSESS ING OFFICERS DECISION TO ADOPT THE METHOD OF ACCOUNTING IN REGULAR ASSESSMEN T FOR ASST.YEAR 2003- ITA NO.1041/AHD/2006& OTHERS 18 04 AS MERCANTILE SIMPLY BECAUSE THE ASSESSING OFFIC ER HAD MENTIONED THE SYSTEM OF ACCOUNTING IN BLOCK ASSESSMENT, WHICH WAS FOR THE PERIOD (BLOCK PERIOD 01/04/1995 TO 27/09/2001), AS MERCANTILE AND FOR NON-FILING OF APPEAL BY THE ASSESSEE AGAINST THAT ACTION, NOT O NLY IN LAW, BUT ON FACTS ALSO, THE REVENUES RELIANCE ON THE METHOD OF ACCOU NTING MENTIONED IN THE ASSESSMENT ORDER FOR BLOCK PERIOD CANNOT BE HELD T O BE LEGAL OR JUSTIFIED, BECAUSE : (I) AS SUBMITTED BY THE ASSESSEE, THE ASSESSEE DID NOT FILE APPEAL AGAINST THE ASSESSMENT ORDER FOR BLOCK PERIO D BECAUSE THE UNDISCLOSED INCOME COMPUTED BY THE ASSESSING OF FICER IN ASSESSMENT FOR BLOCK PERIOD WAS COMPUTED AT NIL, TH E ASSESSEE HAS TO BE GIVEN THE BENEFIT OF BONA FIDE B ELIEF FOR NOT HAVING ANY GRIEVANCE AGAINST SUCH AN ASSESSMENT AN D, CONSEQUENTLY, FOR ENTERTAINING A BELIEF THAT THERE WAS NO NECESSITY TO FILE AN APPEAL ALSO. (II) STILL, THE ASSESSEE HAVING OBJECTED TO THE SYS TEM OF ACCOUNTING TAKEN IN THE ASSESSMENT ORDER FOR BLOCK PERIOD BY W AY OF PETITION U/S.154 OF THE ACT, THE REVENUES PLEA THA T THE ASSESSEE DID NOT APPEAL AGAINST ASSESSING OFFICERS ACTION IS UNFOUNDED AND, THEREFORE, GETS REJECTED. (III) FURTHER, BLOCK PERIOD BEING FROM 01/04/1995 TO 27/09/2001 AND THE ASSESSEE HAVING CHANGED THE SYSTEM OF ACCOUNTIN G FORM MERCANTILE SYSTEM OF CASH SYSTEM W.E.F. 01/04/2 000 I.E. W.E.F ASST.YEAR 2001-02, THE ASSESSING OFFICER SHOU LD NOT HAVE TAKEN THE SYSTEM OF ACCOUNTING AS MERCANTILE F OR THE PERIOD 01/04/2000 TO THE DATE OF SEARCH, I.E. 27.09 .2001 AND, THEREFORE, REVENUES ACTION FOR MENTIONING THE SYST EM OF ACCOUNTING IN THE ASSESSMENT FOR BLOCK PERIOD (FOR THE PERIOD 1.4.2000 TO 31.3.2001 AND 1.4.2001 TO 27.9.2001) WA S NOT ONLY ARBITRARY, BUT ILLEGAL ALSO AND, THEREFORE, SU CH AN ORDER CANNOT BE RELIED UPON. (IV) FURTHER, IN BLOCK ASSESSMENT ALSO, THE ASSESSE E HAD NEITHER COMPUTED THE UNDISCLOSED INCOME ON MERCANTILE SYSTE M NOR HAD CLAIMED THE SYSTEM OF ACCOUNTING AS MERCANTILE AND, THEREFORE, THE ASSESSING OFFICER HAD NO POWER TO AD OPT A PARTICULAR SYSTEM OF ACCOUNTING AS PER HIS WHIMS AN D FANCIES. ACCORDING TO THE PROVISIONS OF SECTION 158BB, THE A SSESSING OFFICER WAS BOUND FIRST TO COMPUTE THE TOTAL INCOM E FOR EACH ASSESSMENT YEAR FALLING WITHIN THE BLOCK PERIOD AS WELL AS FOR THE PERIOD 1.4.2001 TO 27.9.2001 AND THEN TO ARRIVE AT THE UNDISCLOSED INCOME ADOPTING THE PROCEDURE PRESCRIBE D ITA NO.1041/AHD/2006& OTHERS 19 U/S.158BA, 158BB AND 158BC OF THE ACT. HAD THE AS SESSING OFFICER PROCEEDED TO MAKE THE ASSESSMENT FOR BLOCK PERIOD AS PER THE PROVISIONS OF THE ACT, HE WOULD HAVE DEFIN ITELY NOT TAKEN THE SYSTEM OF ACCOUNTING FOR THE PERIOD 01/04 /2000 TO DATE OF SEARCH, I.E. UPTO 27.9.2001; AS MERCANTILE , BECAUSE, ASSESSEE HAD, BY THAT TIME, FURNISHED ITS RETURN OF INCOME FOR ASST.YEARS 2001-02, 2002-03 AND 2003-04 DISCLOSING THE SYSTEM OF ACCOUNTING AS CASH. (V) IN ADDITION TO ABOVE, THE UNDISCLOSED INCOME FO R THE BLOCK PERIOD HAVING BEEN ASSESSED AT NIL, IT IS QUITE CLE AR THAT THE INCOME RETUNED OR ASSESSED AS PER RETURNS FILED BY THE ASSESSEE OR AS PER REGULAR ASSESSMENTS, AS THE CASE MAY BE, STOOD ACCEPTED AS IT IS AND SINCE THE INCOME FOR RE GULAR ASSESSMENTS FOR THE ASSESSMENT YEAR 2001-02 WAS DEC LARED ON CASH SYSTEM, THE SYSTEM ADOPTED BY THE ASSESSEE STOOD ACCEPTED (VI) THE BLOCK ASSESSMENT BEING FOR THE PERIOD ENDI NG ON THE DAY OF SEARCH, I.E. 27.09.2001, CANNOT BIND THE ASSES SEE FOR ALL TIMES TO COME BECAUSE NOT ONLY THE ASSESSEE HAD RIG HT TO CHANGE THE SYSTEM OF ACCOUNTING BUT THE PROVISIONS FOR ASSESSMENT FOR BLOCK PERIOD AND FOR REGULAR ASSESSM ENT ARE QUITE DIFFERENT; MEANING THEREBY THAT IF AFTER THE DATE OF SEARCH, ONE PREFERS TO CHANGE THE SYSTEM OF ACCOUNTING, REV ENUE HAS NO JURISDICTION TO IMPOSE THE SYSTEM OF ACCOUNTING ADOPTED TILL THE DATE OF SEARCH, UPON THE ASSESSEE FOR SUBSEQUEN T YEARS. 22. SO FAR AS ASSESSEES RIGHT TO CHANGE THE SYSTE M OF ACCOUNTING IS CONCERNED, THE ASSESSEES OBLIGATION, AS HAS BEEN DISCUSSED IN THE EARLIER PART OF THIS ORDER, WAS ONLY TO SHOW THAT THE CHANG E WAS BONA FIDE AND THAT COULD BE ESTABLISHED BY SHOWING THAT CHANGED SYSTEM OF ACCOUNTING WAS BEING FOLLOWED REGULARLY IN THE SUBSEQUENT YEARS. IN THE CASE OF SUNDARAM LTD VS. CIT (36 ITR 162, 167) WHEREIN THE HON'BLE HIGH COURT OF MADRAS HAS HELD THAT THE FACT THAT THE ASSESSEE WAS FOLLOW ING THE CONSTANT METHOD OF ACCOUNTING CAN BE ESTABLISHED BY SHOWING THAT IT WAS FOLLOWING THE SAME SYSTEM IN SUBSEQUENT YEARS. SO FAR AS PRESENT CAS E IS CONCERNED, THE ASSESSEE SUCCEEDS IN ESTABLISHING, FROM THE DOCUME NTS ON RECORD, I.E. ITS RETURN OF INCOME AND ACCOMPANYING ACCOUNTS; THAT I T WAS FOLLOWING THE CHANGED SYSTEM OF ACCOUNTING (CASH SYSTEM) W.E.F. 0 1/04/2000 CONSISTENTLY, I.E. IN ALL SUBSEQUENT YEARS UPTO ASS T.YEAR 2004-05. 23. THE DEPARTMENT, IN OUR OPINION, COULD REJECT T HE ASSESSEES CHANGE IN SYSTEM OF ACCOUNTING ONLY AFTER IT WAS FOUND THAT T HE CHANGE WAS NOT BONA FIDE, BUT SO FAR AS PRESENT CASE IS CONCERNED, IT IS NOT THE DEPARTMENTS CASE AS CAN BE SEEN FROM THE ORDER FOR BLOCK PERI OD AS WELL THE REASONING FOR ADOPTING MERCANTILE SYSTEM FOR ASST.YEAR 2002-0 3 AND ASST.YEAR 2003- ITA NO.1041/AHD/2006& OTHERS 20 04. THE DEPARTMENT HAS NO WHERE ALLEGED THAT THE A SSESSEES CHOICE TO CHANGE THE SYSTEM OF ACCOUNTING FORM MERCANTILE SYS TEM TO CASH SYSTEM W.E.F. 01/04/2000 WAS NOT BONA FIDE ONE. 24. THE LD.DR DURING THE COURSE OF HIS ARGUMENTS H AD PLEADED THAT THE ASSESSEE SHOULD HAVE ESTABLISHED THAT THE CHANGE WA S BONA FIDE. THIS ARGUMENT OF THE LD.DR, IN OUR OPINION, IS DEVOID OF ANY MERIT BECAUSE IT HAD NEVER BEEN THE REVENUES CASE. THE REVENUE HAD NE VER RAISED THE ISSUE RELATING TO BONA FIDE OF THE CHANGE. SO FAR AS BL OCK ASSESSMENT AND REGULAR ASSESSMENTS FOR ASST.YEARS 2001-02 AND 2002 -03 ARE CONCERNED, IT IS DEPARTMENT WHICH HAS ACTED ARBITRARILY AND ILLEG ALLY FOR ADOPTING A SYSTEM OF ACCOUNTING WHICH WAS NEVER ADOPTED BY THE ASSESSEE AND WAS NOT BORNE OUT EVEN FORM THE FACTS ON RECORD. 24.1. IF WE CONSIDER THE SECTION 145 OF THE ACT, I T WILL BE REVEALED THAT ALL THAT SECTION 145(1) LAYS DOWN IS THAT IF AN ASSESSE E REGULARLY EMPLOYS ANY OF THE METHOD OF ACCOUNTING MENTIONED THEREIN, I.E. CASH SYSTEM OR MERCANTILE SYSTEM; HIS INCOME UNDER TWO SPECIFIED H EADS, I.E. BUSINESS OR PROFESSION OR OTHER SOURCES SHOULD BE COMPUTED I N ACCORDANCE LAW THEREWITH. THE SECTION, IN ITS TERMS, DOES NOT RE QUIRE ANY ENQUIRY INTO THE BONA FIDES OF THE ASSESSEE IN FOLLOWING REGULAR MET HOD AND IT IS SO BECAUSE FOLLOWING ANY ONE OF THE METHOD SPECIFIED THEREIN R EGULARLY WOULD NECESSARILY RESULT IN A PROPER COMPUTATION OF ASSES SEES REAL INCOME. EVEN IF ONE REGULAR METHOD OF ACCOUNTING IS SUBSTIT UTED BY ANOTHER REGULAR METHOD, THE SAME RESULT WILL FOLLOW. ONLY IN A CA SE WHERE THE ASSESSEE CHANGES HIS REGULAR METHOD OF ACCOUNTING BY ANOTHER METHOD AND DOES NOT FOLLOW THE CHANGED METHOD REGULARLY THEREAFTER, IT MIGHT BE POSSIBLE FOR THE ASSESSEE BY INTRODUCING SUCCESSIVE CHANGES IN HIS M ETHOD OF ACCOUNTING TO EXCLUDE ITEMS OF ITS INCOME FORM BEING INCLUDED IN THE COMPUTATION OF HIS TOTAL INCOME, OTHERWISE NOT. THEREFORE, WHEN AN A SSESSEE CHANGES HIS REGULAR METHOD OF ACCOUNTING BY ANOTHER REGULAR MET HOD, THE QUESTION OF HIS BONA FIDES HAS A LITTLE RELEVANCE. EVEN OTHERW ISE, IT IS ONLY IN THE YEAR IN WHICH A CHANGE METHOD OF ACCOUNTING IS INTRODUCE D, FOR THE FIRST TIME, THAT THE CHANGE IS TO BE EXAMINED BY THE REVENUE AU THORITIES TO FIND OUT WHETHER THE CHANGE INTRODUCED IS MEANT TO BE REGULA RLY FOLLOWED OR NOT. IT IS IN THIS CONTEXT ONLY THAT THE EXPRESSIONS, GOOD FAITH AND BONA FIDE OCCUR IN THE OBSERVATION OF THE HON'BLE BOMBAY HIGH COURT IN THE JUDGEMENT IN THE CASE OF SWAROOPCHAND VS. CIT (4 ITR 420) AND OF HON'BLE MADRAS HIGH COURT IN THE CASE OF INDO COMMERCIAL BANK LTD. VS. CIT (44 ITR 22)[MAD.] 24.2. IN THIS VIEW OF THE MATTER, WHERE IT IS FOU ND THAT AN ASSESSEE HAS CHANGED HIS REGULAR METHOD OF ACCOUNTING BY ANOTHER RECOGNIZED METHOD AND HAS FOLLOWED THE REGULAR METHOD OF THEREAFTER, IT IS NOT OPEN TO THE REVENUE AUTHORITIES TO GO INTO THE QUESTION OF BONA FIDE OF THE INTRODUCTION AND CONTINUOUSLY FOLLOWING THE CHANGE AND THIS PROP OSITION IS SUPPORTED BY ITA NO.1041/AHD/2006& OTHERS 21 THE DECISION OF CALCUTTA HIGH COURT IN THE CASE OF SANOVIDE FOOD PRODUCTS CO.LTD. VS. CIT (141 ITR 861, 874). IN OTHER WORDS , THE REVENUE CANNOT CONTEND THAT A CHANGE HAS TO BE SUPPORTED BY COGENT REASONS SHOWING THE BONA FIDES OF THE ASSESSEE IN SO CHANGING THE METHO D AS HAS BEEN HELD BY THE HON'BLE HIGH COURT CALCUTTA IN THE CASE OF SANO WIDE FOOD PRODUCTS CO.LTD.(SUPRA). 24.3. WITHOUT PREJUDICE TO THE ABOVE, IF WE ANALYS E THE SECTION 145 OF THE ACT HAS A LITTLE FURTHER, IT WILL BE REVEALED THAT WEF 01/04/1997, THE ASSESSING OFFICER HAS BEEN DIVESTED OF THE POWERS T O CHANGE THE SYSTEM OF ACCOUNTING. HE CAN DO AND THAT TOO IN THE CASE OF VIOLATION OF REQUIREMENTS MENTIONED IN SUB-SECTION(1) & (2) OF SECTION 145 OF THE ACT IS THAT HE CAN MAKE THE ASSESSMENT IN THE MANNER PROVIDED IN SECTI ON 144 OF THE ACT. SO FAR AS PRESENT CASE IS CONCERNED, THE REVENUE HAS NO WHERE ALLEGED OR TAKEN A STAND THAT THE ASSESSEE HAS VIOL ATED ANY OF THE PROVISIONS OF SUB-SECTION (1) & (2) OF SECTION 145 OF THE ACT AND, THEREFORE, THE REVENUES STAND TO TAKE THE SYSTEM OF ACCOUNTIN G AS MERCANTILE CANNOT BE UPHELD. THE REVENUES CASE FOR TAKING THE SYSTEM OF ACCOUN TING OF MERCANTILE IS ON THE BASIS OF SYSTEM OF ACCOUNTING MENTIONED IN THE ASSESSMENT ORDER FOR BLOCK PERIOD COMPLETED UNDER C HAPTER IX-B OF THE ACT ONLY AND THAT TOO TO APPLY CIRCULAR NO.2 OF 2002 WH ICH WAS NOT AVAILABLE ON 01/10/2000 WHEN THE ASSESSEE HAD PREFERRED TO CHANG E ITS SYSTEM OF ACCOUNTING FROM MERCANTILE TO CASH AND, THEREFORE, THE REVENUES RELIANCE ON THE DECISION IN BLOCK PERIOD BEING NOT ONLY ILLE GAL AND UNJUSTIFIED BUT UNWARRANTED ALSO CANNOT BE ALLOWED TO PENALIZE THE ASSESSEE FOR NOT FOLLOW OF IT. 24.4. REVENUE HAS NOT ALLEGED NON-COMPLIANCE OF ANY OF THE REQUIREMENT OF SUB-SECTION (1) OR SUB-SECTION (2) OF SECTION 14 5 OF THE ACT AND, THEREFORE, IN ABSENCE OF CLEAR FINDINGS ON THIS ACC OUNT, I.E. IT BEING NOT THE REVENUES CASE; THE ACTION OF THE ASSESSING OFFICER ADOPTING THE METHOD OF ACCOUNTING AS MERCANTILE FOR ASST.YEAR 2003-04, IN OUR OPINION, IS ILLEGAL AND BAD IN LAW FOR WANT OF JURISDICTION AND, THEREF ORE, CANNOT BE SUSTAINED. 24.5. WITHOUT PREJUDICE TO THE ABOVE, IN THE GIVEN CIRCUMSTANCES, WHAT THE ASSESSING OFFICER COULD AT THE MOST, DO WAS TO MAK E THE ASSESSMENT IN THE MANNER AS PROVIDED U/S.144 OF THE ACT AND NOTHI NG ELSE, BUT COULD NOT, IN ANY CASE CHANGE THE SYSTEM OF ACCOUNTING ARE IND EPENDENT OF THESE PROCEEDINGS. THEREFORE, THAT FACT CANNOT SNATCH A WAY THE ASSESSEES RIGHT TO CLAIM DURING REGULAR ASSESSMENT PROCEEDING S THAT HE WAS FALLOWING CASH SYSTEM OF ACCOUNTING. 24.6. SO FAR AS ASSESSEE IS CONCERNED, IT HAVING SOLD IT RUNNING BUSINESS ON 28.03.2000 AND WAS LEFT WITH THE SOURCE OF IN COME FROM DIVIDEND, ITA NO.1041/AHD/2006& OTHERS 22 CAPITAL GAIN AND INTEREST ONLY AND, THEREFORE, IT HAD A JUSTIFIABLE REASON TO CHANGE THE SYSTEM OF ACCOUNTING FROM MERCANTILE TO CASH. HERE, IT IS IMPORTANT TO HIGHLIGHT THAT BY THE TIME, THE ASSESS EE OPTED TO CHANGE THE SYSTEM OF ACCOUNTING, I.E. FROM 01/04/2000, EVEN CI RCULAR NO.2 OF 2002 WAS NOT ON STATUTE AND, THEREFORE, REVENUE CANNOT ALLE GED THAT THE ASSESSEE HAD CHANGED THE SYSTEM TO AVOID APPLICABILITY OF CI RCULAR NO.2 OF 2002. CHANGE OVER IN THE SYSTEM OF ACCOUNTING BY THE ASSE SSEE WAS, THEREFORE, IN OUR OPINION, LAWFUL AND BONA FIDE. 24.7. IN VIEW OF ABOVE FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE OF THE OPINION THAT OBJECTION OF THE LD.DR THAT IT WAS FOR THE ASSESSEE TO ESTABLISH THE CHANGE IN METHOD OF ACCOUNTING WHICH HE WAS ADO PTING WEF 01/04/2000, WAS A BONA FIDE HAS NO FORCE AND, THERE FORE, IS REJECTED. 25. FURTHER, EVEN IF FOR THE SAKE OF ARGUMENTS, TH E REVENUES STAND THAT THE ISSUE RELATING TO SYSTEM OF ACCOUNTING HAD BECO ME FINAL BECAUSE OF THE BLOCK ASSESSMENT THEN ALSO, THE BLOCK ASSESSMENT B EING UPTO I.E. 27/09/2001, IT CAN AT THE MOST, BE SAID THAT MERC ANTILE SYSTEM OF ACCOUNTING CONTINUED TILL 21/09/2001 AND NOT THEREA FTER. THIS FACT CANNOT DEBAR THE ASSESSEE TO CHANGE ITS SYSTEM OF ACCOUNTI NG FOR THE FUTURE YEARS; MEANING THEREBY THAT STILL THE ASSESSEE COULD ADOP T A CHANGED SYSTEM OF ACCOUNTING W.E.F. 22/09/2001 OR FORM ANY SUBSEQUEN T DATE. 26. TO CONCLUDE, WE, IN VIEW OF THE FACTS AND CIRCU MSTANCES OF THE CASE, PROVISIONS RELATING TO SYSTEM OF ACCOUNTING, CASE L AWS AND ABOVE DISCUSSION, ARE OF THE OPINION THAT (I) RETURN OF INCOME FOR ASST.YEAR 2001-02 SHOWING INCOME FROM OTHER SOURCES ON CASH SYSTEM WAS FILED ON 31/07/2001 WHICH STOOD ACCEPTED, THOUGH U/S.143(1)( A) OF THE ACT, AND THIS CONCLUSION IS ON THE BASIS THA T REVENUE HAD NOT PREFERRED TO MAKE ASSESSMENT U/S.143(3) OF THE ACT. (II) RETURN OF INCOME FOR ASST.YEAR 2002-2003 SHOWI NG INCOME FORM OTHER SOURCES AND CAPITAL GAIN ON CASH SYSTEM WAS FILED ON 09/08/2002 WHICH WAS AGAIN BEFO RE THE DATE OF SEARCH AND, THEREFORE, SYSTEM ADOPTED B Y ASSESSEE WAS NOT EFFECT BY THE ASSESSMENT FOR BLOCK PERIOD. (III) SIMILARLY, THE RETURN OF INCOME FORAY 2003-0 4 SHOWING INCOME FROM CAPITAL GAIN AND OTHER SOURCES ON THE BASIS OF MERCANTILE SYSTEM WAS FURNISHING ON 30/09/2003 BEFORE COMPLETION OF ASSESSMENT U/S.158B C ITA NO.1041/AHD/2006& OTHERS 23 OF THE ACT AND, THEREFORE, SYSTEM ADOPTED BY THE ASSESSEE FOR THIS YEAR WAS ALSO NOT EFFECT BY THE ASSESSMENT FOR BLOCK PERIOD. (IV) EVEN OTHERWISE, IN OUR OPINION, THE CHANGE AD OPTED BY THE ASSESSEE IN SYSTEM OF ACCOUNTING WAS BONA FIDE BECAUSE THE ASSESSEE HAD CEASED TO HAVE INCOME FROM BUSINESS AND HAS BEEN FOLLOWING THE CHANGED SYSTEM CONSISTENTLY IN SUBSEQUENT YEARS. 27. THEREFORE, THE ASSESSEE ON ITS PART, IN OUR OPI NION, SUCCEEDED IN ESTABLISHING THE CHANGE OF BONA FIDE BECAUSE IT HAS CEASED TO HAVE ANY BUSINESS INCOME AND HAD ADOPTED THE CHANGE WELL BEF ORE THE SEARCH AS WELL AS COMPLETION OF ASSESSMENT FOR BLOCK PERIOD AND ALSO BEFORE COMING OF CIRCULAR NO.2 OF 2002 ON THE STATUTE. SINCE TH E ASSESSEE HAS FOLLOWED THE SAME SYSTEM IN ALL THE SUBSEQUENT YEARS, WE, SE E NO REASON AS TO WHY ASSESSEES CHOICE/PREFERENCE TO ADOPT THE CHANGED S YSTEM OF ACCOUNTING BE NOT ACCEPTED. IN VIEW OF THE TOTALITY OF THE F ACTS AND CIRCUMSTANCES OF THE CASE AS WELL AS SETTLED PROVISIONS OF LAW DISC USSED HEREINBEFORE, WE ARE OF THE OPINION THAT THE ASSESSEE HAD RIGHT TO A DOPT THE CHANGED THE SYSTEM OF ACCOUNTING AND BY CHANGING THE SYSTEM OF ACCOUNTING FROM MERCANTILE TO CASH WAS A BONA FIDE CHANGE. IN OTHER WORDS, WE ARE OF THE OPINION THAT SO FAR AS ASSESSEES CASE IS CONCERNED, IT HAS TO BE HELD TO HAVE FOLLOWED CA SH SYSTEM OF ACCOUNTING WITH EFFECT FORM 01/04/2001. 28. SINCE WE HAVE ACCEPTED THE ASSESSEES CHANGE IN SYSTEM OF ACCOUNTING AS CASH SYSTEM FROM MERCANTILE SYSTEM , THERE IS NO QUESTION OF TAXING THE INTEREST OR ANY OTHER INCOME FROM SO -CALLED DEEP DISCOUNT BONDS INCLUDING ON ACCRUAL BASIS AND, THEREFORE, DI RECT THE ASSESSING OFFICER TO DELETE ALL SUCH ADDITIONS. TO BE SPECIF IC, WE DIRECT THE ASSESSING OFFICER TO DELETE THE ADDITION OF RS.77,95,691/-. 29. SO FAR AS REVENUES RELIANCE ON THE BOARD CIRCU LAR NO.409 DATED FEBRUARY 12, 1985 WHICH RELATES TO TAXABILITY OF IN TEREST ON CUMULATIVE DEPOSIT SCHEMES OF PRIVATE SECTOR UNDERTAKINGS IS C ONCERNED, WE, AFTER HAVING GONE THROUGH THE SAME, ARE OF THE OPINION TH AT THIS CIRCULAR IS NO HELP TO THE ASSESSEE BECAUSE THE ISSUE INVOLVED IN THIS CIRCULAR IS QUITE DIFFERENT THAN THE ISSUE INVOLVED IN THE APPEAL BEF ORE US. 9. SINCE THE FACTS AND CIRCUMSTANCES OF THE PRESEN T CASE AS WELL AS THE ISSUES WHICH RELATE TO THE ASSESSEES CLAIM OF HAVING FOLLOWED CASH SYSTEM OF ACCOUNTING AND WITH RESPECT TO VALIDITY A ND DATE OF APPLICABILITY OF CIRCULAR NO.2 OF 2002, EXCEPT THE FACTS STATED HEREINAFTER, ITA NO.1041/AHD/2006& OTHERS 24 ARE, ADMITTEDLY SIMILAR TO THE FACTS AND CIRCUMSTAN CES AS WELL AS THE ISSUES AS WERE IN THE CASE OF KISAN DISCRETIONARY FAMILY T RUST, WE, AFTER FOLLOWING OUR DECISION IN THE CASE OF KISAN DISCRETIONARY FAM ILY TRUST, I.E. ITA NO.1850/AHD/2007 FOR ASST.YEAR 2003-04 RELEVANT PAR T OF WHICH HAS BEEN REPRODUCED HEREINABOVE AND FOR THE FOLLOWING REASON S STATED HEREUNDER, UPHOLD THE ASSESSEES PLEA WITH RESPECT TO SYSTEM O F ACCOUNTING FOLLOWED AND TAXABILITY OF INTEREST ON DDBS/OFCPN ON CASH BA SIS AND OUR DECISION IN THE CASE KISAN DISCRETIONARY FAMILY TRUST, APPLY TH E MUTATIS MUTANDIS TO THIS CASE ALSO. 9.1. SINCE THE ASSESSEE HAS BEEN FOLLOWING THE SAM E SYSTEM CONSISTENTLY AND HAD NOT CLAIMED ANY CHANGE IN SYSTEM OF ACCOUNT ING THEREAFTER, EITHER IN REGULAR RETURNS OF INCOME OR IN THE RETUR N OF UNDISCLOSED INCOME FURNISHED UNDER CHAPTER XIV-B OF THE ACT, THERE WAS NO REASON FOR THE AUTHORITIES TO ADOPT THE SYSTEM OF ACCOUNTING AS M ERCANTILE SYSTEM WITHOUT MAKING OUT A CASE THAT EITHER THE ASSESSEE WAS, IN FACT, NOT FOLLOWING THE CASH SYSTEM OF ACCOUNTING OR HAVING F OLLOWED IN ASST.YEAR 2000-01, HAD NOT FOLLOWING THE SAME CONSISTENTLY IN SUBSEQUENT YEARS. FROM THE FACTS ON RECORDS, WE FIND THAT THE REVENUE HAS NOT BASED ITS DECISION ON THESE GROUNDS. THE REVENUES CASE, AS HAS BEEN OBSERVED FROM PARAGRAPH NO.2.1 OF ASSESSMENT ORDER FOR ASST. YEAR 2002-03 AS WELL AS THE ASSESSMENT ORDER FOR ASST.YEAR 2003-04, FOR AD OPTING THE SYSTEM OF ACCOUNTING AS MERCANTILE IN ASST.YEAR 2002-03 AN D ASST.YEAR 2003-04 IS THE MENTIONING OF SYSTEM OF ACCOUNTING AS MERCANTI LE IN ASSESSMENT FOR BLOCK PERIOD WHICH ADMITTEDLY, WAS FOR THE PERIOD 01-04-1995 TO 27-09- 2001. SINCE MENTIONING OF ACCOUNTING PERIOD IN BLO CK ASSESSMENT, IN OUR OPINION,AS HAS BEEN DISCUSSED IN THE CASE OF KISAN DISCRETIONARY FAMILY TRUST) COULD NOT BE A REASON FOR ADOPTING SYSTEM OF ACCOUNTING AS MERCANTILE IN SUBSEQUENT ASSESSMENT YEARS AND THA T TOO WITHOUT COMPLYING WITH THE PROVISIONS OF LAW IN THIS RESPEC T, WE UPHOLD THE ASSESSEES PLEA THAT THE ASSESSEE WAS CONSISTENTLY FOLLOWING THE CASH SYSTEM OF ACCOUNTING, SINCE ASST.YEAR 2000-01; MEAN ING THEREBY THAT ASSESSEES SYSTEM OF ACCOUNTING FOR ASST.YEAR 2003- 04 WAS CASH SYSTEM. 6. IN THE LIGHT OF VIEW TAKEN IN THE AFORESAID O RDERS OF THE ITAT IN THE CASE OF SHIVA SPECIFIC FAMILY TRUST AND NIMA SP ECIFIC FAMILY TRUST IN THE AY 2003-04, WE HAVE NO ALTERNATIVE T O ACCEPT THE PLEA ON BEHALF OF THE ASSESSEE THAT METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE IN THE AY 2002-03 IS CASH. THEREFORE, GRO UND NO.2 IN THESE TWO APPEALS IS ALLOWED. ITA NO.1041/AHD/2006& OTHERS 25 6.1 AS REGARDS OTHER FOUR APPEALS IN THE CASE OF HARSIDDH SPECIFIC FAMILY TRUST AND SMT. SHANTABEN K PATEL, SINCE THE LD. CIT(A) MAINLY RELIED UPON FINDINGS OF THE AO IN TH E BLOCK ASSESSMENT PROCEEDINGS WITHOUT ASCERTAINING THE ME THOD OF ACCOUNTING CONSISTENTLY FOLLOWED BY THESE ASSESSEES NOR RECORD ED HIS SPECIFIC FINDINGS AS TO WHETHER OR NOT ANY CHANGE WAS CLAIME D IN THE METHOD OF ACCOUNTING, WE FIND MERIT IN THE CONTENTIONS OF BOTH THE PARTIES AND ACCORDINGLY, RESTORE THE MATTER TO THE FILE OF THE AO WITH THE DIRECTIONS TO READJUDICATE THE CLAIM IN ACCORDANCE WITH LAW AFTER ALLOWING SUFFICIENT OPPORTUNITY TO THESE ASSESSEES AND RECORD HIS SPECIFIC FINDINGS ON THE METHOD OF ACCOUNTING KEEPI NG IN MIND THE PROVISIONS OF SEC. 145 OF THE ACT AND IN THE LIGHT OF OUR AFORESAID OBSERVATIONS . 6.2 IN VIEW OF THE FOREGOING, GROUND NO.2 ITA NOS. 1242 & 1251/AHD/2006 IS ALLOWED WHILE IN ITA NO.1041& 12 46/AHD/2006 AND ITA NOS. 1852 &1856/AHD/2007 IS DISPOSED OF A S INDICATED ABOVE. 7. GROUND NO.3 IN ITA NOS.1041,1242 & 1251/AHD/200 6 READS AS UNDER: 3 IN LAW AND IN FACTS AND CIRCUMSTANCES OF THE APP ELLANTS CASE, THE LD. CIT(A) HAS GROSSLY ERRED IN NOT DECIDING, INSTE AD HAS SET ASIDE THE ISSUE TO THE LD. AO, ON THE STATUS OF THE APPELLANT WHEN THE LD. AO HAS ERRED IN CHANGING STATUS OF THE ASSESSEE FROM INDI VIDUAL TO TRUST WITHOUT GIVING ANY REASON FOR MAKING SUCH CHANGE IN STATUS. 7.1 THE AO ADOPTED THE STATUS OF TRUST WHILE COMPL ETING THE ASSESSMENT IN THESE CASES, WITHOUT ASSIGNING ANY RE ASONS. ON APPEAL, THE ASSESSEE CONTENDED THAT THE AO CHANGED THE STATUS TO TRUST WITHOUT GIVING ANY REASON AND IN THIS CONNE CTION RELIED ON A DECISION OF THE ITAT, MUMBAI. SINCE THE AO HAD NOT ALLOWED ANY OPPORTUNITY TO THESE ASSESSES BEFORE CHANGING THE S TATUS NOR CONSIDERED THE BOMBAY TRIBUNAL DECISION CITED BY TH E ASSESSEE, THE LD. CIT(A) DIRECTED THE AO TO PASS A SPEAKING ORDER ON THIS ISSUE ITA NO.1041/AHD/2006& OTHERS 26 AFTER TAKING INTO CONSIDERATION THE FACTS OF THE CA SE AND THE RELEVANT CASE LAWS ON THE SUBJECT. 7.2 THE AFORESAID THREE ASSESSEES ARE NOW IN APPEA L BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LD. CIT(A).TH E LEARNED AR ON BEHALF OF THE ASSESSEE SUBMITTED THAT THE ISSUE IS SQUARELY COVERED BY THE DECISIONS OF THE HONBLE GUJARAT HIGH COURT IN THE CASES OF CIT VS. HARJIVANDAS JUTHABHAI ZAVERI (2002) 258 ITR 785 (GUJ) AND CIT VS. DEEPAK FAMILY TRUST (NO.1) (1995) 211 ITR 5 75 (GUJ). ON THE OTHER HAND, THE LD. DR CONTENDED THAT THE LD. C IT(A) HAD RESTORED THE ISSUE TO THE FILE OF THE AO FOR PASSIN G A SPEAKING ORDERS IN THE LIGHT OF RELEVANT DECISIONS AND THEREFORE, T HERE IS NO INFIRMITY IN THESE DIRECTIONS. 7.3 WE HAVE HEARD BOTH THE PARTIES AND GONE THROUG H THE FACTS OF THE CASE AS ALSO THE RELEVANT DECISIONS. S INCE THE AO DID NOT PASS A SPEAKING ORDER ON THE ISSUE, THE LD. CIT (A) MERELY DIRECTED THE AO TO PASS A SPEAKING ORDER IN THE LIG HT OF RELEVANT DECISIONS. WE DO NOT FIND ANY INFIRMITY IN THESE DI RECTIONS, SINCE THE AO IS DUTY BOUND TO CONSIDER THE DECISIONS OF THE H ONBLE JURISDICTIONAL HIGH COURT, CITED BEFORE US. THEREFO RE , GROUND NO.3 IN ITA NOS.1041,1242 & 1251/AHD/2006 IS DISMISSED. 8. GROUND NO.4 IN ITA NOS.1041,1242 & 1251/AHD/2006 AND GROUND NO.3 IN ITA NOS.1246/AHD/2006 RELATE TO CLAI M OF THE ASSESSEE IN RELATION TO LONG TERM CAPITAL GAIN[LTC G] ON RE-PURCHASE OF DEEP DISCOUNT BONDS (DDBS) OF NIRMA LTD.A SERI ES WHILE GROUND NO. 6 IN ITA NO. 1251/AHD./2006 RELATES TO CLAIM OF THE ASSESSEE IN RESPECT OF LTCG ON SALE OF DDBS OF NIRMA LTD.. DUR ING THE COURSE OF ASSESSMENT PROCEEDINGS FOR THE AY 2002-03 IN TH E CASE OF HARSIDDH SPECIFIC FAMILY TRUST , THE AO NOTICED THA T THE ASSESSEE HAD SHOWN LTCG OF RS.3,19,60,000 ON REPURCHASE OF 1 880 DDBS OF NIRMA LTD. BY THE ISSUER, THESE BONDS WERE ALLOTTE D TO THE ITA NO.1041/AHD/2006& OTHERS 27 ASSESSEE ON 28.07.00 @ RS. 1 LAC PER BOND FOR A TOT AL CONSIDERATION OF RS.18,80,00,000 AND SUBSEQUENTLY THESE WERE REP URCHASED ON 18.3.2002 BY THE ISSUER FOR A CONSIDERATION OF RS.2 1,99,60,000/-. THE ASSESSEE CLAIMED THE DEDUCTION U/S.54EC OF ACT ON THE LTCG ON ACCOUNT OF INVESTMENT OF RS.43,85,368 IN THE BON DS OF RURAL ELECTRIFICATION CORPORATION. HOWEVER, THE ASSESSEE DID NOT OFFER ANY INTEREST INCOME ACCRUING ON THESE BONDS EITHER AS PER CIRCULAR DATED 15.02.02 OR AS PER LETTER DATED 12.03.96 OF THE BOA RD. THE AO WAS OF THE OPINION THAT INCOME AS A RESULT OF REPURCHASE OF DDBS HAS TO BE TAXED AS STCG AND ACCORDINGLY, IN THE LIGHT OF CIRC ULAR NO.2 OF 2002 DATED 15-02-2002 OF THE CBDT CONCLUDED THAT THE INC OME GENERATED ON THE REPURCHASE OF 1880 DDBS, SERIES-A OF NIRMA LTD. DATED 01.10.01 OF RS.3,19,60,000 IS INTEREST INCOME. SIMILAR WERE HI S FINDINGS IN THE CASE OF SHIVA SPECIFIC FAMILY TRUST, NIMA SPECIFIC FAMILY TRUST & SHANTABEN K PATEL IN THE AY 2002-03. 9. ON APPEAL, THE LD. CIT(A) WHILE RELYING UPON T HE APPELLATE ORDER NO. CIT(A)-I/ CCI (I) / 35/ 05-06 DATED 02-03 -06 IN THE CASE OF KARSANBHAI K PATEL (HUF) FOR AY 2002-03 UPHELD THE FINDINGS OF T HE AO AND DENIED DEDUCTION U/S 54 EC OF THE ACT. 10. THESE ASSESSEES ARE NOW IN APPEAL BEFORE US AG AINST THE AFORESAID FINDINGS OF THE LD. CIT(A).BEFORE US ,BOTH THE PARTIES AGREED THAT ISSUE IS SQUARELY COVERED BY THE DECIS ION DATED 9-10- 2009 OF THE ITAT IN THE CASE OF KARSANBHAI KHODIDA S PATEL HUF FOR AY 2002-03 IN ITA NO.1042/AHD/2006 . 11. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE AS ALSO THE DECISION RELIED UPON. WE FIND THAT WHILE ADJUDICATING A SIMILAR ISSUE, THE ITAT AHMEDABAD, BENCH-A VIDE THEIR ORDER DATED 9.10.2009 IN THE CASE OF KARSANB HAI KHODIDAS PATEL HUF FOR THE AY 2002-03 IN ITA NO.1042/AHD/20 06, CONCLUDED IN THE FOLLOWING TERMS:- ITA NO.1041/AHD/2006& OTHERS 28 3. THE SECOND GROUND RAISES A LEGAL QUESTION AS TO WHETHER THE CAPITAL GAINS DERIVED BY THE ASSESSEE ON SALE OF DEEP DISCO UNT BONDS ARE LONG TERM CAPITAL GAINS AS CLAIMED BY THE ASSESSEE OR SH ORT TERM CAPITAL GAINS AS HELD BY THE ASSESSING OFFICER. GROUND NO.3 IS C ONNECTED TO THE QUESTION OF CAPITAL GAINS. IN THIS GROUND THE ASSE SSEE HAS CHALLENGED THE DISALLOWANCE OF THE DEDUCTION UNDER SECTION 54EC OF THE ACT. THE BENEFIT OF THE DEDUCTION IS AVAILABLE TO THE ASSESSEE ONLY IF THE CAPITAL GAINS ARE TREATED AS LONG TERM CAPITAL GAINS. THE GROUND IS THEREFORE CONSEQUENTIAL TO OUR DECISION WITH REGARD TO GROUND NO.2. 4. THE FACTS GIVING RISE TO THE CONTROVERSY MAY BE NOTICED. THE ASSESSEE WAS ALLOTTED 1180 DEEP DISCOUNT BONDS (HER EINAFTER REFERRED TO AS BONDS) OF NIRMA LIMITED, EACH AMOUNTING TO RS. 1,00,000/-. THE CHEQUE ISSUED BY THE ASSESSEE IN FAVOUR OF THE COMP ANY WAS CLEARED ON 28-7-2000. THE BOARD OF DIRECTORS OF NIRMA LIMITED PASSED A RESOLUTION ON 23-9-2000 AND A LETTER OF ALLOTMENT WAS ISSUED T O THE ASSESSEE ON THAT DATE. ACCORDING TO THE LETTER OF ALLOTMENT THE DEE MED DATE OF ALLOTMENT OF THE BONDS WAS TO BE TAKEN AS 28-7-2000. THE LETTER OF ALLOTMENT WAS TO BE EXCHANGED BY THE ASSESSEE BY SURRENDERING THE SAME TO THE COMPANY AGAINST WHICH THE COMPANY WAS TO ISSUE DEBENTURE CE RTIFICATES OR BONDS. THE BONDS WERE ACCORDINGLY ISSUED TO THE ASSESSEE O N 10-5-2001. THEY WERE DEMATED ON 19-9-2001 AND ULTIMATELY THE BONDS WERE SOLD ON 20-3- 2002 FOR RS.14,41,18,902/-. THE COST OF ACQUISITIO N OF THE BONDS WAS RS.11,80,00,000/- AND THUS A CAPITAL GAIN OF RS.2,6 1,18,902/- AROSE TO THE ASSESSEE IN THE ACCOUNTING YEAR RELEVANT TO THE ASS ESSMENT YEAR 2002- 2003. IN THE RETURN OF INCOME THE ASSESSEE DECLARE D THE CAPITAL GAIN AS LONG TERM CAPITAL GAINS ON THE FOOTING THAT THE BON DS WERE ACQUIRED ON 23- 9-2000 WHEN THE LETTER OF ALLOTMENT WAS ISSUED BY T HE COMPANY AND SINCE THEY WERE SOLD AFTER A PERIOD OF 12 MONTHS FROM THA T DATE THE CAPITAL GAINS WERE LONG TERM CAPITAL GAINS UNDER THE PROVISO TO S ECTION 2(42A) OF THE ACT. IT WAS FURTHER CLAIMED IN THE RETURN THAT THE ASSESSEE HAD INVESTED RS.2,61,20,000/- IN RURAL ELECTRIFICATION CORPORATI ON BONDS ON 13-9-2002 AND SINCE THESE BONDS WERE ELIGIBLE ASSETS UNDER SE CTION 54EC, THE ENTIRE CAPITAL GAINS WERE EXEMPT FROM TAX. 5. THE AFORESAID CLAIM OF THE ASSESSEE WAS NOT ACCE PTED BY THE AO. ACCORDING TO HIM, THE CAPITAL GAINS SHOULD BE TREAT ED AS SHORT TERM CAPITAL GAINS. HE GAVE THE FOLLOWING REASONS FOR HIS CONCL USION: A) CIRCULAR NO.2 OF 2002 DATED 15-2-2002 AND LETTER NO.225 DATED 12- 3-1996 ISSUED BY THE CBDT SHOW THAT ON TRANSFER OF THE BONDS BEFORE MATURITY THEY HAVE TO BE TREATED AS GIVING RISE TO CAPITAL GAINS, BUT THE PERIOD OF HOLDING OF THE BONDS IN SUCH CASES WILL B E RECKONED FROM THE DATE OF PURCHASE/SUBSCRIPTION OR THE LAST VALUATION DATE IN RESPECT OF WHICH THE TRANSFEROR HAS OFFERED INCOME TO TAX, WHICHEVER IS LATER. SINCE SUCH PERIOD WOULD ALWAYS BE LESS THAN 12 MONTHS, THE CAPITAL GA INS WILL BE CHARGEABLE TO TAX AS SHORT TERM CAPITAL GAINS. ITA NO.1041/AHD/2006& OTHERS 29 B) THE PRESS RELEASE DATED 20-3-2002 ISSUED BY THE CBDT ALSO SUPPORTS THE VIEW THAT THE CAPITAL GAINS SHOULD BE TREATED AS SHORT TERM. C) SECTION 94(2) AND SECTION 94(3) INDICATE THAT TH E LEGISLATURE ALWAYS PROHIBITED THE TREATMENT OF THE SALE PROCEEDS OF DE EP DISCOUNT BONDS AS LONG TERM CAPITAL GAINS. THEY CAN BE TREATED AS LO NG TERM CAPITAL GAINS ONLY IF THEY ARE ZERO COUPON BONDS ISSUED BY INFRAS TRUCTURE COMPANIES AFTER 1-6-2005. NIRMA LIMITED IS NOT AN INFRASTRUC TURE COMPANY. D) THE BONDS WERE ISSUED BY THE NIRMA LIMITED UNDER THE TERMS OF THE DEBENTURE TRUST DEED DATED 27-4-2001. THE CERTIFIC ATE OF HOLDING WAS ISSUED TO THE ASSESSEE ON 10-5-2001. THE BONDS WER E LISTED IN THE NATIONAL STOCK EXCHANGE (NSE) ON 20-9-2001 AND WERE MADE AVAILABLE FOR DE-MATING ON 24-9-2001. THE DATE OF THE LETTER OF ALLOTMENT CANNOT BE TAKEN AS THE DATE ON WHICH THE BONDS WERE ACQUIRED AS CLAIMED BY THE ASSESSEE AND IT IS ONLY THE DATE OF ISSUANCE OF THE CERTIFICATE OF THE HOLDING I.E. 10-5-2001 WHICH CAN BE TAKEN AS THE DATE ON WH ICH THE BONDS WERE ACQUIRED. SINCE THE ASSESSEE SOLD THE BONDS ON 20- 3-2002, WITHIN 12 MONTHS FROM 10-5-2001, THE CAPITAL GAINS ARE TO BE TREATED AS SHORT TERM CAPITAL GAINS ONLY. E) THE BASIC CONDITION FOR BEING TERMED AS LONG TER M CAPITAL GAINS IS THAT THE BONDS SHOULD BE LISTED IN RECOGNIZED STOCK EXCHANGE. THE BONDS ACQUIRED BY THE ASSESSEE WERE LISTED IN NSE ONLY ON 20-9-2001 AND RECKONING FROM THIS DATE, THE SALE OF THE BONDS ON 20-3-2002 IS WITHIN THE PERIOD OF 12 MONTHS AND THEREFORE THE CAPITAL GAINS ARE TO BE TREATED AS SHORT TERM CAPITAL GAINS. FOR THE ABOVE REASONS, THE AO TREATED THE CAPITAL G AINS OF RS.2,61,18,902/- AS SHORT TERM CAPITAL GAINS AND CO NSEQUENTLY ALSO REJECTED THE DEDUCTION CLAIMED UNDER SECTION 54EC O F THE ACT. 6. ON APPEAL THE CIT(A) CONFIRMED THE VIEW TAKEN BY THE AO AND UPHELD HIS ORDER. THE FINDINGS OF THE CIT(A) CAN B E SUMMARISED AS UNDER: A) THE REAL QUESTION FOR CONSIDERATION RELATES TO T HE PERIOD OF HOLDING OF THE BONDS BY THE ASSESSEE. B) THE BONDS WERE LISTED IN THE NSE ON 20-9-2001. THE LISTED BONDS ARE THUS DIFFERENT THAN THE UNLISTED BONDS. FOR TH E PURPOSE OF RECKONING THE PERIOD OF HOLDING, THE DATE OF LISTING IS RELEV ANT AND SINCE IN THE ASSESSEES CASE THE LISTED BONDS WERE NOT HELD FOR A PERIOD EXCEEDING 12 MONTHS FROM 20-9-2001, THEY CANNOT BE CONSIDERED AS LONG TERM CAPITAL ASSETS. ACCORDINGLY, THE CAPITAL GAINS CAN BE TREA TED ONLY AS SHORT TERM CAPITAL GAINS AS HELD BY THE CALCUTTA HIGH COURT IN THE CASE OF A.GHOSH VS. CIT, (1983) 141 ITR 45. ITA NO.1041/AHD/2006& OTHERS 30 C) THERE WAS NO ASSET BEFORE THE ISSUE OF THE DEBEN TURE CERTIFICATE ON 10-5-2001 IN EXCHANGE FOR THE LETTER OF ALLOTMENT. THE CAPITAL ASSET IN THE FORM OF DEBENTURE CERTIFICATE CAME INTO EXISTENCE O NLY ON 10-5-2001 AND SINCE IT WAS HELD ONLY UPTO 20-3-2002, A PERIOD LES S THAN 12 MONTHS, THE CAPITAL GAIN ON SALE THEREOF CAN ONLY BE SHORT TERM CAPITAL GAINS. THE LETTER OF ALLOTMENT DOES NOT POSSESS ALL THE FEATURES OF D EBENTURE CERTIFICATE. IT CAN EVEN BE CANCELLED IN CERTAIN CIRCUMSTANCES. IT IS NOT A SECURED INSTRUMENT IN THE MANNER IN WHICH THE DEBENTURE CER TIFICATE IS SECURED UNDER THE TRUST DEED. THE DEBENTURE IS TRADABLE CO MMODITY UNDER THE SALE OF GOODS ACT, WHEREAS THE LETTER OF ALLOTMENT CANNO T BE SO TRADED AS CAN BE SEEN FROM SECTION 75 OF THE COMPANIES ACT, 1956. IN VIEW OF THESE DIFFERENCES BETWEEN THE LETTER OF ALLOTMENT AND THE DEBENTURE CERTIFICATE, THE LETTER OF ALLOTMENT CANNOT BE CONSIDERED AS A C APITAL ASSET AND THEREFORE IT CANNOT BE HELD THAT THE ASSESSEE ACQUI RED THE CAPITAL ASSET ON THE DATE OF ISSUE THEREOF I.E. ON 23-9-2000. D) CIRCULAR NO.2 ISSUED ON 15-2-2002 IS MANDATORY A ND THE ASSESSEE OUGHT TO HAVE FOLLOWED THE SAME AND DECLARED THE CA PITAL GAINS AS SHORT TERM CAPITAL GAINS. THE CLARIFICATION ISSUED BY TH E PRESS RELEASE DATED 20- 3-2002 CANNOT OVERRIDE THE CIRCULAR NOR CAN IT OVER RULE THE STATUTORY PROVISIONS. THE ASSESSEES RELIANCE ON THE PRESS R ELEASE IS THEREFORE MISPLACED. E) THE ASSESSEE IS ALSO NOT RIGHT IN RELYING ON THE LETTER DATED 12-3- 1996 ISSUED BY THE CBDT. F) THE DEBENTURE CERTIFICATE ISSUED ON 10-5-2001 WA S BASED ON THE TERMS AND CONDITIONS OF THE DEBENTURE TRUST DEED DA TED 27-4-2001. ACCORDING TO CLAUSES 8 AND 9 OF THE TRUST DEED, THE DEBENTURES WERE SECURED BY IFCI. SINCE SECURITY IS THE MAIN FEATUR E OF THE BONDS, AND THEY WERE SECURED BY WAY OF PARI PASSU FIRST MORTGAGE AN D CHARGE IN FAVOUR OF THE TRUSTEES ON THE BHAVNAGAR COMPLEX PROPERTY OF T HE COMPANY. THE NATURE AND CHARACTER OF THE BONDS UNDER CONSIDERATI ON WERE DEFINED AND DETERMINED ONLY UNDER THE TRUST DEED AND ACCORDINGL Y THE ASSESSEE CANNOT BE SAID TO HAVE ACQUIRED THE CAPITAL ASSET IN THE F ORM OF DEBENTURE CERTIFICATES BEFORE 10-5-2001. G) THE LEGISLATIVE INTENTION HAS ALWAYS BEEN TO TRE AT THE GAINS ARISING FROM THE SALE OF DEEP DISCOUNT BONDS AS INTEREST. THE LEGISLATURE HAS ALWAYS PROHIBITED THE TREATMENT OF THE GAINS AS CAP ITAL GAINS (LONG TERM). IT IS ONLY A CONCESSION AVAILABLE TO ZERO COUPON BONDS ISSUED BY AN INFRASTRUCTURE CAPITAL COMPANY THAT TOO AFTER 1-6-2 005 THAT THE GAINS WILL BE TREATED AS CAPITAL GAINS. NIRMA LIMITED WHICH ISSU ED THE BONDS TO THE ASSESSEE IS NOT SUCH A COMPANY NOR WERE THE BONDS I SSUED AFTER 1-6- 2005. H) THE ASSESSEE AND THE COMPANY ISSUING THE BONDS H AVE INDULGED IN TAX PLANNING. WHILE THE ASSESSEE HAS CLAIMED THAT THE SURPLUS ARISING ON ITA NO.1041/AHD/2006& OTHERS 31 THE SALE OF THE BONDS SHOULD BE TREATED AS CAPITAL GAINS, THE COMPANY HAS CLAIMED THE INTEREST ACCRUED ON THE BONDS AS DEDUCT ION EVERY YEAR. BOTH HAVE THUS TAKEN CONTRARY STANDS AS PART OF TAX PLAN NING MEASURE WHICH CANNOT BE APPROVED. IN VIEW OF THE ABOVE FINDINGS THE CIT(A) UPHELD THE VIEW TAKEN BY THE AO AND DISMISSED THE APPEAL FILED BY THE ASSESSEE. 7. THE ASSESSEE IS IN FURTHER APPEAL BEFORE THE TRI BUNAL. THE MAIN CONTENTION URGED ON ITS BEHALF WAS THAT THE ASSESSE E MUST BE HELD TO HAVE HELD THE CAPITAL ASSET FROM THE DATE ON WHICH THE L ETTER OF ALLOTMENT WAS ISSUED VIZ. 23-9-2000 AND NOT MERELY FROM THE DATE OF ISSUE OF THE DEBENTURE CERTIFICATE ON 10-5-2001 OR ANY LATER DAT E. OUR ATTENTION WAS DRAWN TO SECTION 75 OF THE COMPANIES ACT TO HIGHLIG HT THE FACT THAT THERE IS NO DIFFERENCE BETWEEN THE LETTER OF ALLOTMENT AND T HE DEBENTURE CERTIFICATE. IT IS POINTED OUT FURTHER THAT THE DEPARTMENTAL AUT HORITIES HAVE NOT APPRECIATED THE CIRCULAR NO.2 OF 2002 ISSUED BY THE CBDT IN PROPER PERSPECTIVE AND THAT THEY WERE WRONG IN RELYING ON THE SAME TO HOLD THAT THE CAPITAL GAINS IN THE PRESENT CASE ARE NOT LONG TERM CAPITAL GAINS. IT IS SUBMITTED THAT THE CIRCULAR APPLIES PROSPECTIVELY I N THE SENSE THAT THE TREATMENT REFERRED TO THEREIN WOULD BE APPLICABLE T O BONDS OR DEBENTURES ALLOTTED AFTER 15-2-2002 AND IT HAS BEEN SO HELD BY THE AHMEDABAD BENCH OF THE TRIBUNAL IN THE CASE OF ARVIND COTSPIN VS. D CIT IN ITANO.519/AHD/2001 (ASSTT.YEAR 1996-97) DATED 20-6- 2006. THE LEARNED COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE LETTER OF ALLOTMENT COMPILED IN THE PAPER BOOK AT PAGE 102 AND POINTED OUT THAT WHAT IS ALLOTTED ARE DEEP DISCOUNT BONDS (SERIES-A) AND THA T THE LETTER OF ALLOTMENT EVIDENCES THE TITLE TO THE BONDS AND IS NOT QUALITA TIVELY DIFFERENT IN ANY MANNER FROM THE DEBENTURE BOND CERTIFICATES ITSELF. HE ACCORDINGLY CONTENDED THAT THE ASSUMPTION OF THE DEPARTMENTAL A UTHORITIES THAT THE LETTER OF ALLOTMENT IS A SEPARATE INSTRUMENT, APART FROM THE DEBENTURE CERTIFICATE, IS ERRONEOUS. THE SUBSTANCE OF THE MA TTER ACCORDING TO HIM IS THAT BOTH THE LETTER OF ALLOTMENT AND THE DEBENTURE CERTIFICATES ACKNOWLEDGE THE DEBT OF THE COMPANY AND THE DEBENTURE CERTIFICA TE IS ISSUED IN LIEU OF THE LETTER OF ALLOTMENT AND THE FACT THAT IN THE IN TERREGNUM THE DEBENTURE TRUST DEED CAME INTO EXISTENCE AND CREATED A CHARGE ON THE ASSETS OF THE COMPANY DOES NOT IN ANY WAY ALTER THE NATURE AND CH ARACTER OF THE DEBT. ACCORDING TO THE LEARNED COUNSEL, THE ASSESSEE HELD A DEBT AND INITIALLY IT WAS REPRESENTED BY THE LETTER OF ALLOTMENT AND LATE R BY THE DEBENTURE CERTIFICATE. THE STARTING POINT IN COMPUTING THE PERIOD FOR WHICH THE CAPITAL ASSET WAS HELD BY THE ASSESSEE SHOULD THEREFORE BE THE DATE OF THE LETTER OF ALLOTMENT AND NOT THE DATE ON WHICH THE DEBENTUR E CERTIFICATE WAS ISSUED. 8. AS REGARDS THE STAND TAKEN BY THE DEPARTMENTAL A UTHORITIES THAT THE PERIOD OF HOLDING, IF IT CANNOT BE RECKONED FROM TH E DATE OF THE DEBENTURE CERTIFICATE, SHOULD BE RECKONED FROM THE DATE ON WH ICH THE DEBENTURES WERE LISTED IN THE NSE WHICH WAS ON 20-9-2001, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS STAND WAS UNTENABL E AND UNDER THE ITA NO.1041/AHD/2006& OTHERS 32 PROVISO TO SECTION 2(42A) OF THE INCOME TAX ACT WHA T WAS REQUIRED WAS THAT THE SECURITY SHOULD BE LISTED IN A RECOGNISED STOCK EXCHANGE AT THE TIME OF SALE AND THERE WAS NO REQUIREMENT THAT IT S HOULD HAVE ALSO BEEN LISTED AT THE POINT OF TIME WHEN THE ASSESSEE ACQUI RED IT. HE ALSO SUBMITTED THAT THE BOND HOLDER HAS NO CONTROL OVER THE LISTING OF THE BONDS IN A RECOGNIZED STOCK EXCHANGE AND IT WOULD BE UNJU ST AND CONTRARY TO THE LAW TO EXCLUDE THE TIME TAKEN BY A COMPANY TO GET T HE BONDS LISTED IN THE STOCK EXCHANGE FROM THE PERIOD FOR WHICH THE BONDS WERE HELD BY THE ASSESSEE. IN SUPPORT OF HIS SUBMISSIONS, THE LEARN ED COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE JUDGMENT OF THE HONBLE GUJARAT HIGH COURT IN RANCHHODBHAI BHAIJIBHAI PATEL VS. CIT, (1 971) 81 ITR 446 AND PLACED RELIANCE ON THE RATIO LAID DOWN IN THIS DECI SION. 9. IN SUPPORT OF HIS SUBMISSIONS, THE LEARNED COUNS EL FOR THE ASSESSEE ALSO RELIED ON THE FOLLOWING JUDGMENTS AND ORDERS: I) SHANKERLAL GAFURBHAI PATEL VS. CIT, (2004) 269 I TR 508 (GUJ); II) KESHAVJI KARSONDAS VS. CIT, (1994), 207 ITR 737 (BOM); III) KALYANI EXPORTS & INVESTMENTS P. LTD. VS. DCIT , (2001) 78 ITD 95 (PUNE); IV) ARVIND COTSPIN LTD. VS. DCIT, (AHMEDABAD BENCH) (SUPRA); 10. THE LEARNED CIT-DR SUBMITTED THAT ON A PROPER R EADING OF SECTION 2(42A) AND SECTION 2(14) OF THE INCOME TAX ACT IT M UST BE HELD THAT THE PERIOD OF HOLDING OF THE SECURITY MUST BE RECKONED FROM THE DATE OF LISTING IN A RECOGNISED STOCK EXCHANGE IN INDIA AND IT IS I RRELEVANT THAT THE ASSESSEE HAS NO CONTROL OVER THE EVENTS AND CONDITI ONS THAT ARE REQUIRED TO BE COMPLIED WITH BY THE COMPANY ISSUING THE SECU RITY IN ORDER TO OBTAIN LISTING. HE ACCORDINGLY SUBMITTED THAT IN THE PRES ENT CASE THE DATE OF LISTING OF THE BONDS IN NSE, WHICH IS 20-9-2001, SHOULD BE TAKEN TO BE THE DATE ON WHICH THE CAPITAL ASSET VIZ. THE BONDS WERE ACQU IRED AND SINCE THEY WERE SOLD ON 20-3-2002, WITHIN THE PERIOD OF 12 MON THS, THE GAINS SHOULD BE TREATED A SHORT TERM CAPITAL GAINS. HE NEXT CON TENDED THAT CLAUSE(D) OF SECTION 2(42A) REFERS TO SECURITY SUBSCRIBED TO B Y THE ASSESSEE AND NOT TO A LETTER OF ALLOTMENT WHICH IS INDICATIVE OF THE FACT THAT THE DATE OF THE LETTER OF ALLOTMENT IS NOT TO BE TAKEN AS THE START ING POINT FOR COMPUTING THE PERIOD OF 12 MONTHS. HE DREW OUR ATTENTION TO SECT ION 2(H) OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 WHICH D EFINES THE WORD SECURITIES AS INCLUDING BONDS AND DEBENTURES OR O THER MARKETABLE SECURITIES OF LIKE NATURE IN OR OF ANY INCORPORATED COMPANY OR BODY CORPORATE. ACCORDING TO THE LEARNED CIT-DR THESE T WO STATUTORY PROVISIONS READ TOGETHER SHOW THAT THE LETTER OF ALLOTMENT CAN NOT BE THE BASIS FOR COMPUTING THE PERIOD OF HOLDING. IT WAS FURTHER A RGUED THAT CLAUSES (D) AND (F) OF EXPLANATION 1 BELOW SECTION 2(42A) SUPPO RTED THE DEPARTMENTS STAND THAT THE DATE OF COMMENCEMENT OF THE HOLDING PERIOD SHOULD BE RECKONED FROM THE DATE OF ALLOTMENT OF BOND AND NOT FROM THE DATE OF THE ITA NO.1041/AHD/2006& OTHERS 33 LETTER OF ALLOTMENT ISSUED BEFORE THE ALLOTMENT OF THE BONDS OR DEBENTURE CERTIFICATES. DRAWING OUR ATTENTION TO PAGE 102 OF THE PAPER BOOK WHICH CONTAINS THE TERMS AND CONDITIONS OF THE ISSUE OF T HE BONDS OF NIRMA LTD., THE LEARNED CIT-DR POINTED OUT THAT THE COMPANY CLE ARLY STATED THAT IT IS IN THE PROCESS OF APPOINTING A TRUSTEE FOR THE PROPOS ED BOND ISSUE WHICH IMPLIED THAT THE BONDS OR THE DEBENTURES ISSUED BY THE NIRMA LTD., WERE YET TO BE ALLOTTED AS ON 28-7-2000 WHICH IS THE DAT E ON WHICH THE INFORMATION MEMORANDUM WAS ISSUED BY THE COMPANY. HE ALSO DREW OUR ATTENTION TO THE OTHER TERMS AND CONDITIONS OF THE ISSUE OF BONDS AT PAGE 105 OF THE PAPER BOOK UNDER THE HEAD MODE OF TRANS FER AND AT PAGE 108 AND SUBMITTED THAT THESE TERMS CLEARLY SHOWED THAT THE ISSUE OF THE BOND CERTIFICATES WAS A FUTURE EVENT ON 28-7-2000. IT W AS THE ATTEMPT OF THE LEARNED CIT-DR TO SHOW TO US, BY REFERRING TO THE A BOVE PAGES OF THE PAPER BOOK THAT THE STARTING POINT OF PERIOD OF HOL DING OF THE BONDS CAN IN NO EVENT BE EARLIER TO THE ACTUAL ISSUE OF THE DEBE NTURE CERTIFICATE. 11. THE LEARNED CIT-DR STRONGLY RELIED ON THE REASO NING ADOPTED BY THE DEPARTMENTAL AUTHORITIES AND DREW OUR ATTENTION TO THE FOLLOWING ASPECTS WHICH ACCORDING TO HIM WERE STRONGLY IN FAVOUR OF T HE DEPARTMENTS VIEW: A) THE CIRCULAR NO.2 OF 2002 IS NO DOUBT PROSPECTIV E BUT IT APPLIES TO ALL SALES OF BONDS ON OR AFTER 15-2-2002 AND THIS H AS BEEN CLEARLY BROUGHT OUT IN PARA-5.1 OF THE CIRCULAR. B) IN CASE OF CONFLICT BETWEEN THE CIRCULAR AND THE PRESS RELEASE, IT IS THE CIRCULAR WHICH SHOULD PREVAIL. THIS HAS BEEN M ADE CLEAR IN CIRCULAR NO.783 DATED 18-11-1999 IN WHICH IT WAS EXPLAINED T HAT CLAIMS BASED ON PRESS NOTES CANNOT BE ENTERTAINED ON THE FOOTING TH AT THE PRESS NOTE IS A FINAL LEGAL DOCUMENT. IN THE PRESENT CASE, THE ASS ESSEE CANNOT THEREFORE RELY ON THE PRESS NOTE DATED 20-3-2002 IN PREFERENC E TO THE CIRCULAR NO.2. C) THE BOND CERTIFICATES WERE ISSUED ON 10-5-2001 I N TERMS OF THE DEBENTURE TRUST DEED DATED 27-4-2001 AND THEREFORE THEY HAVE TO BE TAKEN AS VALID ISSUE OF A SECURITY ONLY ON THE DATE OF TH E ISSUE AND NOT ON ANY EARLIER DATE. D) THE LETTER OF ALLOTMENT CANNOT BE TRANSFERRED. IT IS ONLY THE DEBENTURE CERTIFICATES THAT CAN BE TRANSFERRED. TH EREFORE IT IS NOT POSSIBLE TO TAKE THE DATE OF THE LETTER OF ALLOTMENT AS THE STARTING POINT OF THE PERIOD OF 12 MONTHS. IN SUPPORT OF THE ABOVE SUBMISSIONS, THE LEARNED CI T-DR RELIED ON THE FOLLOWING JUDGMENTS/ORDERS: I) CIT VS. SANTOSH L. CHOWGULE & OTHERS, (1998) 234 ITR 787; II) MRS.A.GHOSH VS. CIT (SUPRA); III) GIRIDHARKRISHNA VS. ACIT, (2008) 307 ITR (AT)6 8 (BANG.); ITA NO.1041/AHD/2006& OTHERS 34 IV) SPLENDOR CONSTRUCTIONS PVT. LTD. VS. ITO, (2009 ) 27 SOT 39 (DEL) 12. IN HIS REPLY THE LEARNED COUNSEL FOR THE ASSESS EE CONTENDED THAT THE ARGUMENT OF THE LEARNED CIT-DR BASED ON CLAUSES (D) AND (F) OF EXPLANATION 1 BELOW SECTION 2(42A) WAS NOT VALID AN D IT WOULD APPLY ONLY IF THERE ARE TWO FINANCIAL ASSETS, ONE EXCHANGED FOR T HE OTHER, WHEREAS IN THE PRESENT CASE, THERE IS ONLY ONE FINANCIAL ASSET VIZ . DEBENTURE BONDS AND THESE BONDS WERE ALLOTTED TO THE ASSESSEE UNDER THE LETTER OF ALLOTMENT ON WHICH DAY THE ASSESSEE BECAME THE OWNER THEREOF AND THEREFORE THE HOLDING PERIOD OF 12 MONTHS SHOULD BE RECKONED FROM THAT DATE. WITH REFERENCE TO THE CONTENTION OF THE LEARNED CIT-DR T HAT IT IS ONLY WHEN THE TRUSTEES ARE APPOINTED UNDER THE DEBENTURE TRUSTEE DEED DATED 27-4-2001 THAT THE ASSESSEES RIGHT TO OBTAIN THE DEBENTURE G ETS CRYSTALISED, THE LEARNED COUNSEL FOR THE ASSESSEE REFUTED THE SAME A ND URGED THAT IT WOULD BE FALLACIOUS TO CONSIDER THAT THE CAPITAL ASSET AC QUIRED BY THE ASSESSEE IS REPRESENTED BY THE DEBENTURE OR BOND CERTIFICATE AN D THAT THE CERTIFICATE MERELY EVIDENCES THE DEBT DUE TO THE ASSESSEE, AND SUCH DEBT WAS INITIALLY REPRESENTED OR EVIDENCED BY A LETTER OF ALLOTMENT A ND SINCE THE LETTER OF ALLOTMENT WAS ISSUED FIRST IN POINT OF TIME ACKNOWL EDGING THE DEBT DUE TO THE ASSESSEE, IT WAS THE DATE ON WHICH SUCH LETTER WAS ISSUED THAT SHOULD BE CONSIDERED TO BE THE STARTING POINT OF THE HOLDI NG PERIOD. 13. AS REGARDS THE QUESTION AS TO WHETHER THE PRESS RELEASE ISSUED BY THE CBDT SHOULD BE FOLLOWED IN PREFERENCE TO THE CI RCULAR, THE LEARNED COUNSEL FOR THE ASSESSEE REFERRED TO THE FOLLOWING JUDGMENTS TO CONTEND THAT THE PRESS RELEASE IS EQUALLY BINDING ON THE DE PARTMENT: I) UNION OF INDIA & ANR. VS. AZADI BACHAO ANDOLAN & ANOTHER, (2003) 263 ITR 706 (SC) II) UNIT TRUST OF INDIA & ANR. VS. P.K. UNNI AND AN R. (2001) 249 ITR 612 (BOM) III) TAIYABJI LUKMANJI VS. CIT, (1981) 131 ITR 642 IT WAS SUBMITTED THAT IN THE PRESENT CASE THE PRESS NOTE ONLY EXPLAINED THE CIRCULAR AND WAS NOT CONTRARY TO WHAT WAS CONTAINED IN THE CIRCULAR. IT WAS FINALLY ARGUED BY THE LEARNED COUNSEL FOR THE ASSES SEE THAT THE ISSUE WHETHER THE CIRCULAR OR THE PRESS RELEASE SHOULD BE FOLLOWED IS ACADEMIC IN THE PRESENT CASE SINCE THE AO HIMSELF HAS ASSESSED THE SURPLUS ARISING ON THE SALE OF THE BONDS AS CAPITAL GAINS AND NOT AS I NTEREST AS HELD IN THE CIRCULAR. 14. IN THE COURSE OF THE REPLY, THE LEARNED COUNSEL FOR THE ASSESSEE ALSO DREW OUR ATTENTION TO THE BALANCE SHEET OF THE NIRM A LTD., AS ON 31-3-2001 AND POINTED OUT THAT AT PAGE 25 IN SCHEDULE-4 UNDER THE HEAD UNSECURED LOANS THE COMPANY HAS SHOWN THE LIABILITY AS DEEP DISCOUNT BOND - SERIES-A WHICH IS CONSISTENT WITH THE CLAIM OF THE ASSESSEE THAT THE LETTER OF ALLOTMENT ITSELF IS THE STARTING POINT FOR RECKO NING THE HOLDING PERIOD OF 12 ITA NO.1041/AHD/2006& OTHERS 35 MONTHS. IT IS POINTED OUT THAT IT IS SIGNIFICANT T HAT THE COMPANY, EVEN BEFORE THE ISSUE OF THE DEBENTURE CERTIFICATE ON 10-5-2001 , HAS ACKNOWLEDGED THE LIABILITY IN ITS BALANCE SHEET AS A LIABILITY ON AC COUNT OF THE ISSUE OF DEEP DISCOUNT BONDS AND THEREFORE THE DEPARTMENTS STAND THAT THE HOLDING PERIOD OF 12 MONTHS CAN BE RECKONED ONLY FROM 10-5- 2001 WAS UNTENABLE. 15. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTI ONS PRESENTED BEFORE US. IN OUR OPINION IT APPEARS DIFFICULT TO UPHOLD THE CONTENTION OF THE REVENUE TO THE EFFECT THAT THE HOLDING PERIOD OF 12 MONTHS SHOULD BE RECKONED FROM THE DATE ON WHICH THE DEBENTURE CERTI FICATE WAS ISSUED, I.E. ON 10-5-2001 OR FROM THE DATE ON WHICH THE DEBENTUR E TRUST DEED CAME INTO EFFECT I.E. ON 27-4-2001 OR FROM THE DATE ON W HICH THE DEBENTURES WERE LISTED IN THE NATIONAL STOCK EXCHANGE I.E. ON 20-9- 2001. WE MAY STRAIGHT AWAY CLARIFY THAT THE CIRCULAR NO.2 OF 2002 WHICH W AS ISSUED BY THE CBDT ON 15-2-2002 IS NOT RELEVANT FOR DECIDING THE PRESE NT APPEAL BECAUSE AS RIGHTLY POINTED OUT ON BEHALF OF THE ASSESSEE, THE AO HIMSELF DID NOT APPLY THE CIRCULAR TO HOLD THAT THE SURPLUS ARISING ON TH E SALE OF THE BONDS SHOULD BE TREATED AS INTEREST. HE HAS HIMSELF ASSESSED TH E SURPLUS AS CAPITAL GAINS. THE DISPUTE IS ONLY WHETHER THEY ARE LONG T ERM CAPITAL GAINS AS CONTENDED BY THE ASSESSEE OR SHORT TERM CAPITAL GAI NS AS CONTENDED BY THE REVENUE. A SHORT TERM CAPITAL ASSET IS DEFINED BY SECTION 2(42A) AS A CAPITAL ASSET HELD BY AN ASSESSEE FOR NOT MORE THAN 36 MONTHS IMMEDIATELY PRECEDING THE DATE OF ITS TRANSFER. TH ERE IS A PROVISO TO THE SUB-SECTION WHICH WAS INSERTED BY THE FINANCE ACT, 1987 W.E.F. 1-4-1988. THE SAID PROVISO SAYS THAT IN RESPECT OF THE CAPITA L ASSETS MENTIONED THEREIN, THEY WOULD BE TREATED AS SHORT TERM CAPITA L ASSETS IF THEY ARE HELD FOR A PERIOD OF NOT MORE THAN 12 MONTHS. A LONG TE RM CAPITAL ASSET HAS BEEN DEFINED BY SECTION 2(29A) OF THE INCOME TAX AC T AS MEANING A CAPITAL ASSET WHICH IS NOT A SHORT TERM CAPITAL ASS ET. THE RESULT IS THAT IN THE CASE OF THE CAPITAL ASSET SPECIFIED IN THE PROV ISO TO SECTION 2(42A), IT BECOMES A LONG TERM CAPITAL ASSET IF IT IS HELD FOR MORE THAN 12 MONTHS AND IT IS NOT NECESSARY THAT SUCH AN ASSET SHOULD BE HE LD AT LEAST FOR A PERIOD OF 36 MONTHS IN ORDER TO QUALIFY AS A LONG TERM CAPITA L ASSET. ONE OF THE ASSETS SPECIFIED IN THE PROVISO IS A SECURITY LISTE D IN A RECOGNISED STOCK EXCHANGE IN INDIA. SUCH A SECURITY WAS ADDED IN TH E PROVISO BY THE FINANCE ACT, 1994 WITH EFFECT FROM 1-4-1995. IT IS COMMON GROUND THAT IN THE PRESENT CASE THE DEPARTMENTS CASE IS THAT THE CAPITAL ASSET ACQUIRED BY THE ASSESSEE FROM NIRMA LTD. FALLS UNDER THIS CA TEGORY OF ASSETS VIZ. SECURITY LISTED IN A RECOGNISED STOCK EXCHANGE IN I NDIA. WE MAY ALSO REFER TO SECTION 2(H) (I)OF THE SECURITIES CONTRACTS (REG ULATION) ACT, 1956 WHICH DEFINES SECURITIES TO INCLUDE SHARES, BONDS, DEBEN TURES, DEBENTURE STOCK OR OTHER MARKETABLE SECURITIES OF A LIKE NATURE IN OR OF ANY INCORPORATED COMPANY OR OTHER BODY CORPORATE. THERE ARE OTHER SUB-CLAUSES IN THIS CLAUSE BUT SINCE THE LEARNED CIT-DR RESTED HIS CASE ONLY ON SUB-CLAUSE (I) OF SECTION 2(H) OF THE SECURITIES CONTRACTS (REGULA TIONS) ACT, WE ARE NOT REFERRING TO THEM. 16. THE ASSESSEES CONTENTION IS THAT IT BECAME THE OWNER OF THE DEEP DISCOUNT BONDS SERIES A ISSUED BY NIRMA LTD. ON 2 3-9-2000 WHICH IS THE ITA NO.1041/AHD/2006& OTHERS 36 DATE ON WHICH THE LETTER OF ALLOTMENT WAS ISSUED. A COPY OF THE LETTER OF ALLOTMENT HAS BEEN PLACED AT PAGE 96 OF THE PAPER B OOK FILED BY THE ASSESSEE. WE REPRODUCE BELOW THE LETTER OF ALLOTM ENT. NIRMA LIMTED REGISTERED OFFICE : NIRMA HOUSE, ASHRAM ROAD, AHMED ABAD 380 009 LETTER OF ALLOTMENT SECURED REDEEMABLE DEEP DISCOUNT BONDS (DDB SERIES -1) OF RS.1,00,000/- EACH FOR CAST AT PAR THIS IS TO CERTIFY THAT THE PERSON NAMED BELOW OR T HE LAST TRANSFEREE(S) WHOSE NAME(S) IS/ARE THE HOLDERS OF THE WITHIN MENT IONED DDB-SERIES A, SUBJECT TO THE INFORMATION MEMORANDUM DATED 28.L07. 2000 AND MEMORANDUM AND ARTICLES OF ASSOCIATION OF THE COMPA NY AND THAT THE AMOUNT ENDORSED HEREIN HAS BEEN PAID UP ON EACH DDB -SERIES A. DDB SERIES A EACH OF RS.1,00,000/- AMOUNT PAID UP ON APPLICATON RS.1,00,000/- REGISTERED FOLIO NO.DDBAK03 LETTER OF ALLOTMENT NO .DA005 NAMES(S) OF HOLDER(S). KARSANBHAI K PATEL NUMBER OF DDB HELD. ONE THOUSAND ONE HUNDRED EIGHT ONLY (**1180*) DISTINCTIVE NO.(S) DA05682 TO DA06861 GIVEN AT AHMEDABAD THIS 23 RD SEPTEMBER, 2000. THE INSTRUCTIONS FOR DEALING WITH THE LETTER OF AL LOTMENT ARE SET OUT OVERLEAF AND ARE TO BE REGARDED AS FORMING PART OF THE CONDI TIONS OF THIS LETTER OF ALLOTMENT. BY ORDER OF THE BOARD OF DIRECTORS FOR NIRMA LIMITED REVENUE STAMPS SD/ HASIT SHUKLA COMPANY SECRETARY A BARE PERUSAL OF THE LETTER OF ALLOTMENT SHOWS THA T THE COMPANY HAS CERTIFIED THAT THE PERSON NAMED THEREIN AS THE LAST TRANSFEREE IS THE HOLDER OF 1180 DEEP DISCOUNT BONDS SERIES A, EACH OF RS. 1,00,000/-. IT IS ALSO TO BE NOTED THAT THE DISTINCTIVE NUMBERS OF THE BON DS HAVE BEEN GIVEN IN ITA NO.1041/AHD/2006& OTHERS 37 THE ALLOTMENT LETTER ITSELF. THE ASSESSEE HAS BEEN SHOWN AS THE HOLDER OF THE BONDS WITH THE REGISTERED FOLIO NUMBER. THE RE VERSE OF THE LETTER OF ALLOTMENT CONTAINS A MEMORANDUM OF TRANSFERS OF THE BONDS. THIS IS BLANK AND OBVIOUSLY SO BECAUSE THE ASSESSEE IS THE FIRST ALLOTTEE OF THE BONDS. ITEM NO.1 OF THE INSTRUCTIONS BELOW THE MEMORANDUM OF TRANSFERS SAYS THAT TRANSFER OF DDB-SERIES A COMPRISED IN THE LETTER O F ALLOTMENT WILL BE REGISTERED BY THE COMPANY UPON SURRENDER OF THIS LE TTER OF ALLOTMENT WITH DULY COMPLETED TRANSFER DEED. ITEM 2 SAYS THAT T HIS LETTER OF ALLOTMENT SHOULD BE PRESERVED BY THE HOLDER(S) CAREFULLY. DD B-SERIES A CERTIFICATE(S) WILL BE EXCHANGED AGAINST SURRENDER OF LETTER OF ALLOTMENT DULY DISCHARGED BY THE HOLDER(S). THE CONTENTS OF THE L ETTER OF ALLOTMENT AND THE CATEGORICAL MANNER IN WHICH THE ASSESSEE HAS BE EN SHOWN AS THE HOLDER OF THE BONDS WITH DISTINCTIVE NUMBERS AND A REGISTERED FOLIO NUMBER SHOW THAT ON THE ISSUE OF THE LETTER OF ALLOTMENT T HE ASSESSEE BECAME ENTITLED TO THE BONDS. FROM THE DATE OF THE LETTER OF ALLOTMENT, VIZ. 23-9- 2000, THE COMPANY BECAME A DEBTOR TO THE ASSESSEE. FOR THE TIME BEING AND UNTIL THE DEBENTURE CERTIFICATE WAS ISSUED, THE LETTER OF ALLOTMENT EVIDENCED THE ASSESSEES TITLE TO THE BONDS. THERE CAN BE NO DOUBT THAT THE ASSESSEE, IF SUCH A SITUATION HAD ARISEN, COULD HAVE SUED THE COMPANY ON THE BASIS OF THE LETTER OF ALLOTMENT FOR REPAYME NT OF THE DEBT. THE ISSUE OF THE DEBENTURE CERTIFICATE ON 10-5-2001, AFTER TH E FORMALITIES SUCH AS ENTERING INTO OF A DEBENTURE TRUST DEED ON 27-4-200 1, DID NOT HAVE THE EFFECT OF DELAYING THE VESTING OF THE OWNERSHIP RIG HTS ON THE ASSESSEE IN RELATION TO THE BONDS. IF THE STAND OF THE DEPARTM ENT IS TO BE ACCEPTED, THEN IT WOULD BE DIFFICULT TO DEFINE THE STATUS OF THE ASSESSEE AS WELL AS THE COMPANY VIS--VIS THE TRANSACTION IN THE INTERREGNU M BETWEEN THE DATE OF THE LETTER OF ALLOTMENT AND THE DATE OF ISSUE OF TH E DEBENTURE CERTIFICATE. THE MOMENT THE LETTER OF ALLOTMENT WAS ISSUED THE C OMPANY BECAME THE DEBTOR TO THE ASSESSEE AND THAT RELATIONSHIP STOOD DEFINED AT THAT MOMENT ITSELF. THE ISSUE OF THE DEBENTURE CERTIFICATE AT A LATER DATE AFTER THE COMPLETION OF THE FORMALITIES SUCH AS THE DEBENTURE TRUST DEED ETC. DID NOT IMPROVE MATTERS AND BROUGHT ABOUT NO CHANGE IN THE RELATIONSHIP. THE LETTER OF ALLOTMENT MERELY GOT EXCHANGED FOR THE IS SUE OF THE DEBENTURE CERTIFICATES ON 10-5-2001. THE ASSESSEE CANNOT BE SAID TO HAVE ACQUIRED THE CAPITAL ASSET TWICE, FIRST WHEN THE LETTER OF A LLOTMENT WAS ISSUED AND THEREAFTER WHEN THE DEBENTURE CERTIFICATES WERE ISS UED. THERE WAS ONLY ONE CAPITAL ASSET AND THAT WAS ACQUIRED ON 23-9-200 0 WHEN THE LETTER OF ALLOTMENT WAS ISSUED. 17. THE LEARNED COUNSEL FOR THE ASSESSEE HAD REFERR ED TO SECTION 75 OF THE COMPANIES ACT, 1956 WHICH SPEAKS OF RETURN AS TO ALLOTMENT. THIS SECTION APPLIES TO ALLOTMENT OF SHARES. HOWEVER, T HE MEANING OF THE WORD ALLOTMENT HAS BEEN EXPLAINED AT PAGE 687 OF GUID E TO THE COMPANIES ACT, A TREATISE BY A. RAMAIYA (14TH EDN. 1998). T HERE IS REFERENCE IN THIS PAGE TO THE JUDGMENT OF THE SUPREME COURT IN SRI GO PAL JALAM & CO. VS. CALCUTTA STOCK EXCHANGE ASSN., (AIR 1964 SC 250) IN WHICH THE SUPREME COURT HAS QUOTED THE OBSERVATIONS OF THE CHANCERY D IVISION IN ENGLAND IN THE CASE OF FLORENCE LAND AND PUBLIC WORKS CO. IN R E (1885) 29 CH D 421. IT WAS OBSERVED IN THE ENGLISH CASE THAT AN ALLOTME NT IS GENERALLY NEITHER ITA NO.1041/AHD/2006& OTHERS 38 MORE NOR LESS THAN THE ACCEPTANCE BY THE COMPANY OF THE OFFER TO TAKE SHARES. IT HAS FURTHER BEEN OBSERVED THAT WHEN THE OFFER IS ACCEPTED BY THE COMPANY, IT CONSTITUTES A BINDING CONTRACT TO T AKE THAT NUMBER OF SHARES ACCORDING TO THE OFFER AND ACCEPTANCE. EXTE NDING THE LOGIC TO THE ALLOTMENT OF DEEP DISCOUNT BONDS OR DEBENTURES, IT SEEMS TO US THAT WHEN THE LETTER OF ALLOTMENT WAS ISSUED BY NIRMA LTD. ON 23-9-2000 THERE WAS A BINDING CONTRACT BETWEEN THE COMPANY AND THE ASSESS EE AND THE RELATIONSHIP OF DEBTOR CREDITOR CAME INTO BEING. AT PAGE 607 OF THE ABOVE TREATISE, IN THE COMMENTARY RELATING TO SECTION 69 OF THE COMPANIES ACT, WHICH PROHIBITS ALLOTMENT OF SHARES UNLESS THE COMP ANY RECEIVES THE MINIMUM SUBSCRIPTION, IT HAS BEEN OBSERVED THAT TH E MERE SUBSCRIPTION TO SHARES IN A COMPANY DOES NOT CONSTITUTE A SUBSCRIBE R A SHAREHOLDER OF THE COMPANY; HE ACQUIRES THE STATUS OF SHAREHOLDER AND THE RIGHT TO DEMAND SHARES AND TO EXERCISE THE RIGHTS OF A SHAREHOLDER ONLY WHEN SHARES ARE ALLOTTED TO HIM AND A COMMUNICATION OF THE ALLOTMEN T IS MADE TO HIM. SIMILARLY, IT APPEARS TO US TO BE THE POSITION IN L AW THAT ON AND FROM THE DATE OF ALLOTMENT OF THE BONDS THE ASSESSEE BECAME ENTITLED TO EXERCISE THE RIGHTS OF A BOND HOLDER OR DEBENTURE HOLDER WHI CH MEANS THAT HE HAS STARTED HOLDING THE BONDS FROM THAT DATE. IF THE A SSESSEE HAS STARTED HOLDING THE BONDS FROM 23-9-2000 WHICH IS THE DATE ON WHICH HE WAS INFORMED THAT THEY WERE ALLOTTED TO HIM, THEN IT WO ULD BE ANOMALOUS TO SAY THAT THEY WERE ACQUIRED BY HIM AGAIN WHEN THE DEBEN TURE CERTIFICATES WERE ISSUED ON 10-5-2001. THIS ASPECT OF THE MATTER HAS BEEN DEALT WITH BY THE HONBLE GUJARAT HIGH COURT IN THE CASE OF RANCHHODB HAI BHAIJJIBHAI PATEL (SUPRA). IN THIS CASE, IT WAS HELD THAT THERE CAN BE NO TWO DIFFERENT ACQUISITIONS OF PROPERTY, ONE AS A NON-CAPITAL ASSE T AND THE OTHER AS A CAPITAL ASSET AND THAT THE PROPERTY IS ACQUIRED BY THE ASSESSEE ONLY ONCE AND MERELY ITS CHARACTER CHANGES IN THE SENSE THAT, WHEREAS, ORIGINALLY IT WAS NON-CAPITAL ASSET, IT NOW BECOMES CAPITAL ASSET . IN THIS CASE, THE ASSESSEE HAD ACQUIRED AGRICULTURAL LAND WHICH AT TH E TIME OF ACQUISITION WAS NOT A CAPITAL ASSET UNDER THE INCOME TAX ACT. THE LAND WAS LATER CONVERTED AS NON-AGRICULTURAL LAND AND SOLD. THE A RGUMENT OF THE ASSESSEE WAS THAT THE VALUE OF THE LAND ON THE DATE OF CONVERSION TO NON- AGRICULTURAL PURPOSES SHOULD BE TAKEN AS THE COST O F ACQUISITION OF THE CAPITAL ASSET. REPELLING THE ARGUMENT IT WAS HELD THAT THERE CAN BE ONLY ONE ACQUISITION OF A CAPITAL ASSET AND THEREFORE TH E COST OF THE AGRICULTURAL LAND AT THE TIME OF PURCHASE OR THE FAIR MARKET VAL UE OF THE SAID LAND AS ON 1-1-1954, AT THE OPTION OF THE ASSESSEE, WAS TO BE DEDUCTED AND NOT THE MARKET VALUE OF THE LAND ON THE DATE ON WHICH IT WA S CONVERTED FOR NON- AGRICULTURAL PURPOSES. IT MUST BE REMEMBERED THAT THE JUDGMENT WAS RENDERED IN THE CONTEXT OF AN ASSET WHICH WAS NOT A CAPITAL ASSET ACCORDING TO THE ACT AT THE TIME OF ACQUISITION. T HE RATIO OF THE JUDGMENT APPLIES WITH STRONGER FORCE TO THE CASE BEFORE US W HERE THE BONDS OR THE DEBENTURES WERE CAPITAL ASSETS AT BOTH POINTS OF TI ME UNDER THE ACT. THE JUDGMENT OF THE BOMBAY HIGH COURT IN THE CASE OF KE SHAVJI KARSONDAS VS. CIT (SUPRA) AND THE ORDER OF THE PUNE BENCH (THIRD MEMBER) IN THE CASE OF KALYANI EXPORTS & INVESTMENTS P. LTD. (SUPRA) AL SO SUPPORT THE ABOVE PROPOSITION. ITA NO.1041/AHD/2006& OTHERS 39 18. HAVING HELD THAT THE ASSESSEE CANNOT BE SAID TO HAVE ACQUIRED THE BONDS ON THE DATE OF ISSUE OF THE BONDS CERTIFICATE S (10-5-2001), WE NOW PROCEED TO CONSIDER THE CONTENTION OF THE REVENUE T HAT SINCE THE BONDS WERE LISTED IN THE NSE ONLY ON 20-9-2001, THAT IS T HE DATE ON WHICH THE ASSESSEE CAN BE SAID TO HAVE STARTED HOLDING THEM. THIS CONTENTION IS BASED ON THE PROVISO TO SECTION 2(42A). ACCORDING TO THE REVENUE SINCE IT IS A CONDITION THAT THE CAPITAL ASSET IN QUESTION, BEING A SECURITY, SHOULD BE LISTED IN A RECOGNISED STOCK EXCHANGE IN INDIA, THE DATE ON WHICH THE SECURITY WAS LISTED IN THE STOCK EXCHANGE ALONE CAN BE TAKEN AS THE STARTING POINT FOR COMPUTING THE HOLDING PERIOD. T HE DIFFICULTY IN ACCEPTING THE CONTENTION OF THE REVENUE IS THAT THERE IS NO I NDICATION IN THE PROVISO THAT THE SECURITY VIZ. THE BONDS SHOULD BE LISTED I N A RECOGNISED STOCK EXCHANGE IN INDIA AT BOTH POINTS OF TIME VIZ. WHEN THEY ARE ACQUIRED BY THE ASSESSEE AND WHEN THEY ARE SOLD. IT SEEMS TO US TH AT WE HAVE TO ONLY SEE THAT THE CONDITION STANDS SATISFIED AT THE POINT OF TIME WHEN THE SECURITY IS SOLD AND IT HARDLY MATTERS THAT THE SECURITY WAS NO T LISTED WHEN IT WAS ACQUIRED. ON THIS QUESTION ALSO WE ARE OF THE VIEW THAT THE JUDGMENT OF HONBLE GUJARAT HIGH COURT IN THE CASE OF RANCHHODB HAI BHAIJIBHAI PATEL VS. CIT(SUPRA) APPLIES. AS ALREADY NOTICED, IN THA T CASE THE LAND WAS ORIGINALLY AGRICULTURAL IN NATURE AND WAS NOT INCLU DED IN THE DEFINITION OF CAPITAL ASSET UNDER THE INCOME TAX ACT. WHEN IT WA S ACQUIRED BY THE ASSESSEE IT WAS NOT A CAPITAL ASSET. HOWEVER, WHEN IT WAS SOLD, IT WAS NOT AGRICULTURAL LAND AS IT HAD BEEN CONVERTED BY THE A SSESSEE FOR NON- AGRICULTURAL USE. IT WAS THUS A CAPITAL ASSET AS D EFINED BY THE ACT AT THE TIME OF SALE. THE ARGUMENT OF THE ASSESSEE WAS TH AT THE ASSET SOLD SHOULD BE A CAPITAL ASSET UNDER THE ACT BOTH AT THE POINT OF ACQUISITION AND AT THE POINT OF SALE. THE HONBLE HIGH COURT REPEL LED THE CONTENTION AND AT PAGES 455-457 OF THE JUDGMENT REFERRED TO SECTION 4 5 AND HELD THAT IT WAS CLEAR ON A PLAIN READING OF THE SECTION THAT THE ON LY CONDITION FOR ATTRACTING THE CHARGE OF TAX WAS THAT THE ASSET TRANSFERRED MU ST BE A CAPITAL ASSET AT THE POINT OF SALE AND THERE WAS NO CONDITION THAT I T SHOULD HAVE BEEN A CAPITAL ASSET UNDER THE ACT EVEN AT THE POINT OF AC QUISITION. THE HONBLE HIGH COURT FURTHER REFERRED TO SECTION 48 WHICH PRO VIDED FOR THE COMPUTATION OF THE CAPITAL GAINS AND HELD THAT THER E WAS NO CONDITION IN THIS SECTION THAT THE ASSET SOLD SHOULD SATISFY THE DEFINITION OF THE CAPITAL ASSET AT THE DATE OF ACQUISITION ALSO. IT WAS OBS ERVED THAT THE EXPRESSION CAPITAL ASSET IS TO BE UNDERSTOOD ONLY AS A DEMON STRATIVE NOUN TO REFER TO THE PROPERTY TRANSFERRED AND CANNOT BE UNDERSTOOD A S IMPOSING A CONDITION FOR THE CHARGE THAT THE ASSET SHOULD HAVE BEEN A CA PITAL ASSET AS DEFINED BY THE ACT EVEN AT THE POINT OF ACQUISITION. IF TH E RATIO OF THIS JUDGMENT IS APPLIED TO THE PRESENT CASE, AS WE ARE RESPECTFULLY BOUND TO, IT SEEMS TO US THAT THE EXPRESSION ANY OTHER SECURITY LISTED IN A RECOGNISED STOCK EXCHANGE IN INDIA APPEARING IN PROVISO TO SECTION 2(42A) IS MERELY DEMONSTRATIVE OF THE ASSET THE SALE OF WHICH HAS GI VEN RISE TO CAPITAL GAINS AND IT DOES NOT IMPOSE ANY CONDITION THAT THE SECUR ITY SHOULD HAVE ALSO BEEN LISTED IN THE STOCK EXCHANGE WHEN IT WAS ACQUI RED BY THE ASSESSEE. APART FROM THE JUDGMENT OF THE HONBLE GUJARAT HIGH COURT CITED SUPRA ON THIS POINT THERE IS ALSO THE JUDGMENT OF THE BOMBAY HIGH COURT IN KESHAVJI KARSONDAS VS. CIT (SUPRA) WHICH HAS ALSO TAKEN THE SAME VIEW FOLLOWING ITA NO.1041/AHD/2006& OTHERS 40 THE HONBLE GUJARAT HIGH COURTS VIEW. THE RESULT IS THAT THE STAND OF THE REVENUE THAT THE ASSESSEE CAN BE SAID TO HAVE ACQUI RED THE CAPITAL ASSET VIZ. A SECURITY LISTED IN A RECOGNISED STOCK EXCHAN GE, ONLY ON 20-9-2001 WHEN THE BONDS WERE LISTED IN THE NSE CANNOT BE ACC EPTED AS SOUND. 19. THE LEARNED CIT-DR HAD REFERRED TO CLAUSES (D) AND (F) OF EXPLANATION 1 OF SECTION 2(42A). THE SAID EXPLANAT ION PROVIDES FOR THE COMPUTATION OF THE PERIOD FOR WHICH ANY CAPITAL ASS ET IS HELD BY THE ASSESSEE. CLAUSE (D) SAYS THAT IN THE CASE OF SHAR E OR ANY OTHER SECURITY SUBSCRIBED TO BY THE ASSESSEE ON THE BASIS OF HIS R IGHT TO SUBSCRIBE TO THE SAME OR SUBSCRIBED TO BY THE PERSON IN WHOSE FAVOUR THE ASSESSEE HAS RENOUNCED HIS RIGHT TO SUBSCRIBE TO THE SHARE OR TH E SECURITY, THE PERIOD OF HOLDING SHALL BE RECKONED FROM THE DATE OF ALLOTMEN T OF THE SHARE OR OTHER SECURITY. WE ARE UNABLE TO APPRECIATE THE RELEVANC E OF THIS CLAUSE TO THE CONTROVERSY BEFORE US. THE CLAUSE APPLIES ONLY TO A SHARE OR OTHER SECURITY SUBSCRIBED TO BY THE ASSESSEE ON RIGHTS BASIS. IT SAYS THAT IF THE ASSESSEE HAS SUBSCRIBED TO THE SHARE OR THE SECURITY ON RIGH TS BASIS THEN THE PERIOD OF HOLDING SHALL COMMENCE ON THE DATE OF ALLOTMENT OF THE SHARE OR THE SECURITY. THIS CLAUSE IN TERMS DOES NOT APPLY TO T HE FACTS OF THE PRESENT CASE BECAUSE THE ASSESSEE HEREIN HAS NOT SUBSCRIBED TO THE BONDS ON RIGHTS BASIS, EVEN TAKING NOTE OF THE FACT THAT THE BONDS AND ALSO SECURITIES COVERED BY THE CLAUSE. IF ANYTHING, THIS CLAUSE SU PPORTS THE CONTENTION OF THE ASSESSEE THAT THE PERIOD OF HOLDING OF THE SECU RITY SHALL COMMENCE FROM THE DATE OF ALLOTMENT OF THE BONDS I.E. ON 23- 9-2000 BECAUSE THE CLAUSE SPECIFICALLY SAYS THAT IT IS THE ALLOTMENT O F THE SHARE OR SECURITY, SUBSCRIBED TO BY THE ASSESSEE ON RIGHTS BASIS, THAT WILL BE THE STARTING POINT OF THE PERIOD OF HOLDING. 20. CLAUSE (F) OF EXPLANATION 1 SAYS THAT IN THE CA SE OF FINANCIAL ASSET ALLOTTED TO THE ASSESSEE WITHOUT ANY PAYMENT AND ON THE BASIS OF HOLDING OF ANY OTHER FINANCIAL ASSET, THE PERIOD OF HOLDING SHALL BE RECKONED FROM THE DATE OF THE ALLOTMENT OF SUCH FINANCIAL ASSET. WE WERE NOT REFERRED TO ANY DEFINITION OF WHAT A FINANCIAL ASSET IS UNDER T HE INCOME TAX ACT. HOWEVER, WE SHALL ASSUME FOR THE SAKE OF ARGUMENT T HAT THE LISTED BONDS HELD BY THE ASSESSEE ARE FINANCIAL ASSETS. EVEN SO THE CLAUSE WOULD APPLY ONLY WHERE THE LISTED BONDS WERE ALLOTTED TO THE AS SESSEE WITHOUT ANY PAYMENT AND ON THE BASIS OF HOLDING OF ANY OTHER FI NANCIAL ASSET. EVEN ASSUMING THAT THE LISTED BONDS (DEBENTURE CERTIFICA TES) WERE ALLOTTED TO THE ASSESSEE WITHOUT ANY PAYMENT WHEN THEY WERE ALLOTTE D, THEY CANNOT BE SAID TO HAVE BEEN ALLOTTED TO THE ASSESSEE ON THE B ASIS OF HOLDING OF ANY OTHER FINANCIAL ASSET. THE ARGUMENT OF THE LEARNED CIT-DR WAS THAT THE LETTER OF ALLOTMENT IS A FINANCIAL ASSET AND THAT H AS BEEN EXCHANGED FOR THE DEBENTURE CERTIFICATES AND THEREFORE THE DEBENTURE CERTIFICATES WERE ALLOTTED TO THE ASSESSEE ON THE BASIS OF HOLDING OF THE LETTER OF ALLOTMENT AND ACCORDINGLY THE DATE OF ISSUE OF THE DEBENTURE CERTIFICATES AS SUCH SHALL BE TAKEN AS THE DATE OF ALLOTMENT WHICH SHALL BE THE STARTING POINT OF THE PERIOD OF HOLDING. HERE WE HAVE TO GO BACK TO THE FUNDAMENTAL PROPOSITION THAT THE DEBT DUE TO THE ASSESSEE FROM NIRMA LTD. WAS FIRST EVIDENCED BY THE LETTER OF ALLOTMENT AND THEREAFTER THE LETTER OF ALLOTMENT ITA NO.1041/AHD/2006& OTHERS 41 WAS SURRENDERED AND IN LIEU THEREOF THE COMPANY ISS UED DEBENTURE CERTIFICATES TO THE ASSESSEE. THUS THERE WAS CHANG E ONLY IN THE NATURE OF THE DOCUMENT WHICH ACKNOWLEDGED THE DEBT DUE TO THE ASSESSEE, BUT THERE WAS NO CHANGE IN THE NATURE AND CHARACTER OF THE ASSET ITSELF. WE MAY AGAIN REFER TO THE JUDGMENT OF THE HONBLE GUJA RAT HIGH COURT IN THE CASE OF RANCHHODBHAI BHAIJIBHAI PATEL VS. CIT (SUPR A) WHERE IT WAS HELD THAT THE PROPERTY CAN BE ACQUIRED ONLY ONCE AND WHE N IT BECAME A CAPITAL ASSET WITHIN THE MEANING OF THE INCOME TAX ACT, WHA T HAPPENS IS MERELY THAT ITS CHARACTER CHANGED IN THE SENSE THAT WHEREA S IT WAS A NON-CAPITAL ASSET AT THE TIME OF ACQUISITION, IT BECAME A CAPIT AL ASSET LATER. IT SEEMS TO US THAT CLAUSE (F) WOULD APPLY TO A CASE WHERE THER E ARE TWO SEPARATE AND DISTINCT CAPITAL ASSETS, AS RIGHTLY POINTED OUT ON BEHALF OF THE ASSESSEE, AND ONE IS EXCHANGED FOR THE OTHER. IT IS ONLY IN SUCH A CASE THAT IN RESPECT OF THE SECOND FINANCIAL ASSET, THE PERIOD OF HOLDING S HALL BE RECKONED FROM THE DATE OF ALLOTMENT THEREOF. WE ARE ACCORDINGLY, WITH RESPECT, UNABLE TO GIVE EFFECT TO THE ARGUMENT OF THE LEARNED CIT-DR B ASED ON THE SAID CLAUSE. 21. IT NOW REMAINS FOR US TO CONSIDER THE ARGUMENT OF THE DEPARTMENT THAT THE RIGHTS OF THE ASSESSEE AS A BOND HOLDER BE CAME CRYSTALLISED ONLY WHEN THE DEBENTURE TRUST DEED WAS DRAWN UP AND TRUS TEES WERE APPOINTED. ACCORDINGLY, IT IS CONTENDED THAT IT WA S ONLY ON 27-4-2001 THAT THE ASSESSEE CAN BE SAID TO HAVE BECOME A BOND HOLD ER IN THE REAL AND FULL SENSE OF THE TERM. THE DEBENTURE TRUST DEED M ERELY SECURES THE DEBT DUE TO THE ASSESSEE BY THE COMPANY BY CREATING A CH ARGE OR MORTGAGE OF THE ASSET BELONGING TO THE COMPANY. THERE IS NO CH ANGE EFFECTED IN THE NATURE OF THE DEBT. WHAT PERHAPS CAN BE SAID AT BE ST IS THAT THE BOND CERTIFICATES WERE ISSUED BY THE COMPANY ON THE FINA LISATION OF THE DEBENTURE TRUST DEED BUT IT MUST BE REMEMBERED THAT THE CAPITAL ASSET IS NOT REPRESENTED BY THE BOND CERTIFICATES THEMSELVES , WHICH ARE MERE EVIDENCE OF THE ASSESSES TITLE TO THEM AND THE SUB STANCE OF THE MATTER IS THAT IT IS THE DEBT DUE TO THE ASSESSEE WHICH IS HI S ASSET. THAT DEBT AROSE TO HIM ONCE THE LETTER OF ALLOTMENT WAS ISSUED ON 2 3-9-2000. WE ARE THEREFORE UNABLE TO UPHOLD THE ARGUMENT OF THE DEPA RTMENT. 22. WE MAY BRIEFLY REFER NOW TO THE AUTHORITIES CIT ED BY THE LEARNED CIT- DR. IN THE JUDGMENT OF THE CALCUTTA HIGH COURT IN THE CASE OF MRS.A. GHOSH (SUPRA) EQUITY SHARES WERE ISSUED TO THE ASSE SSEE ON CONVERSION OF DEBENTURES. SUBSEQUENTLY THE SHARES WERE SOLD WITH IN 12 MONTHS OF CONVERSION. IT WAS HELD THAT THE PROFITS WERE ASSE SSABLE AS SHORT TERM CAPITAL GAINS. IT IS TO BE NOTED THAT IN THIS CASE THE HIGH COURT HELD THAT WHEN THE ASSESSEE GAVE UP THE DEBENTURES AND ACQUIR ED THE SHARES, HE ACQUIRED AN ASSET WHICH WAS QUITE DISTINCT AND SEPA RATE FROM THE DEBENTURES AND FURTHER THAT THE RIGHTS AS A SHAREHO LDER WHICH THE ASSESSEE ENJOYED WERE QUITE DIFFERENT FROM THE RIGH TS THAT THE ASSESSEE HAD AS A DEBENTURE HOLDER. THUS, TWO SEPARATE CAPI TAL ASSETS WERE INVOLVED. IT WAS THEREFORE HELD THAT THE SALE OF S HARES WITHIN A PERIOD OF 12 MONTHS FROM THE DATE OF CONVERSION OF THE DEBENTURE S GAVE RISE TO SHORT TERM CAPITAL GAINS. IN THE PRESENT CASE, WE HAVE AL READY HELD THAT THERE ITA NO.1041/AHD/2006& OTHERS 42 WERE NO TWO OR MORE DISTINCT OR SEPARATE CAPITAL AS SETS AND WHAT THE ASSESSEE HELD THROUGHOUT WAS A SINGLE CAPITAL ASSET WITH CHANGES THAT DID NOT AFFECT THE REAL NATURE AND CHARACTER THEREOF. THE ASSESSEE ENJOYED THE SAME RIGHTS SUBSTANTIALLY THROUGHOUT THE PERIOD COM MENCING FROM THE LETTER OF ALLOTMENT AND ENDING WITH THE SALE OF THE BONDS. THERE LIES THE DISTINCTION BETWEEN THE CITED JUDGMENT AND THE PRES ENT CASE. 23. THE JUDGMENT OF THE BOMBAY HIGH COURT IN CIT VS . SANTOSH L. CHOWGULE AND OTHERS (SUPRA) CAN ALSO BE DISTINGUISH ED ON THE SAME FOOTING. IN THIS CASE, THE ASSESSEE HELD EQUITY SH ARES SINCE 1965 AND IN 1971 THESE SHARES WERE EXCHANGED FOR NEW TYPES OF E QUITY SHARES AND IRREDEEMABLE CUMULATIVE PREFERENTIAL SHARES. THES E SHARES WERE SOLD IN 1976 AND THE ASSESSEE SUFFERED A LOSS. IT WAS HELD THAT THE LOSS WAS A SHORT TERM CAPITAL LOSS SINCE THE NEW TYPES OF EQUI TY SHARES AND IRREDEEMABLE CUMULATIVE PREFERENTIAL SHARES ALLOTTE D TO THE ASSESSEE IN 1971 HAD RIGHTS AND LIABILITIES WHICH WERE DIFFEREN T FROM THE SHARES HELD BY HIM PRIOR TO 1971. AS CAN BE SEEN FROM THE FACTS, THIS JUDGMENT IS ALSO DISTINGUISHABLE FROM THE PRESENT CASE SINCE TWO DIS TINCT AND SEPARATE CAPITAL ASSETS WERE INVOLVED IN THE CITED CASE. 24. THE ORDER OF THE BANGALORE BENCH OF THE TRIBUNA L IN THE CASE OF GIRIDHAR KRISHNA (SUPRA) ALSO TURNED ON DIFFERENT F ACTS. THERE THE ASSESSEE WAS GIVEN A STOCK OPTION UNDER THE EMPLOYE ES STOCK OPTION SCHEME (ESOP). UNDER THE SCHEME THE ASSESSEE WAS V ESTED WITH RIGHT TO PURCHASE CERTAIN NUMBER OF SHARES WITHIN CERTAIN PE RIOD. THIS OPTION WAS EXERCISED BY THE ASSESSEE ON 7-11-2002. THE SHARES WERE SOLD ON 18-5- 2003. THE ASSESSEE CLAIMED THAT THE CAPITAL GAINS ARISING ON THE SALE OF THE SHARES SHOULD BE TREATED AS LONG TERM CAPITAL L OSS. THE CLAIM WAS REJECTED ON THE FOOTING THAT THE PERIOD OF HOLDING OF THE SHARES IS TO BE RECKONED FROM THE DATE OF ALLOTMENT OF THE SHARES A ND NOT FROM THE DATE ON WHICH THE RIGHT TO PURCHASE THE SHARES VESTED IN TH E ASSESSEE. EVEN IF THE RATIO OF THIS ORDER IS TO BE APPLIED TO THE PRESENT CASE, IT SEEMS TO US THE DATE ON WHICH THE ASSESSEE BEFORE US WAS ALLOTTED T HE DEEP DISCOUNT BONDS BY ISSUE OF LETTER OF ALLOTMENT SHOULD BE THE STARTING POINT OF THE HOLDING PERIOD. THE BANGALORE BENCH HELD THAT WHAT EVER HAPPENED BEFORE THE SHARES WERE ALLOTTED, VIZ. THE VESTING OF THE R IGHT IN THE EMPLOYEE TO PURCHASE THE SHARES WITHIN A PARTICULAR PERIOD, WER E ALL IRRELEVANT AND IT WAS ONLY FROM THE DATE OF THE ALLOTMENT OF THE SHAR ES THAT THE ASSESSEE CAN BE SAID TO HAVE HELD THE SHARES. THIS DECISION CANNOT THEREFORE BE SAID TO ADVANCE THE REVENUES CASE. 25. THE ORDER OF THE DELHI BENCH IN THE CASE OF SPL ENDOR CONSTRUCTION P. LTD. VS. ITO (SUPRA) ON WHICH RELIANCE WAS PLACE D BY THE LEARNED CIT- DR IS A CASE OF CONVERSION OF LAND FROM THE COMPANY S STOCK IN TRADE INTO INVESTMENT AND THE QUESTION WAS WHETHER FOR THE PUR POSE OF ASCERTAINING WHETHER THE CAPITAL GAINS ON THE SALE OF THE LAND W ERE LONG TERM OR SHORT TERM, IT IS THE DATE OF CONVERSION THAT SHOULD BE T AKEN AS THE STARTING POINT FOR COMPUTING THE PERIOD OF HOLDING OF THE ASSET. THE QUESTION WAS ANSWERED IN THE AFFIRMATIVE. THIS CASE IS WHOLLY DISTINGUISHABLE ON FACTS ITA NO.1041/AHD/2006& OTHERS 43 FROM THE PRESENT CASE AND THE NATURE OF THE CONTROV ERSY IS ALSO DIFFERENT. WE ARE NOT HEREIN CONCERNED WITH ANY CONVERSION OF STOCK IN TRADE INTO INVESTMENT. THIS ORDER IS ALSO NOT HELPFUL TO THE REVENUE. 26. FOR THE AFORESAID REASONS, WE ARE OF THE VIEW T HAT 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 CAPI TAL GAINS ON THE FOOTING THAT HE HELD THEM FOR A PERIOD OF MORE THAN 12 MONTHS STARTING FROM 23-9-2000 BEFORE THEY WERE SOLD ON 20-3-2002. CONS EQUENTLY, WE ALSO HOLD THAT THE ASSESSEE IS ENTITLED TO THE EXEMPTION UNDER SECTION 54EC AS CLAIMED. THUS BOTH GROUND NOS.2 AND 3 ARE ALLOWED. 11.1 IN THE LIGHT OF VIEW TAKEN BY A CO-ORDINA TE BENCH IN THEIR AFORESAID DECISIONS, ESPECIALLY WHEN NO CONTRARY DE CISION HAS BEEN BROUGHT TO OUR NOTICE BY THE REVENUE WHILE FACTS IN THE CASE UNDER CONSIDERATION ARE SIMILAR TO THE FACTS OBTAINING IN THE AFORESAID DECISION, WE HAVE NO OPTION BUT TO CONCLUDE THAT G AINS ARISING AS A RESULT OF REPURCHASE OF DDBS OF NIRMA LTD.A SERIE S HAVE TO BE ASSESSED AS LTCG. THEREFORE, GROUND NO.4 IN ITA NOS .1041,1242 & 1251/AHD/2006,GROUND NO.3 IN ITA NOS.1246/AHD/2006 AND GROUND NO. 6 IN ITA NO. 1251/AHD./2006 ARE ALLOWED. 12. NEXT GROUND NO.5 IN ITA NOS.1041,1242 & 1251/AHD/2006,GROUND NO. 7 IN ITA NO.1251/AHD./2006 AND GROUND NO. 4 IN ITA NOS.1246/AHD/2006 RELATE TO DEDUCTION U/S 54EC OF THE ACT. SINCE THE AO BROUGHT TO TAX GAINS AS A RESULT OF REPURCHASE OF DDBS OF NIRMA LTD. AS STCG, THE AO DENIED DEDUCTION U/S 54EC OF THE ACT CLAIMED BY THESE ASSESSEES. ON APPEAL , THE LD. CIT(A) UPHELD THE FINDINGS OF THE AO. 13. THESE ASSESSEES ARE NOW IN APPEAL BEFORE US . THE LD. AR ON BEHALF OF THE ASSESSEE CONTENDED THAT SINCE THE AO DID NOT EXAMINE THE APPLICABILITY OF PROVISIONS OF SEC. 54EC OF TH E ACT, THE MATTER NEEDS TO BE RESTORED TO THE FILE OF THE AO. THE LD. DR DID NOT OPPOSE THESE SUBMISSIONS ON BEHALF OF THE ASSESSEES. ITA NO.1041/AHD/2006& OTHERS 44 14. SINCE WE HAVE CONCLUDED IN THE PRECEDING GROU ND THAT GAINS ARISING AS A RESULT OF REPURCHASE OF DDBS OF NIRMA LTD. HAVE TO BE ASSESSED AS LTCG, WE CONSIDER IT FAIR AND APPROPR IATE TO VACATE THE FINDINGS OF THE LD. CIT(A) AND RESTORE THE MATT ER TO THE FILE OF THE AO WITH THE DIRECTIONS TO CONSIDER THE CLAIM OF THE ASSESSEE FOR DEDUCTION U/S 54EC OF THE ACT IN ACCORDANCE WITH LA W AFTER ALLOWING SUFFICIENT OPPORTUNITY TO THESE ASSESSEES. WITH THE SE DIRECTIONS, GROUND NO.5 IN ITA NOS.1041,1242 & 1251/AHD/2006, G ROUND NO. 7 IN ITA NO.1251/AHD./2006 AND GROUND NO. 4 IN ITA NOS.1 246/AHD/2006 ARE DISPOSED OF. 15. GROUND NO.6 IN ITA NO.1041/AHD/2006 RELATES T O ADDITION OF ACCRUED INTEREST ON OPTIONALLY FULLY CONVERTIBLE PR EMIUM NOTES[ OFCPN] OF ECHOLAC FINVEST PVT. LTD., AKSHAT FINSTOCK PVT. LTD. AND DDB SERIES B OF NIRMA LTD. THE AO NOTICED THAT THE ASS ESSEE MADE INVESTMENT IN 50 OFCPN OF ECHOLAC FINVEST PVT. LTD . & 300 OFCPN OF AKSHAT FINSTOCK PVT. LTD. BESIDE 2500 DDBS B SER IES OF NIRMA LTD. EACH OFCPN AND DDB COSTING RS.1 LAC EACH. SINC E THE ASSESSEE DID NOT OFFER INTEREST ACCRUED ON THE SAID INVESTMENTS, THE AO SHOWCAUSED THE ASSESSEE AS TO WHY INTEREST ACCRU ED ON THE AFORESAID INVESTMENTS BE NOT BROUGHT TO TAX IN TERM S OF CIRCULAR NO.2 OF 2002 ISSUED BY THE CBDT . IN RESPONSE, THE ASSES SEE SUBMITTED THAT CIRCULAR NO.2 OF 2002 WAS NOT APPLICABLE RETRO SPECTIVELY, INVESTMENTS HAVING BEEN MADE PRIOR TO 15.2.2002 AND IN THIS CONNECTION RELIED UPON PRESS RELEASE DATED 20.3.200 2. HOWEVER, THE AO DID NOT .ACCEPT THE PLEA OF THE ASSESSEE AND RE LYING UPON CIRCULAR NO.2 OF 2002 BROUGHT TO TAX INTEREST ACCRU ED ON AFORESAID INVESTMENTS, RESULTING IN ADDITION OF RS.97,67,716/ - +15,32,235 IN TERMS OF PARA 4.10 AND 6.2 OF THE ASSESSMENT ORDER. 16. ON APPEAL, THE LD. CIT(A) UPHELD THE FINDING S OF THE AO IN RESPECT OF INTEREST ACCRUED ON DDBS B SERIES OF NIR MA LTD. RELYING UPON THE ORDER DATED 2.3.2006 OF THE LD. CIT(A) IN THE CASE OF ITA NO.1041/AHD/2006& OTHERS 45 KARSANBHAI K PATEL,HUF, CIRCULAR NO.2 OF 2002 AND P ROVISIONS OF SEC.94(2) OF THE ACT. AS REGARDS INTEREST ACCRUED ON OECPNS OF AFORESAID TWO COMPANIES, THE LD. CIT(A) SUPPORTED T HE FINDINGS OF THE AO IN THE LIGHT OF AFORESAID CIRCULAR NO.2 OF 2 002 AND DECISION OF HOBLE CALCUTTA HIGH COURT IN THE CASE OF MRS. A GH OSH VS. CIT,141 ITR 45(CAL.) 17. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAINS T THE AFORESAID FINDINGS OF THE LD. CIT(A).THE LEARNED AR ON BEHALF OF THE ASSESSEE SUBMITTED THAT THE ISSUE IS COVERED BY THE DECISION DATED IN THE CASE OF PUNITABEN K PATEL IN ITA NO.948/AHD/2009 FO R THE AY 2004- 05 AND THREE MORE DECISIONS IN THE CASE OF NAVIN AS SOCIATES, NIRCHEM ASSOCIATES AND NIRMA INDUSTRIES P LTD.. THE LEARNED DR, ON THE OTHER HAND, DID NOT OPPOSE THESE SUBMISSIONS ON BEHALF OF THE ASSESSEE. 18. WE HAVE HEARD BOTH THE PARTIES AND GONE THRO UGH THE FACTS OF THE CASE AS ALSO THE DECISIONS RELIED UPON. WE FIND THAT THE ITAT VIDE THEIR ORDER DATED 12.6.2009 IN THE CASE OF P UNITABEN K PATEL IN ITA NO.948/AHD/2009 FOR THE AY 2004-05 WHILE ADJUD ICATING A SIMILAR ISSUE IN RESPECT OF INTEREST ACCRUED ON DD BS OF RURAL ELECTRIFICATION CORPORATION CONCLUDED AS UNDER: 3. WE FIND THAT THE ITAT VIDE THEIR AFORESAID ORD ER DATED 8.5.2009 ON A SIMILAR ISSUE, ON AN APPEAL BY THE AS SESSEE, HELD AS UNDER: 3. GROUND NO.2 AND 3 READ AS UNDER : 2. IN LAW AND IN FACTS AND CIRCUMSTANCES OF THE AP PELLANTS CASE, THE LEARNED CIT(A) HAS GROSSLY ERRED IN CONFI RMING ADDITION OF ACCRUED INTEREST RS.1,32,423 ON INVESTMENT IN THE B ONDS OF RURAL ELECTRIFICATION CORPORATION LTD. THE ASSESSMENT OF THE ABOVE REFERRED INCOME SHOULD NOT BE MADE EVEN ON THE GROUND THAT APPELLANT IS FOLLOWING CASH METHOD OF ACCOUNTING AS ACCEPTED BY LD. A.O. 3. IN LAW AND IN FACTS AND CIRCUMSTANCES OF THE APP ELLANTS CASE, THE LEARNED CIT(A) HAS GROSSLY ERRED IN NOT DEALING WIT H FOLLOWING ADDITIONAL GROUND OF APPEAL: ITA NO.1041/AHD/2006& OTHERS 46 IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF THE A PPELLANTS CASE, IT IS SUBMITTED THAT IF ADDITION OF RS. 1,32, 423 BEING MADE AS NOTIONAL INTEREST ON REC BONDS, IS ACCEPTED PARTIALLY OR COMPLETELY, IT IS PRAYED THAT THE SAME AMOUNT SHOULD NOT HE TAXED IN THE SUBSEQUENT YEAR. 4. AT THE TIME OF HEARING, THE LEARNED AR OF THE AS SESSEE SUBMITTED THAT THE ISSUE INVOLVED IN THE ABOVE GROUND HAS BEE N DECIDED IN FAVOUR OF THE ASSESSEE BY THE ITAT, AHMEDABAD, VIDE CONSOLIDA TED ORDER DT.31.12.2008 IN ITA NO.1248/AHD/2006 AND OTHERS IN THE CASE OF NAVIN ASSOCIATES V. ACIT AND OTHERS (COPY PLACED ON RECOR D). WE FIND THAT SIMILAR ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN T HE SAID CASE RELYING ON THE DECISION OF THE TRIBUNAL N THE CASE OF NAMAN AS SOCIATE V. DCIT IN ITA NO.1621/AHD/2007 DT.4.4.2008 PERTAINING TO THE ASSE SSMENT YEAR 2002- 03 AND ALSO THE DECISION OF ITAT, MUMBAI BENCH-C IN THE CASE OF M/S.KULGAM HOLDINGS P. LTD IN ITA NO.3785/MUM/2004 DT.25.4.2007. THE LEARNED DR DID NOT DISPUTE THIS FACT SAVE AND EXCEP T RELYING ON THE ORDERS OF THE AUTHORITIES BELOW IN THE PRESENT CASE. IN T HE CASE OF NAVIN ASSOCIATES V. ACIT AND OTHERS (SUPRA), THE TRIBUNAL HAS DELETED SIMILAR ADDITION BY OBSERVING IN ITS ORDER, VIDE PARAGRAPHS 4 AND 5 AS UNDER : 4. HAVING HEARD BOTH THE PARTIES, WE HAVE CAREFULLY GONE THROUGH THE IMPUGNED ORDERS OF THE AUTHORITIES BELO W. WE FIND THAT SIMILAR ISSUE CAME UP FOR DECISION BEFORE THE ITAT, AHMEDABAD (SMC BENCH) IN THE CASE OF NAMAN ASSOCIATE V. DCIT IN ITA NO.1621 /AHD/2007 DT.4.4.2008 PERTAINING TO THE ASS ESSMENT YEAR 2002-03 AND THE TRIBUNAL HAS HELD IN FAVOUR OF THE ASSESSEE. THE RELEVANT PORTION OF THE SAID ORDER IS REPRODUCED AS UNDER : 7. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS AND, PERUSED THE MATERIAL ON RECORD. WE HAVE ALSO GONE THROUGH THE DECISION OF THE TRIBUNAL MUMBAI BENCH IN THE CASE OF M/S KULGAM HOLDINGS P LTD. (SUPRA). IN THIS CASE THE TRIBUNAL VIDE PARA-7 OF THE ORDER HAS HELD AS UNDER: 7. WE HEARD THE RIVAL SUBMISSIONS. CIRCULAR OF CBDT NO.2 OF 2002 DATED 15.02.2002 AND PRESS NOTES HAS BEEN PLACED ON RECORD BY THE ASSESSEE AT PAGE 38 TO 47 OF THE PAPER BOOK. CLAUSE 3 OF CIRCULAR NO.2 OF 2002 W HICH READS AS UNDER: 3. THE MATTER HAS NOW BEEN EXAMINED IN CONSULTATIO N WITH THE RESERVE BANK OF INDIA AND THE MINISTRY OF LAW. THE PRACTICE FOLLOWED IN SEVERAL COUNTRIES OUTSIDE INDI A HAS ALSO BEEN EXAMINED. WITH A VIEW TO REMOVE THE ANOMALIES IN THE EXISTING SYSTEM OF TAXATION OF INCOME FROM DEEP DIS COUNT BONDS, AND TO FORMULATE A SYSTEM WHICH IS MORE IN L INE WITH ITA NO.1041/AHD/2006& OTHERS 47 INTERNATIONAL PRACTICE, THE BOARD HAVE DECIDED THAT SUCH INCOME MAY HEREAFTER BE TREATED AS FOLLOWS . . LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT I N THE SUBSEQUENT YEAR THE ASSESSEE SOLD THE BONDS AND WHA TEVER SURPLUS WAS OFFERED TO TAX AND IT WAS ACCEPTED AS W ELL. LEARNED COUNSEL AGAIN BROUGHT OUR ATTENTION TO PAGE 43 OF THE PAPER BOOK, WHICH IS THE PRESS NOTES/RELEASE FO R TAX TREATMENT OF DEEP DISCOUNT BONDS AND STRIPS. THIS P RESS NOTE DATED 20 TH MARCH, 2002, MAKES IT CLEAR THAT THE AMOUNT RECEIVED ON REDEMPTION WOULD BE OFFERED TO TAX AS P ER THE GUIDELINES OF THE RBI OR A PUBLIC FINANCIAL INSTITU TION. IT IS NOT DISPUTED THAT THE ASSESSEE HAD OFFERED IT AND ACCEP TED BY THE REVENUE. UNDER THESE CIRCUMSTANCES, WE ARE OF THE V IEW THAT THERE IS NO SCOPE OF DISTURB THE ORDER OF THE LEARN ED FIRST APPELLATE AUTHORITY. HENCE, THE APPEAL OF THE REVEN UE FAILS AND DISMISSED. WE HAVE ALSO GONE THROUGH THE DECISION OF THE ITAT AHMEDABAD BENCH IN THE CASE OF KISAN DISCRETIONARY FAMILY TRUST (SUPRA). IN THIS CASE WE FIND THAT THERE IS A CLEAR CUT FINDING UNDER PARA 50(V) AT PAGE 99 OF THE ORDER THAT THE CIRCULAR NO. 2 OF 2002 IS APPLICABLE ONLY TO THE DDBS PURCHASED AFTER 15/02/2002. THE LEARNED ACCOUNTANT MEMBER HAS ALSO AGREED WITH THIS FINDING OF THE LEARNED JUDICIAL MEMBER UNDER PARA 67 THAT THE CIRCULAR IS APPLICABLE ONLY TO DDBS ACQUIRED AND OR AFTER 15/02/2002. SINCE THE JUDGMENT OF THE COORDINATE BENCH IS BINDING ON US, WE ACCORDINGLY HOLD THAT THE CIRCULAR NO.2 OF 2002 IS APPLICABLE ONLY IN RESPECT OF DEEP DISCOUNT BONDS PURCHASED PRIOR TO 15/02/2002. SINCE THE ASSESSEE IN THIS CASE HAS PURCHASED THE SCRIPS ON 23-02-2000 I.E. PRIOR TO 15/02/2002, THEREFORE, THE CIRCULAR NO.2 O F 2002 IS NOT APPLICABLE IN THE CASE OF THE ASSESSEE REQUIRING THE ASSESSEE TO RETURN THE INTEREST INCOM E ON ACCRUAL BASIS. WE, THEREFORE, SET ASIDE THE ORDE R OF THE CIT(A) AND DELETE THE ADDITION OF RS.2,93,823/-. SIMILAR VIEW HAS ALSO BEEN TAKEN IN THE CASE OF ITO V. M/S. KULGAM HOLDINGS P. LTD. (SUPRA), BY THE ITAT, MUMBAI. 5. IN VIEW OF THE ABOVE, RESPECTFULLY FOLLOWING THE ABOVE DECISIONS OF THE ITAT REFERRED TO IN THE FOREGOING PARAGRAPH, WE SET ASIDE THE IMPUGNED ORDERS OF THE AUTHORITIES BELOW AND DELETE THE IMPUGNED ADDITION IN RESPECT OF EACH ASSSSEES. ITA NO.1041/AHD/2006& OTHERS 48 5. IN VIEW OF THE ABOVE, RESPECTFULLY FOLLOWING THE ABOVE DECISION OF THE ITAT REFERRED TO IN THE FOREGOING PARAGRAPH, WE SET ASIDE THE IMPUGNED ORDER OF THE LEARNED CIT(A) AND DELETE THE IMPUGNED ADDITION . GROUNDS NO.2 &3 ARE ALLOWED. 4. IN THE LIGHT OF THE AFORESAID DECISION OF THE ITAT, FOLLOWING THE VIEW TAKEN BY THE ITAT IN THEIR DECISION DATED 2.11.2007 , IN THE CASE OF KISAN DISCRETIONARY FAMILY TRUST IN ITA NO.1850/AHD./2007 FOR THE AY 2003-04 AND ESPECIALLY WHEN NO CONTRARY DECISION HAS BEEN BROUG HT TO OUR NOTICE BY THE REVENUE, WE DO NOT FIND ANY INFIRMITY IN THE FINDI NGS OF THE LD. CIT(A) IN RELYING UPON THE AFORESAID DECISION OF THE ITAT IN THE CASE OF KISAN DISCRETIONARY FAMILY TRUST AND ALLOWING RELIEF TO THE ASSESSEE. THEREFOR E, GROUND NOS. 1 TO 4 ARE DISMISSED 18.1 WE NOTICE THAT THE LD. CIT(A) UPHELD THE FI NDINGS OF THE AO IN RESPECT OF INTEREST ACCRUED ON 2500 DDBS B SERIES O F NIRMA LTD., RELYING, INTER ALIA, ON THE DECISION DATED 2.3.2006 OF THE LD. CIT(A) IN THE CASE OF KARSANBHAI K PATEL, HUF FOR THE AY 2002 -03. IN THAT CASE MATTER HAD TRAVELLED FURTHER AND THE ITAT VIDE THEIR ORDER DATED 9.10.2009 IN THE CASE OF KARSANBHAI KHODIDAS PATEL HUF FOR AY 2002-03 IN ITA NO.1042/AHD/2006 HELD AS UNDER: 27. THE ASSESSEE HAS RAISED AN ADDITIONAL GROUND W HICH READS AS UNDER: IN LAW AND IN THE FACTS OF THE APPELLANTS CASE, THE ADDITION OF RS.2,11,535/- BEING NOTIONAL ACCRUED INTEREST ON OP TIONALLY FULLY CONVERTIBLE PREMIUM NOTES (OFCPNS) OF NIRMA INDUSTRIES MAY BE D ELETED. SINCE THERE IS A DETAILED DISCUSSION IN THE ASSESSM ENT ORDER WITH RESPECT TO THIS ADDITIONAL GROUND AND NO FURTHER VERIFICATI ON OF FACTS IS REQUIRED, WE ADMIT THE ADDITIONAL GROUND WHICH INVOLVES ONLY A L EGAL ISSUE. 28. THE ASSESSEE IS FOLLOWING THE CASH SYSTEM OF AC COUNTING AND THIS HAS BEEN RECORDED IN THE FIRST PAGE OF THE ASSESSME NT ORDER ITSELF. IN THE COURSE OF THE ASSESSMENT PROCEEDINGS THE ASSESSEE F ILED A LETTER DATED 11-8-2004 IN WHICH IT OFFERED THE INTEREST ON THE O FCPNS. ON ACCRUAL BASIS. IT WAS ALSO STATED BY THE ASSESSEE THAT THE INTEREST WAS BEING OFFERED ON ACCRUAL BASIS DUE TO ABUNDANT PRECAUTION AND THAT IT IS THE ASSESSEES CASE THAT THE CIRCULAR NO.2 OF 2002 ISSU ED BY THE CBDT ON 15- 2-2002 IS NOT APPLICABLE TO OFCPNS. AND WAS CONFINE D TO DEEP DISCOUNT BONDS. THE ASSESSEE HAD PURCHASED 7132 OFCPNS. ISS UED BY NIRMA INDUSTRIES LTD. ON 25-3-2002 FOR RS.17.83 CRORES AN D THE INTEREST ACCRUED THEREON TILL 31-3-2002 WAS RS.2,11,535/-. THE AO A CCEPTED THE LETTER TO THE EXTENT THE INCOME WAS OFFERED THEREIN FOR ASSES SMENT BUT MADE IT CLEAR ITA NO.1041/AHD/2006& OTHERS 49 IN THE ASSESSMENT ORDER THAT THE CIRCULAR CITED ABO VE EQUALLY APPLIES TO OFCPNS. SINCE THEY ARE IN NO WAY DIFFERENT FROM DEE P DISCOUNT BONDS. 29. THE ISSUE STANDS COVERED BY THE ORDER OF THE AH MEDABAD BENCH OF THE TRIBUNAL IN THE CASE OF KISAN DISCRETIONARY FAMILY TRUST VS. ACIT IN ITA NO.1850/AHD/2007 (AY 2003-2004) DATED 2-11-2007. I N THIS ORDER IT HAS BEEN HELD THAT AS PER CIRCULAR NO.2 OF 2002 IT IS APPLIC ABLE ONLY TO DEEP DISCOUNT BONDS PURCHASED AFTER 15-2-2002. THEREFORE, IF IT IS HELD THAT THE OFCPNS. ARE SIMILAR IN NATURE TO DEEP DISCOUNT BONDS, THEY HAVING BEEN PUR CHASED AFTER 15-2-2002, THE CIRCULAR IS APPLICABLE AND THE INTEREST MUST BE HEL D TO HAVE BEEN RIGHTLY OFFERED AND ASSESSED. THE CONTENTION BEFORE US HOWEVER IS THAT THE ASSESSEE FOLLOWS THE CASH SYSTEM OF ACCOUNTING AND THEREFORE THE INT EREST IS ASSESSABLE ONLY IN THE YEAR IN WHICH THE OFCPNS. ARE ENCASHED. WE FIND TH AT THE INTEREST HAS BEEN ASSESSED IN THE ASSESSMENT ORDER UNDER THE HEAD IN COME FROM OTHER SOURCES. UNDER SECTION 145(1) OF THE ACT, INCOME CHARGEABLE UNDER THIS HEAD SHALL SUBJECT TO THE PROVISIONS SUB-SECTION (2) BE COMPUTED IN AC CORDANCE WITH EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. AS ALREADY NOTICED THE ASSESSEE IS FOLLOWING THE CASH SYSTEM O F ACCOUNTING. THEREFORE THE INTEREST CANNOT BE ASSESSED ON ACCRUAL BASIS. THE CIRCULAR NO.2 OF 2002 CANNOT OVERRIDE THE PROVISIONS OF SECTION 145(1) AND ON TH E BASIS OF THE CIRCULAR THE INTEREST CANNOT BE ASSESSED ON ACCRUAL BASIS IN THE CASE OF AN ASSESSEE FOLLOWING THE CASH SYSTEM OF ACCOUNTING. FOR THIS REASON, WE ALLOW THE ADDITIONAL GROUND AND HOLD THAT THE INTEREST OF RS.2,11,535/- CANNOT BE ASSESSED IN THE YEAR UNDER APPEAL. 18.2 UNDISPUTEDLY, SINCE THE AFORESAID INVESTMENTS HAVE BEEN MADE PRIOR TO THE DATE OF ISSUE OF CIRCULAR NO.2 OF 2002 , THE CIRCULAR NO.2 OF 2002, REQUIRING TO RETURN THE INTEREST INCOME ON ACCRUAL BASIS, IS NOT APPLICABLE IN THE CASE OF THE ASSESSEE, AS HELD IN THE AFORESAID DECISION IN THE CASE OF PUNITABEN K PATEL(SUPRA) . WE FIND THAT THE INTEREST HAS BEEN ASSESSED IN THE ASSESSMENT ORDER UNDER THE HEAD INCOME FROM OTHER SOURCES. UNDER SECTION 145(1) OF THE A CT, INCOME CHARGEABLE UNDER THIS HEAD SHALL SUBJECT TO THE PROVISIONS SUB-SECTI ON (2) BE COMPUTED IN ACCORDANCE WITH EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. SINCE WHILE ADJUDICATING GROUND NO.2 OF THE APPEAL, WE HAVE ALREADY RESTORED THE ISSUE OF METHOD OF ACC OUNTING BEING FOLLOWED BY ASSESSEE TO THE FILE OF THE AO, THEREFORE , WE CON SIDER IT FAIR AND APPROPRIATE TO RESTORE THE ISSUE RAISED IN THIS GRO UND NO. 6 IN ITA NO.1041/AHD/2006 TO THE FILE OF THE AO WITH THE DI RECTIONS TO ADJUDICATE THE ISSUE IN THE LIGHT OF HIS FINDINGS IN RELATION TO GROUND ITA NO.1041/AHD/2006& OTHERS 50 NO.2 IN THE APPEAL, AFTER ALLOWING SUFFICIENT OPPOR TUNITY TO THE ASSESSEE. 19. IN VIEW OF OUR AFORESAID FINDINGS IN PARA 18. 2, A SIMILAR ISSUE RAISED IN GROUND NOS. 3 & 4 IN ITA NO. 1852/AHD./20 07 RELATING TO ADDITION OF ACCRUED INTEREST ON OFCPN OF ECHOLAC F INVEST PVT. LTD.,AKSHAT FINSTOCK PVT. LTD.,KAUTILYA FIN SECURIT IES LTD. & TURKHIYA OVERSEA PVT. LTD. AND BONDS OF REC LTD. & DDBS B SERIES OF NURMA LTD. AND GROUND NOS. 3,4 & 5 IN ITA NO. 185 6/AHD./2007 RELATING TO ACCRUED INTEREST ON DDBS OF TATA FINAN CE LTD. & REC AS ALSO OFCPN OF NIRMA INDUSTRIES LTD., IS ALSO RESTOR ED TO THE FILE OF THE AO WITH THE DIRECTIONS TO ADJUDICATE THE ISSU E IN THE LIGHT OF HIS FINDINGS IN RELATION TO GROUND NO.2 IN THE APPEAL, AFTER ALLOWING SUFFICIENT OPPORTUNITY TO THE ASSESSEE. NEEDLESS TO SAY THAT IF INCOME IS ASSESSED ON ACCRUAL BASIS , IT CAN NOT B E TAXED AGAIN IN THE YEAR OF RECEIPT . 20. AS REGARDS GROUND NO.6 IN ITA NO. 1242/AHD./20 06 RELATING TO ADDITION OF ACCRUED INTEREST ON OFCPN OF ADESH FIN STOCK PVT. LTD., SINCE WE HAVE ALREADY UPHELD THE CLAIM OF THE ASSES SEE IN RESPECT OF CASH METHOD OF ACCOUNTING IN PARA 6 ABOVE WHILE A SIMILAR ADDITION ON ACCOUNT OF ACCRUED INTEREST ON AFORESAID OFCPN H AS BEEN DELETED BY THE ITAT IN THEIR ORDER DATED 2.11.2007 IN ITA NO. 1853/AHD./2007 IN THE ASSESSEES OWN CASE IN PARA 1 7 OF THEIR ORDER, ADDITION OF RS. 11,86,631/- IS DELETED IN THIS CASE . THEREFORE, GROUND NO.6 IN ITA NO. 1242/AHD./2006 IS ALLOWED. 21. REGARDING GROUND NOS. 8 & 9 IN ITA NO.1251/AHD ./2006 RELATING TO INTEREST ACCRUED ON DDBS OF NIRMA LIMITED SERIES B AND OFCPN OF ECHOLAC FINVEST LTD.,NIRMA INDUSTRIES LTD., NETW ORLD COMMUNICATION PVT. LTD. & AKSHAT FINSTOCK PVT. LTD. SINCE WE HAVE ALREADY UPHELD THE CLAIM OF THE ASSESSEE IN RESPECT OF CASH METHOD OF ACCOUNTING BEING FOLLOWED BY THE ASSESSEE IN PA RA 6 ABOVE WHILE ITA NO.1041/AHD/2006& OTHERS 51 A SIMILAR ADDITION ON ACCOUNT OF ACCRUED INTEREST O N AFORESAID OFCPN HAS BEEN DELETED BY THE ITAT IN THEIR ORDER D ATED 2.11.2007 IN ITA NO. 1854/AHD./2007 IN THE ASSESSEES OWN CAS E IN PARA 14 OF THEIR ORDER, ADDITIONS OF RS. 97,67,716/- & RS.28,7 5,676/- ARE DELETED. THEREFORE, GROUND NOS.8 & 9 IN ITA NO. 125 1/AHD./2006 ARE ALLOWED. 22. GROUND NO.7 IN ITA NO. 1041 & 1242/AHD./2006 & GROUND NO.10 IN ITA NO. 1251/AHD./2006 RELATE TO CLAIM IN RESPECT OF LTCG OF RS.2,38,148/- ON SALE OF INTEREST COUPON STRIPS OF TATA FINANCE LTD.. AS PER RELEVANT ORDERS IN THE CASE OF HARSI DH SPECIFIC FAMILY TRUST, THE AO NOTICED THAT THE ASSESSEE PURCHASED 25 PRINCIPAL STRIPS PARTA OF TATA FINANCE LTD., COSTING RS. 1 L AC EACH. ALONG WITH THESE PRINCIPAL STRIPS PART-A, THE ASSESSEE WAS ALL OTTED INTEREST COUPON STRIPS PART B PAYABLE AFTER 15 MONTHS FOR RS . 4.05 LACS, INTEREST COUPON STRIPS PART C PAYABLE AFTER 27 MONT HS FOR RS. 3.24 LACS, INTEREST COUPON STRIPS PART D PAYABLE AFTER 3 9 MONTHS FOR RS. 3.24 LACS, INTEREST COUPON STRIPS PART E PAYABLE AF TER 51 MONTHS FOR RS. 3.25 LACS AND INTEREST COUPON STRIPS PART F PAY ABLE AFTER 63 MONTHS FOR RS. 3.4 LACS. THE ASSESSEE SOLD PRINCIPA L STRIP PART A ON 30.3.2000 FOR RS. 12.50 LACS AND CLAIMED LOSS OF RS .12.50 LACS IN THE RELEVANT YEAR. ON SALE OF INTEREST COUPON STRI PS PART B ON 19.5.2001 AND INTEREST COUPON STRIPS PART C,D.E & F ON 20.3.2002, THE ASSESSEE REFLECTED LTCG. TO A QUERY BY THE AO, THE ASSESSEE CONTENDED THAT LOSS OF RS. 12.50 LACS SHOWN BY THEM WAS NOT CORRECT AND ACCORDINGLY, THE ASSESSEE REVISED ITS CLAIM TO A FURTHER QUERY BY THE AO ASKING THE ASSESSEE TO EXPLAIN AS TO WHY INTEREST SHOULD NOT BE CONSIDERED TO HAVE ACCRUED ON THESE STRIPS O N ANNUAL BASIS AND WHY AS ON 31.3.2001, INTEREST INCOME SHOULD NOT BE CONSIDERED ON ACCRUAL BASIS AND WHY STCG SHOULD NOT BE CONSIDE RED IN THE LIGHT OF CIRCULAR NO.2 OF 2002, THE ASSESSEE REPLIE D THAT SAID CIRCULAR IS NOT APPLICABLE AND RELIED ON CBDT LETTER DATED 1 2.3.1996 & PRESS RELEASE DATED 20.3.2002 ISSUED BY THE CBDT. HOWEVER , THE AO DID ITA NO.1041/AHD/2006& OTHERS 52 NOT ACCEPT THE PLEA OF THE ASSESSSEE AND BROUGHT TO TAX STCG OF RS.2,38,148/- AS PER PARA 7.3 & 7.4 OF THE ASSESSME NT ORDER IN THE CASE OF HARSIDDH SPECIFIC FAMILY TRUST. SIMILAR FI NDINGS WERE RECORDED IN OTHER TWO CASES. 23. ON APPEAL, THE LD. CIT(A) WHILE OBSERVING THAT DESPITE SHOWCASE NOTICE DATED 14.3.2004 ISSUED BY THE AO, T HE ASSESSEE DID NOT FURNISH EXACT PERIOD OF HOLDING OF THE SECU RITIES ,RELIED ON THE DECISION DATED 2.3.2006 OF THE LD. CIT(A) IN THE CA SE OF KARSANBHAI K PATEL, HUF FOR THE AY 2002-03 AND UPHELD THE FIND INGS OF THE AO. 24. THE ASSESSEES ARE NOW IN APPEAL BEFORE US AGA INST THE AFORESAID FINDINGS OF THE LD. CIT(A).THE LEARNED AR ON BEHALF OF THE ASSESSEE CONTENDED THAT INVESTMENT HAVING BEEN MADE ON 23.3.2000, CIRCULAR NO.2 DATED 15.2.2002 WAS NOT A PPLICABLE. IT WAS ARGUED THAT THE ISSUE IS COVERED BY THE DECISION OF THE ITAT IN THE CASE OF NAVIN ASSOCIATES AND OTHERS IN ITA NO.1248/ AHD/2006 AND OTHERS. ON THE OTHER HAND, THE LD. DR SUPPORTED THE FINDINGS OF THE LD. CIT(A). 25. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUG H THE FACTS OF THE CASE. WE FIND THAT A SIMILAR ISSUE WAS ADJUDICA TED BY THE ITAT A BENCH IN THE CASE OF NAVIN ASSOCIATES AND OTHER S IN ITA NOS.1248,1256 & 1266/AHD/2006 , WHEREIN FOLLOWING A DECISION DATED 4.4.2008 OF SMC BENCH IN NAMAN ASSOCIATES IN ITA NO.1621/AHD./2007, THE ITAT CONCLUDED AS UNDER: 2 IN ALL THESE THREE APPEALS, THE COMMON DISPUTE R AISED BY THE ASSESSEES ARE AGAINST CONFIRMATION OF THE ADDITION OF RS.2,93,823 EACH IN CASE OF NAVIN ASSOCIATES AND NIRCHEM ASSOCIATES AN D RS.24,15,740 IN CASE OF NIRMA INDUSTRIES LTD. IN RESPECT OF INVESTM ENT IN INTEREST COUPON STRIPS OF TATA FINANCE LTD., NCD SERIES II PART B C D E & F HELD BY THE ASSESSEE ITA NO.1041/AHD/2006& OTHERS 53 (I) BY WRONGLY APPLYING THE CIRCULAR DTD. 15.2.2002 OF CNDT N THE BASIS OF ASSUMPTION AND SURMISE AND IGNORING SUBMISSIONS, INCLUDING PRESS NOTE ISSUED BY CBDT, IN THIS REGARD; (II) BY RELYING ON CIRCULAR NO.2 OF 2002 OF CBDT DT . 15.2.02 AND IGNRORING THE PRESS NOTE DT.20.3.2002 ISSUED IN THI S REGARD BY CBDT; (III) BY MAKING THE CIRCULAR APPLICABLE WITH RETROS PECTIVE EFFECT, WHICH IS ILLEGAL AND AGAINST THE INTEREST OF THE ASSESSEE; A ND (IV) BY ASSUMING THE DISCOUNT RATES FOR THE YEARS 2 005 TO 2010 AND GROSS ERROR IN MAKING CALCULATION PURELY BASED ON A SSUMPTION, CONJECTURE AND SURMISES. 3. THE LEARNED AR OF THE ASSESSEE SUBMITTED THAT TH E ISSUE INVOLVED IN THE ABOVE GROUND HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE ITAT, AHMEDABAD IN THE CASE OF NAMAN ASSOCIATE V. DCIT IN ITA NO. 1621 /AHD/2007 DT.4.4.2008 PERTAINING ( TO THE ASSESSMENT YEAR 2002-03 AND THE DECISION OF ITAT, MUMBAI BENCH-C IN THE CASE OF M/S. KULGAM HOLDINGS P. LTD IN ITANO.3785/MUM/2004 DT.25.4.2007 VIDE CONSOLIDATED ORDER DT.25.4.2007. THE LEARNED DR DID NOT DISPUTE THIS FACT SAVE AND EXCEPT RELYING ON THE ORDERS OF THE AUTHORITIES BEL OW IN THE PRESENT CASES ON HAND. 4. HAVING HEARD BOTH THE PARTIES, WE HAVE CAREFULL Y GONE THROUGH THE IMPUGNED ORDERS OF THE AUTHORITIES BELOW. WE FIND T HAT SIMILAR ISSUE CAME UP FOR DECISION BEFORE THE ITAT, AHMEDABAD (SMC BEN CH) IN THE CASE OF NAMAN ASSOCIATE V. DCIT IN ITA NO. 1621 /AHD/2007 D T.4.4.2008 PERTAINING TO THE ASSESSMENT YEAR 2002-03 AND THE T RIBUNAL HAS HELD IN FAVOUR OF THE ASSESSEE. THE RELEVANT PORTION OF THE SAID ORDER IS REPRODUCED AS UNDER : '7. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS AND, PERUSED THE MATERIAL ON RECORD. WE HAVE ALSO GONE THROUGH T HE DECISION OF THE TRIBUNAL MUMBAI BENCH IN THE CASE OF M/S KULGAM HOL DINGS P LTD. (SUPRA). IN THIS CASE THE TRIBUNAL VIDE PARA-7 OF THE ORDER HAS HELD AS UNDER: '7. WE HEARD THE RIVAL SUBMISSIONS. CIRCULAR OF CBD T NO. 2 OJ 2002 DATED 15.02.2002 AND PRESS NOTES HAS BEEN PLACED ON RECORD BY THE ASSESSEE AT PAGE 38 TO 47 OF THE PAPER BOOK. CL AUSE 3 OF CIRCULAR NO. 2 OF 2002 WHICH READS AS UNDER: '3. THE MATTER HAS NOW BEEN EXAMINED IN CONSULTATIO N WITH THE RESERVE BANK OF INDIA AND THE MINISTRY OF LAW. THE PRACTICE FOLLOWED IN SEVERAL COUNTRIES OUTSIDE INDI A HAS ALSO BEEN EXAMINED. WITH A VIEW TO REMOVE THE ANOMALIES IN THE EXISTING SYSTEM *OF TAXATION OF INCOME FROM DEEP DI SCOUNT BONDS, AND TO FORMULATE A SYSTEM WHICH IS MORE IN L INE WITH ITA NO.1041/AHD/2006& OTHERS 54 INTERNATIONAL PRACTICE, THE BOARD HAVE DECIDED THAT SUCH INCOME MAY HEREAFTER BE TREATED AS FOLLOWS ' MAKES IT CLEAR THAT THE CLARIFICATION IS APPLICABLE AND COULD BE APPLIED ONLY SUBSEQUENT TO THE ISSUE OF THIS CIRCUL AR AND NOT BEFORE. LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT IN (HE SUBSEQUENT YEAR] THE ASSESSEE SOLD THE BONDS AN D WHATEVER SURPLUS WAS OFFERED TO TAX AND IT WAS ACCE PTED AS WELL. LEARNED COUNSEL AGAIN BROUGHT OUR ATTENTION T O PAGE 43 OF THE PAPER . BOOK, WHICH IS THE PRESS NOTES/RELE ASE FOR TAX TREATMENT OF :> DEEP DISCOUNT BONDS AND STRIPS. THIS PRESS NOTE DATED 20 TH MARCH, 2002, MAKES IT CLEAR THAT THE AMOUNT RECEIVED ON REDEMPTION WOULD BE OFFERED TO T AX AS PER THE GUIDELINES OF THE RBI OR A PUBLIC FINANCIAL INSTITUTION. IT IS NOT DISPUTED THAT THE ASSESSEE HAD OFFERED IT AN D ACCEPTED BY THE REVENUE. UNDER THESE CIRCUMSTANCES, WE ARE O F THE VIEW THAT THERE IS NO SCOPE OF DISTURB THE ORDER OF THE LEARNED FIRST APPELLATE AUTHORITY. HENCE, THE APPEAL OF THE REVENUE FAILS AND DISMISSED. ' WE HAVE ALSO GONE THROUGH THE DECISION OF THE ITAT AHMEDABAD BENCH IN THE CASE OF KISAN DISCRETIONARY FAMILY TRU ST (SUPRA). IN THIS CASE WE FIND THAT THERE IS A CLEAR CUT FINDING UNDER PARA 50(V) AT PAGE 99 OF THE ORDER THAT THE CIRCULAR NO.2 OF 2002 IS NOT APPLICABLE ONLY TO THE DDBS PURCHASED AFTER 15/02/2002. THE LE ARNED ACCOUNTANT MEMBER HAS ALSO AGREED WITH THIS FINDING OF THE LEARNED JUDICIAL MEMBER UNDER PARA 67 THAT THE CIRCULAR IS APPLICABLE ONLY TO DDBS ACQUIRED AND OR AFTER 15/02/2002. SINCE THE JU DGMENT OF THE COORDINATE BENCH IS BINDING ON US,, WE ACCORDINGLY HOLD THAT THE CIRCULAR NO.2 OF 2002 IS APPLICABLE ONLY IN RESPECT OF DEEP DISCOUNT BONDS PURCHASED PRIOR TO 15/02/2002. SINCE THE ASSE SSEE IN THIS CASE HAS PURCHASED THE STRIPS ON 23-02-2000 I.E. PR IOR TO 15/02/2002, THEREFORE, THE CIRCULAR NO. 2 OF 2002 I S NOT APPLICABLE IN THE CASE OF THE ASSESSEE REQUIRING THE ASSESSEE TO RETURN THE INTEREST INCOME ON ACCRUAL BASIS. WE, THEREFORE, SE T ASIDE THE ORDER OF THE CIT(A) AND DELETE THE ADDITION OF RS.2,93,82 3/-. ' SIMILAR VIEW HAS ALSO BEEN TAKEN IRI THE CASE OF IT O V. M/S. KULGAM HOLDINGS P. LID. (SUPRA), BY IHE ITAT, MUMBAI. 5. IN VIEW OF THE ABOVE, RESPECTFULLY FOLLOWING THE ABOVE DECISIONS OF THE ITAT REFERRED TO IN THE FOREGOING PARAGRAPH, WE SET ASIDE THE IMPUGNED ORDERS OF THE AUTHORITIES BELOW AND DELETE THE IMPUGNED ADDITION IN RESPECT OF EACH ASSESSEE. 25.1 IN THE LIGHT OF VIEW TAKEN IN THE AFORESAID DECISION BY CO- ORDINATE BENCHES AND NO CONTRARY DECISION HAVING BE EN BROUGHT TO OUR NOTICE BY THE REVENUE, WE HAVE NO ALTERNATIVE BUT TO ALLOW THE ITA NO.1041/AHD/2006& OTHERS 55 CLAIM OF THE ASSESSEE. THEREFORE, GROUND NO. 7 IN I TA NO.1041& 1242/AHD/2006 AND GROUND NO. 10 IN ITA NO. 1251/A HD./2006 ARE ALLOWED. 26. GROUND NO. 8 IN ITA NOS.1041 & 1242/AHD/2006 AND GROUND NO.11 IN ITA NO. 1251/AHD./2006 RELATE TO DEDUCTION U/S 54EC OF THE ACT. SINCE THE AO BROUGHT TO TAX GAINS AS A RESULT OF SALE OF INTEREST COUPON STRIPS OF TATA FINANCE LTD. AS STCG , THE AO DENIED DEDUCTION U/S 54EC OF THE ACT CLAIMED BY THESE ASSE SSEES. ON APPEAL , THE LD. CIT(A) UPHELD THE FINDINGS OF THE AO. 27. THESE ASSESSEES ARE NOW IN APPEAL BEFORE US. THE LD. AR ON BEHALF OF THE ASSESSEES CONTENDED THAT SINCE THE AO DID NOT EXAMINE THE APPLICABILITY OF PROVISIONS OF SEC. 54 EC OF THE ACT, THE MATTER NEEDS TO BE RESTORED TO THE FILE OF THE AO. THE LD. DR DID NOT OPPOSE THESE SUBMISSIONS ON BEHALF OF THE ASSESSES. 28. SINCE WE HAVE CONCLUDED IN THE PRECEDING GROUN D THAT GAINS ARISING AS A RESULT OF GAINS AS A RESULT OF SALE O F INTEREST COUPON STRIPS OF TATA FINANCE LTD. HAVE TO BE ASSESSED AS LTCG, WE CONSIDER IT FAIR AND APPROPRIATE TO VACATE THE FIND INGS OF THE LD. CIT(A) AND RESTORE THE MATTER TO THE FILE OF THE A O TO CONSIDER THE CLAIM OF THE ASSESSEE FOR DEDUCTION U/S 54EC OF THE ACT IN ACCORDANCE WITH LAW AFTER ALLOWING SUFFICIENT OPPOR TUNITY TO THE ASSESSES. WITH THESE DIRECTIONS, GROUND NO.8 IN ITA NOS.1041 & 1242/AHD/2006 AND GROUND NO.11 ITA NO. 1251/AHD./20 06 ARE DISPOSED OF. 29. GROUND NO.9 IN ITA NOS.1041& 1242/AHD/2006 AND GROUND NO.13 IN ITA NO.1251/AHD/2006 RELATE TO APPLICABILITY OF PROVISIONS OF SEC. 14A OF THE ACT WHILE ASSESSING INCOME FROM THE HOUS E PROPERTY AND CAPITAL GAINS BESIDE INTEREST ON INCOME TAX REFUND. WHILE DETERMINING TOTAL INCOME, THE AO, OBSERVED IN THE A LTERNATIVE THAT ITA NO.1041/AHD/2006& OTHERS 56 THE ASSESSEE IS NOT ENTITLED TO DEDUCTION OF INTER EST EXPENSES OF RS.35,92,099/- AND OTHER EXPENSES OF RS.6,11,420/-I N THE CASE OF HARSIDDH SPECIFIC FAMILY TRUST AGAINST INCOME UNDER THE HEAD HOUSE PROPERTY AND CAPITAL GAINS IN VIEW OF PROVISI ONS OF SEC. 14A OF THE ACT. ON APPEAL, THE LD. CIT(A) OBSERVED THAT SINCE THE FINDINGS OF THE AO HAD BEEN UPHELD, THIS GROUND DOES NOT SUR VIVE AND ACCORDINGLY WAS DISMISSED AS INFRUCTUOUS SIMILAR FI NDINGS WERE RECORDED IN OTHER TWO CASES... 30. THE LD. AR ON BEHALF OF THE ASSESSEE CONTENDE D THAT IN THE EVENT VIEW OF THE AO AND THE LD. CIT(A) IS DISCARDE D , THE AO MAY BE DIRECTED TO EXAMINE THE ISSUE OF APPLICABILITY O F PROVISIONS OF SEC. 14A OF THE ACT. THE LD. DR SUPPORTED THE SUBMISSION S ON BEHALF OF THE ASSESSEE. 31. SINCE FINDINGS OF THE LD. CIT(A) HAVE BEEN RE VERSED AS DISCUSSED IN THE PRECEDING GROUNDS, WE FIND MERIT I N THE SUBMISSIONS OF THE LD. AR AND ACCORDINGLY, DIRECT T HE AO TO EXAMINE THE APPLICABILITY OF PROVISIONS OF SEC. 14A OF THE ACT AFTER ALLOWING SUFFICIENT OPPORTUNITY TO THE ASSESSEE, WITH THESE DIRECTIONS, GROUND NO. 9 IN ITA NOS.1041& 1242/AHD/2006 AND GROUND NO .13 IN ITA NO.1251/AHD/2006 ARE DISPOSED OF. 32. LAST GROUND IN THE CASE OF SHIVA SPECIFIC FAMI LY TRUST IN ITA NO.1242/AHD./2006 AND IN THE CASE OF NIMA SPECIFIC FAMILY TRUST IN ITA NO. 1251/AHD./2006 AS ALSO IN THE CASE OF SHANT ABEN K PATEL ON ITA NO.1246/AHD./2006 ARE ADDITIONAL GROUNDS RELAT ING TO ACCRUED INTEREST ON OFCPNS OF NIRMA INDUSTRIES LTD. THE LD . AR EXPLAINED THAT INVESTMENT IN OFCPN OF NIRMA INDUSTRIES LTD. WAS MADE ON 25.3.2002 AND ISSUE IS SQUARELY COVERED BY THE DEC ISION DATED 9.10.2009 IN THE CASE OF KARSANBHAI KHODIDAS PATEL HUF FOR AY 2002-03 IN ITA NO.1042/AHD/2006. THE LD. DR DID NOT OPPOSE THESE SUBMISSIONS ON BEHALF OF THE ASSESSEE. ITA NO.1041/AHD/2006& OTHERS 57 33. SINCE ALREADY FACTS HAVE BEEN NARRATED IN DET AIL IN THE RELEVANT ASSESSMENT ORDERS AND NO FURTHER VERIFICATION OF FA CTS IS REQUIRED TO BE MADE, WE ADMIT THESE ADDITIONAL GROUNDS. IN THE LIGHT OF VIEW TAKEN IN THE AFORESAID DECISION IN THE CASE OF KARS ANBHAI KHODIDAS PATEL(SUPRA) IN PARA 27 TO 29 OF THEIR ORDER[REFE RRED TO IN PARA 18.1 ABOVE] , WE HAVE NO OPTION BUT TO CONCLUDE THAT O N THE BASIS OF CIRCULAR NO.2 OF 2002, INTEREST CAN NOT BE ASSESSE D ON ACCRUAL BASIS IN THE CASE OF AN ASSESSEE FOLLOWING CASH SYSTEM OF ACCOUNTING. THEREFORE, WE ALLOW ADDITIONAL GROUND IN THE APPEAL S IN THE CASE OF SHIVA SPECIFIC FAMILY TRUST IN ITA NO.1242/AHD./200 6 AND IN THE CASE OF NIMA SPECIFIC FAMILY TRUST IN ITA NO. 1251 /AHD./2006 AND DELETE THE ADDITION ON ACCOUNT OF ACCRUED INTEREST ON OFCPN OF NIRMA INDUSTRIES LTD. 34. AS REGARDS ADDITIONAL GROUND IN THE CASE OF SHANTABEN K PATEL ON ITA NO.1246/AHD./2006, SINCE WE HAVE RESTORED TH E ISSUE OF METHOD OF ACCOUNTING TO THE FILE OF THE AO , THE IS SUE RAISED IN THE ADDITIONAL GROUND IS ALSO RESTORED TO THE FILE OF THE AO WITH THE DIRECTIONS TO ADJUDICATE THE SAME IN THE LIGHT OF HIS FINDINGS IN RELATION TO GROUND NO.2 IN THE APPEAL, AFTER ALLOWI NG SUFFICIENT OPPORTUNITY TO THE ASSESSEE. WITH THESE DIRECTIONS, ADDITIONAL GROUND RAISED IN THIS APPEAL IS DISPOSED OF. 35. GROUND NO.12 IN ITA NO.1251/AHD/2006 RELATES TO ADDITION OF INTEREST INCOME OF RS.54,00,000/- ON DDBS OF SHREE DEVELOPERS LTD. THE AO OBSERVED THAT FROM THE ANNEXURE-C ENCLOSED W ITH THE RETURN, THAT THE ASSESSEE CLAIMED THE STCL OF RS.6,00,000/- FROM THE TRANSACTIONS OF DDBS OF SHREE DEVELOPERS PVT. LTD. IN THIS ANNEXURE, IT WAS NARRATED THAT THE PURCHASE COST INCLUDES FOR RS.60 LACS IN ACCOUNTING YEAR 2000-01. TO A QUERY BY THE AO, THE ASSESSEE REPLIED VIDE LETTER DATED 24-02-2005 THAT THE TRUST WAS ALLOTTED 25 OPTIONALLY CONVERTIBLE DEEP DISCOUNT BONDS EACH OF RS.50 LACS ON 29.03,00.OUT ITA NO.1041/AHD/2006& OTHERS 58 OF THESE, 13 BONDS WERE SOLD IN THE ASST. YEAR 200 1-02 WHILE THE BALANCE 12 BONDS WERE REPURCHASED BY THE COMPANY ON 20/03/02 A T A PRICE OF RS.54,50.000/- PER BOND. SINCE THESE DDBS WERE REP URCHASED BY NONE OTHER THAN THE ISSUER OF THE DDBS ITSELF, THE AO WA S OF THE OPINION THAT THE ASSESSEE WAS REQUIRED TO SHOW THE INTEREST INCOME ON THE SAME AND NOT THE STCG, AS PER THE CIRCULAR DATED 15.02.02 AND AS PER LETTER DATED 12.03.96 OF THE BOARD. THE AO ALSO OBSERVED THAT THE ASSESSEE CAN NOT CLAIM THE SO CALLED CAPITALIZE D INTEREST EXP. AGAINST THE INTEREST INCOME OF THIS YEAR SINCE THE ASSESSEE WAS REQUIRED TO CLAIM THE INTEREST EXP. IN AY 2000-01, IF AT ALL THIS HAS BEEN PAID BY THE ASSESSEE IN THAT YEAR. ACCORDINGLY ,THE AO TAXED THE INCOME OF RS.54,00,000 IS TAXED AS INTEREST INC OME AND DISALLOWED THE STCL OF RS.6,00,000 CLAIMED BY THE A SSESSEE. 36. ON APPEAL, THE ASSESSEE REITERATED THEIR SUBMIS SIONS BEFORE THE AO AND CONTENDED THAT THE TAXABILITY OF THE IN COME FROM DDB WILL BE GOVERNED BY LETTER F.NO.225/45/96-IT(A-II) DATED 12 .3.1996. SINCE THE ASSESSEE HAD HELD THESE DDB'S AS INVESTMENTS AND WERE SOLD B EFORE THE MATURITY DALE, THE DIFFERENCE BETWEEN THE REPURCHASE PRICE AND THE COS T OF ACQUISITION IS CHARGEABLE TO TAX AS CAPITAL GAINS. RELYING ON CIRCULAR NO. 2 OF 2002. IT WAS CONTENDED THAT ONLY IN THE CASE OF REDEMPTION, THE DIFFERENCE WAS TAXABLE AS INTEREST INCOME. SINCE THESE DDB 'S WERE REPURCHASED SHREE DEVELOP ERS PVT. LTD., THE DIFFERENCE BETWEEN THE REPURCHASE PRICE AND THE COS T OF ACQUISITION WILL NOT BE CHARGEABLE TO LAX AS 'INCOME FROM OTHER SOURCES ' B UT WILL BE TAXED AS 'CAPITAL GAINS ' IN ACCORDANCE WITH THE CIRCULAR AND LETTER ISSUED BY THE C'BDT.AS REGARDS CAPITALIZATION OF INTEREST, THE ASSESSEE SU BMITTED THAT THE ASSESSEE HAD ACQUIRED 25 DDBS ON 29/03/2000 OUT OF BORROWED FUND S. 13 DDBS WERE SOLD IN ASST. YEAR 2001-02. AS REGARDS THE REMAINING BONDS THE INTEREST EXPENSES INCURRED OF RS.60,00,000/- WERE CAPITALISED IN THE ACCOUNTING YEAR 2000-01. SINCE, THE DDBS OF SHREE DEVELOPERS PVT. LTD. IS A CAPITAL ASSET, THE INTEREST EXPENSE INCURRED GOES TO IMPROVE THE COST OF ACQUIS ITION AND HAS TO BE ALLOWED FROM THE RE-PURCHASE PROCEEDS TO WORK OUT THE CAPIT AL GAIN ARISING FROM THE TRANSACTION, AS HELD IN ADDL. COMMISSIONER OF INCOME-LAX, A. P. VS. K.S. GU PLA, ITA NO.1041/AHD/2006& OTHERS 59 119 ITR 372 (A.P), THE ASSESSEE PLEADED . IN THE LIGHT OF THESE SUBMISSIONS, THE LD. CIT(A) CONCLUDED IN THE FOLLOWING TERMS: I HAVE CONSIDERED THE ABOVE SUBMISSIONS. I DO NO T AGREE WITH THE APPELLANT'S SUBMISSIONS BECAUSE OF THE FOLLOWING RE ASONS. (I) 12 DDBS OF SHREE DEVELOPERS PVT. LTD. HAVE BEEN REPURCHASED BY THE ORIGINAL ISSUER. THEREFORE, AS PER CIRCULAR DID . 15/02/2002 AS WELL AS AS PER LETTER DID. 12/03/96 OF THE BOARD, THE IN COME ACCRUING ON THE SAME SHOULD BE TREATED AS INTEREST INCOME. (II) THE ASSESSEE CANNOT CLAIM THE SO CALLED CAPITA LISED INTEREST EXPENSES AGAINST INTEREST INCOME OF THIS YEAR. THE ASSESSEE WAS REQUIRED TO CLAIM THE INTEREST EXPENSES IN ASST. YE AR 2001-02 IF AT ALL THIS IS PAID BY THE ASSESSEE IN THAT YEAR, BUT THE SAME CANNOT BE CLAIMED AS PART OF THE COST OF ACQUISITION. (III) SHREE DEVELOPERS PVT. LTD. HAS DEDUCTED (AX O N SOURCE AND ISSUED THE TDS CERTIFICATE OF RS.5,50,800/-. THIS SHOWS TH E CORRECT INTERPRETATION BY LAW BY TILE ISSUER OF THESE DDBS. 37. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAIN ST THE AFORESAID FINDINGS OF THE LD. CIT(A), THE LD. AR WHILE RELYIN G ON A DECISION DATED 8.1.2010 OF THE ITAT IN THE CASE OF ASHUTOSH R MAJMUDAR IN ITA NO. 124/AHD./2008 AS ALSO DECISIONS REPORTED IN CIT VS. MITHLESH KUMARI,92 ITR 9 AND ADDL. CIT VS. K.S.GUPT A,119 ITR 372(AP)C ONTENDED THAT INTEREST OF RS. 60,00,000/- HAS TO BE TREATED AS PART OF COST WHILE WORKING OUT CAPITAL G AINS OR LOSS. TO A QUERY BY THE BENCH , THE LD. AR DID NOT REPLY AS TO THE BASIS ADOPTED IN THE AY 2001-02 WHILE WORKING OUT GAINS IN THE AY 2001-02 ON SALE OF 13DDBS.ON THE OTHER HAND, THE LD. DR SUPPORTED T HE FINDINGS OF THE LD. CIT(A). 38. WE HAVE HEARD BOTH THE PARTIES AND GONE THRO UGH THE FACTS OF THE CASE. AS IS APPARENT FROM THE AFORESAID FACTS, THE ASSESSEE SOLD 13 BONDS IN THE PRECEDING ASSESSMENT YEAR WHILE THE REMAINING 12 HAVE BEEN REPURCHASED BY THE ISSUER BEFORE REDEMPTI ON IN THE YEAR UNDER CONSIDERATION. DESPITE A SPECIFIC QUERY BY US , THE LD. AR DID ITA NO.1041/AHD/2006& OTHERS 60 NOT EXPLAIN THE BASIS ADOPTED BY THE ASSESSEE IN W ORKING OUT GAINS ON SALE OF BONDS IN THE PRECEDING ASSESSMENT YEAR . ADMITTEDLY, INTEREST EXPENDITURE OF RS. 60,00,000 HAD BEEN CAPI TALIZED IN THE PERIOD RELEVANT TO THE AY 2001-02 WHILE TRANSACTION S OF SALE OF AFORESAID BONDS IN THE PRECEDING ASSESSMENT YEAR AN D THAT OF REPURCHASE IN THE YEAR UNDER CONSIDERATION ARE SIMI LAR. IN THESE CIRCUMSTANCES, GAINS ON SALE OR REPURCHASE BY THE ISSUER OF THESE BONDS HAS TO BE WORKED OUT ON THE SAME BASIS AS HA D BEEN ACCEPTED BY THE AO IN THE PRECEDING AY 2001-02. AC CORDINGLY, ESPECIALLY WHEN THE LD. CIT(A) DID NOT RECORD HIS S PECIFIC FINDINGS ON THE DECISION CITED BEFORE HIM, WE CONSIDER IT FA IR AND APPROPRIATE TO VACATE THE FINDINGS OF THE LD. CIT(A) AND RESTOR E THE MATTER TO THE FILE OF THE AO WITH THE DIRECTIONS TO EXAMINE THE C LAIM OF INTEREST AS PART OF COST OF ACQUISITION OF THE AFORESAID BONDS AFTER ALLOWING SUFFICIENT OPPORTUNITY TO THE ASSESSEEE,IN THE LIGH T OF OUR AFORESAID OBSERVATIONS AND VARIOUS JUDICIAL PRONOUNCEMENTS IN CLUDING THOSE CITED BEFORE US AND THEREAFTER PASS APPROPRIATE O RDERS IN ACCORDANCE WITH LAW. WITH THESE DIRECTIONS, GROUND NO.12 IN THIS APPEAL IS DISPOSED OF . 39 GROUND NO. 5 IN ITA NO. 1852/AHD./2007 & GROUND NO.6 IN ITA NO. 1856/AHD./2007 RELATE TO LEVY OF INTEREST U/S 234A ,234B,234C & 234D OF THE ACT WHILE GROUND NO.10 IN ITA NO.1242/AHD/2006 IN THE C ASE OF SHIVA SPECIFIC FAMILY TRUST, GROUND NO.5 IN THE CASE OF SHANTABEN K PATEL IN ITA NO. 1246/AHD./2006 AND GROUND NO.14 IN ITA NO. 1251/AHD./2006 RELATE TO LEVY OF INTEREST U/S 234B OF THE ACT . AS REGARDS LEVY OF INTEREST U/S 234A,234B AND 234C, T HE LD. AR ON BEHALF OF THE ASSESSEE DID NOT MAKE ANY SUBMISSIONS AND ADMITTED THAT THESE ARE CONSEQUENTIAL IN NATURE. THE LEVY OF INTEREST U/S 234A,234B & 234C OF THE ACT BEING MANDATORY [COMMISSIONER OF INCOME TAX. VS ANJ UM M. H. GHASWALA AND OTHERS,252 ITR 1(SC), AFFIRMED BY HON'BLE APEX COUR T IN THE CASE OF CIT V. HINDUSTAN BULK CARRIERS [2003] 259 ITR 449 (SC) AND IN THE CASE OF CIT V. SANT RAM MANGAT RAM JEWELLERS [2003] 264 ITR 564 (SC) ], THESE GROUNDS ARE ITA NO.1041/AHD/2006& OTHERS 61 DISMISSED. HOWEVER, THE AO MAY ALLOW CONSEQUENTIAL RELIEF ,IF ANY, WHILE GIVING EFFECT TO THIS ORDER. AS REGARDS THE ISSUE OF CHAR GING OF INTEREST U/S 234D IN ITA NO.1852/AHD/2007 AND ITA NO.1856/AHD/20 07 IS CONCERNED, AFTER HEARING THE RIVAL SUBMISSIONS, WE FIND THAT THIS ISSUE IS DULY COVERED BY THE DECISION OF THE ITAT S PECIAL BENCH IN THE CASE OF ITO V EKTA PROMOTERS (P) LTD. (2008) 113 ITD 719 (DELHI) (SB) , IN WHICH THE SPECIAL BENCH OF THIS TRIBUNAL HAS C LEARLY HELD THAT SECTION 234D WHICH HAS BEEN BROUGHT ON TH E STATUTE FROM 01-06-2003 CANNOT BE APPLIED TO THE ASSESSMENT YEAR 2003-04 AND EARLIER YEARS BUT IT WILL HAVE APPLICATION ONLY WIT H EFFECT FROM ASSESSMENT YEAR 2004-05. RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF THE SPECIAL BENCH OF ITAT, WE ALLOW THE GROUND TAKEN BY THESE ASSESSEES 40. GROUND NO.10 IN ITA NOS.1041,/AHD/2006, GRO UND NO.11 IN ITA NO.1242/AHD./2006 ,GROUND NO. 6 IN ITA NO. 1246/AHD ./2006 & GROUND NO. 15 IN ITA NO.1251/AHD/2006 PERTAIN TO IN ITIATION OF PENALTY PROCEEDINGS U/S 271(1)(C) OF THE ACT. SINCE NO APPE AL LIES AGAINST MERE INITIATION OF PENALTY PROCEEDINGS NOR ANY SUBMISSIONS HAVING B EEN MADE BEFORE US , THIS GROUND IS DISMISSED 41. NO ADDITIONAL GROUND HAVING BEEN RAISED IN T ERMS OF RESIDUARY GROUND NO. 11 IN ITA NOS.1041,/AHD/2006 ,GROUND NO. 12 IN ITA NO.1242/AHD./2006,GROUND NO. 7[NUMBERED AS 15] IN I TA NO. 1246/AHD./2006 ,GROUND NO. 6 IN ITA NO.1852 /AHD/ 2007 , GROUND NO. 7 IN ITA NO.1856/AHD/2007 & GROUND NO. 16 IN ITA NO.1251/AHD./2006, THESE GROUNDS ARE DISMISSED ITA NO.4117/AHD/2008[AY 2002-03] 42 NOW, COMING TO THE APPEAL OF THE REVENUE F OR THE AY 2002-03 AGAINST AN ORDER DATED 31.10.2008 OF THE LD . CIT(A)-XVI, CANCELLING LEVY OF PENALTY U/S 271(1)(C) OF THE ACT , FACTS, IN BRIEF, ARE THAT THE AO ADDED AN AMOUNT OF RS.8,53,378/- ON AC COUNT OF ITA NO.1041/AHD/2006& OTHERS 62 INTEREST ACCRUED ON 28772 OFCPN OF NIRMA INDUSTRIES LTD. PURCHASED BY THE ASSESSEE ON 25.3.2002,RELYING UPON CIRCULAR DATED 15.2.2002 OF THE CBDT BESIDES THE ADDITION OF RS.6, 05,13,579/- ON ACCOUNT OF SHORT TERM CAPITAL GAIN ON SALE OF 3237 DEEP DISCOUNT BONDS OF NIRMA LTD. WHILE THE ASSESSEE REFLECTED LO NG TERM CAPITAL GAIN AND CLAIM DEDUCTION U/S 54EC OF THE ACT. INTER ALIA, PENALTY PROCEEDINGS U/S 271(1)(C) OF THE ACT WERE INITIATED FOR FURNISHING INACCURATE PARTICULARS OF INCOME. ON APPEAL, THE LD . CIT(A) UPHELD THE FINDINGS OF THE AO VIDE ORDER DATED 3-3-2006. T HEREAFTER . IN RESPONSE TO A SHOW CAUSE NOTICE ISSUED BEFORE LEVY OF PENALTY, THE ASSESSEE REQUESTED TO KEEP THE PENALTY PROCEEDINGS IN ABEYANCE TILL THE DECISION OF THE ITAT AND FURTHER CONTENDED THAT CIRCULAR DATED 15.2.2002 OF THE CBDT WAS APPLICABLE PROSPECTIVELY AND THE ISSUES BEING DEBATABLE, THERE WAS NO GROUND FOR LEVY OF PE NALTY. HOWEVER, THE AO REJECTED THE CONTENTIONS OF THE ASSESSEE ON THE GROUND THAT THE ASSESSEE FURNISHED INACCURATE PARTICULARS OF IN COME BY EVADING TAXATION OF THE INCOME ON ACCOUNT OF ACCRUED INTERE ST AND RS.65558307/- ON ACCOUNT OF SHORT TERM CAPITAL GAIN . ACCORDINGLY, THE AO IMPOSED A PENALTY OF RS.2,03,21,976/- U/S 2 71(1)(C) OF THE ACT. 43. ON APPEAL, THE LD. CIT(A) CANCELLED THE PENALT Y IN THE FOLLOWING TERMS: 6 THUS IN SHORT THE APPELLANT HAS RELIED UPON THE JUDGMENT OF ITAT IN THE CASE OF KISAN DISCRETIONARY FAMILY TRUST VS. AC IT, CIRCLE 10, AHMEDABAD IN ITA NO.1850/AHD/2007 FOR AY 2003-04. O N THE IDENTICAL FACTS AND CIRCUMSTANCES OF THE CASE THE ITAT HAS HE LD THAT SINCE THE APPELLANT WAS FOLLOWING CASH SYSTEM OF ACCOUNTING, THE INTEREST INCOME ON THE DEEP DISCOUNT BONDS / OFCPNS IS TO BE TAXED IN THE YEAR OF RECEIPT AND NOT ON ACCRUAL BASIS. ACCORDING TO THE APPELLAN T SINCE IN SIMILAR CASE QUANTUM ADDITION HAS BEEN DELETED BY THE ITAT, THER E IS NO SCOPE FOR LEVYING PENALTY U/S 271(1)(C). THE BASIS OF LEVY OF PENALTY IS THE YEAR OF TAXABILITY OF THE INCOME FROM DEEP DISCOUNT BONDS. THE VIEW OF THE AO IS THAT THE INTEREST INCOME HAS TO BE ASSESSED ON YEAR TO YEAR BASIS WHEREAS THE VIEW OF THE APPELLANT IS THAT IT SHOULD BE TAXE D IN THE YEAR OF RECEIPT AS THE APPELLANT IS FOLLOWING CASH SYSTEM OF ACCOUNTIN G. THE APPELLANT HAS DISCLOSED ALL THE FACTS OF THE INCOME GENERATING FR OM THE BONDS AND FILED THE RELATED DETAILS BEFORE AO. IN OTHER WORDS THE S HORT QUESTION IS WHETHER ITA NO.1041/AHD/2006& OTHERS 63 PENALTY U/S 271(1)(C) CAN BE LEVIED IN A CASE WHERE THE ISSUE OF ADDITION ITSELF IS DEBATABLE. AFTER CONSIDERING THE JUDGMENT OF THE HONBLE ITAT IN THE CASE OF KISAN DISCRETIONARY FAMILY TRUST, ITA N O.1850/AHD/2007 AND THE ORDERS PASSED BY CIT(A)-XI ON IDENTICAL ISSUES IN THE CASE OF OTHER FAMILY MEMBERS OF THE GROUP, NAMELY:- 1. SHRI DHIREN K PATEL APPEAL NO. CIT(A)-XI/125/0 7-08 DATED 11-1- 2008 2. SHRI RAKESH K PATEL APPEAL NO. CIT(A)-XI/126/0 7-08 DATED 11-1- 2008 3. SHRI KARSANBHAI K PATEL APPEAL NO. CIT(A)-XI/1 29/07-08 DATED 11-1-2008 I AM AGREEMENT WITH THE APPELLANT THAT ON DEBATABLE ISSUES PENALTY U/S 271(1)(C) CANNOT BE LEVIED. ACCORDINGLY PENALTY OF RS.2,03,21,976/- LEVIED BY THE AO IS CANCELLED. APPEAL OF THE APPELLANT IS ALLOWED. 44. THE REVENUE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LD. CIT(A). THE LD. DR S UPPORTED THE ORDER OF THE AO WHILE THE LD. AR ON BEHALF OF THE ASSESSE E SUPPORTED THE FINDINGS OF THE LD. CIT(A). 45. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUG H THE FACTS OF THE CASE. SINCE WE HAVE REVERSED THE FIND INGS OF THE LD. CIT(A) AND THE AO ON THE TWO ADDITIONS VIDE OUR AFO RESAID ORDER IN ITA NO. 1246/AHD./2006 AND THUS, THE ADDITIONS, FO RMING THE BASIS FOR LEVY OF PENALTY, HAVING BEEN DELETED BY US , PENALTY LEVIED BY THE AO DOES NOT SURVIVE IN RELATION TO THE SAID AMOUNT. HONBLE DELHI HIGH COU RT IN THE CASE OF CIT VS. R.DALMIA,(1992)107 TAXATION 107, HELD THAT NO PENAL TY SURVIVES AFTER DELETION OF ADDITIONS, FORMING THE BASIS FOR THE LEVY OF PENALT Y. HONBLE SUPREME COURT IN THE CASE OF K.C.BUILDERS VS. ACIT,265 ITR 562(SC) HELD THAT ORDINARILY, PENALTY CANNOT STAND IF THE ASSESSMENT ITSELF IS SET ASIDE. WHERE AN ORDER OF ASSESSMENT OR REASSESSMENT ON THE BASIS OF WHICH PENALTY HAS BEEN LEVIED ON THE ASSESSEE, HAS ITSELF BEEN FINALLY SET ASIDE OR CANCELLED BY THE T RIBUNAL OR OTHERWISE, THE PENALTY CANNOT STAND BY ITSELF AND THE SAME IS LIABLE TO BE CANCELLED. 45.1 EVEN OTHERWISE IT IS WELL SETTLED THAT ASS ESSMENT PROCEEDINGS AND PENALTY PROCEEDINGS ARE SEPARATE AND DISTINCT AND AS HELD B Y HON'BLE SUPREME COURT IN THE CASE OF ANANTHRAMAN VEERASINGHAIAH & CO. VS. CI T - 123 ITR 457; THE ITA NO.1041/AHD/2006& OTHERS 64 FINDING IN THE ASSESSMENT PROCEEDINGS CANNOT BE REG ARDED AS CONCLUSIVE FOR THE PURPOSES OF THE PENALTY PROCEEDINGS. IT IS, THEREFO RE, NECESSARY TO REAPPRECIATE AND RECONSIDER THE MATTER SO AS TO FIND OUT AS TO W HETHER THE ADDITION MADE IN THE QUANTUM PROCEEDINGS ACTUALLY REPRESENTS THE CONCEAL MENT ON THE PART OF THE ASSESSEE AS ENVISAGED IN SEC. 271(1 )(C) OF THE ACT AND WHETHER IT IS A FIT CASE TO IMPOSE THE PENALTY BY INVOKING THE SAID PROVISIONS. IT IS ALSO WELL SETTLED THAT THE CRITERION AND YARDSTICKS FOR THE PURPOSE OF IMPOSIN G PENALTY U/S 271(1)(C) OF THE ACT ARE DIFFERENT THAN THOSE APPLIED FOR MAKING OR CONFIRMING THE ADDITIONS. WHEN THE ASSESSEE HAS MADE A PARTICULAR CLAIM IN THE RET URN OF INCOME AND HAS ALSO FURNISHED ALL THE MATERIAL FACTS RELEVANT THERETO, THE DISALLOWANCE OF SUCH CLAIM CANNOT AUTOMATICALLY LEAD TO THE CONCLUSION THAT TH ERE WAS CONCEALMENT OF PARTICULARS OF HIS INCOME BY THE ASSESSEE OR FURNIS HING OF INACCURATE PARTICULARS THEREOF . WHAT IS TO BE SEEN IS WHETHER THE SAID CL AIM MADE BY THE ASSESSEE WAS BONA-FIDE AND WHETHER ALL THE MATERIAL FACTS RELEVA NT THERETO HAVE BEEN FURNISHED AND ONCE IT IS SO ESTABLISHED, THE ASSESSEE CANNOT BE HELD LIABLE FOR CONCEALMENT PENALTY U/S 271(L)(C) OF THE ACT. A MERE REJECTION OF THE CLAIM OF THE ASSESSEE BY RELYING ON DIFFERENT INTERPRETATIONS DOES NOT AMOUN T TO CONCEALMENT OF THE PARTICULARS OF INCOME OR FURNISHING INACCURATE PART ICULARS OF INCOME BY THE ASSESSEE. HON'BLE PUNJAB & HARYANA HIGH COURT IN TH E CASE OF CIT VS. AJAIB SINGH & CO. (2001) 170 CTR (P&H) 489 : (2002) 253 ITR 630 (P&H) HAVE OBSERVED THAT MERE DISALLOWANCE OF A CLAIM PER SE CANNOT MEAN THAT ASSESSEE HAS FURNISHED INACCURATE PARTICULARS OF ITS INCOME. IN THE CASE UNDER CONSIDERATION, THE ASSESSEE HAD GIVEN ALL THE PARTICULARS OF INCOM E AND HAD DISCLOSED ALL FACTS TO THE AO. IN SUCH CIRCUMSTANCE S, HONBLE DELHI HIGH COURT HELD IN THE CASE OF COMMISSIONER OF INCOME-TAX.VS BACARDI MARTINI INDIA LIMITED.,288 ITR 585(DEL) THAT NO PENALTY WAS LEVIA BLE. RECENTLY, HONBLE APEX COURT IN CIT VS. RELIANCE PETRO PRODUCTS, ARISING OUT OF SLP (C) NO.27161 OF 2008, VIDE THEIR ORDER DATED 17.3.2010 HELD THAT ME RELY BECAUSE THE ASSESSEE HAD CLAIMED THE EXPENDITURE, WHICH CLAIM WAS NOT AC CEPTED OR WAS NOT ACCEPTABLE TO THE REVENUE, THAT BY ITSELF WOULD NOT , ATTRACT THE PENALTY U/S 271(1)(C) OF THE ACT. ITA NO.1041/AHD/2006& OTHERS 65 45.2 IN VIEW OF THE FOREGOING AND IN VIEW OF OUR AF ORESAID DECISION IN ITA NO.1246/AHD./2006, WE HAVE NO HESITATION IN UPHOLD ING THE FINDINGS OF THE LD. CIT(A),CANCELLING THE PENALTY LEVIED BY THE AO U/S 271(1)(C) OF THE ACT. THUS, GROUND NOS. 1 TO 5 IN THE APPEAL ARE DISMISSED. 46. IN THE RESULT, APPEALS FILED BY THE AFORESAID ASSESSEES ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES WHILE THAT OF THE REVENUE IN ITA NO.4117/AHD/2008 IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT TODAY ON 30-04- 2010 SD/- SD/- (T K SHARMA) JUDICIAL MEMBER (A N PAHUJA) ACCOUNTANT MEMBER DATE : 30-04-2010 COPY OF THE ORDER FORWARDED TO : 1. THE RESPECTIVE ASSESSEES 2. THE ACIT, CENTRAL CIRCLE-1(1), AHMEDABAD 3. THE DCIT, CIRCLE-10, AHMEDABAD 4. CIT CONCERNED 5. CIT(A)-I / II, AHMEDABAD 6. THE DR, ITAT, ABENCH,AHMEDABAD 7. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT, AHMEDABAD