Appeal Details
Counselvise Citation
[2009] 115 COUNSELVISE.COM (IT) 0322 (ITAT-AHMEDABAD)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
3 year(s) 5 month(s) 11 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
09-10-2009
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
A
Next Hearing Date
16-07-2009
Assessment Year
2002-2003
Appeal Filed On
28-04-2006
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD AHMEDABAD A BENCH (BEFORE S/SHRI R.V.EASWAR, VICE-PRESIDENT AND N.S. SAINI, ACCOUNTANT MEMBER) ITA NO.1042/AHD/2006 [ASSTT.YEAR : 2002-2003] KARSANBHAI KHODIDAS PATEL HUF NIRMA HOUSE, ASHRAM ROAD AHMEDABAD. VS. ACIT, CENT.CIR.1(1) AHMEDABAD. ASSESSEE BY : SHRI S.N.SOPARKAR AND SHRI HIMANSHU SHAH REVENUE BY : SHRI K.SHREEDHAR O R D E R PER R.V.EASWAR, VICE-PRESIDENT : THIS APPEAL BY THE ASSESSEE RELATES TO THE ASSESSMENT YEAR 2002-2003. THE ASSE SSEE IS A HUF BY STATUS. THE APPEAL ARISES OUT OF THE ASSESSMENT ORDER PASSE D ON 23-3-2005 UNDER SECTION 143(3) OF THE INCOME TAX ACT. 2. THE FIRST AND FIFTH GROUNDS ARE GENERAL AND REQU IRE NO DECISION. THE FOURTH GROUND CHALLENGING THE INITIATION OF PENALTY PROCEEDINGS FOR CONCEALMENT OF INCOME IS DISMISSED AS NOT PRESSED. 3. THE SECOND GROUND RAISES A LEGAL QUESTION AS TO WHETHER THE CAPITAL GAINS DERIVED BY THE ASSESSEE ON SALE OF DEEP DISCOUNT BO NDS ARE LONG TERM CAPITAL GAINS AS CLAIMED BY THE ASSESSEE OR SHORT TERM CAPI TAL GAINS AS HELD BY THE ASSESSING OFFICER. GROUND NO.3 IS CONNECTED TO THE QUESTION OF CAPITAL GAINS. IN THIS GROUND THE ASSESSEE HAS CHALLENGED THE DISA LLOWANCE 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 L ONG TERM CAPITAL GAINS. THE GROUND IS THEREFORE CONSEQUENTIAL TO OUR DECISION W ITH REGARD TO GROUND NO.2. 4. THE FACTS GIVING RISE TO THE CONTROVERSY MAY BE NOTICED. THE ASSESSEE WAS ALLOTTED 1180 DEEP DISCOUNT BONDS (HEREINAFTER REFERRED TO AS BONDS) OF PAGE - 2 ITA NO.1042/AHD/2006 -2- NIRMA LIMITED, EACH AMOUNTING TO RS.1,00,000/-. TH E CHEQUE ISSUED BY THE ASSESSEE IN FAVOUR OF THE COMPANY WAS CLEARED ON 28 -7-2000. THE BOARD OF DIRECTORS OF NIRMA LIMITED PASSED A RESOLUTION ON 2 3-9-2000 AND A LETTER OF ALLOTMENT WAS ISSUED TO THE ASSESSEE ON THAT DATE. ACCORDING TO THE LETTER OF ALLOTMENT THE DEEMED 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 CERTIFICATES OR BONDS. THE BONDS WERE AC CORDINGLY ISSUED TO THE ASSESSEE ON 10-5-2001. THEY WERE DEMATED ON 19-9-2 001 AND ULTIMATELY THE BONDS WERE SOLD ON 20-3-2002 FOR RS.14,41,18,902/-. THE COST OF ACQUISITION OF THE BONDS WAS RS.11,80,00,000/- AND THUS A CAPIT AL GAIN OF RS.2,61,18,902/- AROSE TO THE ASSESSEE IN THE ACCOUNTING YEAR RELEVA NT TO THE ASSESSMENT YEAR 2002-2003. IN THE RETURN OF INCOME THE ASSESSEE DE CLARED 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 THE COMPANY AND SINCE THEY WERE SOLD AFTER A PERIOD OF 12 MONTHS FROM THAT DAT E THE CAPITAL GAINS WERE LONG TERM CAPITAL GAINS UNDER THE PROVISO TO SECTION 2(4 2A) OF THE ACT. IT WAS FURTHER CLAIMED IN THE RETURN THAT THE ASSESSEE HAD INVESTED RS.2,61,20,000/- IN RURAL ELECTRIFICATION CORPORATION BONDS ON 13-9-200 2 AND SINCE THESE BONDS WERE ELIGIBLE ASSETS UNDER SECTION 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 R ISE TO CAPITAL GAINS, BUT THE PERIOD OF HOLDING OF THE BONDS IN SUCH CASES WI LL BE RECKONED FROM PAGE - 3 ITA NO.1042/AHD/2006 -3- THE DATE OF PURCHASE/SUBSCRIPTION OR THE LAST VALUA TION DATE IN RESPECT OF WHICH THE TRANSFEROR HAS OFFERED INCOME TO TAX, WHI CHEVER IS LATER. SINCE SUCH PERIOD WOULD ALWAYS BE LESS THAN 12 MONTHS, TH E CAPITAL GAINS WILL BE CHARGEABLE TO TAX AS SHORT TERM CAPITAL GAINS. 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 PROCEED S OF DEEP DISCOUNT BONDS AS LONG TERM CAPITAL GAINS. THEY CAN BE TREA TED AS LONG TERM CAPITAL GAINS ONLY IF THEY ARE ZERO COUPON BONDS IS SUED BY INFRASTRUCTURE COMPANIES AFTER 1-6-2005. NIRMA LIMITED IS NOT AN INFRASTRUCTURE COMPANY. D) THE BONDS WERE ISSUED BY THE NIRMA LIMITED UNDER THE TERMS OF THE DEBENTURE TRUST DEED DATED 27-4-2001. THE CERT IFICATE 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 ACQUIR ED 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 DA TE ON WHICH THE BONDS WERE ACQUIRED. SINCE THE ASSESSEE SOLD THE B ONDS 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 PAGE - 4 ITA NO.1042/AHD/2006 -4- RECKONING FROM THIS DATE, THE SALE OF THE BONDS ON 20-3-2002 IS WITHIN THE PERIOD OF 12 MONTHS AND THEREFORE THE CAPITAL G AINS 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 CONSEQUENTLY ALSO REJE CTED THE DEDUCTION CLAIMED UNDER SECTION 54EC OF 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 BE SUMMA RISED 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 THE PURPOSE OF RECKONING THE PERIOD OF HOLDING, THE DATE OF LISTIN G IS RELEVANT AND SINCE IN THE ASSESSEES CASE THE LISTED BONDS WERE NOT HE LD FOR A PERIOD EXCEEDING 12 MONTHS FROM 20-9-2001, THEY CANNOT BE CONSIDERED AS LONG TERM CAPITAL ASSETS. ACCORDINGLY, THE CAPITAL GAIN S CAN BE TREATED ONLY AS SHORT TERM CAPITAL GAINS AS HELD BY THE CALCUTTA HI GH COURT IN THE CASE OF A.GHOSH VS. CIT, (1983) 141 ITR 45. 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 EXISTEN CE ONLY ON 10-5-2001 AND SINCE IT WAS HELD ONLY UPTO 20-3-2002, A PERIOD LESS 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 FEATUR ES OF DEBENTURE CERTIFICATE. IT CAN EVEN BE CANCELLED IN CERTAIN C IRCUMSTANCES. IT IS NOT A PAGE - 5 ITA NO.1042/AHD/2006 -5- SECURED INSTRUMENT IN THE MANNER IN WHICH THE DEBEN TURE CERTIFICATE IS SECURED UNDER THE TRUST DEED. THE DEBENTURE IS TRA DABLE COMMODITY UNDER THE SALE OF GOODS ACT, WHEREAS THE LETTER OF ALLOTMENT CANNOT BE SO TRADED AS CAN BE SEEN FROM SECTION 75 OF THE COM PANIES ACT, 1956. IN VIEW OF THESE DIFFERENCES BETWEEN THE LETTER OF ALLOTMENT AND THE DEBENTURE CERTIFICATE, THE LETTER OF ALLOTMENT CANN OT BE CONSIDERED AS A CAPITAL ASSET AND THEREFORE IT CANNOT BE HELD THAT THE ASSESSEE ACQUIRED 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 O VERRULE 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 MORTGA GE AND CHARGE IN FAVOUR OF THE TRUSTEES ON THE BHAVNAGAR COMPLEX PRO PERTY OF THE COMPANY. THE NATURE AND CHARACTER OF THE BONDS UND ER CONSIDERATION WERE DEFINED AND DETERMINED ONLY UNDER THE TRUST DE ED AND ACCORDINGLY THE ASSESSEE CANNOT BE SAID TO HAVE ACQUIRED THE CA PITAL ASSET IN THE FORM OF DEBENTURE CERTIFICATES BEFORE 10-5-2001. PAGE - 6 ITA NO.1042/AHD/2006 -6- 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 BO NDS 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 I SSUED 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 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 LETTER 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 DATE. OUR ATTENTION WAS DRA WN TO SECTION 75 OF THE COMPANIES ACT TO HIGHLIGHT THE FACT THAT THERE IS N O DIFFERENCE BETWEEN THE LETTER OF ALLOTMENT AND THE DEBENTURE CERTIFICATE. IT IS POINTED OUT FURTHER THAT THE DEPARTMENTAL AUTHORITIES HAVE NOT APPRECIATED T HE CIRCULAR NO.2 OF 2002 ISSUED BY THE CBDT IN PROPER PERSPECTIVE AND THAT T HEY WERE WRONG IN RELYING ON THE SAME TO HOLD THAT THE CAPITAL GAINS IN THE P RESENT CASE ARE NOT LONG TERM CAPITAL GAINS. IT IS SUBMITTED THAT THE CIRCULAR A PPLIES PROSPECTIVELY IN THE SENSE PAGE - 7 ITA NO.1042/AHD/2006 -7- THAT THE TREATMENT REFERRED TO THEREIN WOULD BE APP LICABLE TO 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. DCIT 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 THAT THE LETTER OF AL LOTMENT EVIDENCES THE TITLE TO THE BONDS AND IS NOT QUALITATIVELY DIFFERENT IN ANY MANNER FROM THE DEBENTURE BOND CERTIFICATES ITSELF. HE ACCORDINGLY CONTENDED THAT THE ASSUMPTION OF THE DEPARTMENTAL AUTHORITIES THAT THE LETTER OF ALLOTME NT IS A SEPARATE INSTRUMENT, APART FROM THE DEBENTURE CERTIFICATE, IS ERRONEOUS. THE SUBSTANCE OF THE MATTER ACCORDING TO HIM IS THAT BOTH THE LETTER OF ALLOTME NT AND THE DEBENTURE CERTIFICATES ACKNOWLEDGE THE DEBT OF THE COMPANY AN D THE DEBENTURE CERTIFICATE IS ISSUED IN LIEU OF THE LETTER OF ALLOTMENT AND TH E FACT THAT IN THE INTERREGNUM THE DEBENTURE TRUST DEED CAME INTO EXISTENCE AND CREATE D A CHARGE ON THE ASSETS OF THE COMPANY DOES NOT IN ANY WAY ALTER THE NATURE AN D CHARACTER OF THE DEBT. ACCORDING TO THE LEARNED COUNSEL, THE ASSESSEE HELD A DEBT AND INITIALLY IT WAS REPRESENTED BY THE LETTER OF ALLOTMENT AND LATER BY THE DEBENTURE CERTIFICATE. THE STARTING POINT IN COMPUTING THE PERIOD FOR WHIC H 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 DEBENTURE CERTIFICATE WAS ISS UED. 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 LEARN ED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS STAND WAS UNTENABLE AND UNDER T HE PROVISO TO SECTION 2(42A) OF THE INCOME TAX ACT WHAT WAS REQUIRED WAS THAT THE SECURITY SHOULD BE LISTED IN A RECOGNISED STOCK EXCHANGE AT THE TIM E OF SALE AND THERE WAS NO PAGE - 8 ITA NO.1042/AHD/2006 -8- REQUIREMENT THAT IT SHOULD HAVE ALSO BEEN LISTED AT THE POINT OF TIME WHEN THE ASSESSEE ACQUIRED IT. HE ALSO SUBMITTED THAT THE B OND HOLDER HAS NO CONTROL OVER THE LIST OF THE BONDS IN A RECOGNIZED STOCK EX CHANGE AND IT WOULD BE UNJUST AND CONTRARY TO THE LAW TO EXCLUDE THE TIME TAKEN B Y A COMPANY TO GET THE BONDS LISTED IN THE STOCK EXCHANGE FROM THE PERIOD FOR WHICH THE BONDS WERE HELD BY THE ASSESSEE. IN SUPPORT OF HIS SUBMISSION S, THE LEARNED COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE JUDGMENT OF THE HONBLE GUJARAT HIGH COURT IN RANCHHODBHAI BHAIJIBHAI PATEL VS. CIT, (1971) 8 1 ITR 446 AND PLACED RELIANCE ON THE RATIO LAID DOWN IN THIS DECISION. 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 ITR 508 (GUJ); II) KESHAVJI KARSONDAS VS. CIT, (1994), 207 ITR 737 (BO M); III) KALYANI EXPORTS & INVESTMENTS P. LTD. VS. DCIT, (20 01) 78 ITD 95 (PUNE); IV) ARVIND COTSPIN LTD. VS. DCIT, (AHMEDABAD BENCH)(SUP RA); 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 TH E DATE OF LISTING IN A RECOGNISED STOCK EXCHANGE IN INDIA AND IT IS IRRELE VANT THAT THE ASSESSEE HAS NO CONTROL OVER THE EVENTS AND CONDITIONS THAT ARE REQ UIRED TO BE COMPLIED WITH BY THE COMPANY ISSUING THE SECURITY IN ORDER TO OBTAIN LISTING. HE ACCORDINGLY SUBMITTED THAT IN THE PRESENT CASE THE DATE OF LIST ING OF THE BONDS IN NSE, WHICH IS 20-9-2001, SHOULD BE TAKEN TO BE THE DATE ON WHI CH THE CAPITAL ASSET VIZ. THE BONDS WERE ACQUIRED AND SINCE THEY WERE SOLD ON 20- 3-2002, WITHIN THE PERIOD OF 12 MONTHS, THE GAINS SHOULD BE TREATED A SHORT T ERM CAPITAL GAINS. HE NEXT CONTENDED THAT CLAUSE(D) OF SECTION 2(42A) REFERS T O SECURITY SUBSCRIBED TO BY PAGE - 9 ITA NO.1042/AHD/2006 -9- 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 TA KEN AS THE STARTING POINT FOR COMPUTING THE PERIOD OF 12 MONTHS. HE DREW OUR ATT ENTION TO SECTION 2(H) OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 WHI CH DEFINES THE WORD SECURITIES AS INCLUDING BONDS AND DEBENTURES OR O THER MARKETABLE SECURITIES OF LIKE NATURE IN OR OF ANY INCORPORATED COMPANY OR BO DY CORPORATE. ACCORDING TO THE LEARNED CIT-DR THESE TWO STATUTORY PROVISIONS R EAD TOGETHER SHOW THAT THE LETTER OF ALLOTMENT CANNOT BE THE BASIS FOR COMPUTI NG THE PERIOD OF HOLDING. IT WAS FURTHER ARGUED THAT CLAUSES (D) AND (F) OF EXPLANATION 1 BELOW SECTION 2(42A) SUPPORTED THE DEPARTMENTS STAND THAT THE DA TE OF COMMENCEMENT OF THE HOLDING PERIOD SHOULD BE RECKONED FROM THE DATE OF ALLOTMENT OF BOND AND NOT FROM THE DATE OF THE LETTER OF ALLOTMENT ISSUED BEF ORE THE ALLOTMENT OF THE BONDS OR DEBENTURE CERTIFICATES. DRAWING OUR ATTENTION T O PAGE 102 OF THE PAPER BOOK WHICH CONTAINS THE TERMS AND CONDITIONS OF THE ISSU E OF THE BONDS OF NIRMA LTD., THE LEARNED CIT-DR POINTED OUT THAT THE COMPA NY CLEARLY STATED THAT IT IS IN THE PROCESS OF APPOINTING A TRUSTEE FOR THE PRO POSED 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 DATE ON WH ICH THE INFORMATION MEMORANDUM WAS ISSUED BY THE COMPANY. HE ALSO DRE W 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 TRANSFER AND AT PAGE 108 A ND SUBMITTED THAT THESE TERMS CLEARLY SHOWED THAT THE ISSUE OF THE BOND CER TIFICATES WAS A FUTURE EVENT ON 28-7-2000. IT WAS THE ATTEMPT OF THE LEARNED CI T-DR TO SHOW TO US, BY REFERRING TO THE ABOVE PAGES OF THE PAPER BOOK THAT THE STARTING POINT OF PERIOD OF HOLDING OF THE BONDS CAN IN NO EVENT BE EARLIER TO THE ACTUAL ISSUE OF THE DEBENTURE CERTIFICATE. PAGE - 10 ITA NO.1042/AHD/2006 -10- 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 THE DEP ARTMENTS 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 THI S HAS 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 THE 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 ALLOTMEN T 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 IT R 787; II) MRS.A.GHOSH VS. CIT (SUPRA); PAGE - 11 ITA NO.1042/AHD/2006 -11- III) GIRIDHARKRISHNA VS. ACIT, (2008) 307 ITR (AT)68 (BA NG.); 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 AND IT WOULD APP LY ONLY IF THERE ARE TWO FINANCIAL ASSETS, ONE EXCHANGED FOR THE OTHER, WHER EAS IN THE PRESENT CASE, THERE IS ONLY ONE FINANCIAL ASSET VIZ. DEBENTURE BONDS AN D THESE BONDS WERE ALLOTTED TO THE ASSESSEE UNDER THE LETTER OF ALLOTMENT ON WH ICH 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 CON TENTION OF THE LEARNED CIT- DR THAT IT IS ONLY WHEN THE TRUSTEES ARE APPOINTED UNDER THE DEBENTURE TRUSTEE DEED DATED 27-4-2001 THAT THE ASSESSEES RIGHT TO O BTAIN THE DEBENTURE GETS CRYSTALISED, THE LEARNED COUNSEL FOR THE ASSESSEE R EFUTED THE SAME AND URGED THAT IT WOULD BE FALLACIOUS TO CONSIDER THAT THE CAPITAL ASSET ACQUIRED BY THE ASSESSEE IS REPRESENTED BY THE DEBENTURE OR BOND CERTIFICATE AND 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 HOLDING PERIOD. 13. AS REGARDS THE QUESTION AS TO WHETHER THE PRESS RELEASE ISSUED BY THE CBDT SHOULD BE FOLLOWED IN PREFERENCE TO THE CIRCUL AR, THE LEARNED COUNSEL FOR THE ASSESSEE REFERRED TO THE FOLLOWING JUDGMENTS TO CONTEND THAT THE PRESS RELEASE IS EQUALLY BINDING ON THE DEPARTMENT: 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. PAGE - 12 ITA NO.1042/AHD/2006 -12- (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 ARISI NG ON THE SALE OF THE BONDS AS CAPITAL GAINS AND NOT AS INTEREST 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 NIRMA 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 B OND - SERIES-A WHICH IS CONSISTENT WITH THE CLAIM OF THE ASSESSEE THAT THE LETTER OF ALLOTMENT ITSELF IS THE STARTING POINT FOR RECKONING THE HOLDING PERIOD OF 12 MONTHS. IT IS POINTED OUT THAT IT IS SIGNIFICANT THAT THE COMPANY, EVEN BEFOR E THE ISSUE OF THE DEBENTURE CERTIFICATE ON 10-5-2001, HAS ACKNOWLEDGED THE LIAB ILITY IN ITS BALANCE SHEET AS A LIABILITY ON ACCOUNT OF THE ISSUE OF DEEP DISCOUN T BONDS AND THEREFORE THE DEPARTMENTS STAND THAT THE HOLDING PERIOD OF 12 MO NTHS 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 C ONTENTION OF THE REVENUE TO THE EFFECT THAT THE HOLDING PERIOD OF 12 MONTHS SHOULD BE RECKONED FROM THE DATE ON WHICH THE DEBENTURE CERTIFICATE WAS ISSUED, I.E. ON 10-5-2001 OR FROM THE DATE ON WHICH THE DEBENTURE TRUST DEED CAME INTO EF FECT I.E. ON 27-4-2001 OR FROM THE DATE ON WHICH THE DEBENTURES WERE LISTED I N THE NATIONAL STOCK EXCHANGE I.E. ON 20-9-2001. WE MAY STRAIGHT AWAY CLARIFY THAT THE CIRCULAR NO.2 OF 2002 WHICH WAS ISSUED BY THE CBDT ON 15-2-2 002 IS NOT RELEVANT FOR PAGE - 13 ITA NO.1042/AHD/2006 -13- DECIDING THE PRESENT APPEAL BECAUSE AS RIGHTLY POIN TED OUT ON BEHALF OF THE ASSESSEE, THE AO HIMSELF DID NOT APPLY THE CIRCULAR TO HOLD THAT THE SURPLUS ARISING ON THE SALE OF THE BONDS SHOULD BE TREATED AS INTEREST. HE HAS HIMSELF ASSESSED THE SURPLUS AS CAPITAL GAINS. THE DISPUTE IS ONLY WHETHER THEY ARE LONG TERM CAPITAL GAINS AS CONTENDED BY THE ASSESSEE OR SHORT TERM CAPITAL GAINS AS CONTENDED BY THE REVENUE. A SHORT TERM CAPITAL ASS ET IS DEFINED BY SECTION 2(42A) AS A CAPITAL ASSET HELD BY AN ASSESSEE FOR N OT 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 CAPITAL ASSETS MENTIONED THEREIN, THEY WOULD BE TREATED AS SHORT TERM CAPITAL ASSETS IF THEY ARE HELD FOR A PERIOD OF NOT MORE THAN 12 MONTHS. A LONG TERM CAPITAL ASSET HAS BEEN DEFINED BY SECTION 2(29A) OF THE INCOME TAX ACT AS MEANING A CAPITAL ASSET WH ICH IS NOT A SHORT TERM CAPITAL ASSET. THE RESULT IS THAT IN THE CASE OF T HE CAPITAL ASSET SPECIFIED IN THE PROVISO TO SECTION 2(42A), IT BECOMES A LONG TERM C APITAL ASSET IF IT IS HELD FOR MORE THAN 12 MONTHS AND IT IS NOT NECESSARY THAT SU CH AN ASSET SHOULD BE HELD AT LEAST FOR A PERIOD OF 36 MONTHS IN ORDER TO QUALIFY AS A LONG TERM CAPITAL ASSET. ONE OF THE ASSETS SPECIFIED IN THE PROVISO IS A SEC URITY LISTED IN A RECOGNISED STOCK EXCHANGE IN INDIA. SUCH A SECURITY WAS ADDED IN THE 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 CAPI TAL ASSET ACQUIRED BY THE ASSESSEE FROM NIRMA LTD. FALLS UNDER THIS CATEGORY OF ASSETS VIZ. SECURITY LISTED IN A RECOGNISED STOCK EXCHANGE IN INDIA. WE MAY A LSO REFER TO SECTION 2(H) (I)OF THE SECURITIES CONTRACTS (REGULATION) ACT, 19 56 WHICH DEFINES SECURITIES TO INCLUDE SHARES, BONDS, DEBENTURES, DEBENTURE STOCK OR OTHER MARKETABLE SECURITIES OF A LIKE NATURE IN OR OF ANY INCORPORAT ED COMPANY OR OTHER BODY CORPORATE. THERE ARE OTHER SUB-CLAUSES IN THIS CL AUSE BUT SINCE THE LEARNED CIT-DR RESTED HIS CASE ONLY ON SUB-CLAUSE (I) OF SE CTION 2(H) OF THE SECURITIES CONTRACTS (REGULATIONS) ACT, WE ARE NOT REFERRING T O THEM. PAGE - 14 ITA NO.1042/AHD/2006 -14- 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 DATE ON WHICH THE LETTER OF ALLOTMENT WAS ISSUED. A COP Y OF THE LETTER OF ALLOTMENT HAS BEEN PLACED AT PAGE 96 OF THE PAPER BOOK FILED BY THE ASSESSEE. WE REPRODUCE BELOW THE LETTER OF ALLOTMENT. 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 CONDITIONS OF THIS LETTER OF ALLOTMENT. PAGE - 15 ITA NO.1042/AHD/2006 -15- 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 TRANSFERE E 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 BONDS HAVE BEEN GIVEN IN THE ALLOTMENT LETTER ITSELF. THE ASSESSEE HAS BEEN SHOWN AS THE HOLDER OF THE BO NDS WITH THE REGISTERED FOLIO NUMBER. THE REVERSE OF THE LETTER OF ALLOTME NT CONTAINS A MEMORANDUM OF TRANSFERS OF THE BONDS. THIS IS BLANK AND OBVIOUSL Y 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 OF ALLOTMENT WILL BE REGISTERED BY THE COMPA NY UPON SURRENDER OF THIS LETTER OF ALLOTMENT WITH DULY COMPLETED TRANSFER DE ED. ITEM 2 SAYS THAT THIS LETTER OF ALLOTMENT SHOULD BE PRESERVED BY THE HOLD ER(S) CAREFULLY. DDB-SERIES A CERTIFICATE(S) WILL BE EXCHANGED AGAINST SURRENDE R 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 BEEN S HOWN AS THE HOLDER OF THE BONDS WITH DISTINCTIVE NUMBERS AND A REGISTERED FOL IO NUMBER SHOW THAT ON THE ISSUE OF THE LETTER OF ALLOTMENT THE ASSESSEE BECAM E 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 ASSES SEES TITLE TO THE BONDS. THERE CAN BE NO DOUBT THAT THE ASSESSEE, IF SUCH A SITUAT ION HAD ARISEN, COULD HAVE SUED THE COMPANY ON THE BASIS OF THE LETTER OF ALLO TMENT FOR REPAYMENT OF THE DEBT. THE ISSUE OF THE DEBENTURE CERTIFICATE ON 10 -5-2001, AFTER THE FORMALITIES SUCH AS ENTERING INTO OF A DEBENTURE TRUST DEED ON 27-4-2001, DID NOT HAVE THE PAGE - 16 ITA NO.1042/AHD/2006 -16- EFFECT OF DELAYING THE VESTING OF THE OWNERSHIP RIG HTS ON THE ASSESSEE IN RELATION TO THE BONDS. IF THE STAND OF THE DEPARTMENT IS TO BE ACCEPTED, THEN IT WOULD BE DIFFICULT TO DEFINE THE STATUS OF THE ASSESSEE AS W ELL AS THE COMPANY VIS--VIS THE TRANSACTION IN THE INTERREGNUM BETWEEN THE DATE OF THE LETTER OF ALLOTMENT AND THE DATE OF ISSUE OF THE DEBENTURE CERTIFICATE. T HE MOMENT THE LETTER OF ALLOTMENT WAS ISSUED THE COMPANY 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 A ND BROUGHT ABOUT NO CHANGE IN THE RELATIONSHIP. THE LETTER OF ALLOTMENT MEREL Y GOT EXCHANGED FOR THE ISSUE OF THE DEBENTURE CERTIFICATES ON 10-5-2001. THE AS SESSEE CANNOT BE SAID TO HAVE ACQUIRED THE CAPITAL ASSET TWICE, FIRST WHEN THE LE TTER OF ALLOTMENT WAS ISSUED AND THEREAFTER WHEN THE DEBENTURE CERTIFICATES WERE ISSUED. 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 A LLOTMENT. THIS SECTION APPLIES TO ALLOTMENT OF SHARES. HOWEVER, THE MEANI NG OF THE WORD ALLOTMENT HAS BEEN EXPLAINED AT PAGE 687 OF GUIDE TO THE COM PANIES ACT, A TREATISE BY A. RAMAIYA (14TH EDN. 1998). THERE IS REFERENCE IN THIS PAGE TO THE JUDGMENT OF THE SUPREME COURT IN SRI GOPAL JALAM & CO. VS. C ALCUTTA STOCK EXCHANGE ASSN., (AIR 1964 SC 250) IN WHICH THE SUPREME COURT HAS QUOTED THE OBSERVATIONS OF THE CHANCERY DIVISION IN ENGLAND IN THE CASE OF FLORENCE LAND AND PUBLIC WORKS CO. IN RE (1885) 29 CH D 421. IT WAS OBSERVED IN THE ENGLISH CASE THAT AN ALLOTMENT IS GENERALLY NEITHER MORE NOR LESS THAN THE ACCEPTANCE BY THE COMPANY OF THE OFFER TO TAKE SHAR ES. IT HAS FURTHER BEEN OBSERVED THAT WHEN THE OFFER IS ACCEPTED BY THE COM PANY, IT CONSTITUTES A BINDING CONTRACT TO TAKE THAT NUMBER OF SHARES ACCO RDING TO THE OFFER AND PAGE - 17 ITA NO.1042/AHD/2006 -17- ACCEPTANCE. EXTENDING THE LOGIC TO THE ALLOTMENT O F 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 BETW EEN THE COMPANY AND THE ASSESSEE AND THE RELATIONSHIP OF DEBTOR CREDITOR CAME INTO BEING. AT PAGE 607 OF THE ABOVE TREATISE, IN THE COMMENTARY RELATING T O SECTION 69 OF THE COMPANIES ACT, WHICH PROHIBITS ALLOTMENT OF SHARES UNLESS THE COMPANY RECEIVES THE MINIMUM SUBSCRIPTION, IT HAS BEEN OBSE RVED THAT THE MERE SUBSCRIPTION TO SHARES IN A COMPANY DOES NOT CONSTI TUTE A SUBSCRIBER A SHAREHOLDER OF THE COMPANY; HE ACQUIRES THE STATUS OF SHAREHOLDER AND THE RIGHT TO DEMAND SHARES AND TO EXERCISE THE RIGHTS OF A SH AREHOLDER ONLY WHEN SHARES ARE ALLOTTED TO HIM AND A COMMUNICATION OF THE ALLO TMENT 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 WHICH MEANS THAT HE HAS STARTED HOLDING THE BONDS FROM THAT DATE. IF THE ASSESSEE HAS STARTED HOLDING THE BONDS FROM 23-9- 2000 WHICH IS THE DATE ON WHICH HE WAS INFORMED THA T THEY WERE ALLOTTED TO HIM, THEN IT WOULD BE ANOMALOUS TO SAY THAT THEY WE RE ACQUIRED BY HIM AGAIN WHEN THE DEBENTURE CERTIFICATES WERE ISSUED ON 10-5 -2001. THIS ASPECT OF THE MATTER HAS BEEN DEALT WITH BY THE HONBLE GUJARAT H IGH COURT IN THE CASE OF RANCHHODBHAI BHAIJJIBHAI PATEL (SUPRA). IN THIS CA SE, IT WAS HELD THAT THERE CAN BE NO TWO DIFFERENT ACQUISITIONS OF PROPERTY, ONE A S A NON-CAPITAL ASSET 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 THE TIME OF ACQUISITION WAS NOT A CAPITAL ASSET UNDER THE INCOME TAX ACT. THE LAND WAS LATE R CONVERTED AS NON- AGRICULTURAL LAND AND SOLD. THE ARGUMENT OF THE AS SESSEE WAS THAT THE VALUE OF THE LAND ON THE DATE OF CONVERSION TO NON-AGRICULTU RAL PURPOSES SHOULD BE TAKEN AS THE COST OF ACQUISITION OF THE CAPITAL ASSET. REPELLING THE ARGUMENT IT WAS PAGE - 18 ITA NO.1042/AHD/2006 -18- HELD THAT THERE CAN BE ONLY ONE ACQUISITION OF A CA PITAL ASSET AND THEREFORE THE COST OF THE AGRICULTURAL LAND AT THE TIME OF PURCHA SE OR THE FAIR MARKET VALUE 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 WAS CONVERTED FOR NON-AGRICULTURAL PURPOSES. IT MUST BE REMEMBERED T HAT 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. THE RATIO OF T HE JUDGMENT APPLIES WITH STRONGER FORCE TO THE CASE BEFORE US WHERE THE BOND S OR THE DEBENTURES WERE CAPITAL ASSETS AT BOTH POINTS OF TIME UNDER THE ACT . THE JUDGMENT OF THE BOMBAY HIGH COURT IN THE CASE OF KESHAVJI KARSONDAS VS. CIT (SUPRA) AND THE ORDER OF THE PUNE BENCH (THIRD MEMBER) IN THE CASE OF KALYANI EXPORTS & INVESTMENTS P. LTD. (SUPRA) ALSO SUPPORT THE ABOVE PROPOSITION. 18. HAVING HELD THAT THE ASSESSEE CANNOT BE SAID TO HAVE ACQUIRED THE BONDS ON THE DATE OF ISSUE OF THE BONDS CERTIFICATES (10- 5-2001), WE NOW PROCEED TO CONSIDER THE CONTENTION OF THE REVENUE THAT SINCE T HE BONDS WERE LISTED IN THE NSE ONLY ON 20-9-2001, THAT IS THE DATE ON WHICH TH E ASSESSEE CAN BE SAID TO HAVE STARTED HOLDING THEM. THIS CONTENTION IS BASE D ON THE PROVISO TO SECTION 2(42A). ACCORDING TO THE REVENUE SINCE IT IS A CON DITION THAT THE CAPITAL ASSET IN QUESTION, BEING A SECURITY, SHOULD BE LISTED IN A R ECOGNISED 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 HO LDING PERIOD. THE DIFFICULTY IN ACCEPTING THE CONTENTION OF THE REVENUE IS THAT THERE IS NO INDICATION IN THE PROVISO THAT THE SECURITY VIZ. THE BONDS SHOULD BE LISTED IN 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 NOT LISTED WHEN IT WAS ACQUIRED. ON THIS QUESTION ALSO WE ARE OF THE VIEW THAT THE JUDGMENT OF HONBLE GUJARAT HIGH PAGE - 19 ITA NO.1042/AHD/2006 -19- COURT IN THE CASE OF RANCHHODBHAI BHAIJIBHAI PATEL VS. CIT(SUPRA) APPLIES. AS ALREADY NOTICED, IN THAT CASE THE LAND WAS ORIGINAL LY AGRICULTURAL IN NATURE AND WAS NOT INCLUDED IN THE DEFINITION OF CAPITAL ASSET UNDER THE INCOME TAX ACT. WHEN IT WAS ACQUIRED BY THE ASSESSEE IT WAS NOT A C APITAL ASSET. HOWEVER, WHEN IT WAS SOLD, IT WAS NOT AGRICULTURAL LAND AS I T HAD BEEN CONVERTED BY THE ASSESSEE FOR NON-AGRICULTURAL USE. IT WAS THUS A C APITAL ASSET AS DEFINED BY THE ACT AT THE TIME OF SALE. THE ARGUMENT OF THE ASSE SSEE WAS THAT 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 REPELLED THE CONTENTION AND AT PAGES 455-457 OF THE JUDGMENT REFERRED TO SECTION 45 AND HELD THAT IT WAS CLEAR ON A PLAIN READING OF THE SECTION THAT THE ONLY CONDITIO N FOR ATTRACTING THE CHARGE OF TAX WAS THAT THE ASSET TRANSFERRED MUST BE A CAPITA L ASSET AT THE POINT OF SALE AND THERE WAS NO CONDITION THAT IT SHOULD HAVE BEEN A C APITAL ASSET UNDER THE ACT EVEN AT THE POINT OF ACQUISITION. THE HONBLE HIGH COURT FURTHER REFERRED TO SECTION 48 WHICH PROVIDED FOR THE COMPUTATION OF TH E CAPITAL GAINS AND HELD THAT THERE WAS NO CONDITION IN THIS SECTION THAT TH E ASSET SOLD SHOULD SATISFY THE DEFINITION OF THE CAPITAL ASSET AT THE DATE OF ACQU ISITION ALSO. IT WAS OBSERVED THAT THE EXPRESSION CAPITAL ASSET IS TO BE UNDERS TOOD ONLY AS A DEMONSTRATIVE NOUN TO REFER TO THE PROPERTY TRANSFERRED AND CANNO T BE UNDERSTOOD AS IMPOSING A CONDITION FOR THE CHARGE THAT THE ASSET SHOULD HA VE BEEN A CAPITAL ASSET AS DEFINED BY THE ACT EVEN AT THE POINT OF ACQUISITION . IF THE RATIO OF THIS JUDGMENT IS APPLIED TO THE PRESENT CASE, AS WE ARE RESPECTFU LLY 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 ME RELY DEMONSTRATIVE OF THE ASSET THE SALE OF WHICH HAS GIVEN RISE TO CAPITAL G AINS AND IT DOES NOT IMPOSE ANY CONDITION THAT THE SECURITY SHOULD HAVE ALSO BE EN LISTED IN THE STOCK EXCHANGE WHEN IT WAS ACQUIRED BY THE ASSESSEE. APA RT 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 KARSO NDAS VS. CIT (SUPRA) PAGE - 20 ITA NO.1042/AHD/2006 -20- WHICH HAS ALSO TAKEN THE SAME VIEW FOLLOWING THE HO NBLE GUJARAT HIGH COURTS VIEW. THE RESULT IS THAT THE STAND OF THE REVENUE THAT THE ASSESSEE CAN BE SAID TO HAVE ACQUIRED THE CAPITAL ASSET VIZ. A S ECURITY LISTED IN A RECOGNISED STOCK EXCHANGE, ONLY ON 20-9-2001 WHEN THE BONDS WE RE LISTED IN THE NSE CANNOT BE ACCEPTED AS SOUND. 19. THE LEARNED CIT-DR HAD REFERRED TO CLAUSES (D) AND (F) OF EXPLANATION 1 OF SECTION 2(42A). THE SAID EXPLANATION PROVIDES FOR THE COMPUTATION OF THE PERIOD FOR WHICH ANY CAPITAL ASSET IS HELD BY THE A SSESSEE. CLAUSE (D) SAYS THAT IN THE CASE OF SHARE OR ANY OTHER SECURITY SUBSCRIB ED TO BY THE ASSESSEE ON THE BASIS OF HIS RIGHT TO SUBSCRIBE TO THE SAME OR SUBS CRIBED TO BY THE PERSON IN WHOSE FAVOUR THE ASSESSEE HAS RENOUNCED HIS RIGHT T O SUBSCRIBE TO THE SHARE OR THE SECURITY, THE PERIOD OF HOLDING SHALL BE RECKON ED FROM THE DATE OF ALLOTMENT OF THE SHARE OR OTHER SECURITY. WE ARE UNABLE TO A PPRECIATE THE RELEVANCE OF THIS CLAUSE TO THE CONTROVERSY BEFORE US. THE CLAUSE AP PLIES ONLY TO A SHARE OR OTHER SECURITY SUBSCRIBED TO BY THE ASSESSEE ON RIGHTS BA SIS. IT SAYS THAT IF THE ASSESSEE HAS SUBSCRIBED TO THE SHARE OR THE SECURIT Y ON RIGHTS BASIS THEN THE PERIOD OF HOLDING SHALL COMMENCE ON THE DATE OF ALL OTMENT 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 T HE BONDS ON RIGHTS BASIS, EVEN TAKING NOTE OF THE FACT THAT THE BONDS AND ALS O SECURITIES COVERED BY THE CLAUSE. IF ANYTHING, THIS CLAUSE SUPPORTS THE CONT ENTION OF THE ASSESSEE THAT THE PERIOD OF HOLDING OF THE SECURITY SHALL COMMENCE FR OM THE DATE OF ALLOTMENT OF THE BONDS I.E. ON 23-9-2000 BECAUSE THE CLAUSE SPEC IFICALLY SAYS THAT IT IS THE ALLOTMENT OF THE SHARE OR SECURITY, SUBSCRIBED TO B Y THE ASSESSEE ON RIGHTS BASIS, THAT WILL BE THE STARTING POINT OF THE PERIOD OF HO LDING. 20. CLAUSE (F) OF EXPLANATION 1 SAYS THAT IN THE CASE 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 PAGE - 21 ITA NO.1042/AHD/2006 -21- THE ALLOTMENT OF SUCH FINANCIAL ASSET. WE WERE NOT REFERRED TO ANY DEFINITION OF WHAT A FINANCIAL ASSET IS UNDER THE INCOME TAX ACT. HOWEVER, WE SHALL ASSUME FOR THE SAKE OF ARGUMENT THAT 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 ASSESSEE WITHOUT ANY PAYMENT AND ON THE BASIS OF HOLDING OF ANY OTHER FINANCIAL ASSET. EVEN ASSUMING THAT THE LIST ED BONDS (DEBENTURE CERTIFICATES) WERE ALLOTTED TO THE ASSESSEE WITHOUT ANY PAYMENT WHEN THEY WERE ALLOTTED, THEY CANNOT BE SAID TO HAVE BEEN ALLOTTED TO THE ASSESSEE ON THE BASIS OF HOLDING OF ANY OTHER FINANCIAL ASSET. THE ARGUMENT OF THE LEARNED CIT-DR WAS THAT THE LETTER OF ALLOTMENT IS A FINANCIAL ASSET A ND THAT HAS BEEN EXCHANGED FOR THE DEBENTURE CERTIFICATES AND THEREFORE THE DEBENT URE CERTIFICATES WERE ALLOTTED TO THE ASSESSEE ON THE BASIS OF HOLDING OF THE LETT ER 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 T HE 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 O F ALLOTMENT AND THEREAFTER THE LETTER OF ALLOTMENT WAS SURRENDERED AND IN LIEU THEREOF THE COMPANY ISSUED DEBENTURE CERTIFICATES TO THE ASSESSEE. THUS THERE WAS CHANGE 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 AS SET ITSELF. WE MAY AGAIN REFER TO THE JUDGMENT OF THE HONBLE GUJARAT HIGH C OURT IN THE CASE OF RANCHHODBHAI BHAIJIBHAI PATEL VS. CIT (SUPRA) WHERE IT WAS HELD THAT THE PROPERTY CAN BE ACQUIRED ONLY ONCE AND WHEN IT BECA ME A CAPITAL ASSET WITHIN THE MEANING OF THE INCOME TAX ACT, WHAT HAPPENS IS MERELY THAT ITS CHARACTER CHANGED IN THE SENSE THAT WHEREAS IT WAS A NON-CAPI TAL ASSET AT THE TIME OF ACQUISITION, IT BECAME A CAPITAL ASSET LATER. IT S EEMS TO US THAT CLAUSE (F) WOULD APPLY TO A CASE WHERE THERE ARE TWO SEPARATE AND DI STINCT 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 O F THE SECOND FINANCIAL ASSET, THE PAGE - 22 ITA NO.1042/AHD/2006 -22- PERIOD OF HOLDING SHALL BE RECKONED FROM THE DATE O F ALLOTMENT THEREOF. WE ARE ACCORDINGLY, WITH RESPECT, UNABLE TO GIVE EFFECT TO THE ARGUMENT OF THE LEARNED CIT-DR BASED 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 BECAME CRYSTALLISED ONLY WHEN THE DEBENTURE TRUST DEED WAS DRAWN UP AND TRUSTEES WERE APPOINTED. ACCORDINGLY, IT IS CONTENDED THAT IT WAS ONLY ON 27-4-2001 THAT THE ASSESSEE CAN BE SAID TO HAVE BECOME A BOND HOLDER IN THE REAL AND FULL SENS E OF THE TERM. THE DEBENTURE TRUST DEED MERELY SECURES THE DEBT DUE TO THE ASSESSEE BY THE COMPANY BY CREATING A CHARGE OR MORTGAGE OF THE ASS ET BELONGING TO THE COMPANY. THERE IS NO CHANGE EFFECTED IN THE NATURE OF THE DEBT. WHAT PERHAPS CAN BE SAID AT BEST IS THAT THE BOND CERTIFICATES W ERE ISSUED BY THE COMPANY ON THE FINALISATION OF THE DEBENTURE TRUST DEED BUT IT MUST BE REMEMBERED THAT THE CAPITAL ASSET IS NOT REPRESENTED BY THE BOND CERTIF ICATES THEMSELVES, WHICH ARE MERE EVIDENCE OF THE ASSESSES TITLE TO THEM AND TH E SUBSTANCE 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 23-9-200 0. WE ARE THEREFORE UNABLE TO UPHOLD THE ARGUMENT OF THE DEPARTMENT. 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 ASSESSEE O N CONVERSION OF DEBENTURES. SUBSEQUENTLY THE SHARES WERE SOLD WITHIN 12 MONTHS OF CONVERSION. IT WAS HELD THAT THE PROFITS WERE ASSESSABLE AS SHORT TERM CAPI TAL GAINS. IT IS TO BE NOTED THAT IN THIS CASE THE HIGH COURT HELD THAT WHEN THE ASSE SSEE GAVE UP THE DEBENTURES AND ACQUIRED THE SHARES, HE ACQUIRED AN ASSET WHICH WAS QUITE DISTINCT AND SEPARATE FROM THE DEBENTURES AND FURTHER THAT THE R IGHTS AS A SHAREHOLDER WHICH THE ASSESSEE ENJOYED WERE QUITE DIFFERENT FROM THE RIGHTS THAT THE ASSESSEE HAD AS A DEBENTURE HOLDER. THUS, TWO SEPARATE CAPITAL ASSETS WERE INVOLVED. IT WAS PAGE - 23 ITA NO.1042/AHD/2006 -23- THEREFORE HELD THAT THE SALE OF SHARES WITHIN A PER IOD OF 12 MONTHS FROM THE DATE OF CONVERSION OF THE DEBENTURES GAVE RISE TO SHORT TERM CAPITAL GAINS. IN THE PRESENT CASE, WE HAVE ALREADY HELD THAT THERE WERE NO TWO OR MORE DISTINCT OR SEPARATE CAPITAL ASSETS 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 SUBS TANTIALLY THROUGHOUT THE PERIOD COMMENCING FROM THE LETTER OF ALLOTMENT AND ENDING WITH THE SALE OF THE BONDS. THERE LIES THE DISTINCTION BETWEEN THE CITE D JUDGMENT AND THE PRESENT 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 SHARES SINCE 19 65 AND IN 1971 THESE SHARES WERE EXCHANGED FOR NEW TYPES OF EQUITY SHARES AND I RREDEEMABLE CUMULATIVE PREFERENTIAL SHARES. THESE SHARES WERE SOLD IN 19 76 AND THE ASSESSEE SUFFERED A LOSS. IT WAS HELD THAT THE LOSS WAS A SHORT TERM C APITAL LOSS SINCE THE NEW TYPES OF EQUITY SHARES AND IRREDEEMABLE CUMULATIVE PREFER ENTIAL SHARES ALLOTTED TO THE ASSESSEE IN 1971 HAD RIGHTS AND LIABILITIES WHICH W ERE DIFFERENT 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 FACTS. TH ERE THE ASSESSEE WAS GIVEN A STOCK OPTION UNDER THE EMPLOYEES STOCK OPTION SCHE ME (ESOP). UNDER THE SCHEME THE ASSESSEE WAS VESTED WITH RIGHT TO PURCHA SE CERTAIN NUMBER OF SHARES WITHIN CERTAIN PERIOD. THIS OPTION WAS EXERCISED B Y THE ASSESSEE ON 7-11-2002. THE SHARES WERE SOLD ON 18-5-2003. THE ASSESSEE CL AIMED THAT THE CAPITAL GAINS ARISING ON THE SALE OF THE SHARES SHOULD BE TREATED AS LONG TERM CAPITAL LOSS. THE CLAIM WAS REJECTED ON THE FOOTING THAT THE PERIOD O F HOLDING OF THE SHARES IS TO PAGE - 24 ITA NO.1042/AHD/2006 -24- BE RECKONED FROM THE DATE OF ALLOTMENT OF THE SHARE S AND 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 THE DEEP DISCOUNT BONDS BY ISSUE OF LETTER OF ALLOTMENT SHOULD BE THE STARTING POINT OF THE HOLDING PERIOD. THE BANGALORE BENCH HELD THAT WHATEVER HAPPENED BEFORE THE SHARES WERE ALLOTTED, VIZ. THE VESTING OF THE RIGHT IN THE EMPLOYEE TO PU RCHASE THE SHARES WITHIN A PARTICULAR PERIOD, WERE ALL IRRELEVANT AND IT WAS O NLY FROM THE DATE OF THE ALLOTMENT OF THE SHARES THAT THE ASSESSEE CAN BE SA ID TO HAVE HELD THE SHARES. THIS DECISION CANNOT THEREFORE BE SAID TO ADVANCE T HE 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 PLACED B Y THE LEARNED CIT-DR IS A CASE OF CONVERSION OF LAND FROM THE COMPANYS STOCK IN TRADE INTO INVESTMENT AND THE QUESTION WAS WHETHER FOR THE PURPOSE OF ASC ERTAINING WHETHER THE CAPITAL GAINS ON THE SALE OF THE LAND WERE LONG TER M OR SHORT TERM, IT IS THE DATE OF CONVERSION THAT SHOULD BE TAKEN AS THE STARTING POINT FOR COMPUTING THE PERIOD OF HOLDING OF THE ASSET. THE QUESTION WAS A NSWERED IN THE AFFIRMATIVE. THIS CASE IS WHOLLY DISTINGUISHABLE ON FACTS FROM T HE PRESENT CASE AND THE NATURE OF THE CONTROVERSY IS ALSO DIFFERENT. WE AR E 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 CAPITAL GAINS ON TH E FOOTING THAT HE HELD THEM FOR A PERIOD OF MORE THAN 12 MONTHS STARTING FROM 2 3-9-2000 BEFORE THEY WERE SOLD ON 20-3-2002. CONSEQUENTLY, 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. PAGE - 25 ITA NO.1042/AHD/2006 -25- 27. THE ASSESSEE HAS RAISED AN ADDITION GROUND WHIC H 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 INDUSTR IES MAY BE DELETED. SINCE THERE IS A DETAILED DISCUSSION IN THE ASSESSM ENT ORDER WITH RESPECT TO THIS ADDITIONAL GROUND AND NO FURTHER VERIFICATION OF FA CTS IS REQUIRED, WE ADMIT THE ADDITIONAL GROUND WHICH INVOLVES ONLY A LEGAL ISSUE . 28. THE ASSESSEE IS FOLLOWING THE CASH SYSTEM OF AC COUNTING AND THIS HAS BEEN RECORDED IN THE FIRST PAGE OF THE ASSESSMENT O RDER ITSELF. IN THE COURSE OF THE ASSESSMENT PROCEEDINGS THE ASSESSEE FILED A LET TER DATED 11-8-2004 IN WHICH IT OFFERED THE INTEREST ON THE OFCPNS. ON ACCRUAL B ASIS. 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 ISSUED BY THE CBDT ON 15-2-2002 IS NOT APPLICABLE TO OFCPN S. AND WAS CONFINED TO DEEP DISCOUNT BONDS. THE ASSESSEE HAD PURCHASED 71 32 OFCPNS. ISSUED BY NIRMA INDUSTRIES LTD. ON 25-3-2002 FOR RS.17.83 CRO RES AND 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 ASSESSMEN T BUT MADE IT CLEAR IN THE ASSESSMENT ORDER THAT THE CIRCULAR CITED ABOVE EQUA LLY APPLIES TO OFCPNS. SINCE THEY ARE IN NO WAY DIFFERENT FROM DEEP DISCOUNT BON DS. 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 I S HELD THAT THE OFCPNS. ARE PAGE - 26 ITA NO.1042/AHD/2006 -26- SIMILAR IN NATURE TO DEEP DISCOUNT BONDS, THEY HAVI NG BEEN PURCHASED AFTER 15- 2-2002, THE CIRCULAR IS APPLICABLE AND THE INTEREST MUST BE HELD TO HAVE BEEN RIGHTLY OFFERED AND ASSESSED. THE CONTENTION BEFOR E US HOWEVER IS THAT THE ASSESSEE FOLLOWS THE CASH SYSTEM OF ACCOUNTING AND THEREFORE THE INTEREST IS ASSESSABLE ONLY IN THE YEAR IN WHICH THE OFCPNS. AR E ENCASHED. WE FIND THAT THE INTEREST HAS BEEN ASSESSED IN THE ASSESSMENT OR DER 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 -SECTION (2) BE COMPUTED IN ACCORDANCE WITH EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. AS ALREADY NOTICED THE A SSESSEE IS FOLLOWING THE CASH SYSTEM OF ACCOUNTING. THEREFORE THE INTEREST CANNOT BE ASSESSED ON ACCRUAL BASIS. THE CIRCULAR NO.2 OF 2002 CANNOT OV ERRIDE THE PROVISIONS OF SECTION 145(1) AND ON THE 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 ADDITION AL GROUND AND HOLD THAT THE INTEREST OF RS.2,11,535/- CANNOT BE ASSESSED IN THE YEAR UNDER APPEAL. 30. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT 9 TH OCTOBER, 2009. SD/- SD/- (N.S. SAINI) ACCOUNTANT MEMBER (R.V.EASWAR) VICE-PRESIDENT PLACE : AHMEDABAD DATE : 09-10-2009 COPY OF THE ORDER FORWARDED TO: 1) : ASSESSEE 2) : RESPONDENT 3) : CIT(A) 4) : CIT CONCERNED 5) : DR, ITAT. PAGE - 27 ITA NO.1042/AHD/2006 -27- BY ORDER DR, ITAT, AHMEDABAD
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