Kisan Discretionary Family Trust, Ahmedabad V. The ACIT., Cent.Circle-1(1), Ahmedabad

ITA 1261/AHD/2006

• Counselvise Citation: 126120514 RSA 2006
• Duration Of Justice: 5 year(s) 8 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 29-12-2011
• Assessment Year: 2002-2003
• Appeal Filed On: 17-05-2006
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Retrospective amendment

Judgement Text

, , , , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, AHMEDABAD , .. !', #$ # % BEFORE SHRI MUKUL KR.SHRAWAT, JUDICIAL MEMBER AND SHRI B.P.JAIN, ACCOUNTANT MEMBER ./ I.T.A. NO.1261/AHD/2006 ( ' ' ' ' ' ' ' ' / / / / ASSESSMENT YEAR : 2002-03) KISAN DISCRETIONARY FAMILY TRUST NIRMA HOUSE ASHRAM ROAD AHMEDABAD ' ' ' ' / VS. THE ASSTT.CIT CENTRAL CIRCLE-1(1) AHMEDABAD ( #$ ./ ) ./ PAN/GIR NO. : AAATK 2653 D ( (* / // / APPELLANT ) .. ( +,(*/ RESPONDENT ) (* - #/ APPELLANT BY : SHRI S.N.SOPARKAR +,(* . - # / RESPONDENT BY : SHRI S.S. PANWAR '/ . 0$/ // / DATE OF HEARING : 29/12/2011 12' . 0$ / DATE OF PRONOUNCEMENT : 31.1.2012 #3/ O R D E R PER SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER : THIS IS AN APPEAL AT THE BEHEST OF THE ASSESSEE WHICH HAS EMANATED FROM THE ORDER OF LEARNED CIT(APPEALS)-I, AHMEDABAD DATED 7/3/2006 PASSED FOR A.Y. 2002-03. 2. NUMBER OF GROUNDS HAVE BEEN RAISED, HOWEVER, AT THE OUTSET, LD.AR MR.S.N.SOPARKAR HAS EXPRESSED NOT TO PRESS GROUND N OS.1 & 2 BEING ITA NO. 1261/AHD/2006 KISAN DISCRETIONARY FAMILY TRUST VS. ASST.CIT ASST.YEAR 2002-03 - 2 - GENERAL IN NATURE AND GROUND NOS.6,7 & 8 BEING CONS EQUENTIAL IN NATURE. WE ARE NOW LEFT WITH GROUND NOS.3, 4 & 5; REPRODUCE D BELOW: - 3. IN LAW AND IN FACTS AND CIRCUMSTANCES OF THE A PPELLANTS CASE, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN CONFIRMING THE ADDITIONS OF RS.45,15,49,625/- MADE BY LD. ASSESSING OFFICER BY CONSIDERING ARTIFICIAL ACCRUAL OF INTEREST INCOME ON INVESTMENTS MADE AND HELD BY YOUR APPELLANT. LD. CIT(A) HAS FURTHER ERRED IN UPHOLDING THE ASSES SING OFFICERS ACTION, WHILE MAKING THE ADDITION OF RS.45,15,49,62 5/-, RELYING ON CIRCULAR NO.2 OF 2002 OF CBDET DATED 15/02/02 AND I GNORING THE PRESS NOTE DATED 20/03/02 ISSUED IN THIS REGARD BY CBDT. LD. CIT(A) HAS FURTHER ERRED IN UPHOLDING THE ASSES SING OFFICERS ACTION, MAKING THE ADDITION OF RS.45,15,49,625/-, M AKING THE CIRCULAR APPLICABLE WITH RETROSPECTIVE EFFECT, WHICH IS ILLE GAL AND AGAINST THE INTEREST OF THE APPELLANT. LD. CIT(A) HAS FURTHER ERRED IN UPHOLDING THE ASSES SING OFFICERS ACTION, WHILE MAKING THE ADDITION OF RS.45,15,49,62 5/-, ASSUMING THE DISCOUNT RATES FOR THE YEARS 2005 TO 2010 AND GROSS ERROR IN MAKING CALCULATIONS PURELY BASED ON ASSUMPTION, CONJECTURE AND SURMISE. 4. IN LAW AND IN FACTS AND CIRCUMSTANCES OF THE AP PELLANTS CASE, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN UPHOLDING THE ACTION OF THE LEARNED ASSESSING OFFICER IN CONSIDER ING THE LONG TERM CAPITAL GAIN OF RS.4,51,34,165/- ON SALE OF INTERES T COUPON STRIPS OF TATA FINANCE LTD. AS SHORT TERM CAPITAL GAIN. 5. IN LAW AND IN FACTS AND CIRCUMSTANCES OF THE AP PELLANTS CASE, THE LD. COMMISSIONER OF INCOME3 TAX (APPEALS) HAS ERRED IN UPHOLDING THE ACTION OF LD. ASSESSING OFFICER IN NOT ALLOWING DEDUCTION OF RS.3,52,20,000/- U/S.54EC OF THE I.T. ACT. ON LONG TERM CAPITAL GAINS REFERRED TO IN GROUND NO.4 ABOVE. 3 . APROPOS TO GROUND NO.3, THE OBSERVATION OF THE AO WAS THAT FOLLOWING TWO INVESTMENTS WERE MADE:- ITA NO. 1261/AHD/2006 KISAN DISCRETIONARY FAMILY TRUST VS. ASST.CIT ASST.YEAR 2002-03 - 3 - (I) INVESTMENT IN DEEP DISCOUNT BOND (DDB) OF I CICI LTD. OF RS.125,00,29,233/- ON 08/09/2000. THE MATURITY VAL UE WAS NOTED AS RS.185,83,00,000/- AND THE MATURITY DATE I S NOTED AS 08/03/2004. (II) INVESTMENT IN DDB OF INFRASTRUCTURE LEASING AND FINANCIAL SERVICES LTD. OF RS.50 CRORES ON 22/09/2000 HAVING MATURITY ON 22/03/2004 AT THE MATURITY VALUE OF RS.74,92,50, 000/-. THE AO HAS ASKED AS TO WHY THE INTEREST ON ACCRUAL BASIS WAS NOT DISCLOSED BY THE ASSESSEE. THE ASSESSEES MAIN CON TENTION WAS THAT IT HAD FOLLOWED CASH SYSTEM OF ACCOUNTING, HENCE INTEREST ON ACCRUAL BASIS WAS NOT DISCLOSED. AS AGAINST THAT, THE AO HAS REFERR ED BOARDS CIRCULAR NO.2 OF 2002 DATED 15/02/2002 AND INFORMED THE ASS ESSEE THAT THE ASSESSEE HAD FAILED TO FOLLOW THE GUIDELINES OF THE SAID CIRCULAR. THE ASSESSEESS OBJECTION WAS THAT THE SAID CIRCULAR SI NCE ISSUED ON 15/02/2002, THEREFORE NOT APPLICABLE RETROSPECTIVEL Y ON THE ASSESSEE. THE AOS REMARK WAS THAT AS FAR AS THE LAW IN RESPE CT OF ACCRUAL OF INCOME IS CONCERNED, THE SAME HAD NOT CHANGED AND T HAT THROUGH THE SAID CIRCULAR IT WAS SIMPLY CLARIFIED. AS PER AO, IN RESPECT OF SECURED DEBENTURES THE LIQUIDITY IS FULLY ASSURED AND, THE REFORE, THE ASSESSEE COULD SAFELY CALCULATE THE ANNUAL ACCRUAL ON THE S AID SECURITIES. THE INTEREST SHOULD HAVE BEEN OFFERED BY THE ASSESSEE O N ACCRUAL BASIS IRRESPECTIVE OF THE METHOD OF ACCOUNTING ADOPTED. THE AO HAS, THEREAFTER, COMPUTED THE ACCRUED INTEREST AS UNDER: - ITA NO. 1261/AHD/2006 KISAN DISCRETIONARY FAMILY TRUST VS. ASST.CIT ASST.YEAR 2002-03 - 4 - MATURITY VALUE (FACE VALUE) [1 + R/100]N HERE R IS PREVAILING DISCOUNTING RATE IN INDIAN EC ONOMY AND N IS THE REMAINING PERIOD BEFORE MATURING. THE RANGE OF PREVAILING DISCOUNTING RATE R IS AS UNDER: 1999 10.05-11.50 2000 10.00-12.00 2001 8.75-11.25 2002 7.41-10.25 2003 6.00-7.75 2004 4.7-6.50 THUS THE AVERAGE OF RANGE FOR 2002 IS 8.83. (I) THE DISCOUNTED VALUE AS ON 31.03.02 IN CASE OF DDBS OF ICICI LTD. IS AS UNDER: DISCOUNTED VALUE = 1,85,83,00,000 185,83,00,000 = 1,56,89,80,074 (1+0.0883) 2 1.18.440 PURCHASE CONSIDERATION IN THIS CASE IS RS.1,25,00,2 9,233. THUS THE ACCRUED INTEREST IS RS.31,89,50,841. (II) THE DISCOUNTED VALUE AS ON 31.03.02 IN CASE OF DDBS OF INFRASTRUCTURE LEASING & FINANCIAL SERVICES LTD. IS AS UNDER: DISCOUNTED VALUES= 74,92,50,000 = 74,92,50,000 = 63,25,98,784 (1+0.0883) 2 1.18440 PURCHASE CONSIDERATION IN THIS CASE IS RS.50,00,00, 000. THUS THE ACCRUED INTEREST IS RS.13,25,98,784. IN THE LIGHT OF THE ABOVE OBSERVATION, THE ADDITION OF THESE AMOUNTS IS MADE IN THE HANDS OF THE ASSESSEE. (ADDITION OF ACCRUED INTEREST RS.45,15,49,625) ITA NO. 1261/AHD/2006 KISAN DISCRETIONARY FAMILY TRUST VS. ASST.CIT ASST.YEAR 2002-03 - 5 - THE MATTER WAS CARRIED BEFORE THE FIRST APPELLATE AUTHORITY. 4. THE LD.CIT(A) HAS PASSED A CRYPTIC ORDER AND AFF IRMED THE ADDITION ON THE GROUND THAT THE ASSESSEES CONTENTION TO CHA LLENGE THE VALIDITY OF THE SAID CIRCULAR WAS MISPLACED AND HE HAD NO POWER TO DECLARE THE SAID CIRCULAR AS ULTRA VIRUS . BEING AGGRIEVED NOW THE ASSESSEE IS FURTHER IN APPEAL. 5. HAVING HEARD THE SUBMISSIONS OF BOTH THE SIDES, IT IS WORTH TO MENTION, AT THE OUTSET, THAT AS PER THE RETURN OF INCOME UNDISPUTEDLY IT WAS FOUND THAT THE ASSESSEE HAD FOLLOWED THE CASH S YSTEM OF ACCOUNTING. AT THE OUTSET, WE HAVE ALSO FOUND THAT THE IDENTICA L ISSUE HAD COME UP BEFORE ITAT A BENCH AHMEDABAD IN THE CASE OF KARS ANBHAI KHODIDAS PATEL HUF VS. ACIT BEARING ITA NO.1042/AHD/2006 FOR A.Y. 2002-03 ORDER DATED 09-10-2009, WHEREIN IT WAS HELD AS UND ER:- 27. THE ASSESSEE HAS RAISED AN ADDITION GROUND WHI CH READS AS UNDER: IN LAW AND IN THE FACTS OF THE APPELLANTS CASE, T HE ADDITION OF RS.2,11,535/- BEING NOTIONAL ACCRUED INTEREST ON OP TIONALLY FULLY CONVERTIBLE PREMIUM NOTES (OFCPNS) OF NIRMA I NDUSTRIES MAY BE DELETED. 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 LEGAL 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 ITA NO. 1261/AHD/2006 KISAN DISCRETIONARY FAMILY TRUST VS. ASST.CIT ASST.YEAR 2002-03 - 6 - 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 CONF INED TO DEEP DISCOUNT BONDS. THE ASSESSEE HAD PURCHASED 7132 OF CPNS. 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 ACCEPTED THE LETTER TO THE EXTENT THE INCOME WAS OFFERED THEREIN FOR ASSESSMENT BUT MADE IT CLEAR IN THE ASSESSMENT ORDER THAT THE CIRC ULAR CITED ABOVE EQUALLY APPLIES TO OFCPNS. SINCE THEY ARE IN NO WAY DIFFERENT FROM DEEP 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. IN THIS ORDER IT HAS BEEN HELD THAT AS PER CIRCULAR NO .2 OF 2002 IT IS APPLICABLE ONLY TO DEEP DISCOUNT BONDS PURCHASED AF TER 15-2-2002. THEREFORE, IF IT IS HELD THAT THE OFCPNS. ARE SIMIL AR IN NATURE TO DEEP DISCOUNT BONDS, THEY HAVING BEEN PURCHASED 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 HOW EVER IS THAT THE ASSESSEE FOLLOWS THE CASH SYSTEM OF ACCOUNTING AND THEREFORE THE INTEREST IS ASSESSABLE ONLY IN THE YEAR IN WHICH TH E OFCPNS. ARE ENCASHED. WE FIND THAT THE INTEREST HAS BEEN ASSES SED IN THE ASSESSMENT ORDER UNDER THE HEAD INCOME FROM OTHER SOURCES. UNDER SECTION 145(1) OF THE ACT, INCOME CHARGEABLE UNDER THIS HEA D SHALL SUBJECT TO THE PROVISIONS SUB-SECTION (2) BE COMPUTED IN ACCOR DANCE WITH EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY E MPLOYED BY THE ASSESSEE. AS ALREADY NOTICED THE ASSESSEE IS FOLLO WING THE CASH SYSTEM OF ACCOUNTING. THEREFORE THE INTEREST CANNOT BE AS SESSED ON ACCRUAL BASIS. THE CIRCULAR NO.2 OF 2002 CANNOT OVERRIDE T HE 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 ASSESSE E FOLLOWING THE CASH SYSTEM OF ACCOUNTING. FOR THIS REASON, WE ALLOW TH E ADDITIONAL GROUND AND HOLD THAT THE INTEREST OF RS.2,11,535/- CANNOT BE ASSESSED IN THE YEAR UNDER APPEAL. 6. ONCE, THE RESPECTED CO-ORDINATE BENCH HAS HEL D THAT IN RESPECT OF OFCPN/DDB, THE INTEREST THEREON COULD NOT BE ASSES SED ON ACCRUAL BASIS SINCE THE ASSESSEE HAD FOLLOWED CASH SYSTEM OF ACCO UNTING, THEREFORE WE ITA NO. 1261/AHD/2006 KISAN DISCRETIONARY FAMILY TRUST VS. ASST.CIT ASST.YEAR 2002-03 - 7 - HEREBY REVERSE THE FINDINGS OF THE AUTHORITIES BELO W AND ALLOW THIS GROUND OF THE ASSESSEE. 7. APROPOS TO GROUND NO.4, FACTS IN BRIEF AS EMERGED FROM THE CORRESPONDING ASSESSMENT ORDER PASSED U/S.143(3) DA TED 24/03/2005 WERE THAT THE ASSESSEE FAMILY TRUST HAS SHOWN LONG TERM CAPITAL GAIN FROM THE TRANSACTION OF INTEREST COUPON STRIPS OF TATA FINANCE LTD. (SERIES-I). THE ASSESSEE WAS ALLOTTED 47 TATA FINA NCE LTD. NON CONVERTIBLE DEBENTURES AS ON 23/03/2000 HAVING VALU E OF EACH CONVERTIBLE DEBENTURE AT RS.1 CRORE. IT HAS ALSO B EEN NOTED THAT EACH DEBENTURE COMPRISED OF PRINCIPAL STRIP AND FIVE DE TACHABLE INTEREST COUPON STRIPS. THE INTEREST COUPONS WERE STATED T O BE PAYABLE AT A PERIODIC INTERVALS. THE ASSESSEE HAD SHOWN THE LON G TERM CAPITAL GAIN ON SALE OF THOSE DEBENTURES. THE INTEREST COUPON S TRIPS WERE SOLD ON 18/05/2001 AND ASSESSEE HAS SHOWN LONG TERM CAPITAL GAIN. OTHER INTEREST COUPON STRIPS WERE SOLD ON 22/03/2002. 7.1. NEXT, THE ASSESSEE WAS ALLOTTED 2, TATA FINANC E LTD. NON CONVERTIBLE DEBENTURE (SERIES-II) OF RS.25 LACS EAC H. THESE DEBENTURES ALSO COMPRISED PRINCIPAL STRIP AND DETACHABLE INTER EST COUPON STRIPS. ON SALE, ASSESSEE HAD SHOWN LONG TERM CAPITAL GAIN. SALE WAS EXECUTED OF INTEREST COUPON ON 19/5/2001 AND 20/3/2002, HENC E AS PER ASSESSEE LONG TERM CAPITAL GAIN WAS DISCLOSED. A SHOW-CAUSE NOTICE WAS ISSUED AS TO WHY THE ACCRUED INTEREST SHOULD NOT BE CONSID ERED AS ON 31/3/2001 ON THE DISCOUNTED VALUE OF THE STRIPS AND THEN FROM THAT DATE SHORT TERM CAPITAL GAIN SHOULD NOT BE CONSIDERED ON THE INTERE ST COUPON STRIPS IN THE LIGHT OF BOARD CIRCULAR NO.2 OF 2002 DATED 15/0 2/2002. AS PER ITA NO. 1261/AHD/2006 KISAN DISCRETIONARY FAMILY TRUST VS. ASST.CIT ASST.YEAR 2002-03 - 8 - ASSESSING OFFICER, THE ASSESSEE HAD TO OFFER THE IN COME ON THOSE STRIPS ON ANNUAL BASIS IRRESPECTIVE OF THE METHOD OF ACCOU NTING FOLLOWED AND ON SUCH STRIPS THERE COULD NOT BE ANY LONG TERM CAPITA L GAIN BECAUSE AS PER ASSESSING OFFICER, THERE WOULD BE EITHER ACCRUED IN TEREST OR SHORT TERM CAPITAL GAIN. THEREAFTER, THE ASSESSING OFFICER HAD DISCUSSED CERTAIN CIRCULARS AND OTHER PROVISIONS OF THE ACT AND, THER EAFTER ARRIVED AT THE FOLLOWING CONCLUSION:- 5.8. THE ASSESSEE SOLD THE INTEREST COUPON STRIPS PART-B, SERIES-I AS ON 18.05.01 AND IT WAS LISTED AS ON 20.06.2000. THIS IS CLEARLY A SHORT TERM CAPITAL ASSET AND THE GAIN ARISING FRO M THE TRANSACTION OF THE SAME IS THE STCG, THIS IS RS.98,09,876. TH E ASSESSEE SOLD THE INTEREST COUPON STRIPS PART-B, SERIES-II AS ON 19.5.01 AND IT WAS LISTED AS ON 20.06.2000, THIS IS CLEARLY A SHOR T TERM CAPITAL ASSET AND THE GAIN ARISING FROM THE TRANSACTION OF THE SAME IS THE STCG, THIS IS RS.1,04,360. THEREFORE THE STCG ON T HE SAME IS COMPUTED AT RS.99,14,236. (ADDITION OF STCG RS.99,14,236) 5.9. IN THE MATTER OF ALL THE OTHER INTEREST COUPON STRIPS OF TATA FINANCE LTD., THE ASSESSEE SOLD THE SERIES-I AS ON 22.03.02 AND SERIES-II AS ON 20.03.02. IT IS CONCLUDED THAT THE INTEREST ACCRUED ON THE SAME AS ON 31.03.01 AND THE SAME IS ADDED HE RE. FROM 31.03.01 TO THE DATE OF SALE, THE DIFFERENCE IN THE VALUE AS ON 31.03.01 AND AS ON SALE DATE IS CONSIDERED AS STCG. SINCE THE RATE OF TAX IN BOTH THE CASES IS SAME THE NET INCOM E OF RS.3,52,19,929 IS CONSIDERED AS STCG/INTEREST INCOM E. (ADDITION OF STCG OF RS.3,52,19,929) 7.2. ACCORDINGLY A TOTAL ADDITION OF RS.4,51,34,165 /- WAS MADE. ITA NO. 1261/AHD/2006 KISAN DISCRETIONARY FAMILY TRUST VS. ASST.CIT ASST.YEAR 2002-03 - 9 - 7.3. BEING AGGRIEVED THE MATTER WAS CARRIED BEFORE THE FIRST APPELLATE AUTHORITY. 8. THE LEARNED CIT(APPEALS) HAS ALSO DISCUSSED THE ENTIRE ISSUE IN DETAIL AND THEREAFTER AFFIRMED THE ACTION OF THE AS SESSING OFFICER IN THE FOLLOWING MANNER:- I HAVE CONSIDERED THE ABOVE SUBMISSIONS, I AM UNAB LE TO AGREE WITH THEM DUE TO THE FOLLOWING REASONS- 1) INTEREST ACCRUES, WHICH IS TAXABLE ON SUCH DEB ENTURE AND IF SOLD, SHORT TERM CAPITAL GAIN IS LEVIABLE. 2) AS REGARDS TO APPLICABILITY OF SAID CIRCULAR, PR ESS RELEASE DTD. 20/03/2002 IS NOT APPLICABLE, AS IT LEADS UNIN TENDED RESULTS/ABSURDITY. 3) CIRCULAR NO.783 DTD. 18/11/99 IS RELIED UPON BY A .O. FOR POINT NO.2 ABOVE. 4) CIRCULAR NO.2 OF 2002 IS FURTHER CLARIFYING SC OPE OF LETTER OF CBDT DTD. 12/03/96 AND THEREFORE LETTER DTD. 12/03/ 96 IS NOT APPLICABLE. 5) INTENTION OF LEGISLATURE WAS ALWAYS TO TAX SUCH INCOME AS INTEREST IS EVIDENT FROM FINANCE BILL 2005. SINCE AO'S ACTION IN TREATING THE APPELLANTS CLAIM OF LONG TERMS CAPITAL GAIN AS SHORT TERM CAPITAL GAIN IS UPHELD, THE OTHER RELATED GROUND OF APPEAL REGARDING SECTION 54EC DED UCTION ON SUCH CAPITAL GAIN IS ALSO DISMISSED SINCE THAT IS AVAILABLE ONLY ON LONG TERM CAPITAL GAINS. THIS ISSUE HAS ALSO BEEN DEALT WITH IN THE CASE OF HARSIDDH SP.FAMILY TRUST ORDER NO.CIT(A )- I/CC.1(1)/46/05-06 DATED 7/3/06 FOR A.Y. 02-03. HE NCE, IN VIEW OF ABOVE DISCUSSION, GROUND OF APPEAL NO.3 IS DISMISSE D. ITA NO. 1261/AHD/2006 KISAN DISCRETIONARY FAMILY TRUST VS. ASST.CIT ASST.YEAR 2002-03 - 10 - 9. HAVING HEARD THE SUBMISSIONS OF BOTH THE SIDES, ON THE FACE OF RECORDS, THE ISSUE STOOD COVERED BY A DECISION OF I TAT A BENCH AHMEDABAD PRONOUNCED IN THE CASE KARSANBHAI KHODIDA S PATEL HUF (SUPRA), WHEREIN IT WAS HELD AS UNDER:- 7. THE ASSESSEE IS IN FURTHER APPEAL BEFORE THE TR IBUNAL. 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 D ATE 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 AN D THE DEBENTURE CERTIFICATE. IT IS POINTED OUT FURTHER THAT THE DE PARTMENTAL AUTHORITIES HAVE NOT APPRECIATED THE CIRCULAR NO.2 OF 2002 ISSU ED BY THE CBDT IN PROPER PERSPECTIVE AND THAT THEY WERE WRONG IN RELY ING 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 P ROSPECTIVELY IN THE SENSE 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 ARVI ND COTSPIN VS. DCIT IN ITANO.519/AHD/2001 (ASSTT.YEAR 1996-97) DAT ED 20-6-2006. THE LEARNED COUNSEL FOR THE ASSESSEE DREW OUR ATTEN TION TO THE LETTER OF ALLOTMENT COMPILED IN THE PAPER BOOK AT PAGE 102 AN D POINTED OUT THAT WHAT IS ALLOTTED ARE DEEP DISCOUNT BONDS (SERIES-A) AND THAT THE LETTER OF ALLOTMENT EVIDENCES THE TITLE TO THE BONDS AND IS N OT QUALITATIVELY DIFFERENT IN ANY MANNER FROM THE DEBENTURE BOND CER TIFICATES ITSELF. HE ACCORDINGLY CONTENDED THAT THE ASSUMPTION OF THE DE PARTMENTAL AUTHORITIES THAT THE LETTER OF ALLOTMENT IS A SEPAR ATE INSTRUMENT, APART FROM THE DEBENTURE CERTIFICATE, IS ERRONEOUS. THE SUBSTANCE OF THE MATTER ACCORDING TO HIM IS THAT BOTH THE LETTER OF ALLOTMENT AND THE DEBENTURE CERTIFICATES ACKNOWLEDGE THE DEBT OF THE COMPANY AND THE DEBENTURE CERTIFICATE IS ISSUED IN LIEU OF THE LETT ER OF ALLOTMENT AND THE FACT THAT IN THE INTERREGNUM THE DEBENTURE TRUST DE ED CAME INTO EXISTENCE AND CREATED A CHARGE ON THE ASSETS OF THE COMPANY D OES NOT IN ANY WAY ALTER THE NATURE AND CHARACTER OF THE DEBT. ACCORD ING TO THE LEARNED COUNSEL, THE ASSESSEE HELD A DEBT AND INITIALLY IT WAS REPRESENTED BY THE LETTER OF ALLOTMENT AND LATER BY THE DEBENTURE CERT IFICATE. THE STARTING POINT IN COMPUTING THE PERIOD FOR WHICH THE CAPITAL ASSET WAS HELD BY THE ASSESSEE SHOULD THEREFORE BE THE DATE OF THE LE TTER OF ALLOTMENT AND NOT THE DATE ON WHICH THE DEBENTURE CERTIFICATE WAS ISSUED. ITA NO. 1261/AHD/2006 KISAN DISCRETIONARY FAMILY TRUST VS. ASST.CIT ASST.YEAR 2002-03 - 11 - 15. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENT IONS PRESENTED BEFORE US. IN OUR OPINION IT APPEARS DIFFICULT TO UPHOLD THE CONTENTION OF THE REVENUE TO THE EFFECT THAT THE HOLDING PERIO D OF 12 MONTHS SHOULD BE RECKONED FROM THE DATE ON WHICH THE DEBENTURE CE RTIFICATE WAS ISSUED, I.E. ON 10-5-2001 OR FROM THE DATE ON WHICH THE DEBENTURE TRUST DEED CAME INTO EFFECT I.E. ON 27-4-2001 OR FROM THE DATE ON WHICH THE DEBENTURES WERE LISTED IN THE NATIONAL STOCK EXCHAN GE I.E. ON 20-9- 2001. WE MAY STRAIGHT AWAY CLARIFY THAT THE CIRCU LAR NO.2 OF 2002 WHICH WAS ISSUED BY THE CBDT ON 15-2-2002 IS NOT RE LEVANT FOR DECIDING THE PRESENT APPEAL BECAUSE AS RIGHTLY POIN TED OUT ON BEHALF OF THE ASSESSEE, THE AO HIMSELF DID NOT APPLY THE CIRC ULAR 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 GAIN S. THE DISPUTE IS ONLY WHETHER THEY ARE LONG TERM CAPITAL GAINS AS CO NTENDED BY THE ASSESSEE OR SHORT TERM CAPITAL GAINS AS CONTENDED B Y THE REVENUE. A SHORT TERM CAPITAL ASSET IS DEFINED BY SECTION 2(42 A) AS A CAPITAL ASSET HELD BY AN ASSESSEE FOR NOT MORE THAN 36 MONTHS IMM EDIATELY PRECEDING THE DATE OF ITS TRANSFER. THERE IS A PROVISO TO TH E 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 MENTIONE D 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 C APITAL ASSET WHICH IS NOT A SHORT TERM CAPITAL ASSET. THE RESULT IS T HAT IN THE CASE OF THE CAPITAL ASSET SPECIFIED IN THE PROVISO 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 HELD AT LEAS T FOR A PERIOD OF 36 MONTHS IN ORDER TO QUALIFY AS A LONG TERM CAPITAL A SSET. 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 T HE CAPITAL ASSET ACQUIRED BY THE ASSESSEE FROM NIRMA LTD. FALLS UNDE R THIS CATEGORY OF ASSETS VIZ. SECURITY LISTED IN A RECOGNISED STOCK E XCHANGE IN INDIA. WE MAY ALSO REFER TO SECTION 2(H) (I)OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 WHICH DEFINES SECURITIES TO INCLUDE SHAR ES, BONDS, DEBENTURES, DEBENTURE STOCK OR OTHER MARKETABLE SEC URITIES OF A LIKE NATURE IN OR OF ANY INCORPORATED COMPANY OR OTHER B ODY CORPORATE. THERE ARE OTHER SUB-CLAUSES IN THIS CLAUSE BUT SINC E THE LEARNED CIT-DR RESTED HIS CASE ONLY ON SUB-CLAUSE (I) OF SECTION 2 (H) OF THE SECURITIES CONTRACTS (REGULATIONS) ACT, WE ARE NOT REFERRING T O THEM. ITA NO. 1261/AHD/2006 KISAN DISCRETIONARY FAMILY TRUST VS. ASST.CIT ASST.YEAR 2002-03 - 12 - . 26. FOR THE AFORESAID REASONS, WE ARE OF THE VIEW THAT THE ASSESSEE IS RIGHT IN CLAIMING THAT THE CAPITAL GAIN S ARISING ON THE SALE OF THE DEEP DISCOUNT BONDS SHOULD BE ASSESSED AS LONG TERM CAPITAL 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. CONSEQUENTLY, WE ALSO HOLD THAT THE ASS ESSEE IS ENTITLED TO THE EXEMPTION UNDER SECTION 54EC AS CLA IMED. THUS BOTH GROUND NOS.2 AND 3 ARE ALLOWED. 9. THE RESPECTED CO-ORDINATE BENCH HAS HELD THAT TH E CAPITAL GAIN ARISING ON SALE OF DEEP DISCOUNT BOND SHOULD BE ASS ESSED AS LONG TERM CAPITAL GAIN ON THE FOOTING THAT THE PERIOD OF HOLD ING OF DEEP DISCOUNT BOND IS MORE THAN THE PERIOD PRESCRIBED. THE RES PECTED BENCH HAS ALSO OPINED THAT THE CIRCULAR NO.2 OF 2002 ISSUED BY CBD T ON 15/02/2002 WAS NOT RELEVANT FOR DECIDING THE ISSUE WHETHER THE GAIN IS LONG TERM OR NOT. THE RESPECTED BENCH HAS CONSIDERED THE PROV ISIONS OF SECTION 2 (42A) ALSO. THUS, THE TOTALITY OF THE CIRCUMSTANCE S WARRANTS TO FOLLOW THE AFORESAID DECISION OF THE TRIBUNAL. IN THE RESULT, THIS GROUND OF THE ASSESSEE IS HEREBY ALLOWED. 10. APROPOS TO GROUND NO.5 , SINCE THE A.O. HAD ASSESSED AS STCG, CONSEQUENT THEREUPON HE HAS DISALLOWED THE DEDUCTIO N U/S.54EC AS FOLLOWS:- 5.10. THE CLAIM OF DEDUCTION U/S.54EC OF I.T. ACT OF RS.3,52,19,929 IS NOT ALLOWED TO THE ASSESSEE SINCE THE SAME CAN BE CLAIMED ONLY AGAINST THE LTCG AS PER THE PROVISI ONS OF THE ACT. ITA NO. 1261/AHD/2006 KISAN DISCRETIONARY FAMILY TRUST VS. ASST.CIT ASST.YEAR 2002-03 - 13 - 10.1 WE HAVE NOTICED THAT AFTER HOLDING THAT THE GAIN IN QUESTION WAS TO BE TAXED AS LONG TERM CAPITAL GAIN, THE TRIBUNAL(SU PRA) HAS ALSO HELD THAT IN CONSEQUENCE THEREUPON THE ASSESSEE SHOULD ALSO B E ENTITLED FOR EXEMPTION U/S.54AC OF IT ACT. RESPECTFULLY FOLLOWI NG THE SAID VIEW AS WELL THIS GROUND OF THE ASSESSEE IS ALLOWED AND THE AO IS DIRECTED TO VERIFY THE INVESTMENT AND THEREUPON ALLOW AS PER LA W. GROUND IS ALLOWED. 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOW ED IN TERMS INDICATED ABOVE. SD/- SD/- ( .. !' ) ( ) #$ ( B.P. JAIN ) ( MUKUL KR. SHRAWAT ) ACCOUNTANT MEMBER JUDICIAL ME MBER AHMEDABAD; DATED 31 / 01 /2012 40..', .'../ T.C. NAIR, SR. PS #3 . +5 6#5' #3 . +5 6#5' #3 . +5 6#5' #3 . +5 6#5'/ COPY OF THE ORDER FORWARDED TO : 1. (* / THE APPELLANT 2. +,(* / THE RESPONDENT. 3. 7 / CONCERNED CIT 4. 7() / THE CIT(A)-I, AHMEDABAD 5. 5:; +' , , / DR, ITAT, AHMEDABAD 6. ;< =/ / GUARD FILE. #3' #3' #3' #3' / BY ORDER, ,5 + //TRUE COPY// > >> > / // / ( DY./ASSTT.REGISTRAR) , , , , / ITAT, AHMEDABAD