Shri Manankumar M. Patel, Mehsana V. The ACIT, Mehsana Circle, Mehsana

ITA 1558/AHD/2013

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 9873 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 6 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2016
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 29-11-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 28-05-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: U S BHATI
• Keywords: Capital asset; Business income; Principle of natural justice; Rule of consistency; Retrospective amendment; Cost of acquisition; Competent authority; Tax effect; Benefit of exemption
• Section: 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD A BENCH AHMEDABAD BEFORE, SHRI S. S. GODARA, JUDICIAL MEMBER AND SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER ITA NO. 1558 & 1702/AHD/2013 (ASSESSMENT YEAR: 2009-10) MANANKUMAR M. PATEL OPP. UMIYA COMPLEX, APOLLO COMPOUND HIGHWAYS, MEHSANA - 384002 APPELLANT VS. ASSTT. COMMISSIONER OF INCOME TAX, MEHSANA CIRCLE, MEHSANA, 2 ND FLOOR, APOLLO ENCLAVE, HIGHWAY, MEHSANA - 384002 RESPONDENT/ CROSS APPELLANT PAN: ABXPP3019N & ITA NO. 1559 & 1703/AHD/2013 (ASSESSMENT YEAR: 2009-10) SHRI MAULIKKUMAR M. PATEL OPP. UMIYA COMPLEX, APOLLO COMPOUND, HIGHWAY, MEHSANA - 384002 APPELLANT VS. ASSTT. COMMISSIONER OF INCOME TAX, MEHSANA CIRCLE, MEHSANA, 2 ND FLOOR, APOLLO ENCLAVE, HIGHWAY, MEHSANA - 384002 RESPOND ENT/ CROSS APPELLANT PAN: ABXPP3020D ITA NOS. 1558,1559, 1702 & 1703 & /AHD/2013 (MANAN KUMAR M. PATEL & MAULIK KUMAR M. PATEL) A.Y. 2009-10 - 2 - / BY REVENUE : SHRI K. MADHUSUDAN, SR. D.R. /BY ASSESSEE : SHRI U. S. BHATI, A.R. /DATE OF HEARING : 29.11.2016 /DATE OF PRONOUNCEMENT : 30.11.2016 ORDER PER S. S. GODARA, JUDICIAL MEMBER THIS SET OF FOUR APPEALS ARISES IN CASE OF TWO DIFF ERENT ASSESSEES FOR ASSESSMENT YEAR 2009-10. FIRST ASSESSEE SHRI MANAN KUMAR M. PATEL HAS FILED ITA NO.1558/AHD/2013 FOLLOWED BY REVENUES CROSS AP PEAL ITA NO.1702/AHD/2013 AGAINST CIT(A), GANDHINAGARS ORDE R DATED 04.03.2013 IN APPEAL NO. CIT(A)/GNR/270/2011-12. THE LATTER ASSE SSEE SHRI MAULIKKUMAR M. PATEL AND THE DEPARTMENT HAVE INSTITUTED LATTER SET OF CROSS APPEALS ITA NOS. 1559 & 1703/AHD/2013 RESPECTIVELY AGAINST THE VERY CIT(A)S ORDER IN APPEAL NO. CIT(A)/GNR/269/2011-12. RELEVANT PROCE EDINGS IN BOTH SETS OF CASES ARE U/S.143(3) OF THE INCOME TAX ACT, 1961; I N SHORT THE ACT. 2. BOTH THE LEARNED REPRESENTATIVES STATE AT THE OU TSET THAT THESE FOUR APPEALS RAISE A COMMON ISSUE OF TAXATION OF ASSESSE ES PROFITS ARISING FROM REDEMPTION OF 400 DEEP DISCOUNT BONDS OF SARDAR SA ROVAR NIGAM LTD. PURCHASE @3600 PER BOND ON 11.01.1994 AND REDEEM AT A PRICE OF RS.50,000/- EACH ON 10.01.2009. WE THUS TREAT FORM ER ASSESSEE MANANKUMAR M. PATEL APPEAL ITA NO.1558/AHD/2013 ALONG WITH REV ENUES CROSS APPEAL ITA NO.1702/AHD/2013 AS THE LEAD CASES. ITA NOS. 1558,1559, 1702 & 1703 & /AHD/2013 (MANAN KUMAR M. PATEL & MAULIK KUMAR M. PATEL) A.Y. 2009-10 - 3 - 3. WE COME TO RELEVANT FACTS FIRST. THERE IS NO DI SPUTE THAT THE ASSESSEE ACQUIRED AND REDEEMED THE ABOVE DEEP DISCOUNT BONDS ON THE DATES AND PRICES STATED IN THE PRECEDING PARAGRAPH. THE ASSE SSEE AT THE FIRST INSTANCE CLAIMED THAT THESE PROFITS ARISING FROM THE ABOVE R EDEMPTION WERE IN THE NATURE OF LONG TERM CAPITAL GAINS U/S.10(38) OF THE ACT. THE ASSESSING OFFICER SOUGHT TO KNOW AS TO WHETHER THE SAME HAD B EEN SUBJECTED TO THE SECURITIES TRANSACTION TAX OR NOT. THE REPLY CAME WAS IN NEGATIVE. THE ASSESSING OFFICER OBSERVED IN ASSESSMENT ORDER DATE D 24.12.2011 THAT ASSESSEES ABOVE CLAIM U/S.10(38) OF THE ACT WAS NO T ADMISSIBLE SINCE ITS CAPITAL ASSETS WAS NOT IN THE NATURE OF AN EQUITY S HARE IN A COMPANY OR A UNIT OF AN EQUITY ORIENT FUND SUBJECT TO VARIOUS OTHER S TIPULATIONS THEREIN. THE ASSESSING OFFICER THEREAFTER WENT ON TO TREAT ASSES SEES REDEMPTION INCOME AS INTEREST ON SECURITIES TO MAKE THE IMPUGNED ADDITIO N OF RS.1,85,60,000/- U/S. 10(38) OF THE ACT. 4. THE ASSESSEE PREFERRED APPEAL. THE CIT(A) DECID ES THE ISSUE AS FOLLOWS: 6. THE NEXT GROUND OF APPEAL IS ON THE ISSUE OF T AXATION OF INCOME ARISING OUT OF REDEMPTION OF 400 DEEP DISCOUNT BONDS OF SSN NL PURCHASED @ 3600/- PER BOND ON 11/1/1994, THE BONDS WERE REDEEM ED PREMATURELY ON 10/1/2009 AT A VALUE OF RS.50,000/- PER BOND. THE A PPELLANT HAD CLAIMED THAT THE BONDS WERE HELD AS CAPITAL ASSET AND THE I NCOME IS TAXABLE AS LONG TERM CAPITAL GAIN. IT FURTHER CLAIMED THAT ITS INCO ME WAS EXEMPT U/S 10(38) OF THE IT ACT. THE AO DISALLOWED THE CLAIM OF THE A PPELLANT U/S 10(38) SAYING THAT IT IS NOT AN EQUITY SHARE OR UNIT OF AN EQUITY RELATED FUND AND NO STT HAS BEEN DEDUCTED. THE AO FURTHER OBSERVED THAT SSNNL H AS TREATED THE DIFFERENTIAL BETWEEN THE REDEMPTION VALUE AND THE PURCHASE VALUE AS INTEREST ON SECURITIES AND DEDUCTED TDS AND THEREFORE, THE I NCOME WAS NEVER OF THE NATURE OF CAPITAL GAIN FOR WHICH EXEMPTION U/S 10(3 8) COULD HAVE BEEN AVAILABLE. HE HELD THE INCOME AS INTEREST ON SECURI TIES AND TAXED THE DIFFERENTIAL BETWEEN THE REDEMPTION VALUE AND THE P URCHASE VALUE AS INTEREST ON SECURITIES. 6.1 THE APPELLANT SUBMITTED THE FOLLOWING DETAI LED SUBMISSIONS ON THE ISSUE: ITA NOS. 1558,1559, 1702 & 1703 & /AHD/2013 (MANAN KUMAR M. PATEL & MAULIK KUMAR M. PATEL) A.Y. 2009-10 - 4 - '. THESE BONDS WERE HELD BY THE APPELLANT BEING 'LO NG TERM INVESTMENT', HENCE IN THE BOOKS OF ACCOUNTS THEY AR E SHOWN AS SUCH AND THE SAME ARE REFLECTED AS ASSET IN THE FINAL BALANCE SHEET SUBMITTED TO THE DEPARTMENT ALONGWITH RETURNS OF IN COME, YEAR AFTER YEAR. NOT ONLY THIS, BUT THE SAME HAVE BEEN SHOWN AS SUCH IN WEALTH TAX, RETURNS OF THE APPELLANT WHICH HAVE BEEN ACCEPTED B Y THE DEPARTMENT, IN THE PAST WEALTH TAX ASSESSMENTS. SUBSEQUENTLY, IN 2008 THE STATE OF GUJARAT PASSED N ECESSARY LAW TO REPAY RS.50,000/- PER BOND TOWARDS 'EARLY RE DEMPTION' AND PUBLISHED OFFICIAL NOTICE DATED 3/11/2009, FOR THE INTEREST OF ALL THE HOLDERS OF SUCH BONDS. THEREUPON, THE APPELLANT OPT ED TO GO FOR PRE- MATURED REDEMPTION OF INVESTMENT MADE IN THESE BOND S, SINCE THESE BONDS WERE HELD AS 'LONG TERM INVESTMENT' WITHOUT A NY INCOME/YIELD FROM SUCH MONEY INVESTED. ACCORDINGLY, THE APPELLANT RECEIVED RS.2,00,00,000/- TOWARDS SALE PROCEEDS OF SUCH BONDS. THE APPELLANT HAVING RECEIVED THE SUM ON SURRENDERING T HOSE BONDS WHICH FELL IN THE ACCOUNTING YEAR RELEVANT TO A.Y. 2009-10. SINCE THE SAID BONDS IN QUESTION WERE 'CAPITAL ASSETS' OF THE APPELLANT, THE SURPLUS EARNED BY THE APPELLANT ON THE SURRENDER OF THE BONDS WAS DISCLOSED BY THE APPELLANT AS 'LONG TERM CAPITAL GA INS' AND CLAIMED AS EXEMPT FROM TAXATION BY VIRTUE OF PROVISIONS OF SECTION 10(38) OF THE ACT. 4.2 IN THE COURSE OF THE ASSESSMENT PROCEEDINGS, TH E A.O. HAS REJECTED THE CLAIM OF THE APPELLANT, AND HAS TAXED THE SURPLUS ARISING AS 'INTEREST ON SECURITIES' RELYING UPON A LETTER O F SARDAR SAROVAR NARMADA NIGAM LTD. (PURPORTEDLY RELYING UPON CBDT C IRCULAR BY THE LATTER), AND HAS DENIED BENEFIT OF EXEMPTION U/ S 10(38) OF THE ACT. 4.3 AS SUBMITTED IN PARA 3 ABOVE, THE A.O. HAS NEITHER SUPPLIED A COPY OF ALLEGED LETTER OF SARDAR SAROVAR NARMADA NI GAM LTD. TO THE APPELLANT NOR SPECIFIED DATE AND NUMBER OF PARTICUL AR CIRCULAR OF CBDT. THE COURTS HAVE HELD, TIME AND AGAIN, THAT WHEN EVIDENCE/MATERIAL/STATEMENTS ARE COLLECTED AT THE B ACK OF THE APPELLANT AND ARE USED IN THE ASSESSMENT PROCEEDING S, THE PRINCIPLE OF NATURAL JUSTICE REQUIRES THAT THE APPELLANT SHOU LD BE GIVEN A FAIR OPPORTUNITY, PROVIDING COPY OF MATERIAL BEING USED AGAINST THE APPELLANT, TO ENABLE HIM TO DEFEND HIS CASE. THE AP PELLANT IS OBVIOUSLY, DEPRIVED OF SUCH OPPORTUNITY BEFORE PASS ING IMPUGNED ORDER. 4.4 WITHOUT PREJUDICE TO THE ABOVE, IT IS RESPECTFU LLY SUBMITTED THAT AS MAY BE VERIFIED FROM THE RECORDS, THE APPELLANT MAINTAINS REGULAR BOOKS OF ACCOUNTS ON MERCANTILE BASIS, SINCE BEGINN ING. THE INVESTMENT IN 'BONDS' HAVE BEEN MADE ON 11/1/1994 R ELEVANT TO A.Y. ITA NOS. 1558,1559, 1702 & 1703 & /AHD/2013 (MANAN KUMAR M. PATEL & MAULIK KUMAR M. PATEL) A.Y. 2009-10 - 5 - 1994-95 AND ARE SHOWN UNDER THE HEAD 'INVESTMENT' I N THE APPELLANT'S BALANCE SHEET AS AT 31/3/1994 AND THERE AFTER IN SUBSEQUENT YEARS BALANCE SHEETS, AS FILED WITH THE RETURNS OF INCOME OF RESPECTIVE YEARS, THESE BONDS ARE REFLECTED AS 'INVESTMENT' BEING A CAPITAL ASSET. THE A.O HAS ACCEPTED THE FIGURES OF REALIZATION ON REDEMPTION AS WELL AS COST OF INVESTMENT AS MAY BE PERUSED FROM PARA 6.1 OF HIS ORDER. THE A.O HAS NOT DISPUTED THA T THE BONDS IN QUESTION WERE THE CAPITAL ASSET OF THE APPELLANT AS WELL AS THEY BEING SPECIFIED GOVERNMENT SECURITIES. IT IS HOWEVER OBSE RVED BY HIM IN PARA 6.2 THAT FOLLOWING THE CBDT CIRCULAR, THE REDE MPTION VALUE IS TREATED AS 'INTEREST ON SECURITIES' AND HE HAS TAXE D THE ENTIRE SURPLUS IN THE HANDS OF THE APPELLANT. SO FAR AS DENIAL OF EXEMPTION U/S 10(38) OF THE ACT BY THE A.O. IS CONCERNED, IT MAY KINDLY BE APPRECIATED THAT WHEN THE APPELLANT INVESTED IN THE F.Y. 93-94 THE P ROVISIONS OF STT WERE NOT IN OPERATION. SO ALSO, IN THE PREVIOUS YEA R SARDAR SAROVAR NARMADA NIGAM LTD. ITSELF HAVING PURCHASED THE DD B ONDS FROM THE APPELLANT UNDER THE LAW PRONOUNCED BY THE STATE OF GUJARAT AND TRANSACTION BEING NOT ROUTED THROUGH STOCK EXCHANGE , QUESTION OF PAYMENT OF STT DOESN'T ARISE ONLY. THE APPELLANT HA S, THEREFORE, RIGHTLY CALCULATED AND CLAIMED EXEMPTION U/S 10(38) OF THE ACT. 4.5 IN THIS CONTEXT, IT IS SUBMITTED THAT THERE ARE MANY IUDICIAL PRONOUNCEMENT ON THIS ISSUE IN FAVOUR OF THE APPELL ANT, FEW OF THEM BEING RELIED UPON BY THE APPELLANT ARE AS UNDER. (1) MADHYA PRADESH FINANCIAL CORPORATION VS.CIT 132 ITR 884 (M.P). FACTS: THE APPELLANT INVESTED CERTAIN AMOUNT IN STATE GOV ERNMENT BONDS. THE EXCESS AMOUNT RECEIVED BY APPELLANT ON S URRENDERING THOSE BONDS WAS TAXED BY THE I.T.O. AS BUSINESS INC OME. ON SECOND APPEAL, THE APPELLANT BEFORE THE TRIBUNAL CONTENDED THAT THE TRANSACTION OF SURRENDER OF BONDS DIDN'T AMOUNT TO RELINQUISHMENT OF ANY ASSET AND HENCE THE EXCESS AMOUNT RECEIVED BY T HE APPELLANT WAS NOT LIABLE TO BE TAXED AS BUSINESS INCOME. ON REFER ENCE, THE HIGH COURT HELD THAT IT WAS NOT DISPUTED BY THE APPELLAN T BEFORE THE TRIBUNAL THAT THE BONDS IN QUESTION, WHICH IS SURRE NDER, RESULTED IN A GAIN TO THE APPELLANT. IN VIEW OF SUCH FINDINGS, TH E PROFIT EARNED BY THE APPELLANT ON THE SURRENDER OF THE BONDS WAS RIG HTLY HELD BY THE TRIBUNAL AS LIABLE TO BE TAXED AS CAPITAL GAINS. THE FACTS OF THIS CASE ARE APPLICABLE TO THE APPELL ANT'S CASE IN AS MUCH AS IN THE BOOKS OF ACCOUNTS OF THE APPELLAN T THESE BONDS ARE BEING SHOWN AS CAPITAL ASSETS AND THEY ARE SURRENDE RED, RESULTING IN A GAIN LEASE TO BE TAXED AS LONG AS LONG TERM CAPIT AL GAIN BUT FOR EXEMPTION PROVIDED U/S 10(38) OF THE ACT. ITA NOS. 1558,1559, 1702 & 1703 & /AHD/2013 (MANAN KUMAR M. PATEL & MAULIK KUMAR M. PATEL) A.Y. 2009-10 - 6 - (2) PERVIZ WANG CHUK BASI VS. 3CIT [20061102ITD 123 (MUMBAI) FACTS: THE APPELLANT CLAIMED LONG TERM CAPITAL LOSS ON RED EMPTION OF BONDS MATURED IN THE YEAR. ACCORDING TO THE CIT(A) THERE WAS NOT A TRANSFER AND HENCE HE CONFIRMED THE DECISION OF THE A.O. OF NON- ALLOWANCE OF LONG TERM CAPITAL LOSS. ON THE APPEAL, THE TRIBUNAL HELD THAT REDEMPTION OF THESE BONDS DOES GIVE RAISE TO C APITAL GAIN/LOSS AND THE APPELLANT DESERVES TO SUCCEED. (IN CASE, TH E TRIBUNAL HAS DISMISSED AND ANALYZED OTHER LAND MARK CASES OF HON 'BLE SC) IN THE APPELLANT'S CASE WHEN THE CAPITAL BONDS ARE REDEEMED, THEN AFTER THE DATE OF REDEMPTION, THEY HAVE NOT RE MAINED AS BONDS, BUT CERTAINLY WHAT REMAINED IS AN ASSET WITH THE AP PELLANT. THERE WAS APPELLANT'S RIGHT IN ASSET WHICH HAS BEEN LATER ENC ASHED BY SURRENDER TO THE COMPETENT AUTHORITY AND RECEIVING CASH THERE ON. THE APPELLANT'S CASE IS THEREFORE, ON MUCH BETTER FOOTI NGS AND IS QUITE JUSTIFIED BEING IN TUNE WITH THE PROVISIONS OF THE ACT. IN THE LIGHT OF THE ABOVE RATIO AND IN VIEW OF THE ENTIRELY, THE CLAIM OF THE APPELLANT DESERVES TO BE ALLOWED. 4.5 WITHOUT PREJUDICE TO THE ABOVE, SO FAR AS CIRCU LAR OF CBDT BEING REFERRED BY THE A.O., WITHOUT ITS NUMBER AND DATE O F ISSUANCE BY THE AUTHORITY, IT IS SUBMITTED THAT CIRCULARS ISSUED BE THE CBDT, AGAINST JUDICIAL PRONOUNCEMENT ARE NOT ACCEPTABLE OR BINDIN G. IN THIS CONTEXT THERE ARE MANY REPORTED DECISIONS, FEW OF THEM ARE AS FOLLOWS: (1). KERALA FINANCIAL CORPORATION V. CIT [1994] 210 ITR 129 (SC) WHAT SECTION 119 HAS EMPOWERED IS TO ISSUE ORDERS, INSTRUCTIONS OR DIRECTIONS FOR THE 'PROPER ADMINIST RATION' OF THE ACT OR FOR SUCH OTHER PURPOSES SPECIFIED IN SECTION 119(2) . SUCH AN ORDER, INSTRUCTION OR DIRECTION CANNOT OVERRIDE THE PROVIS IONS OF THE ACT; THAT WOULD BE DESTRUCTIVE OF ALL THE KNOWN PRINCIPL ES OF LAW AS THE SAME WOULD REALLY AMOUNT TO GIVING POWER TO A DELEG ATED AUTHORITY TO EVEN AMEND THE PROVISIONS OF LAW BY THE PARLIAMENT. (2). STUMP, SCHULE & SOMAPPA LTD. V.CIT 190 ITR 152 (KAR) ONLY THE CIRCULARS ISSUED BY AUTHORIZED AUTHORITIES OF THE INCOME TAX DEPARTMENT ARE BINDING ON THE ASSESSING OFFICERS, CIRCULARS & INSTRUCTIONS ISSUED BY AUTHORITIES OTHE R THAN THOSE EMPOWERED TO ISSUE DIRECTIONS U/S 119 ARE NOT OF A BINDING NATURE. (3). KESHAVJI RAVJI & CO. V. CIT [1990] 183 ITR 1 ( SC). ITA NOS. 1558,1559, 1702 & 1703 & /AHD/2013 (MANAN KUMAR M. PATEL & MAULIK KUMAR M. PATEL) A.Y. 2009-10 - 7 - THE BOARD CANNOT PRE-EMPT A JUDICIAL INTERPRETATION ON THE SCOPE AND AMBIT OF A PROVISION OF THE ACT BY ISSUIN G CIRCULARS ON THE SUBJECT. (4). CIT V. HERO CYCLES (P) LTD. [1997] 94 TAX MAN 271/228ITR463 (SC). IT IS WELL SETTLED THAT CIRCULARS CAN BIND THE ITO BUT WILL NOT BIND THE APPELLATE AUTHORITY OR THE TRIBUNAL OR THE COURT OR EVEN THE ASSESSEE. (5). ALL GUJARAT FEDERATION OF TAX CONSU LTANTS V. CBDT[1994] 76 TAXMAN 307 (GUJ). BOARD'S CIRCULARS ARE NOT BINDING ON HIGH COURT/ITA T. (6) CIT V. SWADESH EAST ASIA CO. LTD. [1981] 127 I TR 148 (CAL). A BOARD'S CIRCULAR WHICH DISALLOWS A BENEFIT/CURTAI LS BENEFIT TO THE ASSESSEE OTHERWISE ADMISSIBLE UNDER THE ACT, IS NOT BINDING. (7). BHARTIA INDUSTRIES LTD. V. CIT [2011] 201 TAXM AN 180/12 TAXMAN.COM 409 (CAL). ON A PLAIN READING OF THE PROVISION OF SECTION 119, IT IS CLEAR THAT THE CIRCULAR ISSUED BY THE BOARD UNDER THE AFO RESAID PROVISION IS MEANT FOR GUIDING THE OFFICERS OF THE REVENUE FOR A DMINISTRATIVE PURPOSE OF ENFORCING THE PROVISIONS OF THE ACT. BUT WHEN AN AUTHORITY UNDER THE ACT IS REQUIRED TO PERFORM QUASI-JUDICIAL FUNCTIONS, SUCH AUTHORITIES SHOULD BE GUIDED BY THE LAW OF THE LAND AS ENUNCIATED BY VARIOUS JUDICIAL AUTHORITIES WHICH HAS A BINDING EF FECT. IF AN EXISTING CIRCULAR IS A CONFLICT WITH THE LAW OF THE LAND LAI D DOWN BY SUPREME COURT, THE REVENUE AUTHORITIES, WHILE ACTING QUASI- JUDICIALLY, SHOULD IGNORE SUCH CIRCULARS IN DISCHARGE OF THEIR QUASI-J UDICIAL FUNCTIONS. 5. IN THE VIEW OF THE ABOVE STATED FACTS AND SUBMIS SIONS MADE IN THE PRECEDING PARAGRAPHS, YOUR HONOUR MAY KINDLY AP PRECIATE THAT THE DISALLOWANCE MADE BY THE A.O. IN REGARD TO THE CLAIM OF THE APPELLANT IS COMPLETELY UNJUSTIFIED BOTH ON FACTS A S WELL AS IN LAW AND THE APPELLANT CRAVES THAT THE ADDITION BE DELETED.' 6.2 THE ISSUES, THE JUDICIAL DECISIONS AND THE CIRC ULAR OF THE CBDT REGARDING TAXABILITY OF BONDS, ISSUES LIKE TAXABILI TY U/S 112 AND APPLICATION OF PROVISO (3) TO SECTION 48 ETC., WERE DISCUSSED WITH THE ITA NOS. 1558,1559, 1702 & 1703 & /AHD/2013 (MANAN KUMAR M. PATEL & MAULIK KUMAR M. PATEL) A.Y. 2009-10 - 8 - APPELLANT AT LENGTH. SUBSEQUENTLY, THE APPELLANT FI LED THE FOLLOWING WRITTEN SUBMISSIONS: 3. REGARDING TAXATION OF INCOME UNDER THE HEAD 'INT EREST INCOME' VIS -A-VIS MERCANTILE SYSTEM OF ACCOUNTING. 3.1 AS MAY BE VERIFIED FROM THE RECORDS, IT IS UNDI SPUTED FACT, THAT THE LD. A.O. HAS TAXED THE SURPLUS ARISING ON THE SURRE NDER OF THE DEEP DISCOUNT BONDS OF SARDAR SAROVAR NARMADA NIGAM LTD. AS 'INTEREST INCOME' IN THE HANDS OF THE APPELLANT. 3.2 AT THE COST OF REPETITION, IT IS SUBMITTED THAT THE APPELLANT HAD MADE THE 'INVESTMENT IN BONDS' ON 11/1/1994 RELEVAN T TO THE A.Y. 1994-95 OUT OF UNUTILIZED FUNDS AVAILABLE WITH THE APPELLANT. THE SAME HAD BEEN SHOWN UNDER THE HEAD 'INVESTMENT' IN THE APPELLANT'S BALANCE SHEET AS AT 31/3/1994 AND THEREAFTER SUBSEQ UENT YEARS' BALANCE SHEETS. AS MAY BE VERIFIED FROM THE RETURNS OF INCOME OF RESPECTIVE YEARS, THESE BONDS ARE REFLECTED AS 'INV ESTMENT' BEING A NON- TRADING ONE. THE LD. A.O. HAS ACCEPTED THE FIG URES OF COST OF INVESTMENT, AS WELL AS REALIZATION OF REDEMPTION AS MAY BE PERUSED FROM PARA 6 OF THE ORDER. 3.3 IT IS ALSO UNDISPUTED FACT ON RECORD THAT THE A PPELLANT FOLLOWS MERCANTILE SYSTEM OF ACCOUNTING SINCE INCEPTION. WH ILE PASSING THE IMPUGNED ORDER ALSO THE LD. A.O. HAS RECORDED A FIN DING OF FACT AS REVEALED FROM ASSESSMENT ORDER ITSELF. IT MAY KINDL Y BE APPRECIATED THAT THE APPELLANT HAS BEEN EARNING INTEREST INCOME OUT OF MONEY INVESTED AS WELL AS EXPENDING TOWARDS INTEREST IN T HE APPELLANT'S ORDINARY COURSE OF BUSINESS, WHICH HAS BEEN SHOWN I N THE BOOKS OF ACCOUNT ON MERCANTILE BASIS AND THE SAME HAS BEEN A CCEPTED BY THE DEPARTMENT AS SUCH. ACCORDING TO THE PROVISIONS OF SECTION 145(1) OF THE ACT, INCOME CHARGEABLE UNDER THE HEAD 'PROFITS & GAINS OF BUSINESS OR PROFESSION' OR 'INCOME FROM OTHER SOURC ES' SHALL BE COMPUTED IN ACCORDANCE WITH EITHER 'CASH' OR 'MERCA NTILE' SYSTEM OF ACCOUNTING REGULARLY BY THE ASSESSEE. THAT IS, IF T HE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED IS 'CASH', THEN IT IS CHARGEABLE ON 'CASH BASIS' AND IF IT IS 'MERCANTILE' THEN IT IS C HARGEABLE ON 'ACCRUAL BASIS'. 3.4 US SUBMITTED EARLIER, IT IS UNDISPUTEDLY PROVED ON RECORD THAT THE DEPARTMENT ACCEPTED THE 'MERCANTILE METHOD' OF ACCO UNTING BEING REGULARLY EMPLOYED BY THE APPELLANT, IN EARLIER YEA RS ON THE SAME SET OF FACTS AND CIRCUMSTANCES OF THE CASE OF THE APPEL LANT. IT IS WELL SETTLED THAT THE PRINCIPLE OF RES-JUDICIAL DOESN'T APPLY TO I.T, PROCEEDINGS, BUT THE PRINCIPLE OF CONSISTENCY SHALL HAVE TO BE FOLLOWED BY THE REVENUE DEPARTMENT WHILE MAKING THE ASSESSMENT. ITA NOS. 1558,1559, 1702 & 1703 & /AHD/2013 (MANAN KUMAR M. PATEL & MAULIK KUMAR M. PATEL) A.Y. 2009-10 - 9 - 3.5 I IN MAY KINDLY BE APPRECIATED THAT IN RELATION TO DEEP DISCOUNT BONDS THE DIFFERENCE BETWEEN THE MARKET VALUATIONS AS ON TWO SUCCESSIVE VALUATION DATES WILL REPRESENT THE ACCRE TION TO THE VALUE OF THE BOND, DURING THE RELEVANT FINANCIAL YEARS AND W ILL BE TAXABLE AS 'INTEREST' INCOME WHERE THE BONDS ARE HELD AS INVES TMENTS OR BUSINESS INCOME WHERE THE BONDS ARE HELD AS TRADING ASSETS. SIMILARLY, WHERE THE BOND IS REDEEMED BY THE ORIGINAL SUBSCRIBER, TH E INTEREST INCOME WILL BE PROPORTIONATELY TAXED ON ACCRUAL BASIS IN T HAT YEAR. THEREFORE, IN THE CASE OF THE APPELLANT, THE APPELL ANT HAVING REGULARLY EMPLOYED 'MERCANTILE SYSTEM' OF ACCOUNTING, THE INT EREST INCOME ATTRIBUTED TO THE INVESTMENT IN BONDS WILL BE REQUI RED TO BE TAXED IN THE YEAR UNDER APPEAL AS CALCULATED ON ACCRUED BASI S IN THE MANNER AS STATED ABOVE. IT MAY KINDLY BE APPRECIATED THAT TAXING OF THE ENTIRE INCOME RECEIVED FROM BOND IN THE YEAR OF THE REDEMP TION ,AS INTEREST INCOME AS HAS BEEN DONE IN THE IMPUGNED ORDER WOULD AMOUNT TO SHEER ABUSE IN THE PROCESS OF LAW. THE APPELLANT TH EREFORE, REQUESTS YOUR HONOUR TO HOLD THAT THE APPELLANT IS ENTITLED TO BE TAXED ON THE ACCRUED INCOME OF INTEREST IN ACCORDANCE WITH THE M ERCANTILE METHOD OF ACCOUNTING REGULARLY AND CONSISTENTLY EMPLOYED B Y THE APPELLANT AND ACCEPTED BY THE DEPARTMENT AS EVIDENT FROM PAGE NO.L; COLUMN NO.8 OF ASSESSMENT ORDER APPEALED AGAINST. 3.6 IN VIEW OF THE ABOVE STATED FA CTS AND PECULIAR CIRCUMSTANCES OF THE CASE OF THE APPELLANT, IT MAY KINDLY BE HELD THAT THE INTEREST PORTION ATTRIBUTED AND PERTAINING TO A .Y. 2009-10 ON THE DEEP DISCOUNT BONDS UNDER CONSIDERATION IS LIABLE TO BE TAXED AS INTEREST INCOME CALCULATED ON ACCRUED BASIS ON LY I.E. PROPORTIONATE INCOME ACCRUED IN THE F.Y. 2008-09, M AY KINDLY BE TAXED IN THE A.Y. 2009-10. ACCORDINGLY, THE BALANCE OF SUCH INTEREST MAY BE DELETED IN FULL FROM THE ADDITION MADE OF RS . 1,85,60,000/-. THEREFORE, THE A.O. MAY BE DIRECTED TO DELETE THE B ALANCE ADDITION OF INCOME IN THE HANDS OF THE APPELLANT. 4. REGARDING TAXATION OF GAIN U/S. 112 OF THE ACT. IN ADDITION TO THE APPELLANT'S AFORESAID SUBMISSION S, IN THE ALTERNATIVE, THE APPELLANT RESPECTIVELY BAGS TO SUB MIT AS FOLLOWS. 4.1 IT IS UNDISPUTED FACTS FROM THE RECORDS THAT TH E A.O. HAS SOUGHT TO TAX THE INCOME FROM REDEMPTION OF DD BONDS UNDER TH E HEAD 'INTEREST FROM SECURITIES'. EXPRESSION 'SECURITIES' IS DEFINED TO HAVE MEANING ASSIGNED TO IT IN SECTION 2 (H) OF THE ACT SECURITIES CONTRACTS (REGULATION) ACT, 1956. AS PER SECTION 2(4) OF THE SAID ACT, 'SECURITIES' INCLUDE SHAVES, SCRIPS, STOCKS, BONDS, DEBENTURES STOCK OR OTHER MARKETABLE SECURITIES OF A LIKE NATURE IN OR OF ANY INCORPORATED COMPANY OR OTHER BODY CORPORATE, GOVER NMENT ITA NOS. 1558,1559, 1702 & 1703 & /AHD/2013 (MANAN KUMAR M. PATEL & MAULIK KUMAR M. PATEL) A.Y. 2009-10 - 10 - SECURITY, SUCH OTHER INSTRUMENTS AS MAY BE DECLARED BY THE GOVERNMENT TO BE SECURITIES AND RIGHTS OR INTEREST IN SECURITIES. LISTED SECURITIES ARE DEFINED TO MEAN SECURITIES WHICH ARE LISTED ON ANY RECOGNIZED STOCK EXCHANGE IN INDIA. ACCORDINGLY, DE EP DISCOUNT BONDS OF SARDAR SAROVAR NARMADA NIGAM LTD. ARE PLAC ED UNDER THE CATEGORY OF 'LISTED SECURITIES'. 4.2 AS IS EVIDENT FROM THE RECORDS, THE APPELLANT H AD INVESTED OUT OF HIS UNUTILIZED SURPLUS FUNDS IN DD BONDS WAY BACK I N F.Y. 1993-94 AND THE SAME BEING HELD AS INVESTMENT IN ALL THESE YEARS AND STOOD ACCEPTED AS SUCH IN THE WEALTH TAX RETURN, THE SURP LUS ON REDEMPTION THEREOF SHOULD BE TAXED AS LONG TERM CAPITAL GAINS. THE FACTUM OF THE BONDS BEING HELD AS INVESTMENT IS NOT DISPUTED BY T HE A.O. AS NO ADVERSE REMARK IS PASSED IN THE ASSESSMENT ORDER TH OUGH IT WAS SPECIFICALLY BROUGHT ON RECORD BY THE LETTER DATED 15.12.2011 FILED WITH THE A.O. AND AS NOTED IN PARA 5.1 OF THE ASSES SMENT ORDER COUPLED WITH THE FINDING OF THE A.O.(THOUGH CONTEST ED AS TAXED IN ONE YEAR) THAT THE INCOME ARISING OUT OF INVESTMENT MAD E IN SUCH BONDS IS TAXED AS 'INTEREST ON SECURITIES'. FURTHER, UNDER T HE PROVISO TO SECTION 112(1), RATE OF INCOME TAX ON LONG TERM CAPITAL GAI NS ARISING FROM TRANSFER OF LISTED SECURITIES OR UNIT OR BONDS WILL BE 10% OF THE GAIN SO COMPUTED. THUS, THE APPELLANT IS ELIGIBLE TO BE CHARGED THE TAX AT THE FLAT RATE OF TAX U/S. 112 OF THE ACT. BESIDES, SINCE NO SECURITY TRANSACTION TAX PAID BY THE 'NIGAM', THE BENEFIT OF INDEXATION WILL BE AVAILABLE TO THE APPELLANT. THEREFORE, IT MAY KINDL Y BE HELD, THAT THE SURPLUS IS LIABLE TO BE TAXED AS LONG TERM CAPITAL GAIN U/S. 112 OF THE ACT, WITH BENEFIT OF APPROPRIATE INDEXATION. SINCE THE INCOME TAX ON LONG TERM CAPITAL GAINS ON LISTED SECURITIES OR UNI T OR BOND REQUIRES TO BE COMPUTED U/S 112 I.E. AFTER INDEXATION OF COST A CQUISITION UNDER THE 2 ND PROVISO TO SECTION 48 OF THE ACT. 4.3 IN THE ABOVE CONTEXT, THE APPELLANT RESPECTFULL Y RELIES UPON THE FOLLOWING JUDICIAL PRONOUNCEMENTS: (COPIES ENCLOSED ) CIT V. ANUJ A. SHETH (HUF [20101 324 ITR 191 (BOM.) THE OPENING WORDS OF SUB SECTION (1) OF SECTION 112 CONTEMPLATED A SITUATION WHERE THE TOTAL INCOME OF AN A SSESSEE INCLUDES ANY INCOME ARISING FROM THE TRANSFER OF A 'LONG TERM CAPITAL ASSET'. THIS WOULD BE INDICATIVE OF THE FACT THAT I N COMPUTING INCOME FOR THE PURPOSES OF CAPITAL GAINS, THE ASSESSEE WOU LD BE ENTITLED TO BENEFIT OF THE NORMAL PROVISIONS OF THE ACT, INTER ALIA, IN REGARD TO A SET OFF UNDER SECTION 70. THE EFFECT OF THE PROVISO TO SECTION 112 IS THAT IN THE EVENT THAT THE TAX WHICH (S PAYABLE IN RESPECT OF INCOME ARISING FROM THE TRANSFER OF LISTED SECURITIES WHI CH IS A LONG TERM CAPITAL ASSET, EXCEEDS 10 PERCENT OF THE AMOUNT OF CAPITAL GAINS ITA NOS. 1558,1559, 1702 & 1703 & /AHD/2013 (MANAN KUMAR M. PATEL & MAULIK KUMAR M. PATEL) A.Y. 2009-10 - 11 - BEFORE GIVING EFFECT TO INDEXATION AS PROVIDED IN T HE SECOND PROVISO TO SECTION 70 THE TAX WOULD BE LIABLE TO BE CAPPED AT 10 PERCENT, BY IGNORING THE EXCESS BEYOND 10 PERCENT. FOR THE PURPOSES OF WORKING OUT THE APPLICATION OF THE PROVISO TO SECTION 112, THERE IS NOTHING IN THE SECTION WHICH WOULD DERIVE AN ASSESSEE OF INDEXATION CLAIMED ON SALE OF SHARES WH ERE THERE IS A RESULTANT LOSS. WHAT THE PROVISO TO SECTION 112 ESS ENTIALLY REQUIRES IS THAT WHERE THE TAX PAYABLE IN RESPECT OF INCOME ARI SING FROM A LISTED SECURITY, BEING A LONG TERM CAPITAL GAIN ASSET, EXC EEDS 10 PERCENT OF THE CAPITAL GAINS BEFORE INDEXATION, SUCH EXCESS BE YOND 10 PERCENT IS LIABLE TO BE IGNORED. THE PROVISO TO SECTION 112 R EQUIRES A COMPARISON TO BE MADE BETWEEN THE TAX PAYABLE IN RE SPECT OF INCOME ARISING FROM THE OF LISTED SECURITIES, COMPUTED AT 10 PERCENT AND THE TAX PAYABLE AT THE RATE OF 10 PERCENT ON THE CAPITA L GAINS BEFORE GIVING EFFECT TO INDEXATION. THERE IS NOTHING IN TH E PROVISIONS OF SECTION 112 WHAT WOULD LEAD TO THE ACCEPTANCE OF TH E CONTENTION OF THE REVENUE THAT THE ASSESSEE WOULD BE ENTITLED TO SET OFF THE LOSS UNDER SECTION 70, NUT WITHOUT THE BENEFIT OF INDEXA TION. NO SUCH REQUIREMENT IS LEGISLATED UPON BY THE PARLIAMENT EI THER UNDER SECTION 70 OR IN SECTION 112. DURING THE RELEVANT ASSESSMENT YEAR THE ASSESSEE EN TERED INTO EIGHT SALE TRANSACTIONS OF SHARES. IN ONE TRANSACTI ON SHARES BEING BONUS SHARES THEIR COST ACQUISITION WAS NIL AND, TH EREFORE, THE ENTIRE SALE CONSIDERATION WAS CONSIDERED AS A LONG TERM CA PITAL GAIN. OUT OF THE REMAINING SEVEN TRANSACTIONS, ONE SALE RESULT I N LONG TERM CAPITAL GAIN WITH INDEXATION WHEREAS IN THE REMAINING TRANS ACTION THE ASSESSEE REPORTED A LOSS WITH INDEXATION. THE ASSES SEE SET OFF LONG TERM CAPITAL GAIN LOSS FROM LONG TERM CAPITAL GAINS AND PAID A TAX OF 10 PERCENT ON NET LONG TERM CAPITAL GAIN. HELD THAT DURING THE RELEVANT ASSESSMENT YEAR THE A SSESSEE ENTERED INTO EIGHT SALE TRANSACTION OF SHARES. IN O NE TRANSACTION, SHARE BEING BONUS SHARES THEIR COST ACQUISITION WAS NIL AND, THEREFORE, THE ENTIRE SALE CONSIDERATION WAS CONSID ERED AS A LONG TERM CAPITAL GAIN. OUT OF THE REMAINING SEVEN TRANSACTIO NS, ONE SALE RESULT IN LONG TERM CAPITAL GAIN WITH INDEXATION WHEREAS I N THE REMAINING TRANSACTION THE ASSESSEE REPORTED A LOSS WITH INDEX ATION. THE ASSESSEE SET OFF LONG TERM CAPITAL GAIN LOSS FROM LONG TERM CAPITAL GAINS AND PAID A TAX OF 10 PERCENT ON NET LONG TERM CAPITAL G AIN. THE ASSESSEE'S CLAIM OF COMPUTATION OF LONG TERM CAPITAL GAINS ON SALE OF SHARES OTHER THAN THE BONUS SHARES AFTER GIVING THE BENEFI T OF INDEXATION WHEREAS IN CONSONANCE WITH PROVISO TO SECTION 112(1 ). ITA NOS. 1558,1559, 1702 & 1703 & /AHD/2013 (MANAN KUMAR M. PATEL & MAULIK KUMAR M. PATEL) A.Y. 2009-10 - 12 - 2. GIRISH HARIBHAI TRIVEDI V. ACIT IN I.T APPEAL NO . CIT FAVXIV/AC. CIR.7/302/ 10-11 DATED 26.09.2011 OF CIT (A)- XIV, AMD. RELEVANT PORTION IS REPRODUCED AS BELOW : ' IT IS OBSERVED FROM THE STATEMENT OF ACCOUNT OF T HE POLICY WHICH HAS BEEN ENCLOSED TO THE ASSESSMENT ORDER BY THE A.O. THAT THE APPELLANT INITIALLY OPTED FOR INVESTMENT IN PROTECT OR FUND AND LATER ON IS SWITCHED CERTAIN PART TO MAX/MISER FUND. AT THE TIME OF SURRENDER I.E. ON 21.08.2007, THE FULL VALUE OF POLICY WAS RS . 32,74,492.91 FOR WHICH THE CHEQUE WAS ISSUED TO THE APPELLANT. THE A .O. WAS NOT JUSTIFIED IN TREATING THE ENTIRE RECEIPTS AS INCOME OF THE APPELLANT AS ONLY THE SURPLUS COULD HAVE BEEN CONSIDERED FOR THE PURPOSE OF TAXATION. AS EVIDENT FROM ABOVE, THE INVESTMENT BY THE APPELLANT WAS IN A\ UNIT LINKED INSURANCE POLICY IN WHICH MAJOR P ORTION WAS INVESTED\IN MUTUAL FUNDS AND ACCORDINGLY THE SURPLU S ON MATURITY OF THE POLICY SHOULD BE TREATED AS CAPITAL GAIN. SINCE NO SECURITY TRANSACTION TAX HAS BEEN DEDUCTED AT THE TIME OF TR ANSACTION BY THE FUND, THE BENEFIT OF INDEXATION WILL BE AVAILABLE T O THE APPELLANT. THE LAST PAYMENT IN THE FUND WAS MADE BY THE APPELLANT ON 25.08.2005 AND THE POLICY HAS BEEN SURRENDERED ON 22.08,2007 W HICH SHOWS THAT THE INVESTMENT WAS FOR MORE THAN THREE YEARS FOR TH E OVERALL POLICY AND MORE THAN ONE YEAR FROM THE DATE OF LAST INVEST MENT. THE SURPLUS WILL, THEREFORE, BE TREATED AS LONG TERM CAPITAL GA IN ON INVESTMENT IN MUTUAL FUNDS. THE A.O. IS, THEREFORE, DIRECTED TO T AKE THE SALE CONSIDERATION OF UNITS AS THE AMOUNT RECEIVED ON AC COUNT OF MATURITY OF THE POLICY AND THE COST OF INVESTMENT AS THE AMO UNT INVESTED BY THE APPELLANT DURING THE SPAN OF 2-3 YEARS I.E. RS. 18, 00,000/- AND ACCORDINGLY WORK OUT THE LONG TERM CAPITAL GAIN AND TAX PAYABLE THEREON, IF ANY. THE GROUND OF APPEAL IS ACCORDINGL Y PARTLY ALLOWED.' 4.4 HAVING REGARD TO THE FACTUAL MATRIX AND THE LEG AL POSITION AS STATED ABOVE, YOUR HONOUR MAY KINDLY BE PLEASED TO DIRECT THE A.O. TO WORK OUT THE LONG TERM CAPITAL GAIN WITH THE BENEFI T OF INDEXATION AND WORK OUT TAX PAYABLE AT THE FLAT RATE OF 10% AN D SURCHARGE ETC. IF ANY, U/S. 112 OF THE ACT.' 6.3 I HAVE CAREFULLY GONE THROUGH THE FACTS OF THE CASE, THE ASSESSMENT ORDER, THE SUBMISSIONS, THE CIRCULARS ISSUED BY THE CBDT, THE CASE LAW ON THE ISSUE. THE FOLLOWING PERTINENT OBSERVATIONS/DECISIONS ARE MADE AFTER THOROUGH CONSIDERATION OF ALL MATERIAL FACTS: (I) UNDISPUTEDLY, THE INVESTMENT IN SSNNL BONDS HAVE BE EN MADE ON 11/1/1994 RELEVANT TO A.Y. 1994-95. THESE WERE CALL ED DEEP DISCOUNT BONDS OF RS.3600/- EACH AND WOULD HAVE MAT URED ON 11/01/2014 AS PER THE CERTIFICATE ISSUED. THESE CAR RIED FIXED MATURITY VALUE. THE APPELLANT SINCE THEN HAD NOT SHOWN ANY ITA NOS. 1558,1559, 1702 & 1703 & /AHD/2013 (MANAN KUMAR M. PATEL & MAULIK KUMAR M. PATEL) A.Y. 2009-10 - 13 - INTEREST INCOME IN THE RETURNS FILED. THE APPELLANT HAS SHOWN CAPITAL GAINS ON THESE IN THE CURRENT YEAR AND CLAI MED THE SAME EXEMPT U/S 10(38) OF THE ACT. (II) THEREFORE, THE APPLICANTS CLEARLY WERE APP LYING FOR BONDS MATURING IN 2014 WHEN THEY MADE THE APPLICATIONS. (III) HOWEVER, THE GOVERNMENT OF GUJARAT PASSED T HE SARDAR SAROVAR NARMADA NIGAM LIMITED (CONFERMENT OF POWER TO REDEE M BONDS) ACT, 2008 (HEREINAFTER REFERRED TO AS THE 'ACT'). T HE ACT AMENDS THE FINANCIAL COVENANTS AND CONDITIONS FOR DDBS BY PROV IDING AN OPTION TO NIGAM TO REDEEM THE DDBS EARLIER ON SUCH DATE AN D WITH SUCH DEEMED FACE VALUE AS NIGAM MAY DETERMINE BY PAYMENT OF THE AMOUNT SO DETERMINED AS STIPULATED IN THE ACT. THE BOARD OF DIRECTORS OF NIGAM AT THEIR MEETING HELD ON 3RD NOV EMBER 2008, IN TERMS OF THE ACT, DECIDED TO REDEEM THE DDBS EARLIE R AND HAVE DETERMINED THE DATE FOR SUCH REDEMPTION AS 10TH JAN UARY 2009 WITH DEEMED FACE VALUE OF RS. 50,000/- PER BOND (REDEMPT ION AMOUNT). ACCORDINGLY, ALL OUTSTANDING DDBS WERE REDEEMED ON 10TH JANUARY 2009. (IV) THE CBDT HAD ISSUED CIRCULAR NO.2 OF 2002 D ATED 15/2/2002 ON THIS ISSUE. IT TALKS OF THE EARLIER CLARIFICATIONS ISSUE D BY THE BOARD IN THIS REGARD AS FOLLOWS: 1. A REVIEW OF THE TAX TREATMENT OF INCOME ARISING FROM DEEP DISCOUNT BONDS HAS BEEN UNDER CONSIDERATION IN THE BOARD FOR SOME TIME. THE BOARD HAD EARLIER CLARIFIED BY WAY O F CERTAIN LETTERS ISSUED TO THE RESERVE BANK OF INDIA AND OTH ERS THAT THE DIFFERENCE BETWEEN THE BID PRICE (SUBSCRIPTION PRIC E) AND THE REDEMPTION PRICE (FACE VALUE) OF SUCH BONDS WILL BE TREATED AS INTEREST INCOME ASSESSABLE UNDER THE INCOME-TAX ACT . ON TRANSFER OF THE BONDS BEFORE MATURITY, THE DIFFEREN CE BETWEEN THE SALE CONSIDERATION AND THE COST OF ACQUISITION WOULD BE TAXED AS INCOME FROM CAPITAL GAINS WHERE THE BONDS WERE HELD AS INVESTMENT, AND AS BUSINESS INCOME WHERE THE BON DS WERE HELD AS TRADING ASSETS. ON FINAL REDEMPTION, HOWEVE R, NO CAPITAL GAINS WILL ARISE. IT WAS FURTHER CLARIFIED THAT TAX WOULD BE DEDUCTED AT SOURCE ON THE DIFFERENCE BETWEEN THE BID PRICE AND THE REDEMPTION PRICE AT THE TIME OF MATURITY.' (V) THE SAME CIRCULAR GIVES DIRECTIONS/GUIDELINES F OR THE TAX TREATMENT OF SUCH DEEP DISCOUNT BONDS SUBSEQUENT TO THE ISSUE OF THE CIRCULAR. THE BOARD HAS LATER CLARIFIED BY PRESS NOTE I.E. PI B PRESS RELEASE (254 ITR 302) DATED 20 TH MARCH, 2002 REGARDING THE CIRCULAR DATED FEBRUARY 15, 2002 NOT HAVING RETROSPECTIVE EFFECT I N THE FOLLOWING WORDS: ITA NOS. 1558,1559, 1702 & 1703 & /AHD/2013 (MANAN KUMAR M. PATEL & MAULIK KUMAR M. PATEL) A.Y. 2009-10 - 14 - 'IT IS ALSO AN ESTABLISHED PRINCIPLE THAT A CIRCULA R ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES CANNOT HAVE A RETROSP ECTIVE TAX EFFECT. THE PRESENT CIRCULAR ON DEEP DISCOUNT BONDS, THEREF ORE, SPECIFIES THE TAX TREATMENT IN RESPECT OF BONDS WHICH ARE ISSUED AFTER THE ISSUE OF THE CIRCULAR, AND DOES NOT SEEK TO IMPOSE THE MODIF IED TREATMENT ON EXISTING BOND HOLDERS.' CLEARLY, THIS CIRCULAR DATED 15 TH FEBRUARY, 2002 WOULD NOT BE APPLICABLE TO THE APPELLANT'S CASE AS THE BONDS WER E ISSUED MUCH EARLIER. (VI) THE BACKGROUND PART OF CIRCULAR NO.2 OF 2002 D ATED 15/2/2002 CLEARLY SHOWS THAT THERE WERE NO CLEAR CIRCULARS BE FORE THAT AND THERE WERE ONLY LETTERS WRITTEN TO RBI ETC., CONVEYING TH AT THE ENTIRE INCOME WOULD BE TAXED AS INTEREST INCOME IN THE YEAR OF RE DEMPTION ON MATURITY BUT IN CASE OF TRANSFER BEFORE MATURITY TH ESE WOULD BE TAXED AS CAPITAL GAINS IF HELD AS INVESTMENTS. BECAUSE TH ERE IS NO CIRCULAR ON THIS ISSUE, THE LETTERS WOULD ONLY BE HAVING AT THE MOST GUIDANCE VALUE AND WOULD NOT BE BINDING. (VII) CLEARLY, ALL THE BOND HOLDERS WERE FORCED TO TAKE THE AMOUNT OFFERED BY THE SSNNL AFTER THE GUJARAT GOVERNMENT ACT. THE BONDS DID NOT MATURE ON THE MATURITY DATE IN 2014 AS INITIALLY CO NTEMPLATED IN THE OFFER WHICH WAS ACCEPTED BY THE APPLICANTS. (VIII) THE FORCED REDEMPTION/PAYMENT WOULD NOT AMOU NT TO PAYMENT RECEIVED ON MATURITY AND IN MY CONSIDERED OPINION A MOUNTS TO TRANSFER OF A CAPITAL ASSET AS DEFINED IN SECTION 2 (47) OF THE ACT. I WOULD RELY ON THE DECISIONS OF HON'BLE MADHYA PRADE SH HIGH COURT IN M.P. FINANCIAL CORPN. V. CIT [1981] 132.UR 884, ACCORDING TO WHICH, BONDS ARE HELD TO BE CAPITAL ASSET AND ANY S URPLUS RESULTED ON SALE OF BONDS IS LIABLE TO CAPITAL GAINS TAX AND TH AT OF HON'BLE ITAT, MUMBAI BENCH 'G' IN THE CASE OF MRS. PERVIZ WANG CH UK BASI [102 ITD 123 (2006)]. AFTER CONSIDERING ALL THE FACTS AND OBSERVATIONS AS ABOVE, IT IS CLEAR THAT IF IT WAS NORMAL MATURITY OF BOND, THEN THE EN TIRE INTEREST INCOME WOULD BE TAXABLE IN THE LAST YEAR I.E. THE ASSESSMENT YEA R UNDER CONSIDERATION (AS PER THE BOARD'S LETTERS TO RBI ETC.) AND ALSO AS PE R THE DECISION OF HON'BLE IT AT BANGALORE BENCH 'A' IN THE CASE OF K. NAGENDRASA 12 TAXMANN.COM 438; PARTICULARLY WHERE THE APPELLANT HIMSELF HAS NOT OF FERED THE INTEREST FROM YEAR TO YEAR. ITA NOS. 1558,1559, 1702 & 1703 & /AHD/2013 (MANAN KUMAR M. PATEL & MAULIK KUMAR M. PATEL) A.Y. 2009-10 - 15 - HOWEVER, IN THE PRESENT CASE, IN VIEW OF THE JUDGME NTS RELIED ON AND REFERRED AT POINT (VIII), ABOVE, IN THE PRESENT CASE IT IS HELD TAXABLE AS CAPITAL GAINS. I HAVE ALSO NOTED THAT THE JURISDICTIONAL ITAT, BEN CH A IN THE CASE OF AREEZ P. KHAMBATTA 17 TAXMANN.COM 51, THE U TI MIP-99 CARRYING FIXED AMOUNT OF INTEREST IF PAYMENT IS RECEIVED ON MATURITY; HAS BEEN HELD AS BONDS AND TAXABLE AS CAPITAL GAINS IN CASE OF PREMA TURE WITHDRAWAL. FOLLOWING THE SAME DECISION, I ALSO HOLD THAT THESE BEING THE BONDS, NO BENEFIT OF INDEXATION WOULD BE AVAILABLE BECAUSE TH E CASE IS HIT BY 3 RD PROVISO TO SECTION 48 OF THE ACT. AS FAR AS THE CLAIM OF APPELLANT OF ITS INCOME BEIN G EXEMPT U/S 10(38) IS CONCERNED, I AGREE WITH THE AO THAT THE CLAIM IS TOTALLY WRONG, NOWHERE EVEN NEAR TO THE PROVISIONS OF THE LAW AND IS FRIVO LOUS TO SAY THE LEAST. THE PROVISION IS APPLICABLE TO THE EQUITY SHARES AND UN ITS OF EQUITY ORIENTED FUND. THESE BONDS DO NOT GIVE ANY SHARE HOLDING AND ARE T HEREFORE NOT EQUITY AND NEITHER ARE MEANT TO INVEST 65% IN EQUITY SHARES NO R SET UP UNDER A SCHEME OF MUTUAL FUNDS UNDER CLAUSE 10(23D). THE CLAIM IS REJECTED. THE AO IS THEREFORE, DIRECTED TO COMPUTE CAPITAL G AINS ON THE TRANSACTIONS IN BONDS WITHOUT GIVING BENEFIT OF IND EXATION. THE GROUND OF APPEAL IS DECIDED ACCORDINGLY. 5. THE CIT(A) ACCORDINGLY TREATS ASSESSEES REDEMPT ION INCOME TO BE IN THE NATURE OF CAPITAL GAINS. THIS LEAVES BOTH THE PARTIES AGGRIEVED. THE ASSESSEE PLEADS IN ITS APPEAL THAT THE CIT(A) HAS E RRED IN NOT ADJUDICATING ITS PRELIMINARY CONTENTION SEEKING ASSESSMENT OF ITS RE DEMPTION INCOME AS INTEREST INCOME IN VIEW OF THE FACT THAT IT FOLLOWE D MERCANTILE SYSTEM. ITS FURTHER CASE IS THAT THE LOWER APPELLATE AUTHORITY OUGHT TO HAVE GRANTED IT INDEXATION BENEFIT U/S.48 OF THE ACT. IT FURTHER R AISES AN ALTERNATIVE PLEA SEEKING ASSESSMENT OF ITS CAPITAL GAIN AT A FLAT RA TE OF 10% AFTER INDEXATION. THE REVENUES SOLE SUBSTANTIVE GROUND ON THE OTHER HAND AVERS THAT THE CIT(A) HAS WRONGLY TREATED ASSESSEES REDEMPTION IN COME HEREINABOVE AS CAPITAL GAINS INSTEAD OF INTEREST ON SECURITIES AS ASSESSED IN THE COURSE OF ABOVE REGULAR ASSESSMENT. WE HAVE HEARD BOTH THE PARTIES. CASE FILE PERUSED . ITA NOS. 1558,1559, 1702 & 1703 & /AHD/2013 (MANAN KUMAR M. PATEL & MAULIK KUMAR M. PATEL) A.Y. 2009-10 - 16 - 6. WE FIRST COME TO COMMON ISSUE RAISED IN BOTH THE APPEALS AS TO WHETHER THE IMPUGNED REDEMPTION INCOME IS TO BE TRE ATED AS CAPITAL GAINS OR INTEREST INCOME FROM SECURITIES. THERE IS NO DISPU TE THAT ASSESSEE HAD ACQUIRED THE DEEP DISCOUNT BONDS IN QUESTION WAY BA CK ON 11.01.1994. IT HAS COME ON RECORD THAT THE CBDT CIRCULAR DATED 15. 02.2002 APPLICABLE FROM PROSPECTIVE EFFECT ONLY HAS DIRECTED THE FIELD AUTH ORITIES TO TREAT SUCH BONDS REDEMPTION INCOME AS INTEREST INCOME. THE CIT(A) R ELIED UPON THE BOARDS PRESS NOTE DATED 20.03.2002 THAT THE ABOVE CIRCULAR WOULD HAVE PROSPECTIVE EFFECT ONLY. WE FURTHER NOTICE THAT A CO-ORDINATE BENCH DECISION IN C. S. GOSLLA VS. ITO (2008) 15 DTR (MUMBAI-TRIB) 271 HOLD S THE VERY DEEP DISCOUNT BONDS AS CAPITAL ASSETS. WE THUS FIND NO FORCE IN REVENUES ARGUMENT THAT THE IMPUGNED REDEMPTION INCOME HAS BE EN WRONGLY TREATED AS CAPITAL GAINS IN THE LOWER APPELLATES PROCEEDINGS. WE FURTHER OBSERVE THAT THE ASSESSEES CORRESPONDING FIRST ARGUMENT SEEKING TO ASSESS HIS REDEMPTION INCOME AS INTEREST INCOME ON MERCANTILE BASIS ALSO HAS NOT MERIT SINCE THE ABOVE DEEP DISCOUNT BONDS HAVE BEEN DECLARED IN THE ORIGINAL RETURN AS CAPITAL ASSETS ONLY. THE ASSESSEE CLAIMED REDEMPTI ON INCOME THEREFROM AS CAPITAL GAINS U/S.10(38) OF THE ACT IN HIS RETURN F ILED. WE THUS FIND NO REASON TO ACCEPT HIS FIRST ARGUMENT ADOPTING A DIFFERENT S TAND AT THIS STAGE WITHOUT ANY TANGIBLE BASIS. THE REVENUES ONLY ARGUMENT AS WELL AS ITS APPEAL ITA NO.1702/AHD/2013 FAILS. SO IS THE OUTCOME OF ASSES SEES FIRST CORRESPONDING SUBSTANTIVE GROUND. 7. THE ASSESSEES SECOND ARGUMENT IS THAT THE CIT(A ) HAS ERRED IN NOT GRANTING HIM COST INDEXATION BENEFIT QUA THE ABOVE DEEP DISCOUNT BONDS WHILST TREATING INCOME THEREFROM AS CAPITAL GAINS. WE NOTICE THAT THE LOWER APPELLATE AUTHORITY HAS PLACED RELIANCE ON SECTION 48 THIRD PROVISO STIPULATING THAT SECOND PROVISO THERETO REGARDING INDEXED COST OF ACQUISITION SHALL APPLY TO LONG TERM CAPITAL GAINS ARISING FROM TRANSFER OF A LONG TERM CAPITAL ASSET ITA NOS. 1558,1559, 1702 & 1703 & /AHD/2013 (MANAN KUMAR M. PATEL & MAULIK KUMAR M. PATEL) A.Y. 2009-10 - 17 - BEING BOND OR DEBENTURE------ AND SO ON. LD. COUN SEL FAILS TO DISPUTE THE APPLICATION OF THIS PROVISO RESTRICTING THE AMBIT A ND SCOPE OF THE OTHER PROVISO REGARDING INDEXATION COST COMPUTATION. THIS ASSESS EES ARGUMENT ALSO MEETS THE SAME OUTCOME. 8. THE ASSESSEE LASTLY ARGUES THAT HE IS ENTITLED F OR ASSESSMENT OF HIS CAPITAL GAINS ARISING FROM REDEMPTION OF DEEP DISCO UNT BONDS AT A FLAT RATE OF 10% U/S.112 OF THE ACT. LD. COUNSEL REFERS TO SECT ION 112(1)(PROVISO) IN SUPPORT OF THIS PLEA. WE FIND NO REASON TO CONCUR WITH THE SAME AS THIS PROVISO ITSELF STIPULATES THAT WHERE THE TAX PAYABL E IN RESPECT OF ANY INCOME ARISING FROM THE TRANSFER OF A LONG TERM CAPITAL AS SET IN THE NATURE OF LISTED SECURITY OTHER THAN A UNIT OR ZERO COUPON BOND EXCE EDS 10% OF THE AMOUNT OF CAPITAL GAINS BEFORE GIVING EFFECT TO PROVISIONS OF SECOND PROVISO TO SECTION 48, THEN, SUCH EXCESS SHALL BE IGNORED FOR THE PURP OSE OF COMPUTING THE TAX PAYABLE BY THE ASSESSEE. IT HAS ALREADY COME ON RE CORD THAT SECOND PROVISO TO SECTION 48 OF THE ACT IS ITSELF NOT APPLICABLE AS P ER THIRD PROVISO DISCUSSED HEREINABOVE. WE THUS OBSERVE THAT THIS ASSESSEES LAST ARGUMENT ALSO DESERVES TO BE DECLINED SINCE THE ABOVE PROVISO TO SECTION 112 APPLIES BEFORE GIVING EFFECT TO THE PROVISIONS OF SECOND PROVISO T O SECTION 48 WHICH ADMITTEDLY IS NOT THE CASE HERE. THE ASSESSEE FAIL S IN ITS ALL SUBSTANTIVE ARGUMENTS AS WELL AS APPEAL ITA NO.1558/AHD/2013. 9 SAME ORDER TO FOLLOW IN LATTER SET OF APPEALS ITA NOS. 1559 & 1703/AHD/2013 IN CASE OF SHRI MAULIKKUMAR M. PATEL AS THE PARTIES HAVE ALREADY INDICATED THAT THERE IS NO DISTINCTION ON F ACTS OR ON THE SOLE ISSUE OF ASSESSMENT OF REDEMPTION INCOME ARISING FROM DEEP D ISCOUNT BONDS HEREINABOVE IS INVOLVED IN THESE TWO CASES. WE THUS DECLINE THESE TWO ITA NOS. 1558,1559, 1702 & 1703 & /AHD/2013 (MANAN KUMAR M. PATEL & MAULIK KUMAR M. PATEL) A.Y. 2009-10 - 18 - APPEALS AS WELL. WE FIND NO REASON TO INTERFERE WI TH WELL REASONED CIT(A)S ORDER UNDER CHALLENGE. 10. THESE FOUR APPEALS ARE DISMISSED. [PRONOUNCED IN THE OPEN COURT ON THIS THE 30 TH DAY OF NOVEMBER, 2016.] SD/- SD/- ( PRADIP KUMAR KEDIA ) (S. S. GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD: DATED 30/11/2016 TRUE COPY S.K.SINHA / COPY OF ORDER FORWARDED TO:- / REVENUE 2 / ASSESSEE ! / CONCERNED CIT 4 !- / CIT (A) ()*+ ,--. ./0 / DR, ITAT, AHMEDABAD 1+23 / GUARD FILE. BY ORDER / . // ./0