Sundaram Finance Limited, CHENNAI V. Addl. CIT, CHENNAI

ITA 71/CHNY/2015

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 7354 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 2 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-03-2017
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 21-02-2017
• Assessment Year: 2003-2004
• Appeal Filed On: 12-01-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Capital asset; Cost of acquisition; Wholly owned subsidiary; Scheme of amalgamation; Capital Gains
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 92; 64; 48

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH: CHENNAI . . . , ! '#.. $ %!& , ( )* BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D.S.SUNDER SINGH, ACCOUNTANT MEMBER ! ./ ITA NO.71/MDS/2015 + ,+ /ASSESSMENT YEAR: 2003-04 M/S.SUNDARAM FINANCE LTD., 21 PATULLOS ROAD, CHENNAI-600 002. VS. THE ASST. COMMISSIONER OF INCOME TAX, LARGE TAXPAYER UNIT, CHENNAI-600 101. [PAN: AAACS 4944 A ] ( -. /APPELLANT) ( /0-. /RESPONDENT) ! ./ ITA NO.284/MDS/2015 + ,+ /ASSESSMENT YEAR: 2003-04 THE ASST. COMMISSIONER OF INCOME TAX, LARGE TAXPAYER UNIT, CHENNAI-600 101. VS. M/S.SUNDARAM FINANCE LTD., 21 PATULLOS ROAD, CHENNAI-600 002. [PAN: AAACS 4944 A ] ( -. /APPELLANT) ( /0-. /RESPONDENT) -. 1 2 / APPELLANT BY : MR.R.VIJAYARAGHAVAN, ADV. /0-. 1 2 /RESPONDENT BY : MR.B.KOTESWARA RAO, CIT $ 1 3 ( /DATE OF HEARING : 21.02.2017 45, 1 3( /DATE OF PRONOUNCEMENT : 31.03.2017 ITA NOS.71 & 284/MDS/2015 :- 2 -: / O R D E R PER D.S.SUNDER SINGH , ACCOUNTANT MEMBER : THESE ARE THE CROSS APPEALS FILED BY THE ASSESSEE AS WELL AS REVENUE AGAINST THE ORDER DATED 14.11.2014 OF COMMI SSIONER OF INCOME TAX (APPEALS), CHENNAI, IN ITA NO.8/13-14/LTU(A) FO R THE AY 2003-04. THE APPEALS ARE HEARD TOGETHER AND DISPOSED OFF IN A COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2.0 ITA NO.71/MDS/2015 THE ASSESSEE RAISED THE FOLLOWING GROUNDS IN ITS APPEAL: 1. THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS ) IS CONTRARY TO LAW, WEIGHT OF EVIDENCE AND PROBABILITIES OF THE CASE. 2. THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN I NCLUDING A SUM OF RS.25,54,35,808/- BEING THE CAPITAL RESERVE ARISING ON AMALGAMATION OF WHOLLY OWNED SUBSIDIARY COMPANY IN THE TAXABLE INCOME. 2.1 THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO H AVE APPRECIATED THE FACT THAT TRANSACTION IN THE CAPITAL FIELD WILL NOT ATTR ACT PROVISIONS OF SECTION 28(IV). IN FACT, THE TRANSFER OF ASSETS IN AMALGAMATION OF COMPANIES WOULD BE CHARGEABLE UNDER THE HEAD CAPITAL GAINS BUT SPECIFI CALLY EXEMPTED IN RESPECT OF TRANSFER OF ASSETS BETWEEN THE HOLDING AND SUBSIDIA RY COMPANIES. HENCE, IT IS NOT CHARGEABLE UNDER THE HEAD OF PROFITS AND GAINS FROM BUSINESS OR PROFESSION. 2.2 THE COMMISSIONER OF INCOME TAX (APPEALS) HAS FAILED TO CONSIDER THAT SECTION 28 OF THE ACT WOULD BE APPLICABLE ONLY TO REVENUE T RANSACTIONS CARRIED OUT BY THE APPELLANT IN THE NORMAL COURSE OF ITS BUSINESS AND ANY PROFIT OR BENEFIT ARISING OUT OF SUCH BUSINESS ALONE SHALL BE TAXED U NDER THE SECTION. 28(IV) OF THE ACT AND NOT CAPITAL TRANSACTIONS LIKE AMALGAMAT ION WHICH IS NOT THE BUSINESS OF THE APPELLANT. 2.3 THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO H AVE APPRECIATED THE FACT THAT THE APPELLANT COMPANY WAS ALREADY THE 100% OWN ER OF THE SURPLUS OF THE ASSETS OVER THE LIABILITIES OF THE SUBSIDIARY COMPA NY AND VALUE OF SHARES IN THE SUBSIDIARY REFLECTS THIS SURPLUS. THUS, WHEN THE SH ARES OF THE SUBSIDIARY, ON AMALGAMATION, REPLACED BY ASSETS AND LIABILITIES OF THE SUBSIDIARY COMPANY, THERE IS NO FRESH BENEFIT OR AMENITY ACCRUING TO TH E COMPANY TO WARRANT TAXABILITY UNDER SECTION 28(IV). 3. FOR THE REASONS STATED ABOVE AND THOSE THAT MAY BE ADDUCED AT THE TIME OF HEARING, THE HONBLE TRIBUNAL MAY BE PLEASED TO ALL OW THE APPEAL OF THE APPELLANT AND GRANT SUCH RELIEF / RELIEFS/ CONSIDERING THE FA CTS AND CIRCUMSTANCES OF THE CASE. ITA NOS.71 & 284/MDS/2015 :- 3 -: 3.0 ALL THE GROUNDS OF THE APPEAL OF THE ASSESSEE ARE RELATED TO THE ADDITION OF RS.25,54,35,808/- BEING CAPITAL RESERVE ARISING ON AMALGAMATION OF WHOLLY OWNED SUBSIDIARY COMPANY. D URING THE ASSESSMENT PROCEEDINGS, THE AO FOUND FROM THE SCH EDULE-17 OF NOTES ON ACCOUNTS THAT SUNDARAM AUTO FINANCE LTD., A JOINT V ENTURE COMPANY PROMOTED BY THE ASSESSEE COMPANY AMALGAMATED WITH T HE ASSESSEE COMPANY UNDER THE PURCHASE METHOD AS PRESCRIBED B Y ACCOUNTING STANDARD. THE SCHEME OF AMALGAMATION HAS BEEN GIVEN EFFECT TO IN THE ACCOUNTS AND ACCORDINGLY, THE ASSETS AND LIABILITIE S OF THE AMALGAMATING COMPANY WERE TRANSFERRED TO AND VESTED WITH THE COM PANY W.E.F. 1.4.2002. THE EXCESS OF ASSETS OVER LIABILITIES ON ACCOUNT OF AMALGAMATION OF M/S.SUNDARAM AUTO FINANCE LTD., TO THE TUNE OF R S.2554.235 LAKHS WAS TRANSFERRED TO THE CAPITAL RESERVE. THE AO WAS OF T HE VIEW THAT THE AMOUNT OF EXCESS OF ASSETS OVER LIABILITIES ARE IN THE NAT URE OF BENEFIT OR PERQUISITE ARISING FROM BUSINESS OR THE EXCESS OF PROFESSION A ND REQUIRED TO BE TAXED U/S 28(IV) OF INCOME TAX ACT. HENCE, THE AO SOUGHT THE OBJECTIONS OF THE ASSESSEE AND THE ASSESSEE COMPANY SUBMITTED THEIR O BJECTION STATING THAT IT HAD ACQUIRED 51% SHAREHOLDING HELD BY FIDIS S P A, THE JOINT VENTURE PARTNER IN FIAT SUNDARAM AUTO FINANCE LTD (FISAF) A ND FISAF BECAME A WHOLLY, OWNED SUBSIDIARY OF THE COMPANY. SUBSEQUENT TO THE ACQUISITION, THE NAME OF FISAF, WAS CHANGED TO SUNDARAM AUTO FIN ANCE LIMITED. IT WAS MERGED WITH THE COMPANY WITH EFFECT FROM 1.4.20 02 IN ACCORDANCE WITH THE ORDER OF THE MADRAS HIGH COURT. THUS, THE ASSESSEE COMPANY WAS ALREADY THE 100% OWNER OF THE SURPLUS OF THE AS SETS OVER LIABILITY OF ITA NOS.71 & 284/MDS/2015 :- 4 -: THE SUBSIDIARY COMPANY AND VALUE OF THE SHARES IN T HE SUBSIDIARY REFLECTS THIS SURPLUS. THUS, WHEN THE SHARES OF SUBSIDIARY, ON AMALGAMATION, REPLACED BY ASSETS AND LIABILITIES OF THE SUBSIDIAR Y COMPANY THERE IS NO FRESH BENEFIT OR AMENITY ACCRUING TO THE COMPANY. T HE ASSESSEE FURTHER SUBMITTED BEFORE THE AO THAT THE TRANSFER OF ASSETS IN AMALGAMATION OF COMPANIES WOULD BE CHARGEABLE UNDER THE HEAD CAPIT AL GAINS BUT SPECIFICALLY EXEMPTED IN RESPECT OF TRANSFER OF ASS ETS BETWEEN HOLDING AND SUBSIDIARY COMPANIES. HENCE, IT IS NOT CHARGEABLE U NDER THE HEAD PROFITS AND GAINS OF BUSINESS. SECTION 28(IV) OF THE INCO ME TAX ACT WOULD BE APPLICABLE TO REVENUE TRANSACTIONS CARRIED BY AN AS SESSEE IN THE NORMAL COURSE OF THE BUSINESS AND ANY PROFIT OR BENEFIT AR ISING OUT OF SUCH BUSINESS ALONE SHALL BE TAXED UNDER THE SUB-SECTION 28(IV) OF THE INCOME TAX ACT. FURTHER TRANSACTION IN THE CAPITAL FIELD W ILL NOT ATTRACT PROVISIONS OF S.28(IV). HENCE, S.28(IV) OF THE INCOME TAX ACT WOULD NOT BE APPLICABLE. NOT BEING IMPRESSED BY THE EXPLANATION OF THE ASSESSEE COMPANY THE AO BROUGHT TO TAX THE CAPITAL RESERVE U /S. 28(IV) OF IT ACT. 4.0 AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER (I N SHORT AO), THE ASSESSEE WENT ON APPEAL BEFORE THE LEARNED COMMISSI ONER OF INCOME TAX(APPEALS) (IN SHORT LD.CIT(A)) AND THE LD.CIT( A) CONFIRMED THE ADDITION MADE BY THE AO AS PER PARAGRAPHS NO.4.2 O F THE LD.CIT(A) ORDER WHICH IS EXTRACTED AS UNDER: 4.2 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CA SE AND SUBMISSION OF THE LD.AR. I HAVE ALSO GONE THROUGH THE DECISIONS RELIED ON BY THE LD .AR. THE ARGUMENT OF THE LD.AR OF THE APPELLANT IS THAT THE APPELLANT WAS ALREADY HAVING 100% OWNERSHIP ON SUNDARAM AUTO FINANCE LTD., THE SUBSIDIARY COMPANY, BEFORE ITS ME RGER INTO THE APPELLANT COMPANY. THEREFORE, TAKING OVER OF SURPLUS OF ASSETS OVER LI ABILITIES OF THE SUBSIDIARY COMPANY INTO ITS ITA NOS.71 & 284/MDS/2015 :- 5 -: RESERVES AFTER AMALGAMATION OF ITS SUBSIDIARY COMPA NY, HAS NOT RESULTED IN ANY FRESH AMENITY OR BENEFIT TO THE APPELLANT COMPANY. SECOND LY, THE AMOUNT IN THE FORM OF SURPLUS OF ASSET OVER LIABILITIES OF THE SUBSIDIARY COMPANY WERE OF CAPITAL IN NATURE, THEREFORE, CANNOT BE DISALLOWED U/S.28. I DO NOT AGREE WITH TH E ARGUMENT OF THE LD.AR. AFTER THE AMALGAMATION, THE EXISTENCE OF THE AMALGAMATING COM PANY WILL BE NON EST. ALL THE ASSETS AND LIABILITIES OF THE AMALGAMATING COMPANY WILL BE TAKEN AWAY BY THE AMALGAMATED COMPANY AND WILL FORM PART OF ITS OWN ASSETS AND LI ABILITIES WHEN THERE IS AN EXCESS OF ASSETS OVER LIABILITIES, AS IN THE PRESENT CASE, UN DISPUTEDLY WILL BECOME THE ASSETS OF THE AMALGAMATED COMPANY AND THE BENEFIT DOES ARISES TO THE AMALGAMATED COMPANY I.E., THE APPELLANT COMPANY IN THE LIGHT OF S.28(IV). THEREFO RE, SUCH BENEFIT SHOULD SUFFER TAX IN THE HANDS OF THE AMALGAMATED COMPANY. THE DECISIONS TAK EN BY THE AO IS PROPER. THE DECISIONS RELIED ON BY THE APPELLANT IN THIS REGARD ARE DISTINGUISHABLE ON FACTS. THE GROUND IS DISMISSED. 5.0 AGGRIEVED BY THE ORDER OF THE LD.CIT(A), THE ASSES SEE FILED APPEAL BEFORE THIS TRIBUNAL. APPEARING FOR THE ASSESSEE, THE LEARNED AUTHORIZED REPRESENTATIVE (IN SHORT LD.AR) ARGUED THAT FIAT SUNDARAM AUTO F INANCE LIMITED WAS JOINT VENTURE BETWEEN THE ASSESSEE AND (49%) FIDIS S P A, ITALY (51%) SHARE HOLDING AND LATER ON, THE ASSESSEE HAD ACQUIR ED THE 51% OF SHARE HOLDING OF FIDIS AND BECAME THE WHOLLY OWNED SUBS IDIARY COMPANY OF THE ASSESSEE. SUBSEQUENT TO THE ACQUISITION, THE NAME OF THE FISAF WAS CHANGED TO SUNDARAM AUTO FINANCE LTD., AND MERGED W ITH THE COMPANY ON 01.04.2002, IN ACCORDANCE WITH THE ORDER OF THE HONBLE MADRAS HIGH COURT. THE LD.AR FURTHER ARGUED THAT THE ASSESSEE I S ALREADY 100% OWNER OF THE SURPLUS OF THE ASSETS OVER THE LIABILITIES O F THE SUBSIDIARY COMPANY AND THE VALUES OF THE SHARES IN THE SUBSIDIARY COMP ANY REFLECTS IN THE ASSESSEE COMPANY. THUS, WHEN THE SHARES OF SUBSIDI ARY COMPANY ON AMALGAMATION REPLACED BY ASSETS AND LIABILITIES OF SUBSIDIARY COMPANY, THERE IS NO FRESH ANNUITY OR BENEFIT ACQUIRED TO TH E COMPANY. THE ASSESSEE FURTHER ARGUED THAT THE TRANSFER OF ASSETS ON AMALGAMATION OF COMPANIES WOULD BE CHARGEABLE UNDER THE HEAD CAPITA L GAINS BUT ITA NOS.71 & 284/MDS/2015 :- 6 -: SPECIFICALLY EXEMPTED IN RESPECT OF ASSETS BETWEEN THE HOLDING COMPANY AND SUBSIDIARY COMPANY. THE AO HAS MADE ADDITION U /S.28(IV) WHICH WOULD BE APPLICABLE ONLY TO REVENUE TRANSACTIONS CA RRIED ON BY THE ASSESSEE IN THE NORMAL COURSE OF BUSINESS BUT NOT F OR AMALGAMATION OF THE ASSETS. ON THE OTHER HAND, THE LD.DR RELIED ON THE ORDERS OF THE LOWER AUTHORITIES. 6.0 WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MAT ERIAL PLACED ON RECORD. M/S.SUNDARAM AUTO FINANCE LTD., WAS 100% OWNED SUB SIDIARY COMPANY OF THE ASSESSEE AND THE SUBSIDIARY COMPANY WAS AMALGAMATED WITH THE ASSESSEE COMPANY. ON AMALGAMATION, THERE W AS A SURPLUS REPRESENTING CAPITAL RESERVE WHICH WAS TAXED BY THE AO U/S.28(IV) OF INCOME TAX ACT. THE AO WAS OF THE VIEW THAT THE AM ALGAMATION RESULTED IN A BENEFIT IN THE FORM OF SURPLUS OF ASSETS OVER LIABILITY OF THE SUBSIDIARY COMPANY. AS RIGHTLY STATED BY THE LD.AR, THE SURPL US IN AMALGAMATION ATTRACTS CAPITAL GAINS TAX, BUT THE CAPITAL GAINS A RE SPECIFICALLY EXEMPTED BY SEC.47 OF INCOME TAX ACT. SEC.28(IV) APPLIES TO THE BUSINESS PROFITS ARISING OUT OF NORMAL BUSINESS TRANSACTIONS. IN TH E CASE OF THE ASSESSEE, THE SUBSIDIARY COMPANY WAS AMALGAMATED WITH THE ASS ESSEE COMPANY AND THERE WAS NO BUSINESS TRANSACTION IN THE AMALGAMATI ON. HENCE, SEC.28(IV) HAS NO APPLICATION IN THE ASSESSEES CAS E. THE ASSESSEE RELIED ON THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT ITA NOS.71 & 284/MDS/2015 :- 7 -: V. STADS LTD. (2015) 373 ITR 313 (MAD) DATED 11.03 .2015. THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE LAW CITED (SU PRA) HELD AS UNDER: 9. THE SHORT POINT THAT ARISES FOR CONSIDERATION IN THIS APPEAL IS WHETHER THE AMALGAMATION RESERVE CONSEQUENT TO THE MERGER OF FOUR COMPANIES WOULD FALL WITHIN THE AMBIT OF PROFITS AND GAINS OF BUSINESS OR PROFESSION, MORE PARTICULA RLY UNDER SECTION 28(IV) OF THE INCOME- TAX ACT. 10. SINCE THE ISSUE REVOLVES AROUND SECTION 28(IV) OF THE INCOME-TAX ACT, IT IS NECESSARY TO EXTRACT THE SAME HEREIN FOR BETTER CLARITY. 28. PROFITS AND GAINS OF BUSINESS OR PROFESSION.T HE FOLLOWING INCOME SHALL BE CHARGEABLE TO INCOME-TAX UNDER THE HEAD PROFITS AN D GAINS OF BUSINESS OR PROFESSION,. (IV) THE VALUE OF ANY BENEFIT OR PERQUISITE, WHETHE R CONVERTIBLE INTO MONEY OR NOT, ARISING FROM BUSINESS OR THE EXERCISE OF A PROFESSI ON ; 11. A PLAIN READING OF THE ABOVE SAID PROVISION MA KES IT CLEAR THAT THE AMOUNT REFLECTED IN THE BALANCE-SHEET OF THE ASSESSEE UNDER THE HEAD R ESERVES AND SURPLUS CANNOT BE TREATED AS A BENEFIT OR PERQUISITE ARISING FROM BUSINESS OR EXERCISE OF PROFESSION. THE DIFFERENCE AMOUNT POST-AMALGAMATION WAS THE AMALGAMATION RESER VE AND IT COULD NOT BE SAID THAT IT IS OUT OF NORMAL TRANSACTION OF THE BUSINESS. THE P RESENT TRANSACTION IS CAPITAL IN NATURE AROSE ON ACCOUNT OF AMALGAMATION OF FOUR COMPANIES. HENCE, WE HAVE NO HESITATION TO HOLD THAT THE MANNER IN WHICH THE REVENUE WANTS TO TREAT THIS AMOUNT IS NOT IN CONSONANCE WITH SECTION 28(IV) OF THE INCOME-TAX ACT. 12. IN THE RESULT, THE ORDER OF THE TRIBUNAL STANDS CONFIRMED AND THIS TAX CASE (APPEAL) STANDS DISMISSED. NO COSTS. THE CASE OF THE ASSESSEE SQUARELY COVERED BY THE D ECISION OF THE HONBLE JURISDICTIONAL HIGH COURT (SUPRA). RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT, WE HOLD THAT THE SURPLUS ON AMALGAMATION IS NOT TAXABLE U/S.28(IV) OF INCOME TAX ACT AND WE SET-ASIDE THE ORDER OF THE LOWER AUTHORITIES AND ALLOW THE APPEAL OF THE ASSESSEE. 7.0 ITA NO.284/MDS/2015 (REVENUES APPEAL) THE DEPARTMENT APPEAL IS RELATING TO INDEXATION BE NEFIT ON CAPITAL GAINS U/S.48 OF INCOME TAX ACT. DURING THE PREVIOU S YEAR RELEVANT TO THE ASSESSMENT YEAR, THE ASSESSEE HAS SOLD THE GOVERNME NT SECURITIES AND CLAIMED INDEXATION BENEFIT ON SALE OF GOVERNMENT SE CURITIES WHICH RESULTED ITA NOS.71 & 284/MDS/2015 :- 8 -: IN LOSS OF RS.3,16,61,933/-. THE AO DISALLOWED THE INDEXATION BENEFIT CLAIMED BY THE ASSESSEE AS PER 3 RD PROVISO OF SEC.48 OF INCOME TAX ACT HOLDING THAT ON SALE OF GOVERNMENT SECURITIES, INDE XATION BENEFIT IS NOT ALLOWED. ON APPEAL TO THE LD.CIT(A), THE LD.CIT(A) ALLOWED THE APPEAL OF THE ASSESSEE. 8.0 AGGRIEVED BY THE LD.CIT(A)S ORDER, THE REVENUE HA S FILED AN APPEAL BEFORE US. DURING THE APPEAL, APPEARING FOR THE REVENUE, THE LEARNED DEPARTMENTAL REPRESENTATIVE (IN SHORT LD.DR) ARGU ED THAT THE GOVERNMENT SECURITIES ARE COVERED BY THIRD PROVISI ON TO SEC.48 OF INCOME TAX ACT AND AS PER THE PROVISO THE INDEXATION BENEF IT IS NOT ALLOWABLE TO THE ASSESSEE. ON THE OTHER HAND, THE LD.AR ARGUED THAT GOVERNMENT SECURITIES ARE CAPITAL ASSETS AND 3 RD PROVISO TO SEC.48 DOES NOT SPECIFICALLY INCLUDE THE GOVERNMENT SECURITIES FOR INDEXATION BE NEFIT. THEREFORE, THE LD.AR CONTENDED THAT THE ASSESSEE IS ENTITLED FOR I NDEXATION BENEFIT. 9.0 WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MAT ERIAL PLACED ON RECORD. THE LD.CIT(A) DELETED THE ADDITION PLACING RELIANC E ON EXPLANATION-2 TO SEC.2(42A) R/W SECURITIES CONTRACTS REGULATION A CT, 1956. FOR READY REFERENCE, WE PRODUCE THE RELEVANT PARAGRAPHS OF TH E LD.CIT(A) ORDER WHICH IS MADE AVAILABLE IN PARA NO.5.2 AS UNDER: I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE A ND SUBMISSIONS OF THE LD.AR. THE APPELLANT HAS MADE CERTAIN INVESTMENTS IN GOVERNMEN T SECURITIES. THE AO HAS DENIED ITA NOS.71 & 284/MDS/2015 :- 9 -: INDEXATION BENEFIT ON SALE OF SUCH GOVERNMENT SECUR ITIES HOLDING THAT THE INVESTMENT IN GOVERNMENT SECURITIES ARE IN THE FORM OF BONDS AND DEBENTURES AND THE INDEXATION BENEFIT IS NOT AVAILABLE FOR SUCH BONDS AND DEBENTURES AS P ER THE THIRD PROVISO TO S.48 OF L.T.ACT. THE AO INTERPRETED THAT THE TERM BONDS USED IN THIRD PROVISO TO S.48 NOT ONLY INCLUDES BONDS OF CORPORATE BUT ALSO THAT OF GOVERNMENT. THE LD.AR ON THE OTHER HAND BROUGHT TO MY NOTICE THE DEFINITION OF SECURITY MENTIONED AT EXPLANATION-2 TO S.2(42A). AS PER THIS EXPLANATION THE EXPRESSION SECURITY SHALL HAVE T HE MEANING ASSIGNED TO IT IN CLAUSE (H) OF S.2 OF THE SECURITIES CONTRACT (REGULATION) ACT, 19 56. IN CLAUSE (H) OF SECTION 2 OF THE SECURITIES CONTRA CTS (REGULATION) ACT, 1956, SECURITIES IS DEFINED SO AS TO INCLUDE, (I) SHARES, SCRIPS, STOCK, BONDS, DEBENTURES, DEBENTURE STOCK OR OTHER MARKETABLE SECURITIES OF A LIKE NATURE IN OR OF ANY INCORPORAT ED COMPANY OR OTHER BODY CORPORATE; (II) GOVERNMENT SECURITIES; (IIA) SUCH OTHER INSTRUMENTS AS MAY BE DECLARED BY THE CENTRAL GOVERNMENT TO BE SECURITIES; AND (III) RIGHTS OR INTEREST IN SECURITIES. SECTION 2(F) OF THE GOVERNMENT SECURITIES ACT, 2006 DEFINES GOVERNMENT SECURITY AS UNDER: GOVERNMENT SECURITY MEANS A SECURITY CREATED AND ISSUED BY THE GOVERNMENT FOR THE PURPOSE OF RAISING A PUBLIC LOAN OR FOR ANY OTHER P URPOSE AS MAY BE NOTIFIED BY THE GOVERNMENT IN THE OFFICIAL GAZETTE AND HAVING ONE OF THE FORMS MENTIONED IN SECTION 3. 5.2.1 IN VIEW OF THE ABOVE FACTS, I AM OF THE OPINI ON THAT BONDS AND DEBENTURES ARE DISTINGUISHABLE FROM GOVERNMENT SECURITIES. THERE FORE, EVEN THOUGH INDEXATION BENEFIT IS NOT AVAILABLE TO BONDS AND DEBENTURES IT IS AVAILAB LE TO GOVERNMENT SECURITIES AS PER THE THIRD PROVISO TO S.48 OF THE IT.ACT. THEREFORE, I D IRECT THE AO TO ALLOW INDEXATION BENEFIT ON THE GOVERNMENT SECURITIES IN WHICH THE APPELLANT HA S MADE THE INVESTMENTS, WHILE WORKING OUT CAPITAL GAINS ON SALE OF SUCH SECURITIES. THE G ROUND IS ALLOWED. 10.0 THE CAPITAL ASSET IS DEFINED U/S.2(14) OF INCOME TAX ACT AS UNDER: 14) 49 ['CAPITAL ASSET' 50 MEANS (A) PROPERTY 50 OF ANY KIND HELD BY AN ASSESSEE, WHETHER OR NOT CON NECTED WITH HIS BUSINESS OR PROFESSION; (B) ANY SECURITIES HELD BY A FOREIGN INSTITUTIONAL INVE STOR WHICH HAS INVESTED IN SUCH SECURITIES IN ACCORDANCE WITH THE REGULATIONS MADE UNDER THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 (15 OF 1992), BUT DOES NOT INCLUDE (I) ANY STOCK-IN-TRADE [OTHER THAN THE SECURITIES REFER RED TO IN SUB-CLAUSE (B )]], CONSUMABLE STORES OR RAW MATERIALS HELD FOR THE PUR POSES OF HIS BUSINESS OR PROFESSION ; 51 [(II) PERSONAL EFFECTS 52 , THAT IS TO SAY, MOVABLE PROPERTY (INCLUDING WEARI NG APPAREL AND FURNITURE) HELD 52 FOR PERSONAL USE 52 BY THE ASSESSEE OR ANY MEMBER OF HIS FAMILY DEPENDENT ON HIM, BUT EXCLUDES (A) JEWELLERY; (B) ARCHAEOLOGICAL COLLECTIONS; (C) DRAWINGS; (D) PAINTINGS; (E) SCULPTURES; OR (F) ANY WORK OF ART. 53 [EXPLANATION 1].FOR THE PURPOSES OF THIS SUB-CLAUS E, 'JEWELLERY' INCLUDES ITA NOS.71 & 284/MDS/2015 :- 10 -: (A) ORNAMENTS MADE OF GOLD, SILVER, PLATINUM OR ANY OTH ER PRECIOUS METAL OR ANY ALLOY CONTAINING ONE OR MORE OF SUCH PRECIOUS M ETALS, WHETHER OR NOT CONTAINING ANY PRECIOUS OR SEMI- PRECIOUS STONE, AND WHETHER OR NOT WORKED OR SEWN INTO ANY WEARING APPAREL; (B) PRECIOUS OR SEMI- PRECIOUS STONES, WHETHER OR NOT SET IN ANY FURNITUR E, UTENSIL OR OTHER ARTICLE OR WORKED OR SEWN INTO ANY WEARING APPAREL.] 54 [EXPLANATION 2.FOR THE PURPOSES OF THIS CLAUSE (A) THE EXPRESSION 'FOREIGN INSTITUTIONAL INVESTOR' SHA LL HAVE THE MEANING ASSIGNED TO IT IN CLAUSE (A) OF THE EXPLANATION TO SECTION 115AD ; (B) THE EXPRESSI ON 'SECURITIES' SHALL HAVE THE MEANING ASSIGNED TO IT IN CLAUSE (H ) OF SECTION 2 OF THE SECURITIES CONTRACTS (REGULAT ION) ACT, 1956 (42 OF 1956) 55 ;] 56 [(III) AGRICULTURAL LAND 57 IN INDIA, NOT BEING LAND SITUATE (A) IN ANY AREA WHICH IS COMPRISED WITHIN THE JURISDICT ION OF A MUNICIPALITY 57 (WHETHER KNOWN AS A MUNICIPALITY, MUNICIPAL CORPORA TION, NOTIFIED ARE A COMMITTEE, TOWN AREA COMMITTEE, TOWN COMMITTEE, O R BY ANY OTHER NAME) OR A CANTONMENT BOARD AND WHICH HAS A POPULATION 58 OF NOT LESS THAN TEN THOUSAND 59 [***] ; OR 60 - 61 [(B) IN ANY AREA WITHIN THE DISTANCE, MEASURED AERIALLY, (I) NOT BEING MORE THAN TWO KILOMETRES, FROM THE LOCAL LIMITS OF ANY MUNICIPALITY OR CANTONMENT BOARD REFERRED TO IN ITE M (A ) AND WHICH HAS A POPULATION OF MORE THAN TE N THOUSAND BUT NOT EXCEEDING ONE LAKH; OR (II) NOT BEING MORE THAN SIX KILOMETRES, FROM THE LOCAL LIMITS OF ANY MUNICIPALITY OR CANTONMENT BOARD REFERRED TO IN ITE M (A ) AND WHICH HAS A POPULATION OF MORE THAN ONE LAKH BUT NO T EXCEEDING TEN LAKH; OR (III) NOT BEING MORE THAN EIGHT KILOMETRES, FROM THE LOCA L LIMITS OF ANY MUNICIPALITY OR CANTONMENT BOARD REFERRED TO IN ITEM (A ) AND WHICH HAS A POPULATION OF MORE THAN TEN LAKH. EXPLANATION.FOR THE PURPOSES OF THIS SUB-CLAUSE, ' POPULATION' MEANS THE POPULATION ACCORDING TO THE LAST PRECEDING CENSUS O F WHICH THE RELEVANT FIGURES HAVE BEEN PUBLISHED BEFORE THE FIRST DAY OF THE PRE VIOUS YEAR;]] 62 [(IV) 6 PER CENT GOLD BONDS, 1977, 63 [OR 7 PER CENT GOLD BONDS, 1980,] 64 [OR NATIONAL DEFENCE GOLD BONDS, 1980,] ISSUED BY THE CENTRAL GO VERNMENT;] 65 [(V) SPECIAL BEARER BONDS, 1991, ISSUED BY THE CENTRAL G OVERNMENT ;] 66 [(VI) GOLD DEPOSIT BONDS ISSUED UNDER THE GOLD DEPOSIT SC HEME, 1999 66A [ OR DEPOSIT CERTIFICATES ISSUED UNDER THE GOLD MONETISATION SCH EME, 2015 ] NOTIFIED BY THE CENTRAL GOVERNMENT.] 67 [EXPLANATION. FOR THE REMOVAL OF DOUBTS, IT IS HEREBY CLARIFIED T HAT 'PROPERTY' INCLUDES AND SHALL BE DEEMED TO HAVE ALWAYS INCLUDED ANY RIGHTS IN OR IN RELATION TO AN INDIAN COMPANY, INCLUDING RIGHTS OF MANAGEMENT OR CONTROL OR ANY OT HER RIGHTS WHATSOEVER;] 11.0 FROM THE DEFINITION OF THE CAPITAL ASSET, THE GOVE RNMENT SECURITIES ARE NOT EXCLUDED FROM THE DEFINITION OF CAPITAL ASS ET. THEREFORE, THE GOVERNMENT SECURITIES ARE CAPITAL ASSETS. AS PER SE C.2(42A) THE EXPRESSION SECURITY SHALL HAVE THE MEANING ASSIGN ED TO CLAUSE-11 OF ITA NOS.71 & 284/MDS/2015 :- 11 -: SECURITIES CONTRACTS REGULATION ACT, 1956 WHICH INC LUDES GOVERNMENT SECURITIES AS DISCUSSED IN THE LD.CIT(A) ORDERS WHI CH WAS EXTRACTED ABOVE. IN RESERVE BANK OF INDIA FAQS GOVERNMENT SECURITIE S ARE DEFINED AS UNDER: A GOVERNMENT SECURITY IS A TRADABLE INS TRUMENT ISSUED BY THE CENTRAL GOVERNMENT OR THE STATE GOVERNMENTS. IT ACKNOWLEDGES THE GOVER NMENTS DEBT OBLIGATION. SUCH SECURITIES ARE SHORT TERM (USUALLY CALLED TREASURY BILLS, WITH ORIGINAL MATURITIES OF LESS THAN ONE YEAR) OR LONG TERM (USUALLY CALLED GOVERNMENT B ONDS OR DATED SECURITIES WITH ORIGINAL MATURITY OF ONE YEAR OR MORE). IN INDIA, THE CENTR AL GOVERNMENT ISSUES BOTH, TREASURY BILLS AND BONDS OR DATED SECURITIES WHILE THE STATE GOVER NMENTS ISSUE ONLY BONDS OR DATED SECURITIES, WHICH ARE CALLED THE STATE DEVELOPMENT LOANS (SDLS). GOVERNMENT SECURITIES CARRY PRACTICALLY NO RISK OF DEFAULT AND, HENCE, AR E CALLED RISK-FREE GILT-EDGED INSTRUMENTS. GOVERNMENT OF INDIA ALSO ISSUES SAVINGS INSTRUMENTS (SAVINGS BONDS, NATIONAL SAVING CERTIFICATES (NSCS), ETC.) OR SPECIAL SECURITIES (O IL BONDS, FOOD CORPORATION OF INDIA BONDS, FERTILISER BONDS, POWER BONDS, ETC.). THEY ARE, USU ALLY NOT FULLY TRADABLE AND ARE, THEREFORE, NOT ELIGIBLE TO BE SLR SECURITIES.(SOURCE: GOVERNMENT SECURITIES MARKET IN INDIA A PRIMER-RBI.) FROM THE ABOVE GUIDANCE NOTE BONDS AND SECURITIES DISTINGUISHABLE. THE BONDS ARE NOT FREELY TRADABLE AND THE SECURITIE S ARE FREELY TRADABLE. THEREFORE, THE BONDS CANNOT BE EQUATED WITH THE SEC URITIES. THE ASSESSEE HAS MADE INVESTMENTS IN GOVERNMENT SECURITIES AND S OLD THE SECURITIES AFTER HOLDING THE PERIOD OF MORE THAN 12 MONTHS TO TREAT THE SECURITIES AS LONG TERM CAPITAL ASSETS. THE CAPITAL GAINS ARISIN G ON TRANSFER OF LONG TERM COMPANY ASSETS ARE ENTITLED FOR THE BENEFIT OF INDE XATION AS PER SEC.48 OF INCOME TAX ACT. THE AO RELIED ON THE THIRD PROVISO TO SEC.48 OF INCOME TAX ACT AND DENIED THE BENEFIT OF INDEXATION. WE H AVE GONE THROUGH THE THIRD PROVISO TO SEC.48 OF INCOME TAX ACT, WHICH RE ADS AS UNDER: 7 [ MODE OF COMPUTATION. 38 48. THE INCOME CHARGEABLE UNDER THE HEAD 'CAPITAL GAIN S' SHALL BE COMPUTED, BY DEDUCTING FROM THE FULL VALUE OF THE CONSIDERATION 39 RECEIVED OR ACCRUING 39 AS A RESULT OF THE TRANSFER OF THE CAPITAL ASSET THE FOLLOWING AMOUNTS , NAMELY : (I) EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CONN ECTION WITH SUCH TRANSFER 40 ; (II) THE COST OF ACQUISITION OF THE ASSET AND THE COST O F ANY IMPROVEMENT 40 THERETO: 41 PROVIDED THAT IN THE CASE OF AN ASSESSEE, WHO IS A NON-RESI DENT, CAPITAL GAINS ARISING FROM THE TRANSFER OF A CAPITAL ASSET BEING SHARES I N, OR DEBENTURES OF, AN INDIAN COMPANY SHALL BE COMPUTED BY CONVERTING THE COST OF ACQUISI TION, EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH SUCH TRANSFER AND TH E FULL VALUE OF THE CONSIDERATION RECEIVED ITA NOS.71 & 284/MDS/2015 :- 12 -: OR ACCRUING AS A RESULT OF THE TRANSFER OF THE CAPI TAL ASSET INTO THE SAME FOREIGN CURRENCY AS WAS INITIALLY UTILISED IN THE PURCHASE OF THE SHARE S OR DEBENTURES, AND THE CAPITAL GAINS SO COMPUTED IN SUCH FOREIGN CURRENCY SHALL BE RECONVER TED INTO INDIAN CURRENCY, SO, HOWEVER, THAT THE AFORESAID MANNER OF COMPUTATION OF CAPITAL GAINS SHALL BE APPLICABLE IN RESPECT OF CAPITAL GAINS ACCRUING OR ARISING FROM EVERY REINVE STMENT THEREAFTER IN, AND SALE OF, SHARES IN, OR DEBENTURES OF, AN INDIAN COMPANY : PROVIDED FURTHER THAT WHERE LONG-TERM CAPITAL GAIN ARISES FROM THE TRANSFER OF A LONG- TERM CAPITAL ASSET, OTHER THAN CAPITAL GAIN ARISING TO A NON-RESIDENT FROM THE TRANSFER OF SHARES IN, OR DEBENTURES OF, AN INDIAN COMPANY REFE RRED TO IN THE FIRST PROVISO, THE PROVISIONS OF CLAUSE (II) SHALL HAVE EFFECT AS IF F OR THE WORDS 'COST OF ACQUISITION' AND 'COST OF ANY IMPROVEMENT', THE WORDS 'INDEXED COST OF ACQ UISITION' AND 'INDEXED COST OF ANY IMPROVEMENT' HAD RESPECTIVELY BEEN SUBSTITUTED: 42 [ PROVIDED ALSO THAT NOTHING CONTAINED IN THE SECOND PROVISO SHALL APPLY TO THE LONG-TERM CAPITAL GAIN ARISING FROM THE TRANSFER OF A LONG-TE RM CAPITAL ASSET BEING BOND OR DEBENTURE OTHER THAN CAPITAL INDEXED BONDS ISSUED BY THE GOVE RNMENT :] 12.0 FROM THE PLAIN READING OF 3 RD PROVISO SECTION 48 OF I.T. ACT, GOVERNMENT SECURITIES ARE NOT EXCLUDED FOR INDEXATI ON BENEFIT ONLY BOND OR DEBENTURE INCLUDED IN THE THIRD PROVISO TO SEC.48. THEREFORE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD.CIT(A) AN D THE SAME IS UPHELD. 13.0 IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOW ED AND THE APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST MARCH, 2017, AT CHENNAI. SD/- SD/- ( . . . ) (N.R.S. GANESAN) /JUDICIAL MEMBER ( '# . . $ %!& ) (D.S.SUNDER SINGH) ( /ACCOUNTANT MEMBER /CHENNAI, 6! /DATED: 31 ST MARCH, 2017. TLN 1 /3% 7 87,3 /COPY TO: 1. -. /APPELLANT 4. $ 93 /CIT 2. /0-. /RESPONDENT 5. 7 : /3 /DR 3. $ 93 ( ) /CIT(A) 6. #+ = /GF