Shri K. V. Jagannathsa, Bangalore V. DCIT, Bangalore

ITA 995/BANG/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 8547 (ITAT-BANGALORE)
• Duration Of Justice: 4 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-03-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2006-2007
• Appeal Filed On: 29-10-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; TDS
• Section: 143(3)

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH A BEFORE DR. O.K NARAYANAN, VICE PRESIDENT AND SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER SN I.T.A NO. APPELLANT S/SHRI RESPONDENT 1 993/BANG/2009 K NAGENDRASA, NO.36, TELUGUPET, CHICKPET CROSS, BLORE . THE DY. COMMISSIONER OF INCOME-TAX, CIRCLE-5(1), BLORE 2 994/BANG/2009 K.V BANUDAS, NO.36, TELUGUPET, CHICKPET CROSS, BLORE THE DY. COMMISSIONER OF INCOME-TAX, CIRCLE-5(1), BLORE. 3 995/BANG/2009 K.V JAGANNATHASA, NO.36, TELUGUPET, CHICKPET CROSS, BLORE. THE DY. COMMISSIONER OF INCOME-TAX, CIRCLE-5(1), BLORE. 4 996/BANG/2009 K.V NAGARAJ, NO.36, TELUGUPET, CHICKPET CROSS, BLORE. THE DY. COMMISSIONER OF INCOME-TAX, CIRCLE-5(1), BLORE. 5 997/BANG/2009 K.V NAGUSA, NO.36, TELUGUPET, CHICKPET CROSS, BLORE. THE DY. COMMISSIONER OF INCOME-TAX, CIRCLE-5(1), BLORE. APPELLANT BY : VISHNU BHARATH, CHARTERED ACCOUNT ANT RESPONDENT BY : SMT. JACINTA ZIMIK VASHAI, ADDL. CO MMISSIONER OF INCOME-T AX O R D E R PER DR. O.K NARAYANAN, VICE PRESIDENT THIS IS THE BUNCH OF FIVE APPEALS, ALL FILED BY TH E ASSESSEES. THE COMMON ASSESSMENT YEAR FOR ALL THE APPEALS IS 2006- 07. THESE ITA NOS.993 TO 997/B/09 2 APPEALS ARE DIRECTED AGAINST THE INDIVIDUAL ORDERS PASSED BY THE CIT(A)-II AT BANGALORE DATED 25.9.2009 AND ARISE OU T OF THE RESPECTIVE ASSESSMENT COMPLETED U/S 143(3) OF THE INCOME-TAX A CT. 2. ALL THESE ASSESSEES HAVE SUBSCRIBED 8% RESER VE BANK OF INDIA BONDS, IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSM ENT YEAR UNDER APPEAL. THE 8% RBI BONDS WERE REDEEMABLE ON MATURIT Y ALONG WITH INTEREST ON MAY 9, 2011. THE RESERVE BANK OF INDIA CREDITS INTEREST ON THIS BOND AT THE TIME OF MATURITY AND NOT BEFORE. 3. IN THE ABOVE SCENARIO, THE ASSESSEES FILED T HE RETURN OF INCOME BUT WITHOUT OFFERING ANY INTEREST INCOME ATTRIBUTABLE T O THE 8% RBI BONDS. ACCORDING TO THE ASSESSEES, THEY ARE FOLLOW ING CASH SYSTEM OF ACCOUNTING AND THE INTEREST SHOULD BE ACCOUNTED ONL Y WHEN THE BONDS ARE REDEEMED AND INTEREST IS PAID AT THE TIME OF RE DEMPTION. ACCORDING TO THE RESERVE BANK OF INDIA, THE INTERES T INCOME IS NOT CREDITED INTO THE FOLIOS OF THE ASSESSEES, AS ACCOR DING TO THE RBI, INTEREST ACCRUES ONLY ON MATURITY OF BONDS. NO TAX WAS DEDUCED AT SOURCE IN THE RELEVANT PREVIOUS YEAR PERIOD. THIS IS ALSO ONE OF THE GROUNDS, ON WHICH THE ASSESSEES HAS STATED THAT THE INTEREST DOES NOT ITA NOS.993 TO 997/B/09 3 ACCRUE FROM YEAR TO YEAR BUT INTEREST IS RECOGNIZED ONLY ON MATURITY/REDEMPTION OF THE BONDS. 4. THE ASSESSING OFFICER HELD THAT INTEREST AC CRUES YEAR AFTER YEAR AND NOT ACCRUE ALL OF A SUDDEN AT THE TIME OF REDEM PTION/MATURITY. THEREFORE, HE HELD THAT ASSESSEES WERE BOUND TO OFF ER INTEREST ON THE RBI BONDS FOR THE PREVIOUS YEAR RELEVANT TO THE IMP UGNED ASSESSMENT YEAR. HE COMPUTED THE INTEREST DUE ON THE BONDS AN D ADDED THE SAME TO THE TAXABLE INCOME OF THE ASSESSES. 5. IN APPEAL, THE CIT(A) FURTHER RELIED ON THE CIRC ULAR ISSUED BY THE CBDT NO.2 DATED 15.2.02 REPORTED IN 254 ITR (ST ) 241, IN WHICH, THE BOARD HAS SUGGESTED THE TAX TREATMENT TO BE AG AIN ON DEEP DISCOUNT BONDS. AFTER CONSIDERING ALL THE ARGUMENT S AND POSSIBILITIES OF THE ISSUE, THE BOARD SUGGESTED THAT THE DIFFEREN TIAL VALUE FROM YEAR TO YEAR OF THE DEEP DISCOUNT BOND HAS TO BE TREATED AS INTEREST INCOME OF THAT PARTICULAR ASSESSMENT YEAR AND TO BE OFFERE D FOR TAXATION. HE HELD THAT THE SAID CIRCULAR COVERS THE PRESENT ISSU E AS WELL AND, THEREFORE, REVENUE OFFICIALS ARE BOUND BY THE CIRCU LAR ISSUED BY THE BOARD. HE ACCORDINGLY UPHELD THE ORDERS OF THE ASS ESSING AUTHORITY. ITA NOS.993 TO 997/B/09 4 6. THE ASSESSEES ARE AGGRIEVED AND, THEREFORE, TH ESE APPEALS BEFORE US. 7. WE HEARD BOTH SIDES IN DETAILS. 8. THE REFERENCE MADE BY THE CIT(A) ON THE BOARDS CIRCULAR NO.2 OF 2002 DATED 15.2.02 REPORTED IN 252 ITR (ST) 241, ISSUED IN THE CONTEXT OF DEEP DISCOUNT BONDS IS NOT APPLICABLE TO THE PRESENT CASE OF 8% RESERVE BANK OF INDIA BONDS. THE GENERAL RU LE ON RECOGNITION OF INCOME IS EITHER ACCRUAL OR CASH ME THOD. THE ASSESSEES HAS THE RIGHT TO CHOOSE THE METHOD, UNLES S THE STATUTORY PROVISIONS PRESCRIBES ANY OTHER METHOD TO BE FOLLOW ED MANDATORILY. IN THIS CASE, THERE IS NO SUCH MANDATE BY THE STATU TORY AND, THEREFORE, THEY ARE ENTITLED TO RECOGNIZE THE INTEREST INCOME ON RBI BONDS, EITHER ON ACCRUAL BASIS OR ON CASH BASIS. 9. THE OPTION OF THE ASSESSEES WILL FOR ALL PRACTI CAL PURPOSES BE FURTHER DETERMINED BY THE TERMS OF THE 8% RESERVE B ANK OF INDIA BONDS. IF THE RESERVE BANK OF INDIA CREDITS THE IN TEREST IN THE ACCOUNT OF INVESTORS ON EVERY YEAR END OR THE RESERVE BANK OF INDIA PERMITS THE INVESTORS TO WITHDRAW SUCH INTEREST CREDIT IN T HEIR FOLIO, IT IS ITA NOS.993 TO 997/B/09 5 POSSIBLE FOR THE ASSESSEES TO TREAT THE INCOME GENE RATED ON AN ACCRUAL BASIS FROM ASSESSMENT YEAR TO ASSESSMENT YEAR. IN SUCH CIRCUMSTANCES, THE RESERVE BANK OF INDIA MIGHT HAVE DEDUCTED TAX AT SOURCE ATTRIBUTABLE TO THE AMOUNT OF INTEREST CREDI TED IN THE ACCOUNTS OF THE ASSESSEES. IN THE PRESENT CASE, THE SITUATION IS JUST CONTRARY. RESERVE BANK OF INDIA HAS MADE IT CLEAR THAT NO INT EREST WOULD BE CREDITED OR PAID ON YEARLY BASIS AND INTEREST WILL BE PAID ONLY AT THE TIME OF REDEMPTION OF THE BONDS AND, THEREFORE, NO TDS WILL BE MADE. IN SUCH CIRCUMSTANCES, AND IN THE LIGHT OF THE OPTI ON AVAILABLE IN THE HANDS OF THE ASSESSEES TO CHOOSE THE METHOD OF ACCO UNTING, THE ASSESSEES MIGHT HAVE REASONABLY OPTED FOR CASH METH OD OF RECOGNITION OF INCOME. 10. THIS POSITION IS FURTHER PERPETUATED BY THE LAW REGARDING TDS. IF THE ASSESSEES RECOGNIZE THE INTEREST INCOME ON A CCRUAL BASIS FROM YEAR TO YEAR AS CONTEMPLATED BY THE ASSESSING AUTHO RITY, THE ASSESSEES SHOULD GET THE BENEFIT OF THE CREDIT OF THE TDS ATT RIBUTABLE TO THAT AMOUNT OF INTEREST INCOME. IF THAT CREDIT IS TO BE TAKEN BENEFIT, THEN THE RESERVE BANK OF INDIA SHOULD HAVE DEDUCTED TAX ON YEARLY BASIS. HERE, THE RESERVE BANK OF INDIA MAKES THE DEDUCTION OF TAX ONLY AT THE TIME OF REDEMPTION. HOW IT IS POSSIBLE FOR AN A SSESSEES TO CLAIM ITA NOS.993 TO 997/B/09 6 CREDIT FOR THE TDS MADE BY THE RESERVE BANK OF INDI A? THIS IS ALMOST IMPOSSIBLE. THIS IMPOSSIBILITY DEFEATS THE CONTENT ION OF THE ASSESSING AUTHORITY THAT THE INTEREST INCOME ATTRIBUTABLE TO 8% RBI BONDS SHOULD HAVE BEEN OFFERED ON ACCRUAL BASIS. 11. REGARDING THE CIRCULAR ISSUED BY THE CBDT IN TH E CONTEXT OF DEEP DISCOUNT BONDS, IT IS TO BE CLARIFIED THAT NO SUCH CIRCULAR HAS BEEN ISSUED IN RESPECT OF THE SUBJECT 8% RESERVE BA NK OF INDIA BONDS. IN THE LIGHT OF THE CIRCULAR ISSUED BY THE CBDT, TH E DEEP DISCOUNT BOND STANDS ON ITS OWN INDEPENDENT FOOTINGS. ONLY FOR THE REASON THAT THERE ARE CERTAIN COMMON FEATURES BETWEEN DEEP DISCOUNT BONDS AND 8% RBI BONDS, THE CIRCULAR ISSUED BY THE CBDT I N RESPECT OF DEEP DISCOUNT BONDS CANNOT BE MADE APPLICABLE TO TH E CASE OF 8% RESERVE BANK OF INDIA BONDS. 12. FURTHER, EVEN THOUGH CIRCULARS AND CLARIFIC ATIONS ISSUED BY THE BOARD ARE BINDING ON THE REVENUE OFFICIALS AS MENTI ONED BY THE CIT(A), THOSE CIRCULARS AND CLARIFICATIONS ARE NOT BINDING ON COURTS AND TRIBUNALS, AND EVEN NOT ON THE ASSESSEES WHO AR E REGULARLY FOLLOWING A PERMISSIBLE METHOD OF ACCOUNTING. IN S PITE OF THE CIRCULAR ISSUED BY THE BOARD, IN THE CASE OF DEEP DISCOUNT B OND, THERE IS NO ITA NOS.993 TO 997/B/09 7 GUARANTEE THAT ASSESSEES HAVING THE CASES OF DEEP DISCOUNT BONDS WOULD INVARIABLY FOLLOW THE DIRECTIONS MADE BY THE BOARD IN THAT CIRCULAR IN THE MATTER OF RECOGNIZING INTEREST INCO ME FOR TAXATION. THE ASSESSEES MAY STILL ARGUE THAT IN CERTAIN CASES, TH E DEEP DISCOUNT BONDS WERE HELD AS CAPITAL ASSET AND ON REDEMPTION, THE SURPLUS WOULD TAKE THE CHARACTER OF CAPITAL GAINS ETC. THEREFORE , THE RELIANCE PLACED BY THE CIT(A) ON THE DEEP DISCOUNT BOND AND THE CIR CULAR ISSUED BY THE CBDT IS NOT RELEVANT IN THE PRESENT CASE. 13. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WE HOLD THAT THE ASSESSEES ARE ENTITLED TO RECOGNIZE THE INTEREST IN COME ATTRIBUTABLE TO 8% RESERVE BANK OF INDIA BONDS ON CASH BASIS AT THE TIME OF REDEMPTION OF THE BONDS. AS SUCH, THE ADDITION MADE BY THE ASSESSING AUTHORITY TOWARDS INTEREST INCOME IS NOT SUSTAINABL E IN LAW. THOSE ADDITIONS ARE HEREBY DELETED. ITA NOS.993 TO 997/B/09 8 14. IN RESULT, ALL THESE APPEALS FILED BY THE ASSES SEES ARE ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THURSDAY , THE 11TH DAY OF MARCH, 2010, AT BANGALORE. SD/- SD/- (SHAILENDRA KUMAR YADAV) (DR. O.K NARAYA NAN) JUDICIAL MEMBER VICE PR ESIDENT VMS. COPY TO : 1. THE ASSESSEES 2. THE REVENUE 3.THE CIT CONCERNED. 4.THE CIT(A) CONCERNED. 5.DR 6.GF 7..GF, ITAT, NEW DELHI. BY ORD ER ASST. REGISTRAR, ITAT, BANGALOR E.