Accrual taxation of Kisan Vikas Patra interest upheld; maturity-based capital asset treatment and indexation claim rejected.

Interest on Kisan Vikas Patras was treated as accruing over time under the governing rules, which allowed encashment on maturity and, after the prescribed lock-in period, even before full maturity. On that basis, the return from the certificates was not viewed as a deferred lump sum payable only at maturity, and the departmental circular also required assessment on accrual basis. The contention that the certificates should be regarded as a capital asset, with taxation deferred until maturity and indexation allowed, was rejected. The operative tax treatment was therefore accrual-based taxation of the interest, not deferred taxation on maturity.

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Issues: Whether interest on Kisan Vikas Patras was taxable on accrual basis during the relevant period and whether the certificates could be treated as a capital asset so as to defer taxation till maturity with the benefit of indexation.

Analysis: The entitlement under the Kisan Vikas Patra scheme was governed by the Kisan Vikas Patra Rules, 1988, which permitted encashment in accordance with specified maturity and premature encashment conditions. The rules showed that return accrued with the passage of time and that an investor could encash the certificate even before full maturity after the prescribed lock-in period. The departmental circular also stated that interest on Kisan Vikas Patras had to be assessed on accrual basis. In these circumstances, the certificate was not treated as a mere promissory note yielding only a deferred lump sum on maturity, and the assessee's contention that taxation should arise only on maturity with indexation was rejected.

Conclusion: The interest on Kisan Vikas Patras was rightly brought to tax on accrual basis, and the assessee's claim to treat the investment as a capital asset taxable only on maturity failed.

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