2014 (6) TMI 352 - AT - Income Tax

Assessees win on capital gains classification and deduction eligibility. Appeals partly allowed, penalty dismissed.

The Tribunal ruled in favor of the assessees on the major issues of classification of capital gains, eligibility for deduction under Section 54EC, and the ... LTCG treated as STCG – Sale of deep discount bonds – Claim of deduction u/s 54EC of the Act not allowed - Held that:- The holding period has to be counted form the date of allotment till the date of sale and if the same is more than 12 months then, it has to be accepted that it is a LTCG and the assessee is entitled to deduction u/s 54EC also - the period of holding was more than 12 months from the date of allotment i.e. 23.09.2000 till the date of sale i.e. 18.03.2002, the resulting gain has to be assessed as LTCG and the assessee should be held as eligible for deduction u/s 54EC also because there is no other objection of the revenue regarding allowability of deduction u/s 54EC except that the income in question is not a LTCG – Decided in favour of Assessee. LTCG treated as STCG - Sale of principal strip - Claim of deduction u/s 54EC of the Act not allowed – Held that:- Board’s Circular dated 15.02.2002 is applicable only to DDBs acquired on or after 15.05.2002 and since Judicial Member was also having the same view, the matter was decided in favour of the assessee without referring the same to the Third Member although the Accountant Member was having some reservations about the view of the Judicial Member on some other aspects - Board’s Circular No.2 dated 15.02.2002 is applicable only on those bonds which were acquired on or after 15.02.2002 - the strip of TATA Finance Ltd. were acquired by the assessee on 23.03.2000 i.e. much prior to 15.02.2002, it has to be accepted that the board’s Circular No.2 dated 15.02.2002 is not applicable - the gain has to be assessed as LTCG and the assessee has to be allowed deduction u/s 54EC – Decided in favour of Assessee. Method of accounting – Use of Cash System instead of Mercantile system – Held that:- The method of accounting being followed by the assessee is cash and not mercantile - As per sub-section (1) of Section 145, the assessee can follow either cash or mercantile system of accounting regularly in respect of determination of income chargeable under the head 'profits & gains of the business and profession' or 'income from other sources' - the assessee can very much follow cash method of accounting for the purpose of declaring income in respect of DDBs/NCD if the assessee is regularly following cash method of accounting - No Board's circular can override the provisions of the Act and the Board's circular is not an accounting standard notified by the Central Government in the official gazette as required u/s 145(2) of the Income tax Act, 1961 to make out an exception in respect of Section 145(1) - the assessee is following cash method of accounting - the income of the assessee cannot be assessed on the basis of hybrid method of accounting by following mercantile method for assessing income in respect of DDBs/NCD and the remaining income on the basis of cash method of accounting – Decided in favour of Assessee. Addition of notional accrued interest – Optionally fully convertible premium notes – Held that:- The assessee is following cash system of accounting, the additional ground raised by the assessee has to be allowed because once it is held that the assessee is following cash system of accounting, no income on account of interest of OFCPNs can be taxed in the present year on accrual basis and this is admitted fact that no such interest income was received by the assessee in the present year - the rider that the interest income should be taxed in the year in which the same is received by the assessee - Decided partly in favour of Assessee. Addition of accrued interest – Investment in bonds of Rural electrification corporation – Held that:- In the computation of income, it is specifically stated by the assessee as per note that assessee is following cash method of accounting - From the audited accounts and computation of income filed by the assessee along with the return of income, the method of accounting being followed by the assessee is cash and not mercantile - No Board’s circular can override the provisions of the Act and since the Board’s circular is not an accounting standard notified by the Central Government in the official gazette as required u/s 145(2) of the Income tax Act, 1961 to make out an exception in respect of Section 145(1) – there was no merit in the contention of the AO that even if the assessee is following cash method of accounting, the assessee is bound to follow mercantile method of accounting for the purpose of declaring income from DDBs/NCD - assessee is following cash method of accounting – Decided in favour of Assessee. Issues Involved:1. Classification of capital gains as long-term or short-term.2. Eligibility for deduction under Section 54EC of the Income Tax Act.3. Method of accounting (cash vs. mercantile).4. Chargeability of interest under Section 234B.5. Initiation of penalty proceedings under Section 271(1)(c).Detailed Analysis:1. Classification of Capital Gains:- Smt. Punitaben K Patel's Appeal:The primary issue was whether the gains from the sale of Deep Discount Bonds (DDBs) of Nirma Ltd. should be classified as long-term capital gains (LTCG) or short-term capital gains (STCG). The Assessing Officer (A.O.) considered the holding period from the date of listing on the National Stock Exchange (NSE), treating the gains as STCG. However, the Tribunal decided that the holding period should be counted from the date of allotment, making the gains LTCG. This decision was based on a similar case involving Shri Karsanbhai P Patel (HUF), where the Tribunal held that the period of holding should be from the date of allotment.- Shri Karsanbhai K Patel's Appeal:Similar to Ms. Punitaben's case, the gains from the sale of DDBs of Nirma Ltd. were considered as LTCG by counting the holding period from the date of allotment. The Tribunal followed the same rationale and decided in favor of the assessee.2. Eligibility for Deduction Under Section 54EC:- Smt. Punitaben K Patel's Appeal:Since the gains were classified as LTCG, the assessee was entitled to the deduction under Section 54EC. The Tribunal allowed the deduction as the only objection from the revenue was the classification of the gains.- Shri Karsanbhai K Patel's Appeal:Following the same reasoning, the Tribunal allowed the deduction under Section 54EC for the LTCG on the sale of DDBs of Nirma Ltd.3. Method of Accounting (Cash vs. Mercantile):- Shri Karsanbhai K Patel's Appeal:The dispute was whether the assessee followed the cash method or mercantile method of accounting. The Tribunal, after examining the balance sheet, P&L account, and computation of income, concluded that the assessee followed the cash method of accounting. This was consistent with the Tribunal's decision for the assessment year 2005-06.- Shri Hirenbhai K Patel's Appeal:The Tribunal also examined the method of accounting for this assessee. Based on the computation of income and audited accounts, it was determined that the assessee followed the cash method of accounting. Consequently, the additions made by the A.O. on the basis of the mercantile method were not upheld.4. Chargeability of Interest Under Section 234B:- Smt. Punitaben K Patel's Appeal:The issue of interest under Section 234B was deemed consequential and held accordingly.- Shri Karsanbhai K Patel's Appeal:Similarly, the interest under Section 234B was considered consequential and held accordingly.- Shri Hirenbhai K Patel's Appeal:The Tribunal decided that interest under Section 234D could not be charged for assessment years prior to 2004-05, following the Special Bench decision in ITO Vs Ekta Promoters (P) Ltd.5. Initiation of Penalty Proceedings Under Section 271(1)(c):- Smt. Punitaben K Patel's Appeal:The ground regarding the initiation of penalty proceedings was rejected as premature.- Shri Karsanbhai K Patel's Appeal:Similarly, the ground regarding the initiation of penalty proceedings was rejected as premature.- Shri Hirenbhai K Patel's Appeal:The penalty proceedings under Section 271(1)(c) were also rejected as premature.Penalty Proceedings:- Shri Hirenbhai K Patel's Penalty Appeal:The penalty imposed by the A.O. was in respect of additions for accrued interest on DDBs and bonds. Since these additions were deleted in the quantum appeal, the penalty had no basis and was deleted by the Tribunal.Conclusion:In summary, the Tribunal ruled in favor of the assessees on the major issues of classification of capital gains, eligibility for deduction under Section 54EC, and the method of accounting. The appeals were partly allowed, and the penalty proceedings were dismissed.