1979 (1) TMI 59 - HC - Income Tax

Court deems annual instalments from compensation and rehabilitation bonds as taxable income, emphasizing commercial intent.

The court held that the annual instalments received by the assessee from both the 2 1/2% U.P. Zamindari Abolition Compensation Bonds and the U.P. ... Capital Receipt, Nature Of Income Issues Involved:1. Whether any income in excess of the interest at the stipulated rate was realized by the assessee in the annual instalments recovered from 2 1/2% U.P. Zamindari Abolition Compensation Bonds.2. Whether any income arose to the assessee in respect of U.P. Zamindari Abolition Rehabilitation Grant Bonds.Summary:Issue 1: Income from Interest Bearing BondsThe court examined whether the assessee realized any income in excess of the stipulated interest rate from the annual instalments of the 2 1/2% U.P. Zamindari Abolition Compensation Bonds. The assessee had purchased these bonds at a price significantly lower than their face value. The ITO had considered the yield from these bonds as taxable income, which was upheld by the AAC. The Judicial Member of the Appellate Tribunal held that only the interest received as indicated in the bonds could be considered as income. The Accountant Member disagreed, viewing the excess realized as income. The third Member sided with the Judicial Member, concluding that the bonds were non-interest bearing, and thus, no interest could be presumed. The court ultimately agreed with the majority decision of the Tribunal, holding that the annual instalments received by the assessee included an element of interest, which was taxable as income. Therefore, question No. 1 was answered in the affirmative and in favor of the revenue.Issue 2: Income from Non-Interest Bearing BondsThe court also addressed whether any income arose to the assessee from the U.P. Zamindari Abolition Rehabilitation Grant Bonds, which were non-interest bearing. The ITO had treated the annual instalments from these bonds as annuities and taxed them based on annuity tables. The Judicial Member of the Appellate Tribunal viewed the instalments as capital gains rather than income. The Accountant Member considered the excess realized as income. The third Member agreed with the Judicial Member, stating that the bonds were non-interest bearing and thus, no interest could be presumed. The court, however, concluded that the nature of the transaction indicated that the assessee's investment was intended to yield income. The annual instalments received by the assessee were seen as payments of capital coupled with interest. Consequently, question No. 2 was also answered in the affirmative and in favor of the revenue.Conclusion:Both questions were answered in the affirmative, indicating that the annual instalments received by the assessee from both types of bonds included an element of income, which was taxable. The court emphasized analyzing the transaction from a commercial point of view, considering the investment's intention to yield income. There was no order as to costs.