Taxation of discounted bond interest and section 54E relief turned on accounting treatment and reasoned consideration of objections.

Discounted interest on IDBI Capital Bonds was considered in relation to the assessee's accounting method, with the dispute centred on whether the full interest of Rs. 47,000 was taxable on receipt or only the accrued portion for the relevant year. The assessee had invested land-sale proceeds in the bonds and claimed exemption under section 54E(1) of the Income-tax Act, 1961. The authorities below did not address the objections with a reasoned discussion, and the assessee's claim was accepted. The addition was not sustained.

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Issues: Whether the discounted interest received on IDBI Capital Bonds was liable to be taxed in the year of receipt on the basis of the assessee's accounting method, and whether the assessee's claim for relief under section 54E was entitled to be accepted on the facts of the case.

Analysis: The assessee had invested sale proceeds of land in IDBI Bonds to claim exemption under section 54E(1) of the Income-tax Act, 1961. The controversy was whether the entire discounted interest of Rs. 47,000 was taxable in the year of receipt or whether only the accrued portion for the relevant year could be brought to tax, in view of the assessee's claim that he followed a hybrid system of accounting. The authorities below did not meet the assessee's objections with a reasoned discussion.

Conclusion: The assessee's claim was accepted and the addition was not sustained.

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