TaxTMI 
TaxTMI 
2013 (11) TMI 924
X X X X Extracts X X X X
X X X X Extracts X X X X
....dication and the findings recorded hereunder in the said case would be applicable to the appeals of other assessees under consideration as well. 4. The first and the last grounds raised in all these appeals being general in nature and no specific issues involved, they have become inconsequential. The issue of charging of interest u/s 234B of the Act is not maintainable as it is mandatory and consequential in nature. The issue of initiation of penal proceedings u/s 271(1)(c) of the Act raised in all the appeals is also not maintainable as it was in its infancy when the AO concluded the assessments. The remaining grounds are reformulated, in a concise manner, as under: The learned CIT (A) had erred in - (i) confirming the stand of the AO in holding that the method of accounting as mercantile as against cash method of accounting regularly followed by the assessee; (ii) upholding the stand of AO in considering the Long Term Capital Gain [LTCG] of Rs.1,19,00,000/- arising on transfer in pursuance to re-purchase of 700 Deep Discount Bonds (DDB) Series -A issued by Nirma Limited as interest income; (iii) upholding the stand of the AO in not allowing the claim of Rs.1.19 cro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the Act, the assessee contended that his method of accounting should only be treated as cash method on regular basis. However, the AO had rejected the assessee's contentions and considered the method of accounting followed by the assessee to be of 'mercantile method' by holding that the assessee was bound to follow the same method of accounting on continuous basis and he was not permitted to change the same. 5.2. On appeal, the learned CIT (A) upheld the stand of the AO by observing as under: "(On page 6) I have considered the submissions of the appellant. I do not find any force in them due to the following reasons- (i) the appellant is not correct in stating that mere fact that no appeal has been filed in the case of the appellant's Block Period assessment by the appellant challenging the method of accounting adopted as mercantile by the AO, should not be a ground for adopting the same method of accounting by the AO in AY 2002-03 assessment order. Firstly, the appellant having missed the bus by not filing an appeal against the block period assessment order, cannot take advantage of his own negligence and then blow hot and cold later. (ii) No doubt the AO cannot force ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he earlier Bench of this Tribunal in the case of Kishan Discretionary Family Trust v. ACIT in ITA No.1850/Ahd/2007 dated 2.11.2007 [courtesy: P 7 - 61 of PB - 'B']. The relevant portion of the finding of the Tribunal is as under: "(On Page 65) 27. Therefore, the assessee on its part, in our opinion, succeeded in establishing the change of bona fide because it has ceased to have any business income and had adopted the change well before the search as well as completion of assessment for block period and also before coming of Circular of No.2 of 2002 on the Statute. Since the assessee has followed the same system in all the subsequent years, we see no reason as to why the assessee's choice/preference to adopt the changed system of accounting be not accepted. In view of the totality of the facts and circumstances of the case as well as settled provisions of laws discussed hereinbefore, we are of the opinion that the assessee had right to adopt the changed system of accounting and by changing the system of accounting from mercantile to cash was a bona fide change." 5.4.2. In conformity with the findings of the co-ordinate Bench of this Tribunal (supra), this issue is decided in f....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... companies i.e., Nirma Limited, the company which issued DDBs and the IFCI Limited as trustee. Nirma Limited issued the Certificate of holding to the assessee on 10.5.2001. This DDB Series - A of Nirma Limited was listed in National Stock Exchange on 20.9.2001 and was made available for dematerialization as on 24.9.2001. Though the letter of allotment was issued to the assessee as on 23.9.2000 for 1936 DDBs and on 5.3.2001 for 155 DDBs, the Certificate of holding could be issued to the assessee as on 10.5.2001. Since the 700 DDBs of Nirma Limited had been re- purchased by it, the income on the same was interest income. For the rest of the DDBs since the Letter of allotment was different in its nature and character, the sale of this scrip can be considered to have taken place only from the date of issuance of certificate of holding and, therefore, the assessee was asked to explain as to why this gain should not be considered as STCG since the assessee was given ownership of these DDB Series - A of Nirma Limited on 10.l5.2001 as per the terms of Debenture Trust Deed dated 27.4.2001 and the same were sold on 19.3.2002. 6.3. On 700 DDBs of Nirma Limited, the same were repurchased by....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in a security accrues on annual basis even though the expenditure may not accrue in the hands of the issuer of the security. In case of Nirma Group, the story is exactly opposite. Nirma Limited, the issuer of DDB Series -A had claimed the interest expenditure on accrual basis, though the liability had not arisen before the maturity date and the holders of DDBs of this Group have not offered the gain on these securities which was automatically accruing in the same because of their high liquidity and nearing down of the maturity date. 6.7. After taking into account of the assessee's submission as recorded in the impugned order, the AO disallowed the claim of the assessee for LTCG of Rs.1,19 crores and treated the same as interest income on re-purchase of 700 DDBs Series - A of Nirma Limited dated 1.10.2001 by observing that - "(on page 28) 5.6............................................................................... The above contentions of the assessee are not tenable. The observation of the assessee that debenture per se is a bundle of rights is correct but the final nature and character of these debentures has emerged only after signing of debenture trust deed dated 27.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n the reasoning that - "(on page 10) I have considered the above submissions and do not find any force in them. The tax treatment given by Nirma Ltd by deducting TDS and mentioning the nature of payment as 'interest' other than interest on security has a direct bearing on the issue. Interest income by the payer cannot suddenly turn into capital gain in the hands of the payee without proper explanation It is seen that all the other arguments taken by the appellant have been dealt with in the appellate order No.CIT (A)-I/CC 1(1)/35/05-06 dated 2.3.06 in the case of Karsanbhai K Patel (HUF) for AY 2002-03 and Harsiddh Specific Family Trust appellate order No.CIT (A)-I/CC 1(1)/46/05-06 dated 7/3/06 for AY 2002-03. it is also seen that the appellant has mixed up the written submissions regarding ground of appeal No.4(b) vis-a-vis the grounds of appeal, since the written submissions on page 14 refer to the addition of 119 lakhs on re-purchase of 700 DDBs of Nirma Ltd whereas the ground of appeal No.4(b) refers to the different addition of Rs.3,01,35,849/- and not Rs.119 lakhs [ground of appeal No.4(a)]. This only proves the confusion in the submissions. In view of the above discuss....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lar No.2 of 2002 which was issued by the CBDT on 15.2.2002 is not relevant for deciding the present appeal because as rightly pointed out on behalf of the assessee, the AO himself did not apply the Circular to hold that the surplus arising on the sale of the bonds should be treated as interest. He has himself assessed the surplus as capital gains. The dispute is only whether they are long term capital gains as contended by the assessee or short term capital gains as contended by the revenue. A short term capital asset is defined by section 2 (42A) as a capital asset held by an assessee for nor more than 36 months immediately preceding the date of its transfer. There is a proviso to the sub- section which was inserted by the Finance Act, 1987 w. e. f. 1.4.1988. The said proviso says that in respect of the capital assets mentioned therein, they would be treated as short term capital assets, if they are held for a period of not more than 12 months. A long term capital asset has been defined by section 2 (29A) of the Income-tax Act as meaning a capital asset which is not a short term capital asset. The result is that in the case of the capital asset specified in the proviso to section ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Allotment are set out overleaf and are to be regarded as forming part of the conditions of this Letter of allotment. By order of the Board of Directors, Revenue stamps For Nirma Limited Sd/- Hasit Shukla Company Secretary" A bare perusal of the letter of allotment shows that the company has certified that the person named therein as the last transferee is the holder of 1180 deep discount bonds - series A, each of Rs.1,00,000/-. It is also to be noted that the distinctive numbers of the bonds have been given in the allotment letter itself. The assessee has been shown as the holder of the bonds with the registered folio number. The reverse of the letter of allotment contains as memorandum of transfer of the bonds. This is blank and obviously so because the assessee is the first allottee of the bonds. Item No.1 of the instructions below the Memorandum of transfers says that 'transfer of DDB- Series A comprised in the Letter of allotment will be registered by the company upon surrender of this Letter of Allotment with duly completed transfer deed'. Item 2 says that 'this letter of allotment should be preserved by the Holder(s) carefully. DDB-Series A certificate(s) will be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tock Exchange Assn. [AIR 1964 SC 250] in which the Supreme Court has quoted the observations of the chancery Division in England in the case of Florence Land and Public Works Co., In re (1885) 29 Ch D 421. It was observed in the English case that an allotment is generally neither more nor less than the acceptance by the company of the offer to take shares. It has further been observed that when the offer is accepted by the company, it constitutes a binding contract to take that number of shares according to the offer and acceptance. Extending the logic to the allotment of deep discount bonds or debentures, it seems to us that when the letter of allotment was issued by Nirma Ltd on 23.9.2000 there was a binding contract between the company and the assessee and the relationship of debtor - creditor came into being. At page 607 of the above treatise, in the commentary relating to section 69 of the Companies Act which prohibits allotment of shares unless the company receives the minimum subscription, it has been observed that 'the mere subscription to shares in a company does not constitute a subscriber a shareholder of the company; he acquires the status of shareholder and the right t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Exports & Investments P. Ltd (supra) also support the above proposition. 18. Having held that the assessee cannot be said to have acquired the bonds on the date of issue of the bonds certificates (10.5.2001), we now proceed to consider the contentions of the revenue that since the bonds were listed in the NSE only on 20.9.2001, that is the date on which the assessee can be said to have started holding them. This contention is based on the proviso to section 2(42A). According to the revenue since it is a condition that the capital asset in question, being a security, should be listed in a recognized stock exchange in India, the date on which the security was listed in the stock exchange alone can be taken as a the starting point for computing the holding period. The difficulty in accepting the contention of the revenue is that there is no indication in the proviso that the security viz., the bonds should be listed in a recognized stock exchange in India at both points of time viz., when they are acquired by the assessee and when they are sold. It seems to us that we have to only see that the condition stands satisfied at the point of time when the security is sold and it hardly m....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s v. CIT (supra) which has also taken the same view following the Hon'ble Gujarat High Court's view. The result is that the stand of the revenue that the assessee can be said to have acquired the capital asset viz., a security listed in a recognized stock exchange, only on 20.9.2001 when the bonds were listed in the NSE cannot be accepted as sound. 19. The learned CIT-DR had referred to clauses (d) and (f) of Explanation 1 of section 2 (42A). The said Explanation provides for the computation of the period for which any capital asset is held by the assessee. Clause (d) says that in the case of share or any other security subscribed to by the assessee on the basis of his right to subscribe to the same or subscribed to by the person in whose favor the assessee has renounced his right to subscribe to the share or the security, the period of holding shall be reckoned from the date of allotment of the share or other security. We are unable to appreciate the relevance of this clause to the controversy before us. The clause applies only to a share or other security subscribed to by the assessee on rights basis. It says that if the assessee has subscribed to the share or the security on ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... document which acknowledged the debt due to the assessee, but, there was no change in the nature and character of the asset itself. We may again refer to the judgment of the Hon'ble Gujarat High court in the case of Ranchhodbhai Bhaijjibhai Patel v. CIT (supra) where it was held that the property can be acquired only once and when it became a capital asset within the meaning of the Income-tax Act, what happens is merely that its character changed in the sense that whereas it was a non-capital asset at the time of acquisition, it became a capital asset later. It seems to us that clause (f) would apply to a case where there are two separate and distinct capital assets, as rightly pointed out on behalf of the assessee, and one is exchanged for the other. It is only in such a case that in respect of the second financial asset, the period of holding shall be reckoned from the date of allotment thereof. We are, accordingly, with respect, unable to give effect to the argument of the learned CIT-DR based on the said clause. 21. It now remains for us to consider the argument of the Department that the rights of the assessee as a bond holder became crystallized only when the debenture tr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nguished on the same footing. In this case, the assessee held equity shares since 1965 and in 1971 these shares were exchanged for new types of equity shares and irredeemable cumulative preferential shares. These shares were sold in 1976 and the assessee suffered as loss. It was held that the loss was a short term capital loss since the new types of equity shares and irredeemable cumulative preferential shares allotted to the assessee in 1971 had rights and liabilities which were different from the shares held by him prior to 1971. As can be seen from the facts, this judgment is also distinguishable from the present case since two distinct and separate capital assets were involved in the cited case. 24. The order of the Bangalore Bench of the Tribunal in the case of Giridhar Krishna (supra) also turned on different facts. There the assessee was given a stock option under the employees' stock option scheme [ESOP]. Under the scheme, the assessee was vested with right to purchase certain number of shares within certain period. This option was exercised by the assessee on 7.11.2002. The shares were sold on 18.5.2003. The assessee claimed that the capital gains arising on the sale of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d CIT (A) was not justified in sustaining (i) the addition of Rs.1.19 crores by treating the same as interest income on re-purchase of 700 DDBs and, consequently (ii) confirming the disallowance of Rs.1.19 crores being the assessee's claim u/s 54EC of the Act. In essence, both the issues are decided in favour of the assessee. It is ordered accordingly. 8. Treating of LTCG of Rs.3,01,35,849/- on sales of 1391 DDB of Nirma Limited as STCG & Not-allowing of deduction u/s 54EC on LTCG of Rs.3.01 crores [Ground Nos.5 & 6]: The facts relating to these grounds are that the assessee sold the balance 1391 DDBs on 19.3.2002 at a consideration of Rs.16,98,95,209/- @ Rs.1,12,139/- per bond. The learned AO considered the income generated from the sale of 155 DDBs Series - A of Nirma Limited which were purchased from Nirav Discretionary Family Trust as STCG which comes to Rs.1,89,31,545/-. Further, it was observed by the AO that out of these 155 DDBs, the assessee purchased 87 DDBs on 5.11.2000 at Rs.89,17,500/- and the balance of 68 DDBs were purchased on 28.2.2001 at Rs.72,42,000/-. Therefore, the AO computed the STCG on the same at Rs.27,72,045/-. Further, it was noticed that the assess....
X X X X Extracts X X X X
X X X X Extracts X X X X
....00/- u/s 54EC of the Act. It is ordered accordingly. 9. Addition of accrued interest of Rs.48,83,858/- on 1250 DDBs of Nirma Limited - Series B [Ground No.7]: The AO had observed that 1250 DDBs each of Rs.1,00,000/- of Series-B were allotted to the assessee, the maturity value of which after 20 months was at Rs.1,15,500/-. The assessee was queried to explain as to why the interest earned on these DDBs should not be added to his income. It was also the stand of the AO that as per the Board's Circular dated 15.2.2002, the assessee should have offered interest on accrual basis irrespective of what method of accounting was adopted by him. As the AO did not find the assessee's explanation to be cogent, he computed the interest on the basis of discounted price as on 31.3.2002 at Rs.12,98,83,858/- and, accordingly, calculated the accrued interest/gain on the same at Rs.48,83,858/-. The same was added to the income of the assessee. 9.1. When the matter traveled in appeal to the CIT (A) for relief, the CIT (A), however, rejected the assessee's contentions by observing that - "(On page 11) This issue is covered by the appellate order No. CIT(A)- I/CC1(1)35/05-06 dated 2.3.06 in t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... not applicable in the case of the assessee since it was related to DDB. The AO had, further, held that the nature of OFCPN and DDBs being similar and, hence, the Board Circular (supra) was applicable in the case of OFCPN also. Accordingly, an addition of Rs.1,13,123/- on account of accrued interest income on OFCPN of Nirma Industries Limited was added. [Refer Paras: 3 - 3.1 of the Asst. order]. 10.1.4. It was the case of the learned A R that the investment in OFCPN of Nirma Industries Limited was made by the assessee on 25.3.2002 and the income earned thereon was duly offered as a precautionary measure on 11.8.2004. It was, further, submitted that the AO made the addition of Rs.1.13 lakhs on account of accrued interest income based on the Board's Circular (supra), which, according to the learned AR, has no relevance and, hence, the same requires to be deleted. 10.1.5. The learned DR, relying on the stand of the AO, submitted that the Board's Circular (supra) is a valid Circular and, hence, the stand of the AO requires to be upheld. 10.1.6. At this juncture, we would like to recall that the earlier Bench of this Tribunal had, vide its order dated 9.10.2009 in the case of K....
X X X X Extracts X X X X
X X X X Extracts X X X X
....be assessed on accrual basis. The Circular No.2 of 2002 cannot override the provisions of section 145(1) and on the basis of the Circular; the interest cannot be assessed on accrual basis in the case of an assessee following the cash system of accounting. For this reason, we all the additional ground and hold that the interest of Rs.2,11,535/- cannot be assessed in the year under appeal."[Courtesy: P 62 - 87 of PB marked 'B'] 10.1.7. As the facts and circumstances of the present issue and that of the issue which has been decided by the Co-ordinate Bench of this Tribunal (supra) are identical, we hold that the interest of Rs.1.13,123/- cannot be assessed in the hands of the assessee in the year under consideration. The addition made by the AO is, accordingly, deleted. 11. In the result: the assessee's appeal for the assessment year 2002-03 is partly allowed. 12. In view of our above findings with regard to the additional ground raised by Shri Hirenbhai K Patel [ITA No.1252/Ahd/2006 - AY 2002-03] relating to the addition of accrued interest income on OFCPNs of Nirma Limited, the common additional ground raised by all other assessees in their appeals under consideration is al....
X X X X Extracts X X X X
X X X X Extracts X X X X
..../- as on 20.3.2002 for the interest amount of Rs.22,50,000/-. Since the difference of sale consideration and purchase cost was Rs.2.5 lakhs, the assessee offered the same as STCG and claimed to be eligible for credit of TDS of Rs.2,29,500/- already deducted. 14.2.1 In respect to DDBs of Shree Developers Pvt. Ltd., the AO observed that 7 DDBs of the said party each of Rs.50 lakhs, totaling to Rs.3.5 crores were originally allotted to Nirma specific Family Trust and the letter of allotment was transferred to the assessee on 18.1.2001 for total consideration of Rs.3,81,50,000/-. The debenture certificate was issued by Shree Developers Pvt. Ltd to the assessee on 27.7.2001. These were re-purchased by Shree Developers Pvt. Ltd on 20.3.2002 at Rs.3,81,50,000/- @ Rs.54,50,000/- each DDB by deducting TDS of Rs.3,21,300/- on the total interest amount of Rs.31,50,000/-. Since the difference of sale consideration and purchase cost is nil, the assessee claimed the same as STCG and claimed credit of TDS of Rs.3,21,300/- already deducted. 14.2.2. From the above transactions, the learned AO observed that the DDBs were re-purchased by the assessee from the original issuer. Therefore, as per ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....titled to the benefit. The aforementioned situation had been made further clear by CBDT Circular No.2 of 2002 by issuing Guidelines. One of the guidelines in the CBDT Circular is that the TDS is to be made at the time of maturity of the bond and it is to be issued to the holder of the bond at the time of maturity. It was undisputed fact that the TDS Certificate was issued in the name of the assessee being holder or owner of the bond at the time of maturity. Therefore, the case of the assessee was covered by the expressions 'owner of the property' or 'the unit holder' which were added in section 199 with effect from 1.4.1997. Therefore, the views taken by the Commissioner (Appeals) as well as the Tribunal were the correct views." 14.2.4. In conformity with the ruling of the Hon'ble Court (supra), this issue with respect to TDS is decided in favour of the assessee and accordingly, credit for TDS shall be granted to the assessee, if the TDS certificates stand in the name of the assessee and the TDS amount is deposited in the government treasury. 15. ITA NO.1250/Ahd/2006-Banihal Holding Pvt.Ltd. A.Y 02-03: Other than the common grounds which have been dealt by us in the case o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ns: (i) The AO has recorded a finding in the assessment order in para 7 that the dividend income is exempt under section 10(33) of the I.T. Act. Against such an exempt income, section 14A does not allow any deduction of expenses; (ii) The AO has recorded a finding the assessment order that the interest expenses and other expenses have been incurred by the appellant against exempt income in the nature of dividends income and agricultural income; & (iii) Against short term capital gains also, such expenditure is not admissible." 15.3. During the course of hearing, the learned A R had, by extensively quoting the provisions of s. 14A of the Act, contended that the section speaks about expenditure in relations to income and not stand alone expenditure; and that the section very clearly and categorically speaks about the allow-ability of expenditure which was incurred only and only to the extent in relation to the income. With regard to the interest expenses of Rs.1,50,754/-, it was explained that the same was incurred mainly on borrowing for repayment of loan which was availed for investment in DDBs of Nirma Limited - Series A. Thus, it was argued, the interest expenditure w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....that purpose it is necessary to appoint clerical staff and secretary or accountant and incur incidental expenses. In this background, the conclusion of the Tribunal that the expenses incurred were wholly and exclusively for the activities to earn income was a reasonable conclusion." Further, the Hon'ble Court, following its own decision in CIT v. Savan Sugar & Gur Refining Co., Ltd (supra) and the ruling of the Allahabad High Court in the case of CIT v. Rampur Timber & Turnery Co. Ltd (supra), had decided that a limited company, even if it does not carry on business and merely derives income from other sources has to maintain its establishment for complying with other statutory requirements so long as it is in operation and, therefore, the expenses on establishment etc., incurred are wholly and exclusively for the activities to earn income and, hence, are allowable deduction in computing income from other sources. (ii) The Hon'ble High Court of Punjab & Haryana had, in the case of Nakodar Bus Service (P) Ltd v. CIT (supra) in conformity with the Allahabad High Court's ruling in the case of CIT v. Rampur Timber & Turnery Co. Ltd (supra) held that 'the assessee was entitled to ded....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ad traveled to the CIT (A) for relief, the CIT (A) had observed as under: "[On page 5] All the grounds of appeal have been dealt with in the appellate order No. CIT (A)-I/CC-1(1)/46/05-06 dated 7/3/06 for AY 2002-03 in the case of Harsiddh Specific Family Trust and Shri Karsanbhai K Patel (HUF) for AY 2002-03 in appeal No.CIT(A)-I/CC 1(1)/35/05-06 dated 2/3/06. Hence, following the above appellate orders, Ground of appeal No.1, 2 to 11 are dismissed and ground of appeal No.3 is partly allowed." 16.3. Before us, the learned AR reiterated more or less what was presented before the authorities below. In furtherance, the learned AR drew the attention of this Bench to the rulings of the Hon'ble jurisdictional High Court in the cases of (i) CIT v. Deepak Family Trust No.1 and others reported in 211 ITR 575 (Guj) and (ii) in DCIT v. Harjivandas Juthabhai Zaveri and another reported in 258 ITR 785 (Guj) to drive home his point that the status of the assessee is to be ordered to treat as 'individual' as against 'trust'. 16.3.1. On the other hand, the learned D R supported the findings of the authorities below. 16.4. We have carefully considered the rival submissions and also per....
X X X X Extracts X X X X
X X X X Extracts X X X X
....firmed the order passed by the Appellate Assistant Commissioner and dismissed the appeal." 16.4.3. In conformity with the ruling of the Hon'ble Court (supra) and also neither the AO nor the first appellate authority for that matter have precisely spelt the reasons for adopting the assessee's status from 'individual' to 'trust', the issue is decided in favour of the assessee. It is ordered accordingly. 17. Ground No. 12 - Learned CIT(A) has erred in disallowing interest expenses of Rs.20.72 lakhs & service charges of Rs.3.15 lakhs u/s. 14A of the Act: The AO has observed in the assessment order as under: "10. Without prejudice to the observations made above, the following observations are also made in this case. In this case from the statement of income it has been found that the assessee has claimed the interest exp and the service charges against the LTCG. But the same cannot be claimed since these claims are not available against the capital gain as per the Act. And from the careful analysis of the balance sheet and the P & L a/c, it is clear that the assessee has invested the funds on the securities. In the assessment order, the income from the other sources arisi....