TaxTMI 
TaxTMI 
2007 (11) TMI 622
X X X X Extracts X X X X
X X X X Extracts X X X X
....appellant's case, the learned CIT(A) has grossly erred in confirming the addition of notional interest of Rs. 77,95,691 on investment in optionally fully convertible premium note of Nirma Industries Ltd. 5. In law and in facts and circumstances of the appellant's case, the learned CIT(A) has erred in not dealing with following additional ground: In law and in the facts and circumstances of the appellant's case, if addition of Rs. 24,03,33,662 made in respect of various investments is confirmed, either whole or in part, direction should be given that the same should not be taxed in the subsequent year in the year of receipt. 6. In law and in facts and circumstances of the appellant's case, the learned CIT(A) has erred in confirming levy of interest under Sections 234A, 234B, 234C and 234D of the IT Act. 7. Your appellant craves leave to add, alter, amend, omit all or any of the above grounds of appeal, till the appeal is finally heard and decided. 2.1 The brief facts which are relevant for decision of all the issues and as have been revealed from the records are that the assessee, which is a family trust, was having income from ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ting was mentioned the AO as "mercantile". 2.9 The assessee did not appeal against the assessment for block period because assessed undisclosed income was 'nil', but thereafter, moved an application under Section 154 of the Act dt. 23rd March, 2005 stating therein that the assessee's system of accounting being cash system and the AO having mentioned the system as mercantile system without allowing the assessee an opportunity of being heard requires rectification, but the same was rejected by the AO as per his order dt. 20th Sep., 2005 (copy of which is available at page No. 61 of the assessee's paper-book) and reads as under: Order under Section 154 of the IT Act, 1961 The assessee has pointed out vide his application dt. 24th March, 2005 that in the block assessment order passed under Section 158BC of the Act, the method of accounting has been taken as mercantile though the assessee has followed cash method of accounting. Moreover, it has been pointed out that no opportunity of being heard has been granted to the assessee in the block assessment proceedings in this issue. 2. In this regard, the contention of the assessee that this is a mista....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 2nd Feb., 2006, wherein the AO, first of all, adopted the method of accounting as "mercantile" as per his observations contained in para No. 3 of the assessment order which reads as under: 3. Method of accounting: From the notes forming part of the Rol, it has been found that the assessee has mentioned that it is following the 'cash' system of accounting. But from the block assessment order dt. 30th June, 2000, it has been found that the AO has considered the method of accounting in the case of the assessee as 'mercantile'. The assessee has not filed any appeal before learned CIT(A) against this order. In the asst. yr. 2002-03 the method of accounting was considered to be 'mercantile' due to the same. The appeal of the assessee is still lying before learned CIT(A), in this issue in asst. yr. 2002-03, therefore in this year also on consistent basis, method of accounting is considered as 'mercantile'. 3.4 The AO further proceeded to deal with the applicability of Circular No. 2 of 2002 [(2002) 173 CTR (St) 217] and after allowing the assessee an opportunity of being heard held the Circular No. 2 of 2002 to be valid in law and appl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r: 7. Claim of consultancy of Rs. 10.30 lacs and accounting charges of Rs. 5.25 lacs against brokerage income of Rs. 66,918. From the Rol filed by the assessee it has been found that the assessee has shown brokerage income of Rs. 66,918 and claimed the consultancy of Rs. 10.30 lacs and accounting charges of Rs. 5.25 lacs against this income. In the notice dt. 25th Nov., 2005 the assessee was asked to explain as to why such huge expenses have been claimed which are not at all commensurate to the business income earned by the assessee, these can also not be claimed against the accrued income/ capital gains arising from the DDB/NCD REC bonds. The relevant part of this notice is as under. From the statement of income it has been found that you are earning brokerage income of Rs. 66,918 only. The expenditure on consultancy and accounting charges are Rs. 10.3 lacs and Rs. 5.25 lacs respectively. Justify that this expenditure is for brokerage income. So far as capital gain is concerned, no such deductions are allowed. Explain as to how accounting charges are related to the earning of brokerage income, as is so meager. If you fail to prove that these exp. have be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income. To sum up, we submit that the expenditure incurred for the purpose of protecting the assets of the trust and necessity of making such expenditures arise out of commercial expediency and are definitely expenditures incurred for the purpose of making or earning of income. Further, the expenditure incurred is not in the nature of capital expenditure or in the nature of personal expenses. The same is laid out or expended in the relevant previous year and not in any prior or subsequent year and therefore the same is clearly allowable as per the provisions of Section 57(iii) of the IT Act. Your good office has referred to the meagerness of the income earned referring to brokerage income of Rs. 66,918. In this regard, we request reference to the computation of income attached to revised return of income filed on 31st March, 2004, from the perusal of which it is evident that your assessee has also offered interest of Rs. 77,95,691 on OFCPN of Nirma Industries Ltd. without prejudice to the validity of the Circular No. 2 of 2002 dt. 15th Feb., 2002 [(2002) 173 CTR (St)....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er this observation of the Court, there can be any scope for controversy in regard to the interpretation of Section 57(iii). In view of above, the expenses claimed are allowable. 7.2 It has been contended that the consultancy charges of Rs. 10.30 lacs have been paid mainly for the income in matters for preparing return of income under IT Act and attending the assessment for the year ended on 31st March, 2002. In this regard it is reiterated that the brokerage income against which these charges have been claimed does not require such expenditure. Secondly the income from other sources which has been offered by the assessee in the revised return of the income is basically due to the Circular No. 2 of 2002 in respect of the OFCPN of Nirma Ind. Ltd. Therefore it is very clear that for earning such income there is no need of any consultancy for which Rs. 10,30,000 has been claimed. Moreover Nirma Ind. Ltd. is the group concern of the Nirma group and the assessee also is one of the entities of the Nirma group. Not only the assessee but most of the group concerns have purchased these OFCPNs, for purchasing the same there was no need to pay such a huge amount. Thirdly, no....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... has been earned is from the investment and that is due to the assets already owned by the assessee. From the activities of the assessee also, it is clear that these expenditure have not been incurred wholly and exclusively for the purpose of the business of the assessee. 7.5 The assessee has also tried to justify the claim of the expenditure Rs. 5,25 lacs paid to Nirma Management Services (P) Ltd. which is the group concern of the Nirma group for consultancy in the investment, taxation and other related services. This argument is misleading since from the careful perusal of the Rol, it is clear that there is no need of such expenditure. The income earned by the assessee is from brokerage of Rs. 66,918 and STCG and due to Circular No. 2 of 2002 these require no such expenditures. Thus again it is clear that these expenditures have not been incurred wholly and exclusively for the purpose of the business. 7.6 The assessee has tried to justify the claim of these expenditure under Section 57(iii) but it is noteworthy that this section requires stricter norms, since expenditure in the case must have been incurred for earning such income. It is needless to say that the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Theatres (P) Ltd. [1979] 8 CTR (Bom) 134 : [1980] 122 ITR 240 (Bom); (iii) Smt. Sushila Devi Rampuria v. CIT [1981] 21 CTR (Cal) 311 : [1982] 137 ITR 272 (Cal); (iv) Rambilas Chandram v. CIT [1985] 156 ITR 344 (Raj); (v) Pratap Cotton Trading Co. v. CIT [1985] 49 CTR (Raj) 41 : [1986] 159 ITR 926 (Raj). In the light of the above observations, the additions of the these amounts are made in the hands of the assessee. 4. On appeal by the assessee, the CIT(A) decided the issue with respect to assessee's claim of system of accounting as per first para of 3.1 of the appellate order, which reads as under: 3.1 So far as the claim that the appellant's method of accounting is cash method and not mercantile method of accounting is concerned, I observe from the submissions of the appellant itself that as per order dt. 7th March, 2006 passed by the CIT(A)-I, Ahmedabad in appellant's own case for asst. yr. 2002-03 it has been held that the assessee was not justified in claiming that it follows cash system of accounting and, therefore, mercantile system of accounting cannot be applied. Though this order is claimed to be subject-matter of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he current PLR and the appellant can recover the accrued value of interest by selling the same at any time. CBDT's Circular No. 2 of 15th Feb., 2002 explains in detail the method for arriving at the discounted value or maturity value of bonds and determining the accrued income. Therefore the contention of the assessee, that there is no income which has accrued is not correct. The circular came into existence on 15th Feb., 2002. It is clearly stated in circular that the income is considered to be arising on 31st March every year for DDB holders. Therefore, the income in this case is also to be recorded by the assessee on 31st March, 2003 on the basis of the prevailing market value as on 31st March, 2003 on the DDB over the FV/PV as the case may be. Therefore the contention that the AO has applied the circular with retrospective effect is not correct as the circular was published before the date of accrual of income. Moreover, the press note nowhere exempts the DDB holders of such bonds which were issued prior to 15th Feb., 2002. The contention of the assessee that since the appellant is following cash method of accounting and therefore the Circular No. 2 of 2002 is not ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Supreme Court decision in Goetze (India) Ltd. v. CIT [2006] 204 CTR (SC) 182 : [2006] 284 ITR 323 (SC). Apart from this, from the papers whose copies are filed with the assessee's submissions dt. 13th Feb., 2002 to this office the said DDBs were issued on or about 7th June, 2002 and certainly after 15th Feb., 2002. On the basis of information and papers furnished by the assessee even by applying the principles of the Circular No. 2 of 2002 dt. 15th Feb., 2002 for the DDBs issued on or after 15th Feb., 2002 the inclusion of the said sum of Rs. 77,95,691 in the total income first by the assessee and then by the AO does not call for any interference. In other words, the corresponding claim made in the grounds of appeal is rejected. 3.3 As far as the reliance placed on the decision of the CIT(A) Mumbai is concerned, I am of the view that as discussed in the appellate order in the case of Nirma Chemical Works Ltd., the addition is to be confirmed and hence respectfully I disagree with the decision of CIT(A), Mumbai. 4.2 The issue relating to disallowance of assessee's claim of expenditure of Rs. 10.30 lacs and Rs. 5.25 lacs has been decided in favour of assessee an....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (ii) It was, further, submitted that for the year ending on 31st March, 2001 i.e. asst. yr. 2001-02, appellant filed its return of income (pp. 167-169) along with tax audit report (pp. 155-166) where on p. 157, it was clearly stated that its method of accounting was cash. Since no order of assessment was passed on this return therefore, the return and system of accounting stand accepted by virtue of the provisions of Section 144(1)(a) of the Act. (iii) The Authorised Representative further submitted that for asst. yr. 2002-03, i.e. accounting year 2001-02, appellant filed its return of income (pp. 170-173) and in notes to its accounts (p. 173 note 4) it was categorically stated that it is following cash method of accounting. (iv) The Authorised Representative further submitted that in its return of income for the current asst. yr. 2003-04 (pp. 54-55 note 3) also, appellant stated that it is following cash method of accounting. The said return was revised (pp. 56-57) wherein also appellant stated that (p. 56 note 3) that it is following cash method of accounting. (v) According to him, the whole controversy arose because of a non-issue. Search took place o....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Hon'ble Tribunal. (viii) Apart from the controversy as to the method of accounting, controversy pertains to the question as to whether appellant is liable to pay tax on interest alleged to have accrued to it. This issue is in two parts and therefore, considered separately. However, before discussing controversy in two parts, cause of controversy needs to be stated. The Authorised Representative, therefore, submitted that the appellant has invested amounts in the purchase of financial instruments. Majority [ICICI Bonds, Deep Discount Bonds (DDBs) of ILFS and Optionally Fully Convertible Premium Notes (OFCPNs) of Nirma Industries Ltd.] are of the nature where fixed amount is given at the beginning and for a specified period and at the end of the specified period, fixed amount is being paid by the issuer. The value at which the bonds are issued, period for which bonds are to be issued and price at which it would be redeemed are given in the table below: Nature of Bond Page Nos. Issue Price Tenure Redmption price Unsecured Bonds in the nature of Debentures (Capital Gains Deep Discounts Bonds)-Issued by ICICI Ltd. 11 to 14 Rs. 67,267.35 each 3 ye....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... would be treated as short-term capital asset irrespective of period of holding as income on a year to year basis till 31st March prior to the date of redemption has already been taxed as interest income. (iii) It was clarified by a press note dt. 20th March, 2002 (pp. 44-45) that earlier Circular dt. 15th Feb., 2002 did not have retrospective effect and does not seek to impose modified treatment to existing bond holders. Present appeal involves the question of validity of the interpretation of these circulars. Some of the DDBs are acquired by the appellant after the second Circular dt. 15th Feb., 2002. Therefore, question would arise before the Tribunal as to the effect of 1st, 2nd and 3rd circular. 7.2 The learned Counsel thereafter, proceeded to argue his case-ground-wise. (i) Ground No. 1: The learned Authorised Representative submitted that this being general, the same is not pressed. (ii) Ground No. 2: Method of accounting The learned Authorised Representative submitted that the case of appellant is that for this assessment year i.e. for asst. yr. 2003-04 ; it followed cash method of accounting whereas the Department claims that appel....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er till eternity appellant has to follow the same method of accounting which is found in the block period. Block period ended on 27th Sep., 2001. We are concerned with asst. yr. 2003-04. There is nothing to show that appellant has to follow the same method of accounting in subsequent period. Further the Revenue has not established even a single transaction which justifies its stand that appellant is following mercantile method of accounting. Barring the disputed items, not a single adjustment of either income or expenditure is made by the AO on the ground that appellant must follow mercantile method of accounting. In other words, what Revenue trying to do is to foist a mixed method of accounting; cash method of accounting for all transactions other than disputed transactions which, Revenue states, appellant must have followed mercantile method of accounting. This is impermissible under law. (c) Third finding given by the learned CIT(A) is that the payer Nirma Ltd. is following mercantile method of accounting. Before we proceed further in the matter, it may be rioted that in relation to other parties namely ILFS, ICICI and REC, neither appellant nor Revenue is aware as to t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t of the grounds 3 and 4 would become academic inasmuch as undisputedly, the appellant has received nothing during the year and therefore, question of making any addition on the basis of accrual of interest would not arise. (iii) Ground Nos. 3 and 5 : Addition of Rs. 24,03,33,662 The learned Authorised Representative submitted that the addition is made on account of interest alleged to have accrued to the appellant on three instruments as stated above. ICICI bonds Rs. 1,697.80 lacs, DDBs of ILFS Rs. 684.54 lacs and REC investment bonds Rs. 21 lacs. Of these three instruments, first two instruments were acquired prior to 15th Feb., 2002 whereas third instrument was acquired after 15th Feb., 2002. In view of this, the submissions are broken up in two parts (A) and (B). (A) Addition of Rs. 23,82,33,662 being alleged accrued interest on ICICI bonds and DDBs of ILFS, purchased prior to the date Circular No. 2 of 2002 came into being: (a) It was submitted that so far as this so-called income is concerned, the same cannot be taxed for following reasons: (i) Appellant is following cash method of accounting and therefore, no income is taxable. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t circular would not apply because of second circular, but the learned Authorised Representative was of the view that for the following reasons, the said argument of the Revenue is incorrect: • As stated in the second circular, the same is to be applied prospectively. See para 4. Third circular itself clarifies that 2nd circular would apply to the instalments issued after the date of second circular. In view of this, Revenue cannot argue that first circular cannot govern when the second circular is issued. • Bombay Tribunal in the group case [Kulgam Holding (P) Ltd.) (pp. 49-53) has accepted appellant's contention that second circular cannot govern instrument prior to the date of second circular. • In any case, it is well-settled that circular of CBDT can be withdrawn only prospectively and not retrospectively. We rely on the following decisions in this regard: (i) Unit Trust of India v. P.K. Unny, ITO [2001] 168 CTR (Bom) 99 : [2001] 249 ITR 612 (Bom); (ii) CIT v. BM. Edward, India Sea Foods [1979] 12 CTR (Ker)(FB) 278 : [1979] 119 ITR 334 (Ker)(FB); (iii) CIT v. Prasad Productions (P) Ltd. [1989] 76 CTR (Mad) 1....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f a provision of the Act by issuing a circular on the subject. It is also well-settled in law that Tribunal is not bound to take judicial notice of the circulars, issued by the Board, as is held in the case of Motor Industries Co. Ltd. v. CIT (1986) 55 CTR (Kar) 36 : (1987) 163 ITR 659 (Kar) by the Hon'ble jurisdictional High Court. It was, therefore, submitted that in view of the above, the second circular is invalid and should not be relied upon. (ii) The Authorised Representative, further, submitted that if the appellant is right in its submission that second circular cannot be foisted upon the appellant the question arises under which provisions of law, the income of Rs. 21 lacs be taxed in the hands of the appellant ? • First contention of the appellant that it is following cash method of accounting and therefore, in absence of receipt, it is not liable to pay tax. • Assuming, without admitting that appellant is not permitted to follow cash method of accounting even then (there) is no accrual of Rs. 21 lacs in favour of the appellant during the year. Bonds do not contain any term as to the right of the appellant to receive intere....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the matter was carried to learned CIT(A), specific ground was raised before him for exclusion of such income. However, learned CIT(A) in para 3.2 of his order holds that inasmuch as appellant had offered this income in the revised return of income, which was not subsequently revised, following the decision of the Supreme Court in the case of Goetze (India) Ltd. v. CIT (supra) appellant is not entitled to plead for its exclusion. He further held that as the investments were subsequent to 15th Feb., 2002, appellant's case is governed by the second circular. (ii) Insofar as second finding given by the CIT(A) namely the acquisition being subsequent to 15th Feb., 2002 the case of the appellant is governed by the second circular, the appellant has already submitted earlier as to why second circular is invalid, illegal and contrary to law. Appellant has also given reason as to why assessment is to be framed independently i.e. income is not required to be taxed. (iii) Coming to the first finding that after offering income in the revised return, which was not withdrawn by the appellant, it is respectfully submitted that the fact that appellant has offered income in th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....unting. Even originally the assessee did not challenge the finding of the AO in the block assessment order about the method of accounting followed by the assessee as being mercantile. As has been rightly held by the CIT(A) while deciding appeal of the assessee for the asst. yr. 2002-03 (kindly refer p. 96 of assessee's paper book) the appellant cannot change the method of accounting arbitrarily and without proper and adequate justification. The learned Authorised Representative has argued that there is nothing in law that after the block period, till eternity the assessee has to follow the same method of accounting. What the learned Authorised Representative says is correct, but the assessee has to state the reasons for the change and justify the change in method of accounting. Even otherwise as per the CBDT Circular dt. 15th Feb., 2002, the assessee has to account interest income on DDBs on accrual basis. Similar types of income for e.g. interest on cumulative deposit schemes of private sector undertakings is taxable on accrual basis annually as per Circular No. 409 dt. 12th Feb., 1985 [(1985) 46 CTR (St) 4 : (1985) 153 ITR (St) 4]. 9.1 With respect to validity and....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... In the case of CIT v. Kerala Financial Corporation [1985] 47 CTR (Ker) 286 : [1985] 155 ITR 228 (Ker), whereas it was held that a letter clarification of the Board in reply to a communication from the assessee or any other person who is not an authority within the meaning of Section 116 cannot be treated as a circular within the meaning of Section 119 and will not be binding on the Revenue authorities. (c) In the case of CIT v. Kerala Financial Corporation Ltd. [1985] 47 CTR (Ker) 297 : [1985] 155 ITR 246 (Ker) it was discussed as to which document can be regarded as a circular. It was held that, To say that a particular document or letter is a circular issued by the Board, it is necessary that the party who presses that into service shall establish that copies of the said letter/document have been sent to the CITs in the various States and that unless copies of the circulars are addressed to the other authorities mentioned in Section 116, the letter/document which is said to be circular cannot be treated as such, (p. 257) (d) In the case of Bharat Vijay Mills Ltd. v. ITO [1985] 45 CTR (Guj) 60 : [1985] 154 ITR 786 (Guj), wherein the Hon'ble Court ha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....have rightly applied the circular. To support the submission, reliance was placed in the following decisions: (a) In the cases of UCO Bank v. CIT [1999] 154 CTR (SC) 88 ; [1999] 237 ITR 889 (SC) and Riper Products IM. v. CCE [2001] 165 CTR (SC) 693 : [2001] 247 UK 128 (SC), wherein it was held that CBDT has power to issue circulars to tone down the rigours of the law and ensure fair enforcement of its provisions. In view of the provisions of Section 119 of the Act, so long as such a circular is in force it would be binding on the Departmental authorities to ensure a uniform and proper administration and application of the IT Act. (b) In the case of CIT v. Jain Construction Co [1999] 156 CTR (Raj.) 290 : [2000] 245 ITR 527 (Rag) wherein it has been held that the CBDT has power to tone down the rigours of the law and ensure a fair enforcement of its provisions by issuing circulars. Such circulars are binding on the authorities in the administration of the Act. 9.4 With respect to the effect of press note dt. 20th March, 2002, the learned Departmental Representative submitted that the learned Authorised Representative has submitted that third letter or clarificati....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e of National Thernval Power Corporation Ltd. v. Union of India [1991] 96 CTR (Del) 140 : [1991] 192 ITR 187 (Del), wherein it was held that opinion of the Central Board of Direct Taxes (CBDT) expressed in its administrative capacity, could, under no circumstances, be binding on the CIT(A) or the Tribunal or the High Court on a reference. 9.5 Effect of circular vis-a-vis assessment year : With respect to applicability of the Circular No. 2 of 2002, the learned Departmental Representative submitted that Circular No. 2 of 2002 dt. 15th Feb., 2002 is on force as on 1st April., 2002, so it is valid for asst. yrs. 2002-03 and 2003-04. According to him, the circular issued by the CBDT as it stands at beginning of assessment year will be applicable, notwithstanding its subsequent modification. Reliance was placed on the decision in following cases: (i) CAT v. Geeva Films [1983] 141 ITR 632 (Ker), wherein it has been held that modifications of the above circular during the pendency of the assessment were not relevant. (ii) Shakti Roj Films Distributors v. CAT [1995] 124 CTR (Bom) 243 : [1995] 213 ITR 20 (Bom), wherein it has been held that if a circular is in force on ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ther submitted that the learned Authorised Representative has relied upon the decision of Chicago Pneumatic India Ltd. v. Dy. CIT (supra). In the cited case of Chicago Pneumatic India Ltd. (supra), the assessee had revised its claim of deduction under Sections 80HH and 801 during course of assessment proceedings which was not accepted by AO but in case of the assessee the facts are different as here assessee had consciously offered the income and thereafter at appellate stage changed its mind and claimed exclusion. Further it is not a statutory deduction as in the case cited by the learned Authorised Representative. Further the Hon'ble Tribunal has held at p. 274 in the cited case that the CIT(A) should have entertained the claim of the assessee if other conditions of the provisions of the law were established. The Tribunal has also observed that decision of apex Court in Goetze India Ltd. (supra) is binding. 10.2 In view of the above submission, it was submitted that the decision of CIT(A) should be sustained. 11. The learned Counsel for the assessee, in rejoinder, submitted that so far as decision relied upon by the learned Departmental Representative is concerned, ther....
X X X X Extracts X X X X
X X X X Extracts X X X X
....accounting? (b) Whether the system of accounting adopted by the Revenue in assessment framed under Chapter XTV-B of the Act, which is the assessment of undisclosed income only upto the date of preparation of last 'Panchnama', in the case in which action under Section 132 of the Act has been taken, can be enforced for future years in regular assessments also, or does the assessee has option to adopt a change in system of accounting ? (c) Whether the Revenue can change the system of accounting disclosed by the assessee in the return of income suo motu without complying with the requirement of the law that the change adopted by the assessee was not bona fide or that the assessee was not following the changed system regularly ? (d) Can the Revenue impose its choice of following a particular method of accounting ? B. (i) The second issue for our decision is the validity of Board's Circular No. 2 of 2002 dt. 15th Feb., 2002. (ii) The third issue for our decision is as to whether Circular No. 2 of 2002 (supra), was applicable retrospectively or prospectively, i.e. whether the DDBs purchased prior to date of this circular i.e. prior ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....itting that the assessee has right to change the system of accounting at any time, with respect to the change in system by saying that it was assessee to establish that change was bona fide and was being followed consistently, we would like to deal with these arguments also and, therefore, we proceed to decide all these issues. 14.2 To decide the aforesaid issue, we are of the opinion that it is desirable for us to consider the provisions of Section 145 of the Act as they stood at the relevant time as well as the provision of block period vis-a-vis the system of accounting for that purpose and, therefore, the same are reproduced as under: Section 145(1) Income chargeable under the head 'Profits and gains of business or profession' or 'Income from other sources' shall, subject to the provisions of Sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the AO is not satisfied a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Sub-section (1) of Section 139 has not expired, on the basis of entries relating to such income or transactions as recorded in the books of account and other documents maintained in the normal course on or before the date of the search or requisition relating to such previous years; (e) where any order of settlement has been made under Sub-section (4) of Section 245D, on the basis of such order; (f) where an assessment of undisclosed income had been made earlier under Clause (c) of Section 158BC, on the basis of such assessment. Explanation-For the purposes of determination of undisclosed income: (a) the total income or loss of each previous year shall, for the purpose of aggregation, be taken as the total income or loss computed in accordance with the provisions of this Act without giving effect to set off of brought forward losses under Chapter VI or unabsorbed depreciation under Sub-section (2) of Section 32: Provided that in computing deductions under Chapter VI-A for the purposes of the said aggregation, effect shall be given to set off of brought forward losses under Chapter VI or unabsorbed depreciation under Sub-section (2) of Se....
X X X X Extracts X X X X
X X X X Extracts X X X X
....urnish within such time not being less than fifteen days but not more than forty-five days, as may be specified, in the notice a return in the prescribed form and verified in the same manner as a return under Clause (i) of Sub-section (1) of Section 142, setting forth his total income including the undisclosed income for the block period: Provided that no notice under Section 148 is required to be issued for the purpose of proceeding under this Chapter: Provided further that a person who has furnished a return under this clause shall not be entitled to file a revised return; (b) the AO shall proceed to determine the undisclosed income of the block period in the manner laid down in Section 158BB and the provisions of Section 142. Sub-sections (2) and (3) of Section 143, Section 144 and Section 145 shall, so far as may be, apply; (c) the AO, on determination of the undisclosed income of the block period in accordance with this chapter, shall pass an order of assessment and determine the tax payable by him on the basis of such assessment; (d) the assets seized under Section 132 or requisitioned under Section 132A shall be dealt wit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....methods, which in turn makes it clear that the choice of the method to be adopted for maintaining the accounts for the income chargeable under the head "Business or profession" or for the income chargeable under the head "Other sources" lays with the assessee and the Revenue has, absolutely, no part to play and this proposition now stands settled by various Courts including the apex Court. The Hon'ble Supreme Court in the case of Investment Ltd. v. CIT [1970] 77 ITR 533 (SC), 537 in the case of CIT v. A. Krishnaswami Mudaliar [1964]. 53 ITR 122 (SC), 127 and in the case of CIT us. McMillan & Co. [1958] 33 ITR 182 (SC) has held that the choice of the method of accounting lies with the assessee. In other words, Revenue cannot enforce its choice for system of accounting to be followed. 14.6 It is also gathered from the aforesaid provisions that the method of accounting adopted by the assessee (subject to the condition that the same is followed regularly) cannot be disturbed by the Revenue, i.e. if an assessee adopts 'cash system' instead of mercantile, e.g. assessable under Section 56; he cannot be assessed for that income on accrual basis [Juggilal Kamlapat Bankers v. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of Sub-sections (1) and (2) of Section 145, then AO has no power /jurisdiction to disturb the method of accounting. Similarly, if the AO has accepted the method of accounting in one year and the assessee has followed the same method in subsequent years, the AO shall not be justified in refusing to accept such method as the basis of assessment in subsequent year. This view is supported by the decision of Hon'ble High Court of Gujarat in the case of Balapur Vibhag Jungle Karndar Mandcdi Ltd. v. CIT [1981] 22 CTR (Guj) 214 : [1982] 135 ITR 91 (Guj) 17. We are further of the opinion that while Sub-section (3) of Section 145 enables the AO to compute the assessee's income in the manner provided under Section 144 if he is of the opinion that accounts of the assessee are not correct or complete or the assessee has not followed any one of the two system of accounting [provided Sub-section (i) regularly or has not followed the accounting standard notified by the Government regularly], but has not been given power to impose his own method of accounting. He can only compute the income in the manner provided under Section 144 of the Act. This view of ours supported by the decision i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in" and income from "other sources", which was consisting of interest income only, computed on cash system of accounting was furnished on 9th Aug., 2002. The system of accounting was duly specified in a note No. 4 of notes forming part of return of income in the following language. (These details find placed at page Nos. 171, 170 and 172 respectively of assessee's paper-book). The assessee trust is following cash method of accounting. (b) The assessment for asst. yr. 2002-03 was completed under Section 143(3) of the Act on 24th March, 2005, wherein the system of accounting was adopted by the AO as "mercantile system" because of the following two reasons as have been gathered from the AO's findings which will be reproduced hereinafter. (i) Because the assessee had not filed any appeal before the CIT(A) against assessment for block period dt. 30th June, 2000, wherein the AO had taken the method of accounting as mercantile. (ii) As per Section 145 of the Act, the assessee can adopt only one system of accounting on the regular basis, the assessee cannot change the same. According to AO, the assessee is bound to follow the same system of accounting ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....isions of Sub-section (2), be computed in accordance with either case or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the AO is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in Sub-section (1) or accounting standards as notified under Sub-section (2), have not been regularly followed by the assessee, the AO may make an assessment in the manner provided in Section 144. Since in the block assessment order the AO has decided the method of accounting in the case of the assessee as 'mercantile' and the assessee has not challenged the same on appeal, the learned CIT(A) has also passed the order dt. 16th Dec, 2004, it is concluded that as per the provisions of the Act, the assessee cannot change the same. The assessee is bound to follow the same method of accounting on continuous basis and he is not permitted to change the same. Hence the method of accounting is co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....: [2001] 247 ITR 658 (SC), the Hon'ble Supreme Court has held that interpretation must avoid absurdity and if literal construction leads to unreasonable or absurd consequences, the same should not be adopted. Hence, the AO's action is upheld and ground of appeal No. 2 is dismissed. (iv) Assessee's appeal against order of the CIT(A) is pending before the Tribunal. 20. (a) So far as facts relating to asst. yr. 2003-04 (under appeal) are concerned, it is again an admitted fact that the assessee had furnished the return of income for asst. yr. 2003-04 declaring income from "capital gain" and "other sources" computed on cash system and the system of accounting was specifically disclosed as per note No. 3 of the notes forming part of the return of income and appended just below the computation of income (p. No. 54 of assessee's paper book). (b) This return was revised by the assessee and the system of accounting was again disclosed as cash as per para No. 3 of notes forming the part of the revised return and appended just below the computation (copy placed at page No. 56 of the assessee's paper-book). (c) The assessment for asst. yr. 2003-04....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o 27th Sept., 2001 and the assessee having changed the system of accounting from "mercantile system" to "cash system" w.e.f. 1st April, 2000 i.e. w.e.f. asst. yr. 2001-02, the AO should not have taken the system of accounting as mercantile for the period 1st April, 2000 to the date of search, i.e. 27th Sept., 2001 and, therefore, Revenue's action for mentioning the system of accounting in the assessment for block period (for the period 1st April, 2000 to 31st March, 2001 and 1st April, 2001 to 27th Sept., 2001) was not only arbitrary but illegal also and, therefore, such an order cannot be relied upon. (iv) Further, in block assessment also, the assessee had neither computed the undisclosed income on mercantile system nor had claimed the system of accounting as mercantile and, therefore, the AO had no power to adopt a particular system of accounting as per his whims and fancies. According to the provisions of Section 158BB, the AO was bound first to compute the total income for each assessment year falling within the block period as well as for the period 1st April, 2001 to 27th Sept., 2001 and then to arrive at the undisclosed income adopting the procedure prescribed ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....3. The Department, in our opinion, could reject the assessee's change in system of accounting only after it was found that the change was not bona fide, but so far as present case is concerned, it is not the Department's case as can be seen from the order for block period as well the reasoning for adopting mercantile system for asst. yr. 2002-03 and asst. yr. 2003-04. The Department has nowhere alleged that the assessee's choice to change the system of accounting from mercantile system to cash system w.e.f. 1st April, 2000 was not bonafide one. 24. The learned Departmental Representative during the course of his arguments had pleaded that the assessee should have established that the change was bonafide. This argument of the learned Departmental Representative, in our opinion, is devoid of any merit because it had never been the Revenue's case. The Revenue had never raised the issue relating to bona fide of the change. So far as block assessment and regular assessments for asst. yrs. 2001-02 and 2002-03 are concerned, it is Department which has acted arbitrarily and illegally for adopting a system of accounting which was never adopted by the assessee and was not ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....1 (Cal) 874. In other words, the Revenue cannot contend that a change has to be supported by cogent reasons showing the bona fides of the assessee in so changing the method as has been held by the Hon'ble High Court Calcutta in the case of Snow White Food Products Co. Ltd. (supra). 24.3 Without prejudice to the above, if we analyse the Section 145 of the Act little further, it will be revealed that w.e.f. 1st April, 1997, the AC) has been divested of the powers to change the system of accounting. He can do and that too in the case of violation of requirements mentioned in Sub-sections (1) and (2) of Section 145 of the Act is that he can make the assessment in the manner provided in Section 144 of the Act. So far as present case is concerned, the Revenue has nowhere alleged or taken a stand that the assessee has violated any of the provisions of Sub-sections (1) and (2) of Section 145 of the Act and, therefore, the Revenue's stand to take the system of accounting as mercantile cannot be upheld. The Revenue's case for taking the system of accounting of mercantile is on the basis of system of accounting mentioned in the assessment order for block period completed ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... stand that the issue relating to system of accounting had become final because of the block assessment then also, the block assessment being upto i.e. 27th Sept., 2001 it can at the most, be said that mercantile system of accounting continued till 27th Sept., 2001 and not thereafter. This fact cannot debar the assessee to change its system of accounting for the future years; meaning thereby that still the assessee could adopt a changed system of accounting w.e.f. 28th Sept., 2001 or from any subsequent date. 26. To conclude, we, in view of the facts and circumstances of the case, provisions relating to system of accounting, case law and above discussion, are of the opinion that: (i) Return of income for asst. yr. 2001-02 showing income from other sources on cash system was filed on 31st July, 2001 which stood accepted, though under Section 145(1)(a) of the Act, and this conclusion is on the basis that Revenue had not preferred to make assessment under Section 143(3) of the Act. (ii) Return of income for asst. yr. 2002-03 showing income from other sources and capital gain on cash system was filed on 9th Aug., 2002 which was again before the date of search and, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....p to the assessee because the issue involved in this circular is quite different than the issue involved in the appeal before us. 29. Validity of Circular No. 2 of 2002 29.1 For considering the issue relating to validity of Circular No. 2 of 2002 as well as its scope of applicability, we are of the opinion that it is desirable to consider all the circulars/press notes/letters/clarification, etc. in connection with this issue. 29.2 The first document to be taken note of is circular issued to IDBI (copy of which is placed at page No. 48 of assessee's paper book) which reads as under: Clarification regarding taxability of income relating to Deep Discount Bonds. Letter F. No. 225/45/1996-ITA. II, dt. 12th March, 1996 of IDBI It is clarified that the difference between the issue price and the redemption price of Deep Discount Bonds will be treated as interest income assessable, under the IT Act. On transfer of bonds before maturity, the difference between the sale consideration and issue price will be treated as capital gains/loss if the assessee purchased them by way of investment. However, in the case of an assessee who deals in purchase and sal....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he investor would be taxed only at the time of maturity. (iv) Taxing the entire income only at the time of maturity amounts to a tax deferral. 3. The matter has now been examined in consultation with the RBI and the Ministry of Law. The practice followed in several countries outside India has also been examined. With a view to remove the anomalies in the existing system of taxation of income from Deep Discount Bonds, and to formulate a system which is more in line with international practice, the Board have decided that such income may hereafter be treated as follows. 4. General Treatment: Every person holding a Deep Discount Bond will make a market valuation of the bond as on the 31st March of each financial year (hereafter referred to as the valuation date) and mark such bond to such market value in accordance with the guidelines issued by RBI for valuation of investments. For this purpose, market values of different instruments declared by the RBI or by the Primary Dealers Association of India jointly with the Fixed Income Money Market and Derivatives Association of India may be referred to. 4.1 The difference between the market valua....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... bond will mean the aggregate of the cost at which the bonds were acquired and the income arising from the bond which has already been offered to tax by the person redeeming the bond. 7. Strips Apart from original issue of Deep Discount Bonds, such bonds can also be created by 'stripping', i.e., the process of detaching the interest coupons from a normal coupon bearing bond and treating the different coupons and the stripped bond as separate instruments or securities ('strips') capable of being traded in independently. Such a mechanism, referred to as STRIPS (Separate Trading of Registered Interest and Principal of Securities) creates instruments which are in the nature of Deep Discount or Zero Coupon Bonds from out of the normal interest bearing bonds. Accordingly, the tax treatment of the different components of principal and interest created by such stripping will be on the same lines as clarified in the preceding paragraphs in respect of Deep Discount Bonds. 7.1 The reasons of stripping of a normal interest bearing bond into its various components will not amount to a transfer within the meaning of the IT Act as it merely involves the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....idelines is being cast on small investors. The reports are misconceived and based on an incorrect understanding and inadequate knowledge of facts and law. The modified tax treatment now specified in fact corrects the anomalies in the existing system by providing a mechanism for taxing income accruing from year to year on deep discount bonds, on the same lines as income from normal coupon bearing bonds is taxed. Transfer of the bonds before maturity will attract capital gains tax, as in the existing system. The earlier system of taxing the entire income received from such bonds in the year of redemption as interest income was anomalous in that it gave rise to a sudden and huge tax liability in one year whereas the value of the bond has been progressively increasing over the period of holding. Further, where the bond was redeemed by a person other than the original subscriber, such person was taxed on the entire difference between the bid price and the redemption price as interest income. Such a system also created tax-induced distortions in the debt market, and was an impediment to the development of a market in STRIPS, which are essentially zero coupon instruments derived ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ealer in purchase and sale of bonds, securities, etc. then the profit or loss was to be treated as trading profit or loss (b) This letter was silent as to the treatment of surplus amount at the time of maturity which in the normal course would have been taxable as income from other sources (interest in case of subscriber who was dealing in purchase and sale of bonds and securities and as capital gain in the hands of subscribers who had purchased them by way of investment. (2) Circular No. 2 of 2002 : After having none through the circular carefully, first of all, we are of the opinion that this circular was intended to mitigate certain hardships, which, in view of the Board the subscribes were likely to face. (a) This circular, first of all, refers to the treatment of difference between subscription price and the redemption price i.e. bid price and the face value of DDBs; on the basis of Board's earlier view according to which the difference at the time of redemption was to be treated as income taxable under IT Act as interest income. (b) On transfer of bonds before maturity, the difference between the sale consideration and the cost of acqui....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the RBI for valuation of investment and made the difference between market value as on 31 March of the first year of holding and subscribed price as taxable under the head "Interest income" in cases where bonds were held investment and as "business income' where the bonds were held as trading assets. This system was to be followed year after year; meaning thereby that in the second and subsequent years, the difference between valuations on two dates, i.e. on the first day of the financial year and the last day of financial year was to be taxed as above. (ii) It was further provided that where the bond was acquired during the year by an intermediate purchaser, i.e. by a person who had acquired the bond by way of purchase at any time during the term of the bond from the original subscriber, the difference between the market value as on the following 31st March and the cost for which bond was acquired would be taxable as interest income or business income, as the case may be, and there was no question of any capital gain arising in the hands of original subscriber or the seller, as the case may be. (iii) The circular further prescribes that where the bond was tra....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ese were not circulars as envisaged in the provisions of Section 119 of the Act. According to Revenue authorities, it is the Circular No. 2 of 2002, which having been issued in exercise of Board's power available under Section 119 of the Act and has been issued to mitigate the various hardships likely to be faced by the subscribers or purchasers of DDBs is binding on the Revenue authorities and, therefore, Revenue authorities were right in taxing the income on these DDBs as per this circular. The next stand of the Revenue is that this circular is retrospective in nature, i.e. applicable to bonds purchased before or after the circular. In support of the aforesaid stands, the learned Departmental Representative advanced detailed arguments along with various quotes from various Court's decisions which have been reproduced in para No. 9 of this order. 33. After having considered the rival submissions, facts and circumstances of the case, various decisions relied upon by the parties and law relating to applicability/validity/scope of circulars, we are of the opinion that: (1) So far as Circular No. 2 of 2002 vis-a-vis to the present assessee, who had subscribed to DD....
X X X X Extracts X X X X
X X X X Extracts X X X X
....issued earlier. The press note being captioned as press note/release is nothing new but only a continuation of earlier circular, i.e. Circular No. 2 of 2002 and had just clarified the date of applicability of that circular. (v) The Revenue's stand that the press note is contradictory to Circular No. 2 of 2002 is also misplaced. (vi) Since we have held that the press note/release dt. 28th March, 2002 was in continuation of circular itself, it was also binding on the Revenue. (vii) Even otherwise, even if Revenue's plea that press note/release was not in consonance with the intention of Circular No. 2 of 2002 or was contradictory then also the same, in view of the decision of Hon'ble Supreme Court in the case of CCE v. Dhiren Chemical Industries [2002] 172 CTR (SC) 670 : [2002] 10 SCC 64, was binding on the Revenue authorities and, therefore, Revenue authorities should have taken note of it. (viii) The Revenue's stand that Circular No. 2 of 2002 is retrospective i.e. applicable to bonds purchased prior to this circular also cannot be sustained because this circular is silent with respect to chargeability of income earned prior to da....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mined in consultation with the RBI and the Ministry of Law, The practice followed in several countries outside India has also been examined. With a view to remove the anomalies in the existing system of taxation of income from Deep Discount Bonds, and to formulate a system which is more in line with international practice, the Board have decided that such income may hereafter be treated as follows. makes it clear that the clarification is applicable and could be applied only subsequent to the issue of this circular and not before. Learned Counsel for the assessee submitted that in the subsequent year the assessee sold the bonds and whatever surplus was offered to tax and it was accepted as well. Learned Counsel again brought our attention to p. 43 of the paper-book, which is the press notes/releases for tax treatment of Deep Discount Bonds and strips. This press note dt. 20th March 2002, makes it clear that the amount received on redemption would be offered to tax as per the guidelines of the RBI or a public financial institution. It is not disputed that the assessee had offered it and accepted by the Revenue. Under these circumstances, we are of the view that there is no ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....te dt. 28th March, 1992 being not a circular had no binding force and, therefore, cannot change the terms and conditions of Circular No. 2 of 2002. 36. Alter careful consideration of the decisions in question, we are of the opinion that the press note dt. 20th March, 1992 being for clarifying the date of applicability of Circular No. 2 of 2002 was not a normal press note, i.e. a press note which is generally issued prior to issuance of a circular, this press note being for clarifying the date of applicability of Circular No. 2 of 2002 was, in our opinion, a part of the circular itself and, therefore, the decision relied upon by the assessee are distinguishable on facts and, hence, not applicable. 36.1 The learned Departmental Representative had further relied on the decisions stated in para Nos. 10.5(i), (ii) and (iii) in support of his submissions that Circular No. 2 of 2002 being available on the first day of financial year 2002-03, i.e. on 1st April, 2002, it could not be withdrawn by any subsequent press note or circular issued during the financial year 2002-03. 36.2 After having considered the decisions, we are of the opinion that Revenue's plea being based on inc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t to plead exclusion of any income shown in the return of income, during the course of assessment proceedings, as well as, later on, before the appellate authorities and has relied on the decision in following cases: 1. Chicago Pneumatic India Ltd. v. Dy. CAT (supra); 2. S.R. Koshti v. CIT (supra); 3. Decision of Gujarat High Court in the case of Mohit Marketing Ltd. v. Dy. CIT in Tax Appeal No. 157 of 2000 and Tax Appeal No. 328 of 2000, dt. 21st April, 2005. 39.1 (a) Decisions relied upon by the learned Departmental Representative: (i) Decision in the case of Goetze (India) Ltd, v. CIT (supra) In this case, the assessee had its return of income for asst. yr. 1995-96 on 30th Nov., 1995. Thereafter, the assessee, by way of a letter addressed to AO on 12th Jan., 1998 claimed a deduction. The AO disallowed the assessee's claim on the ground that there was no provision in the IT Act, 1961 allowing an amendment in the return without a revised return. The Tribunal as well as High Court confirmed this. The assessee went in appeal before the Hon'ble apex Court contenting that it was open to the assessee to raise points of law before ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to understand is what the Hon'ble Supreme Court has held is that it is the AO who is barred to entertain a claim for deduction, made otherwise than by a revised return, and has also held that, this decision does not impinge on the power of the Tribunal under Section 254 of the IT Act. In other words, in our opinion, the Hon'ble apex Court has held that the Tribunal has the power to entertain such claim. We are, therefore, of the opinion that so far as Tribunal's power to entertain the assessee's claim that interest on OFCPN of Nirma Industries Ltd. was not taxable on accrual basis can be entertained by the Tribunal and we do so. (ii) Decision in the case of Injinium Communication (P). Ltd. (supra). (a) The facts of this case were that the assessee had withdrawn its claim of deduction under Section 80-HHE in its statement given during survey action, had confirmed the withdrawal by furnishing a valid revised return under Section 139(5) of the Act, had paid the tax due on the basis of such revised return and never raised any grievance or reiterated the statement till completion of the assessment But, so far as present case is concerned, it....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tificate available on record shows amount paid up per debenture is Rs. 100. It is further stated in the certificate that "The debentures are issued subject to and with the benefit of the financial covenants and conditions endorsed hereon which shall be binding on the company and the debenture holders and all persons claiming by, through or under any of them and shall ensure for the benefit of the trustees and all persons claiming by, through or under any of them and shall ensure for the benefit of the trustees and all persons claiming by, through or under them. The company hereby agrees and undertakes to duly and punctually pay, observe and perform the financial covenants and conditions endorsed thereon. 9. As per financial covenants and conditions, condition No. 2 relatable to 'Interest rate and manner of payment' and condition No. 3 relatable to 'Redemption' read as under: 2. Interest rate and manner of payment Each debenture shall carry interest @ Rs. 62 payable upfront on the date of allotment. 3. Redemption The company agrees and undertakes to redeem the debentures at par in one instalment at the end of 6th year from....
X X X X Extracts X X X X
X X X X Extracts X X X X
....from profits and gains of business. 12. As rightly contended on behalf of the payer company, Section 43(2) of the Act which defines the term 'paid' would take within its sweep as per the definition both 'actual payment' as well as 'incurring of a liability' according to method of accounting on the basis of which profits and gains of business are computed. The said definition is applicable wherever the term 'paid' is used in Sections 28 to 41 of the Act, unless the context otherwise requires. In the circumstances, the term 'paid' as used in Section 36(l)(iii) of the Act would have the same meaning and as per method of accounting regularly employed, on the basis of terms of contract, the payer company had incurred the liability and discharged the same during the accounting period. In other words, not only was there an incurring of liability but there was actual payment of interest. In these circumstances, it is not possible to accept the stand of Revenue that despite the total amount of interest having been paid during the relevant accounting period as per the terms of the contract between the parties, only proportionate amount should ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... tax the interest income or while denying the deduction in the hands of the payer; in bringing to tax the entire amount or while seeking spread over of such interest, but none of the parties to the dispute has stated that the contract has not been acted upon. In the circumstances, in absence of any contrary provisions under the Act, the parties are required to be governed by the terms of the contract and the transaction in question is required to be appreciated in context of the same. Hence, it is apparent that the payer company has made payment of entire amount of interest on the date of allotment and sought deduction thereof in the year of payment. There is no question of the same being denied in light of the fact that as per terms of the contract no other mode of interest payment is stipulated by the covenants which form part and parcel of the debenture certificate. The contention raised on behalf of Revenue that interest would accrue only on a day-to-day basis does not merit acceptance in the light of the fact that the parties have specifically provided for a particular rate of interest as well as the manner of payment. Once that is so, it is not possible to rewrite th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssee filed revised return of income, but the claim of Sections 80IIH and 80HHI was not revised. Subsequently, during the course of assessment proceedings, the assessee revised its claim of deduction under Sections 80HH and 80HHI of the Act. The AO did not take cognizance of this claim made by the assessee under Sections 80IIH and 80HHI as the assessee has not filed revised return to this effect. On appeal, the CIT(A) confirmed the action of the AO. On appeal before the Tribunal, the Tribunal has allowed the assessee's claim and the relevant part as contained in para No. 49 of the order, reads as under: 49. The assessee claimed deduction in the original return of income. Though the assessee revised its original return, however, claim under Sections 80HII and 80-1 was not revised. Subsequently, during the course of assessment proceedings, the assessee revised its claim, which the AO did not take into cognizance as the assessee had not filed revised return to this effect. The learned CIT(A) also confirmed the action of AO. Prima facie, the ratio of the decision of the Hon'ble Supreme Court in the case of Goetze (India) Ltd. (supra) is squarely applicable to the facts ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would in the long run benefit the Department for it would inspire confidence in him that he may be sure of getting a square deal from the Department. Although, therefore, the responsibility for claiming refunds and reliefs rests with assessees on whom it is imposed by law, officers should: (a) draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other; (b) freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs; (c) Public Relation Officers have been appointed at important centres, but by the very nature of their duties, their field of activity is bound to be limited. The following examples (which are by no means e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ns and making eligible claims. These circulars issued by the Board almost 4-5 decades before cast a duty on the assessing authorities to collect only the legitimate tax. Starting from late 1980s, the Government has focussed as voluntary compliance by the assessees and, therefore, Government has reduced the number of cases selected for compulsory scrutiny and has also reduced the tax rates. This policy of the Government has resulted into higher tax revenues and simplification of laws. It is a settled position that the circulars issued by the Board are binding on the subordinate IT authorities and if CBDT issues directions which are beneficial to the assessees although the same may not be directly in consonance with the provisions of law, even then these instructions have to be given effect and adhered to by the concerned authorities. Thus, there is a strong case for reciprocity to be shown by the Revenue authorities while completing assessments and to avoid administrative hardships to the assessees. As far as the decision of the Hon'ble apex Court in the case of Goetze (India) Ltd. (supra) is concerned, there is no dispute that the same is binding on everybody concerned. In the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to consider the claim of the assessee at the revised figures on merits and decide the same according to the provisions of Sections 80HH and 80-1 of the Act after hearing the assessee. Thus, this ground of the assessee stands accepted. 43. Having considered the aforesaid decision, we are of the opinion that the proposition of law held in this decision is squarely applicable to the facts and circumstances of the case before us. More so because, the Hon'ble Tribunal has discussed and distinguished the decision of Hon'ble apex Court in the case of Goetze (India) Ltd. (supra) which has been relied upon by the Revenue before us also. 44. Respectfully following this decision, we are of the opinion that the assessee had right to claim exclusion interest on OFCPN of Nirma Industries Ltd. on the basis of that the same was not taxable on accrual basis. (iii) Decision of Hon'ble Gujarat High Court in the case of S.R. Koshti v. CIT (supra). 45. (a) So far as this decision is concerned, the reliance by the learned Counsel for the assessee was to the effect that authorities under the IT Act are under an obligation to action in accordance with law and if an assessee under ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f law that IT authorities are under obligation to charge, levy and collect only the legitimate tax and if an assessee due to any reason fails to claim deduction/exemption available to it under the law or commits a mistake in showing any income which is otherwise not taxable or shown any income in the return reserving its rights to claim the same as exempt during the course of assessment proceedings, the authorities are bound to assess the assessee and, in case the authorities failed to do so, then the appellate authorities or Tribunal should take note of the same and assess the assessee. 46. After having cumulative understanding of aforesaid three decisions relied upon by the learned Counsel for the assessee, we are of the opinion that the assessee was not precluded from claiming the income from OFCPN of Nirma Industries Ltd. having been shown in its revised return on mercantile basis as exempt, during the course of assessment proceedings, or before the appellate authorities including the Tribunal and also before the Courts. 47. We are further of the opinion that admittedly, there being no contract between the parties for payment of interest on accrual basis, the assessee was....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nce the assessee's system of accounting has been held to be "cash system", the income, even if shown by the assessee in the return on accrual basis, has to be excluded and to be taxed on cash basis, because Circular No. 2 of 2002, so far as assessee's case is concerned, is not applicable to the DDBs purchased even after 15th Feb., 2002, because, the assessee's system of accounting has been held to be "cash system". The income of Rs. 77,95,691 also, therefore, stands deleted. 51. Without prejudice to the aforesaid findings, we are, further of the opinion that there being no contract for payment of interest either on accrual basis or on periodical basis, the interest on DDBs could not be taxed on accrual basis and this proposition is supported by the decision of Hon'ble Gujarat High Court in the case of Mohit Marketing Ltd. (supra). 52. The levy of interest under Sections 234A, 234B, 234C and 234D was pleaded to be consequential, by both the parties and, therefore, we direct the AO to re-compute the interest chargeable under Sections 234A , 234B, 234C and 234D of the Act, if any, in consequence upon giving effect to the Tribunal's order. 53. In the result....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... acquired during the year, the difference in the value between the cost of acquisition and the value as at the ensuing valuation date would be interest or business income, as the case may be. (iii) Where the bond is transferred prior to the maturity date, the difference between the sale value and the cost of the bond would be a capital gain or business income, in the case of an investor or traders, as the case may be. The cost of the bond would be the sum of the price for which the bond is acquired and the aggregate of income, if any, already offered to tax as accrued on the said bond since. As the cost of the bond includes the income accrued upto the last valuation date prior to the transfer date, its period of holding, for the purpose of computation of capital gains, would be reckoned from the said (last) valuation date, so that the said period would be always less than twelve months and the capital gains, resultantly, a short-term capital gain. (iv) On redemption, the difference between the face value and the accumulated value upto the last valuation date, i.e., immediately preceding the redemption date, would be interest or business income, as the case may be.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....years from the issue date, is issued at a discounted price of Rs. 667 (say). Conceptually, therefore, it would not be any different from a bond (or any debt instrument) which is issued at par (say for Rs. 1,000), redeemable five years hence at Rs. 1,500 (say). 58. As such, two questions would arise. Whether the difference between the redemption and the issue price (Rs. 333 in our example) can be said to be interest income, and if so, can it be taxed under separate heads of income. To answer the second question first, it is well-settled that interest income acquires the character from the nature of the underlying transaction [CIT v. Govinda Choudhury & Sons (1994) 116 CTR (SC) 61 : (1993) 203 ITR 881 (SC)], so that it could, and does, in the present case, represent yield/period income (where held as an investment) and trading income (where held as a trading asset), so that its being assessable under the head 'Income from other sources' or 'Business income', is apposite. 59. As regards the first question, interest, by definition, is a time value of money and represents the opportunity cost of fund in the hands of the payer, often referred, thus, as a period cost....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of (say) Rs. 55, Rs. 60, Rs. 65.50, Rs. 72.50 and Rs. 80, for the five consecutive years. Further, true, in practice, other factors, such as the going rate of interest in the debt (money) market would also influence the rate which the bond may fetch on its transfer, so that it is not necessary that the value of the bond increases in these steps. If the yield to maturity ('ytm') of a bond is (say) 15 per cent per annum, an investment of Rs. 100 therein would fetch Rs. 115 after a year, only if the going interest rate on the relevant debt instrument (the market being also segmented ever the terms-time horizon-of the debt security) is still 15 per cent per annum. If it is less, say 14 per cent per annum, the bonds ytm being fixed (at 15 per cent per annum), it is likely to fetch over Rs. 115 (so that the ytm of the investment over the remainder term is aligned to 14 per cent per annum). On the other hand, if the interest rate has increased to 16 per cent per annum, the bond* is likely to fetch less than Rs. 115 in the open market. However, this would only exemplify or explain the valuation process/dynamics involved, and not detract from the fact that the increase in the bond&#....
X X X X Extracts X X X X
X X X X Extracts X X X X
....assessee, some bonds, viz., REC Ltd., ILFS Ltd., ICICI Ltd., as it appears, also specify the interest rate, even as the same, being a matter of fact, could be subject to verification. 62. The comparison with shares, however, is illustrative and clarifying, inasmuch as it demonstrates that both the regular income and capital gain can arise on a particular property; the same yielding both dividend income and capital gains. Also, real estate could give both the regular (rental) income as also capital gains on its transfer. As such, the receipt of more than one type of income, or of the said incomes being assessable under different heads of income, would be of no consequence insofar as assailing the DDBs (or the circular for that matter) is concerned. 63. Concluding the discussion on accrual of income, what better proof thereof could be than that the bond issuer (Nirma Industries Ltd.) accounts for the interest liability on annualized basis, on the ground of it having accrued. Clearly, if no right to receive enures, over time, as contended, there can be no corresponding obligation to pay, so that no expense accrues under the contract. The learned Authorised Representative has pre....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of transfer, is only on account of the underlying contract (of which time is of essence), the said argument would fail; the transfer, or the accrual of interest, being only the different mode per which the value of the bond is realized. A ready example would be of a capital asset employed in business and subject to depreciation allowance; its transfer would, though held over 36 months prior to the transfer date, always yield a short-term capital gain; the economic rationale being that the investment in asset (which is what is sought to be realized per its transfer) stands already realized to the extent of depreciation allowance, so that the (depreciated) asset sold/transferred is not the same as that acquired. Likewise, the bond sold cannot be compared with that acquired, it being impregnated with value over time, and which stands recognized in view of the underlying contractual relationship. 66. The next detraction of the circular is of it being silent as regards the taxability of the income accrued after 15th Feb., 2002 on DDBs purchased prior to that date. This is invalid, being inconsistent with the finding, and which I wholly concur, being a matter of fact, that the circul....