AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2007 (11) TMI 622
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....ng 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 business of manufacturing as well as from dividend and interest, etc. till 28th March, 2000. On 28th....
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....ssed 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 mistake apparent from the records is not correct, therefore, the same cannot be rectified under Section 154 of the Act and the application is treated a....
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....ting: 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 applicable retrospectively. Consequently, he computed the income from deep discount bonds (hereinafter referred to as "DDBs") of ICICI Ltd., DDBs of Infrastructure Leasing and Financial Services Ltd. and bonds of REC on accrual bas....
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.... 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 been incurred for earning the business income, the same will be disallowed. 7.1 In the submissions dt. 5th Jan., 2006, the assessee contended as under: This has reference to the on-going assessment proceedings, and your notice dt. 25th Nov., 2005 received by ....
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.... 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) 217] issued by CBDT. The same appears to have been ignored by your good office. Further the short-term capital gain of Rs. 49,88,607 is also in respect of sale of OFCPN of Nirma Industries Ltd., which if would have been held till maturity would have resulted into interest income. The assessee has other investments like bonds of ICICI Ltd. o....
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....ent 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 such expenditure can be claimed against the STCG/LTCG as per the provisions of the Act. 7.3 The claim of the assessee that out of these Rs. 10.30 lacs, Rs. 5 lacs pertain to attending the assessment proceedings for accounting year ended on 31st March, 2002, is actually incorrect, since from the records it has been found that Kaushik Jayendra & Co. has represented the assessee for t....
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....d. 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 incomes which have been earned under Section 57(iii) are the only incomes which are due to the Circular No. 2 of 2002. For the same the assessee need not incur these expenditure. Hence this contention is not tenable. 7.7 The reliance of the assessee in the decision of Hon'ble Supreme Court in case of CIT v. Rajendra Prasad Moody (supra) is incorrect since the question before Hon'ble Supreme Court in th....
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....sessee, 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 appeal before the Tribunal, at present the stand of assessee stands rejected by the above referred appellate order. Hence, this claim of the assessee about cash method of accounting to be adopted in its case is not accepted. 4.1 The issue with respect to taxability of income/interest from DDBs vis-a-vis the applicability of provisions of Circular No. 2 of 2002 and consequential taxability of income on accrual basis has been dealt with by the CIT(A) in second paras of 3.1, 3.2 and ....
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....1st 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 applicable is not correct as the Circular No. 2 of 2002 is applicable prospectively from 15th Feb., 2002 and is applicable from financial year 2002-03. It is clear from the circular that the interest should be offered by the assessee on accrual basis irrespective of the method of accounting adopted by it. The addition of Rs. 21,33,39,216 made by the AO on account of accrued interest is hereby confirmed. In a result, the 1st ground of appeal is dismissed. (2) The 3rd and 4th ground of appeal contended by the appellant....
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....5,691 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 and against the Revenue as per findings contained in para No. 4.2 of the appellate order, which are in the following terms: 4.2 I have considered the assessment order and the above submissions. Looking the fact that the appellant is not having any separate staff for accounting and administrative services, the appellant was required to obtain services of Nirma Management Services Ltd. and for that matter the payment is made. The disallowance of Rs. 5.25 lakhs is therefore, not justified. So far as the fees for the income-tax matters are concerned, it is well know....
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....otes 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 on 27th Sep., 2001 as a result of which assessment for the block period ending on 27th Sep., 2001 was to be framed. Return of income for the block period at Rs. nil came to be filed which was assessed by the learned AO. at Rs. nil vide order dt. 30th June, 2004 (pp. 58-59). However, while mentioning method of accounting (p. 58), AO has stated the same to be "mercantile", though, in the return of income for block period required to be filed, method of accounting is not required to be stated. In any case, description "mercantile" would be partly correct inasmuch as upto asst. yr. 2000-01, appellant was admittedly following mercantile method ....
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....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 years and 6 months Rs. 1,00,000 each Deep Discounts Bonds in the nature of secured non-convertible debentures - Issued by LFS Ltd. 15 to 16 Rs. 1,000 each 42 months Rs. 1498.50 each Optionally Fully Convertible Premium Notes (OFCPNs)-issued by Nirma Industries Ltd. 30 to 37 Rs. 25,000 each 5 years Rs. 33,750 each (ix) For the sake of convenience, these bonds are being referred as DDBs. As per the terms and conditions for issuing these documents, no return/interest/dividend was to be paid during the tenure of bonds and whosoever would hold DDBs on the date of maturity would get redemption price. (x) As opposed to this, appellant has invested the amount in bon....
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....hereafter, 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 appellant follows mercantile method of accounting. For this purpose the CIT(A) follows earlier year's orders which give three reasons on pp. 96-97; from pp. Nos. 96 and 97 which are as under: (a) With respect to above reasons, the learned Counsel submitted that from above, it is gathered that the CIT(A) accepts in principle that method of accounting cannot be thrust upon on the appellant by the AO but then he proceeds to state that the appellant cannot change the method of accounting arbitrarily or without proper and adequate justification. In saying so, he completely ignores the fact that upto asst. yr. 2000-01 appellant was doing business. It was, therefore, following mercantile method of accounting. On 28th March, 2000, it sold away business. Thereafter, th....
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.... 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 the method of accounting followed by them. One cannot jump to the conclusion that they would have also followed the mercantile method of accounting and claimed the expenditure on a year to year basis. This aspect is without prejudice to the above contention of the appellant that, as stated hereinafter method of accounting followed by the issuer is thoroughly irrelevant for deciding the method of accounting in the hands of the appellant. On merits it is submitted that this consideration is thoroughly irrelevant. Law does not oblige in relation to any transaction, both parties to the transaction must follow the same method of accounting. If that were the rule, there can never be transaction between the two parties following two different methods of accounting because as per the logic ....
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....,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. (ii) Assuming, without admitting, appellant's method of accounting is not cash, even then income cannot be taxed. No income has accrued on a year to year basis on such bonds. Bonds specified issue price, period and the redemption price. No interest on the bonds is being paid during the term of' the bonds. No rate of interest is specified. Under the circumstances, during the term of the bond, no interest accrues to the appellant. When the contract between the parties does not specify obligation to pay interest much less the rate of interest, Revenue cannot rewrite the contract for considering interest and that too at a particular rate. For this purpose, appellant relies upon Hon'ble Gujarat High Court decision in Tax Appeal No. 157 of 2000 and in particular para 14 thereof. (iii) In any case the issue is squarely cov....
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....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) 173 : [1989] 179 ITR 147 (Mad). (d) He, therefore, submitted that in the circumstances, it would not be correct to hold that by virtue of second circular, first circular disappears. (v) The learned Authorised Representative further submitted that even on the merits, the Revenue's arguments would be unsustainable. The 2nd circular is invalid for the reasons stated hereinafter. (B) Addition of Rs. 21,00,000 being alleged accrued interest on REC investment bonds. (a) With respect to this addition, the learned Authorised Representative submitted that inasmuch as REC investment bonds were acquired by the appellant after 15th Feb., 2002, appellant cannot argue its case on the basis of first circular. Under the circumstances, the appellant submits that in spite of the second circular on the basis of principle of law, so-called income of Rs. 21 lacs of REC investment bonds cannot to be taxed because of the following reasons: (i) It is well-settled law that circulars of CBDT....
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....ant during the year. Bonds do not contain any term as to the right of the appellant to receive interest on a year to year basis. As held by Hon'ble Gujarat High Court in the case of Mohit Marketing (supra) Revenue cannot rewrite the terms of contract. Under the circumstances, even on this basis, amount of Rs. 21 lacs is not taxable. (iii) One more aspect would show that circular is invalid. It not only seeks to tax income on a year to year basis even when it does not accrue, it seeks to convert long-term capital asset into short-term capital asset. Short-term capital asset and long-term capital asset defined in Clause 2(29A) and under Clause 2(42A) respectively are sought to be amended by a circular that long-term capital asset can be converted into short-term capital asset. It may be argued that, that part of the circular is invalid. However, such argument is also incorrect inasmuch as once a view is taken that the holding period of asset is given in the Act determines, as to whether an asset is a short-term or long-term asset and once part of the circular which converts a long-term into short-term asset fails, automatically other part of the circular would fail because th....
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....hat the fact that appellant has offered income in the revised return of income cannot preclude and appellant can raise such contentions before learned CIT(A) or before Hon'ble Tribunal. At the outset it is submitted that the income was offered in the revised return on a "without prejudice" basis. Further as a matter of fact, the case of Goetze India Ltd. (supra) carves out exception whereby appellant is entitled to raise such contention under Section 254 before this Hon'ble Tribunal. On merits also this aspect is noted in two decisions as stated below: (i) Universal Subscription Agency (P) Ltd. v. Jt. CAT (2007) 207 CTR (All) 62 : (2007) 159 Taxman 64 (All); (ii) (2006) 10 SOT 715 (Del); However, now appellant finds a detailed order of Mumbai Tribunal in the case of Chicago Pneumatic India Ltd. v. Dy. CAT (2007) 15 SOT 252 (Mumbai) where whole law on the aspect is discussed and the Tribunal has taken a view that even if appellant has offered the income, he has a right to challenge the same, if it is found that income is not otherwise liable to be taxed. (See discussion on pp. 271-275 para 49). That apart, the judgment of the Hon'ble Gujarat High Court in the case ....
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....ar No. 2 of 2002: It was further submitted that, as has been rightly held by CIT(A) in the case of the assessee for the asst. yr. 2002-03 (please refer pp. 91 to 98 of paper book of the assessee) the assessees in Nirma group including the assessee have interpreted the letter of Board and Circular dt. 15th Feb., 2002 and press release dt. 20th March, 2002 in different manners, while claiming deduction of interest on these Deep Discount Bonds (hereinafter referred as DDBs); the company Nirma Ltd. has followed mercantile method and claimed deduction on accrual basis and in cases of holders of DDBs while offering income of interest on DDBs have claimed to offer the same on cash basis.(please refer to p. 97 of paper book filed by assessee at top few lines). Offering of interest income on cash basis postpones the incidence of tax which has not been approved by CBDT Circular dt. 15th Feb., 2002. This clearly shows that assessee has tried to reduce tax liability on interest income and postpone the same to a later year. 9.2 Effect of letter issued by Board dt. 12th March, 1996 The contention of the learned Authorised Representative is that the issue is covered by Board's 1st circul....
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....e legal position, are required to be followed by the ITO since the circulars would go to the assistance of the assessee". (e) In the case of Chotubhai & Anr. v. Union of India [1998] 147 CTR (Del) 83 : [1998] 230 ITR 416 (Del), wherein the Court held that communication from Board/Ministry does not amount to an order, instruction or direction under Section 119 of the Act. 9.3 Binding nature of Circular No. 2 of 2002, dt 15th Feb., 2002 The learned Departmental Representative further submitted that the Circular No. 2 dt. 15th Feb., 2002 has been issued to mitigate hardships to the taxpayers as otherwise as per Circular dt. 12th March, 1996 the taxpayers were faced with sudden and huge tax liability. In para 2 of the said circular it has been stated that such tax treatment of DDBs, i.e. taxing on maturity, however, has posed the following problems: (i) Taxing the entire income received from such a bond in the year of redemption as interest income gives 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. (ii) Where the bond is redeemed by a person other than the original subscriber, such....
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.... neither a circular nor it was issued by CBDT. It is a press release issued by PIB (Press Information Bureau), hence, has no binding force as circulars. Press releases cannot override basic intention of a circular. To support the above submission, reliance was placed on the following: (a) In the case of CAT v. Anjum M.H. Ghaswala [2001] 171 CTR (SC) 1 : [2001] 252 ITR 1 (SC), wherein it has been held that press releases do not have statutory force like circulars and a clarificatory note or press release issued by the CBDT does not have statutory force like circulars issued by the Board under Section 119 of the Act. (b) In the case of Ved Prakash Gupta v. CAT [1957] 32 ITR 133 (All.), wherein it was held that, "The press notifications issued by the Ministry of Finance, Government of India, on 19th May, 1951 and 18th July, 1951 dealing with a concessional scheme for the payment of arrears of tax and disclosure of income have not been passed under the provisions of IT Act or any other law and have no legal force. Court held that assessees taking advantage of the press notification and acting in accordance therewith are not entitled to any relief by way of mandamus directing the o....
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....seding earlier circular. (iii) CAT v. Prasad Productions (P) Ltd. [1989] 76 CTR (Mad) 173 : [1989] 179 ITR 147 (Mad). 9.6 Effect of circular vis-a-vis provisions of Act The Departmental Representative, further submitted that various Courts have held that CBDT circular cannot enlarge the scope of the statutory provision. [CAT v. Ramchandra Poddar Charitable Trust. [1987] 164 ITR 666 (Cal). The circular being executive in character cannot alter the provisions of the Act. The circulars cannot detract from the Act. State Bank of Travancore v. CAT [1986] 50 CTR (SC) 290 : [1986] 158 ITR 102 (SC). 9.7 It was further submitted that the assessee cannot challenge the validity of Circular No. 2 dt. 15th Feb., 2002 when it is issued for the benefit of taxpayers. By challenging the validity of Circular No. 2 dt. 15th Feb., 2002 the assessee has challenged the power of CBDT under Section 119 to issue such circulars to mitigate hardship to the taxpayers, which in my submission assessee can challenge only in writs. In view of the above submissions and the case law, it is submitted that the AO and the CIT(A) have rightly held that interest income on DDBs is to be taxed on accrual basis in t....
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....nd circumstances of the present case. He, therefore, submitted that assessee's claim of following cash system of accounting be accepted. The learned Counsel, further, submitted that if assessee's this claim is accepted, then its submission with respect to validity and applicability of Circular No. 2 of 2002 will be academic only and so far as issue relating to the taxability of income from OFCPN of Nirma Industries Ltd, shown by the assessee in revised return on accrual basis is concerned, the same will automatically be decided in assessee's favour. 11.1 With respect to Departmental Representative's arguments, that it was for the assessee to establish that change in system of accounting was bona fide and that the changed system was being followed regularly, the learned Authorised Representative has submitted that, first of all, this is not the case of the Revenue. According to learned Authorised Representative, neither the AO nor the CIT(A) has raised this issue and even if, for the sake of arguments, the issue is considered from this point of view, then also it was for the Revenue first to allow the assessee an opportunity of being heard, which was never allowed. ....
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....te proceedings ? 13. We have considered the rival submissions, facts and circumstances of the case, provisions of law relating to the issues involved in this appeal as well as various decisions relied upon by the parties with utmost care. 13.1 The first issue as we have already spelt out for our consideration and decision is the system of accounting adopted by the assessee. The assessee's case is that it was following the "cash system of accounting" w.e.f. asst. yr. 2001-02 and has been following the same consistently till now. The Revenue's case is that the system of accounting, in assessment for block period under Chapter XTV-B of the Act completed on 30th June, 2005 (for the period 1st April 1995 to 27th Sept., 2001), having been taken as "mercantile system" and assessee having not appealed against that order and the method of accounting for asst. yr. 2002-03 also having been taken as "mercantile system" : (on the basis of method of accounting taken in block assessment), method of accounting for asst. yr. 2003-04 considered as mercantile is quite justified. In other words, the Revenue's stand is that method of accounting for this assessment year is to be taken as ....
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....putation of undisclosed income of the block period-(1) The undisclosed income of the block period shall be the aggregate of the total income of the previous years falling within the block period computed, (in accordance with the provisions of this Act, on the basis of evidence found as a result of search or requisition of books of account or other documents and such other materials or information as are available with the AO and relatable to such evidence), as reduced by the aggregate of the total income, or as the case may be, as increased by the aggregate of the losses of such previous years, determined: (a) where assessments under Section 143 or Section 144 or Section 147 have been concluded (prior to the date of commencement of the search or the date of requisition), on the basis of such assessments; (b) where returns of income have been filed under Section 139 (or in response to a notice issued under Sub-section (1) of Section 142 or Section 148) but assessments have not been made till the date of search or requisition, on the basis of the income disclosed in such returns; (c) where the due date for filing a return of income has expired, but no return of income has been ....
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.... hands of the partners, whether on allocation or on account of enhancement; (c) assessment under Section 143 includes determination of income under Sub-section (1) or Sub-section (IB) of Section 143. (2) In computing the undisclosed income of the block period, the provisions of Sections 68, 69, 69A, 69B and 69C shall, so far as may be, apply and references to 'financial year' in those sections shall be construed as references to the relevant previous year falling in the block period including the previous year ending with the date of search or of the requisition. (3) The burden of proving to the satisfaction of the AO that any undisclosed income had already been disclosed in any return of income filed by the assessee before the commencement of search or of the requisition, as the case may be, shall be on the assessee. (4) For the purpose of assessment under this Chapter, losses brought forward from the previous year under Chapter VI or unabsorbed depreciation under Sub-section (2) of Section 32 shall not be set off against the undisclosed income determined in the block assessment under this Chapter, but may be carried forward for being set off in the regular assessm....
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.... block period and also from provisions of Section 158BC which prescribe the procedure for completing block assessment and that is why that we have preferred to reproduce these two sections. Section 145 of the IT Act, 1961 14.4 After the analysis of provisions of Section 145, reproduced here in above, effective from asst. yr. 1997-98, we are of the opinion that these provisions clearly lead one to understand that income chargeable under the head "Profits and gains of business or profession" or "Income from other sources", subject however, to the provisions of Sub-section (2) of Section 145, has to be computed in accordance with 'cash system' or 'mercantile system' of accounting regularly employed by the assessee; meaning thereby that choice with the assessee to maintain its accounts is only limited; i.e. the assessee is bound to maintain accounts for 'business or profession' or for income liable to be taxed under the head "Income from other sources" either on "cash system" or on "mercantile system" whichever he is regularly employing, subject, however, to the provisions of Sub-section (2) of Section 145 which authorizes the Central Government to notify the ....
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.... bonafide. (ii). The second condition to be satisfied is that the assessee is to establish that the method of accounting employed (originally or on change) is being followed regularly in the subsequent years and this fact can be established by showing the regularity from accounts of subsequent years. This view of ours finds support from decision of Hon'ble Madras High Court in the case of Sundaram & Co. Ltd. v. CIT [1959] 36 ITR 162 (Mad). 15. So far as AO is concerned, we have already observed that he has no power either to change the system of accounting followed or preferred by the assessee or to thrust upon the system of his choice. 15.1 The only power given to the AO is of the nature to the extent as provided by provisions of Sub-section (3) of Section 145 of the Act and if we analyse, these provisions, it will be clear that the AO has been clothed with the power to make an assessment in the manner provided in Section 144, if he is not satisfied about the correctness or completeness of the accounts of the assessee or the assessee is not employing any of the method of accounting provided in Sub-section (1) regularly or is not following the accounting standards, if any, ....
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....e fact that it is for him to establish that change was bona fide and changed system was being followed regularly. 19.1 Coming to the facts of the present case, there is no dispute that till 28th March, 2000, the assessee was following mercantile system of accounting, but at the same time there is no dispute that the assessee had changed the system of accounting from mercantile to cash w.e.f. asst. yr. 2001-02 i.e. w.e.f. 1st April, 2000 and had furnished its return of income for asst. yr. 2001-02 on 31st July, 2001 showing income under the head "Income from other sources" which was consisting of interest on FDs and other interest. The system of accounting employed was clearly stated to be cash against column 11A of Form 3-CD which was required to be furnished along with return under the statutory provisions of Section 44AB of the Act. 19.2 It is also an admitted fact that the Revenue had not framed assessment for this assessment year, i.e. no assessment under Section 143(3) or under Section 147 of the Act has been made by the AO. This fact goes to show that the assessee's returned income shown on the cash system of accounting was accepted by virtue of provisions of Section 14....
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.... CIT(A) against this order. Therefore it is clear that the assessee has no objection with this finding of the AO and it has accepted that it is following the mercantile system of accounting. The assessee was given the show-cause notice dt. 18th March, 2005 to explain as to why in the light of the Section 145 of IT Act the method of accounting should be considered as 'mercantile' in the case of the assessee in this year also. The relevant portion of this show-cause notice is produced as under: Please refer to the block assessment order dt. 30th June, 2004. In this order the AO has decided that the method of accounting in your case is mercantile; you have not tiled any appeal before learned CIT (A) , this means that you have accepted the same. But in the Rol of this year, on the notes forming part of the Rol, you have stated that the assessee is following the cash system of accounting. This Rol was filed on 9th Aug., 2002, and therefore it is clear that the AO has passed the block order after this date. Explain as to why as per Section 145 of IT Act the system of accounting should not be considered as mercantile since it has to be taken on continuous basis and it cannot b....
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....quate justification for adopting the cash method of accounting is given by the appellant. (ii) The AO's reasoning that the mercantile method of accounting has been adopted in the block period assessment proceedings and the appellant has not filed an appeal against such an adoption by the AO, cannot be faulted on legal or logical grounds. The method of accounting in both the block period and regular assessment proceedings has to be the same. If the appellant has missed the bus by not filing an appeal, the AO's action cannot be faulted. (iii) If such an interpretation of the appellant is accepted, it would make the provisions of Section 145 of the IT Act unworkable. In this regard the Nirma Group has tried to interpret the Section 37(1) in such a way that the claim of interest on these DDBs is available to Nirma Ltd. on accrual basis but in case of the holders of the DDBs the same group has interpreted the letter of Board dt. 12th March, 1996, Circular of the Board dt. 15th Feb., 2002 and press release dt. 20th March, 2002 in different manner. In this regard, the reliance is placed in case of C.W.S. (India) Ltd. v. CAT [1994] 118 CTR (SC) 118 : [1994] 208 ITR 649 (SC) in ....
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....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'. 21. If we consider the above case in the light of settled principles of law, first of all, we are of the opinion that the AO's decision to adopt the method of accounting in regular assessment for asst. yr. 2003-04 as mercantile simply because the AO had mentioned the system of accounting in block assessment, which was for the period (block period 1st April, 1995 to 27th Sept., 2001), as mercantile and for non-filing of appeal by the assessee against that action, not only in law, but on facts also, the Revenue's reliance on the method of accounting mentioned in the assessment order for block period cannot be held to be legal or justified, because: (i) As submitted by the assessee, the assessee did not file appeal against the assessment order for block period because the undisclosed income computed by the AO in assessment for block period was computed at NIL, the assessee has to be given the benefit of bona fide belief for not having any grievance against such an assessment and, c....
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....s for the asst. yr. 2001-02 was declared on cash system, the system adopted by the assessee stood accepted. (vi) The block assessment being for the period ending on the day of search, i.e. 27th Sept., 2001, cannot bind the assessee for all times to come because not only the assessee had right to change the system of accounting but the provisions for assessment for block period and for regular assessment are quite different; meaning thereby that if after the date of search, one prefers to change the system of accounting. Revenue has no jurisdiction to impose the system of accounting adopted till the date of search, upon the assessee for subsequent years. 22. So far as assessee's right to change the system of accounting is concerned, the assessee's obligation, as has been discussed in the earlier part of this order, was only to show that the change was bonafide and that could be established by showing that changed system of accounting was being followed regularly in the subsequent years. In the case of Sundaram Ltd. v. CIT [1959] 36 ITR 162 (Mad) wherein the Hon'ble High Court of Madras has held that the fact that the assessee was following the constant method of accou....
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....same result will follow. Only in a case where the assessee changes his regular method of accounting by another method and does not follow the changed method regularly thereafter, it might be possible for the assessee by introducing successive changes in his method of accounting to exclude items of its income from being included in the computation of his total income, otherwise not. Therefore, when an assessee changes his regular method of accounting by another regular method, the question of his bona fides has a little relevance. Even otherwise, it is only in the year in which a change in method of accounting is introduced, for the first time, that the change is to be examined by the Revenue authorities to find out whether the change introduced is meant to be regularly followed or not. It is in this context only that the expressions, 'good faith' and 'bona fide' occur in the observation of the Hon'ble Bombay High Court in the judgment in the case of Sarupchand us. CIT [1936] 4 ITR 420 (Bom) and of Hon'ble Madras High Court in the case of Indo-Commercial Bank Ltd. v. CIT [1962] 44 ITR 22 (Mad). 24.2 In this view of the matter, where it is found that an asses....
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.... jurisdiction and, therefore, cannot be sustained. 24.5 Without prejudice to the above, in the given circumstances, what the AO could at the most do was to make the assessment in the manner as provided under Section 144 of the Act and nothing else, but could not, in any case change the system of accounting independent of these proceedings. Therefore, that fact cannot snatch away the assessee's right to claim during regular assessment proceedings that he was following cash system of accounting. 24.6 So far as assessee is concerned, it having sold its running business on 28th March, 2000 and was left with the source of income from dividend, capital gain and interest only and, therefore, it had a justifiable reason to change the system of accounting from mercantile to cash. Here, it is important to highlight that by the time, the assessee opted to change the system of accounting, i.e. from 1st April, 2000, even Circular No. 2 of 2002 was not on statute and, therefore, Revenue cannot allege that the assessee had changed the system to avoid applicability of Circular No. 2 of 2002. Changeover in the system of accounting by the assessee was, therefore, in our opinion, lawful and bon....
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....ecause 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 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 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 law 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. In other words, we are of the opinion that so far as assessee's case is concerned, it has to be held to have followed cash system of accounting w.e.f. 1st April, 2001. 28. Since we have accepted the assessee's change in system of accounting as "cash system" from "mercantile system", there is no question of taxing the interest or any other income from so-called DDEs including on accrual basis and, therefore, direct the AO to delete all such additions. To be specifi....
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....such bonds will be treated as interest income assessable under the IT Act. On transfer of the bonds before maturity, the difference between the sale consideration and the cost of acquisition would be taxed as income from capital gains where the bonds held as investment, and as business income where the bonds were held as trading assets. On final redemption, however, no capital gains will arise. It was further clarified that tax would be deducted at source on the difference between the bid price and the redemption price at the time of maturity. 2. Such tax treatment of Deep Discount Bonds, however, has posed the following problems: (i) Taxing the entire income received from such a bond in the year of redemption as interest income gives 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. (ii) Where the bond is redeemed by a person other than the original subscriber, such person becomes taxable on the entire difference between the bid price and the redemption price as interest income, since he is not able to deduct his cost of acquisition from such income. (iii) A company issuing such b....
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....stor or as business income in the hands of a trader. For computing such gains, the cost of the bond will be taken to be the aggregate of the cost of which the bond was acquired by the transferor and the income, if any, already offered to tax by such transferor (in accordance with para 4 above) upto the date of transfer. 5.1 Since the income chargeable in this case is only the accretion to the value of the bond over a specific period, for the purposes of computing capital gains, the period of holding in such cases will be reckoned from the date of purchase/subscription, or the last valuation date in respect of which the transferor has offered income to tax, whichever is later. Since such period would always be less than one year, the capital gains will be chargeable to tax as short-term capital gains. 6. Redemption Where the bond is redeemed by the original subscriber, the difference between the redemption price and the value as on the last valuation date immediately preceding the maturity date will be taxed as interest income in the case of investors, or business income in the case of traders. 6.1 Where the bond is redeemed by an intermediate purchaser, the difference betwe....
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.... such investors holding Deep Discount Bonds upto an aggregate face value of rupees one lakh may, at their option, continue to offer income for tax in accordance with the earlier clarifications issued by the Board referred to in para 1 above. 10. The contents of this Circular may be brought to the notice of all the officers working in your region. (Sd.) Batsala Jha Yadav, Under Secretary (TPL-IV)] (Notification No. F. 149/235/2001 -TPL) 29.4 The third document is to be considered as the press note/release from the CBDT on 20th March, 2002 (copy of which placed at page No. 44 of the assessee's paper-book) and reads as under: Press Notes/Releases Tax Treatment of Deep Discount Bonds and Strips. There have been certain reports in the press recently, suggesting that the tax treatment of deep discount bonds as specified in the Circular dt. 15th Feb., 2002 [published at (2002) 173 CTR (St.) 217] issued by the CBDT is anomalous, as it provides for taxation of income from such bonds on an annual basis, even though no income is received by the bond-holder before maturity. It has been opined that a heavy tax burden is being placed on persons who have been holding such bonds fo....
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....d on redemption would always be liable to tax deduction at source as per normal provisions of the IT Act. However, no TDS is required on interest payable on Government securities, and bonds issued by an institution, authority, public sector company or cooperative society can also be exempted from the requirement by notification. [Source : PIB Press Release, dt. 20 March, 2002.] 30. We have considered the aforesaid circulars/press notes/releases and would, first of all, like to comment on the issues involved in these circulars/press notes/releases. (1) So far as letter issued by the Board to IDBI on 12th March, 1996, i.e. letter No. 225 (copy at page No. 48 of the paper-book) is concerned, we are of the opinion that as per this clarification the taxability of interest income from DDBs was to be treated as under: (a) In case, the DDBs were transferred before maturity, i.e. if the subscriber to these bonds was to transfer the same in the name of anybody else, by way of sale before the date of maturity, the difference between sale consideration and issue price was to be treated as capital gain or loss, if the subscriber had purchased them by way of investment and if the subscribe....
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....ice as interest income. According to the Board such person was not able to deduct his cost of acquisition from such income. (iii) The third problem according to Board, likely to be faced was that the company issuing such bonds and following the mercantile system of accounting might have evolve a system of accounting of actual accrual of the liability in respect of interest on such bond and claim of deduction year after year, though the corresponding income in the hands of the subscriber was to be taxed only at the time of maturity. (iv) The fourth problem according to the Board, which would have arisen was that the taxing the entire income at the time of maturity only amounted to a tax deferral. The Board to mitigate the aforesaid problems prescribed a fresh formula for treatment of surplus on such bonds and as is evident from para No. 3 of the circular wanted the public to follow that formula in future. Formula : General Terms: (i) As per this formula, every person holding DDBs was put under obligation to make market valuation of such bond as on 31 March of each financial year in accordance with the guidelines issued by the RBI for valuation of investment and made the di....
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....s who have subscribed to DDBs for the purpose of keeping the same as investment because Board has no power to tax any income taxable under a particular head as income under any other head. (ii) In any case, para No. 3 of this circular read with press note dt. 20th March, 2002 clarifies beyond doubt that this circular is applicable only to the DDBs purchased on or after the date of this circular which was 15th Feb., 2002 and, therefore, so far as DDBs purchased before 15th Feb., 2002 were not covered by this circular. In support of the aforesaid proposition put forward by the learned Counsel for the assessee, detailed arguments were advanced which have been reproduced by us in earlier part of this order. Decisions relied upon have also been listed in earlier part of this order especially the decision of Bombay Bench [see para No. 9 (iii)(A)(a)(iv) of this order]. 32.1 Revenue's case, on the other hand, is that circular issued by (to) IDBI on 12th March, 1996 and the press note issued by the Board of 21st March, 2002 were not binding on the Revenue authorities because these were not circulars as envisaged in the provisions of Section 119 of the Act. According to Revenue auth....
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.... as a result of such circular. (ii) So far as binding nature is concerned, first of all, we are of the opinion that it is only benevolent circular which is binding on the authority, but so far assessee is concerned, the assessee can prefer not to take or seek benefits of the circular, irrespective of the fact as to whether the circular is benevolent or not and, therefore, if an assessee chooses not to seek benefit of a circular, the Revenue cannot impose the same. (iii) So far as appellate authority, Tribunal and Courts are concerned, circulars issued by the Board even if benevolent are not binding. (iv) So far as press note or release dt. 20th March, 2002 which has been issued by the Board only to clarify the scope of its earlier circular is concerned, is not a press note as understood in the normal parlances because as pleaded by the learned Departmental Representative, the press notes referred to by him are of nature which were released prior to issuance of a particular circular and not to clarify the scope or terms of any circular issued earlier. The press note being captioned as press note/release is nothing new but only a continuation of earlier circular, i.e. Circular ....
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....sed/subscribed before 15th Feb., 2002 and, therefore addition on account of income from such bonds is deleted. This view is supported by the decision of Tribunal Mumbai Bench "C" Mumbai in the case of ITO v. M/s Kulgam Holdings (P) Ltd. for asst. yr. 2001-02 in ITA No. 3785/Mum/2004, dt. 25th April, 2007, wherein the Hon'ble Mumbai Bench had occasion to consider the date of applicability of Circular No. 2 of 2002 and after considering the circular and the press note dt. 20th March, 2002 has held that Circular No. 2 of 2002 was applicable to DDBs purchased after 15th Feb., 2002 and the relevant part as contained in para No. 7 of the appellate order (copy placed at page No. 49 of the assessee's paper book) reads as under: 7. We heard the rival submissions. Circular of CBDT No. 2 of 2002 dt. 15th Feb., 2002 and press notes have been placed on record by the assessee at pp. 38 to 47 of the paper book. Clause 3 of Circular No. 2 of 2002 reads as under: 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 sys....
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..... These decisions, therefore, in our opinion, do not. support the Revenue's case. The learned Departmental Representative had, further relied on the decisions referred to in para Nos. 10.2(d) and 13.3 (a) and (b) in support of his submission that benevolent circulars issues by the CBDT were binding on the Revenue authorities. 35.2 Having considered the decisions, we are of the opinion that there; cannot be any dispute as to the binding nature of benevolent circulars on the Revenue authorities, but it is also settled that the assessee and Courts including the Tribunals are not bound by such requirements and, therefore, in the present case the assessee having disputed the very validity and applicability of Circular No. 2 of 2002, the Revenue authorities' reliance on these decisions is only academic. 35.3 The learned Departmental Representative had further relied on the decisions stated in para Nos. 10.4(1), (b) and (e) in support of his submission that press note 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....
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....ns support the assessee's relevant plea directly, whereas some of the decisions support the decisions indirectly, but since we have allowed the assessee's various grounds after going through these decisions, consideration of the same separately, in our opinion, is not required. Ground No. 4 39. So far as ground No. 4 of assessee's appeal is concerned, we have considered the rival submissions, facts and circumstances of the case and various decisions relied upon by the parties. First of all, we prefer to consider the various decisions relied upon by the parties. (a) So far as Revenue is concerned, it has relied on the decision of Hon'ble Supreme Court in the case of Goetze (India) Ltd. v. CIT (supra) and order of Tribunal Ahmedabad Bench "C" in the case of Injinium Communication (P) Ltd. (supra). (b) The learned Counsel for the assessee, on the other hand, in support of its claim that the assessee has right 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. ....
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....o raise the points of law even before the Tribunal. The decision in question is that the power of the Tribunal under Section 254 of the IT Act, 1961, is to entertain for the first time a point of law provided the facts on the basis of which the issue of law can be raised are before the Tribunal. The decision does not in any way relate to the power of the AO to entertain a claim for deduction otherwise than by filing a revised return. In the circumstances of the case, we dismiss the civil appeal. However, we make it clear that the issue in this case is limited to the power of the assessing authority and does not impinge on the power of the Tribunal under Section 254 of the IT Act, 1961. There shall be no order as to costs. 39.2 After giving our thoughtful consideration to the decision of Hon'ble Supreme Court in the case supra what we have been able 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....
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....re go to show the case of the respondent -assessee in Tax Appeal No. 328 of 2000 and the appellant assessee in Tax Appeal No. 157 of 2000 is primarily based on the debenture issued by the company; namely, tax treatment of interest which is payable by the company and receivable by the individual debenture holder under the debenture. The relevant portion of the debenture certificate shows that debentures are issued in terms of the debenture trust deed dt. 31 March, 1995 in pursuance of resolutions passed by the board of directors of the company on 24th March, 1995 as well as by the general body at the; extraordinary general meeting held on 24th March, 1995. Accordingly, the company has issued secured redeemable non-convertible debentures each of Rs. 100 and as the specimen certificate 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 al....
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....n assessee to become entitled to deduction under Section 36(l)(iii) of the Act while computing income under the head 'Profits and gains of business and profession' the assessee has to establish that it has paid interest in respect of capital borrowed for the purposes of business. In the present case, it is an admitted position between the parties that, the payer company is carrying on business, it had borrowed capital by way of debenture issued for such business, and it had paid interest in respect, of such capital borrowing. The payer company, therefore, has satisfied all the conditions necessary for involving Section 36(l)(iii) of the Act and is thus, entitled to deduction of interest paid while computing its income 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 Se....
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....evenue, attention was invited to observation made by the AO regarding applicability of ratio of McDowell & Co. Ltd. v. CTO, [1985] 47 CTR (SC) 126 : [1985] 154 ITR 148 (SC) to contend that there was a transaction entered into between the parties so as to take double advantage. Whether the transaction is entered into with the object of tax planning or not is an entirely different matter than the contract being sham or not being acted upon by parties. At the cost of repetition it requires to be stated that both the assessees, namely, the payer company as well as the recipient on one side and Revenue on the other side have relied upon the terms of the contract so as to suit their convenience while bringing to 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 s....
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....he decision of Madras High Court in the case of Madras Industrial Investment Corporation Ltd. (supra) in para No. 29 of its order. 41. After careful consideration of the decision (supra), we are of the opinion that so far interest on OFCPN of Nirma Industries Ltd. is concerned, admittedly, there being no agreement for payment of interest on yearly basis, the same was not taxable either on mercantile basis or on cash basis. (ii) Decision Tribunal Mumbai Bench "K" in the case of Chicago Pneumatic India Ltd. v. Dy. CIT (supra). 42. The facts in this case were that the assessee claimed deduction under Sections 80HH and 80HHI in the original return of income. Thereafter, the assessee 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 a....
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.... followed. 2. Complaints are still being received that while ITOs are prompt in making assessments likely to result into demands and in effecting their recovery, they are lethargic and indifferent in granting refunds and giving reliefs due to assessees under the Act. Dilatoriness or indifference in dealing with refund claims (either under Section 48 or due to appellate, revisional, etc. orders) must be completely avoided so that the public may feel that the Government are actually prompt and careful in the matter of collecting taxes and granting refunds and giving reliefs. 3. Officers of the Department must not take advantage of ignorance of an assessee 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 responsibili....
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.... of the assessees in respect of any refunds or reliefs to which they are eligible, which they have not claimed for some reason or the other. The Board has also given few examples in this regard and has specifically clarified that these examples are not exhaustive. Further, the Board also issued Circular F. No. 81/27/65-IT(B), dt. 18th May, 1965 defining the duties of P.R.Os. in providing assistance to the public. In this circular, the Board has also advised the P.R.Os. to visit the Government/commercial establishments to provide them assistance in filing correct returns 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 directio....
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....e in the course of assessment proceedings for which assessee has not filed revised return, although, as per law, the assessee is required to file the revised return. Having stated so, in our view, the learned CIT(A), having coterminous powers with the powers of AO and the fact that appellate proceedings are the continuation of original proceedings, should have entertained the claim of assessee and allowed if other conditions of the provisions of the law were satisfied. In this view of the matter, we accept both the grounds of the assessee and direct the learned CIT(A) 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 Reve....
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....e of West Bengal v. Administrator, Howrah Municipality, AIR 1972 SC 749 and Babhutmal Raichand Oswal v. Laxmibal R. Tarte AIR 1975 SC 1297, that the State authorities should not raise technical pleas if the citizens have a lawful right and the lawful right is being denied to them merely on technical grounds. The State authorities cannot adopt the attitude which private litigants might adopt. 45.1 (b) After careful consideration of the aforesaid extract of the decision, we are of the opinion that there is no doubt about the proposition of 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 ....
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.... above, even if the circular is considered to be valid, then also the same being, in our opinion, applicable only to the DDBs purchased after 15th Feb., 2002, the income/interest from DDBs purchased prior to 15th Feb., 2002, in assessee's case who has held the same as investment, was not liable to be taxed on accrual basis. (vi) The income/interest from OFCPN of Nirma Industries Ltd. could not be taxed only because the assessee had declared the same in the revised return because once 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 t....
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....tutions (in consonance with the RBI guidelines) would form the basis of their valuation as at each (financial) year end. The difference in the value of a particular bond between two successive valuation dates would represent the accretion to the value of the bond during the intervening financial year, and would be taxable as interest income (where held as investment) and as business income (where held as a trading asset). (ii) Where 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 computatio....
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....arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India. (2) ... 57. A DDB is a bond i.e., issued at a price (issue price), i.e., discounted vis-a-vis its par value at which it is to be redeemed at a future date. For example, a bond of face value of Rs. 1,000, to be redeemed five 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 tradin....
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....o discounting. It is for this reason that the concept of compound rate (of interest) gains ground, so that income accrues at a uniform rate over the defined time period, implying a greater proportion of accrual with the, approach of the maturity date, and thus, addresses the aforesaid concern. In the context of our example, it could mean an accrual 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 t....
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....cumulative interest, so as to suit varying liquidity needs of different constituent groups. It is in this context that the CBDT's earlier Circular No. 409 (on Cumulative Deposit Scheme) dt. 12th Feb., 1985 becomes relevant, and its applicability is also emphasized, being only harmonious with the impugned circular. Of the portfolio held by the 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....
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....ort-term capital gains on its transfer. However, this again flows directly from the cost of the bond being thereon upto the last valuation date, or its valuation upto the last valuation date. Once it is recognized that the variation in the intrinsic value (at any point of time) of the bond, which (i.e., value) is sought to be realized by way 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....