TaxTMI 
TaxTMI 
2013 (2) TMI 787
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....ese appeals were almost identical, they were heard, considered together and disposed off by this consolidated order for the sake of convenience and clarity. 3. Since the issues raised in the respective grounds of appeals being almost identical and also common (except the figures), for the sake of clarity, the grounds raised in the case of Shri Hirenbhai Karsanbhai Patel [in ITA No.1252/Ahd/06] are taken up for adjudication and the findings recorded hereunder in the said case would be applicable to the appeals of other assessees under consideration as well. 4. The first and the last grounds raised in all these appeals being general in nature and no specific issues involved, they have become inconsequential. The issue of charging of interest u/s 234B of the Act is not maintainable as it is mandatory and consequential in nature. The issue of initiation of penal proceedings u/s 271(1)(c) of the Act raised in all the appeals is also not maintainable as it was in its infancy when the AO concluded the assessments. The remaining grounds are reformulated, in a concise manner, as under: The learned CIT (A) had erred in - (i) confirming the stand of the AO in holding that the method of a....
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.... cash system of accounting, but, from the block assessment order dated 28.10.2003, it was observed that the AO had considered the method of accounting adopted by the assessee as that of 'mercantile'. The AO had, further, observed that the assessee had not taken any ground before the CIT (A) in this regard which, according to the AO, the assessee had accepted the AO's finding that he was following mercantile system of accounting. Being queried u/s 145 of the Act, the assessee contended that his method of accounting should only be treated as cash method on regular basis. However, the AO had rejected the assessee's contentions and considered the method of accounting followed by the assessee to be of 'mercantile method' by holding that the assessee was bound to follow the same method of accounting on continuous basis and he was not permitted to change the same. 5.2. On appeal, the learned CIT (A) upheld the stand of the AO by observing as under: "(On page 6) I have considered the submissions of the appellant. I do not find any force in them due to the following reasons- (i) the appellant is not correct in stating that mere fact that no appeal has been filed in the case of the appe....
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....issue in favour of the assessee. 5.3.1. On the other hand, the learned DR had relied on the orders of the authorities below. 5.4. We have carefully considered the rival submissions, perused the relevant materials on record and also the documentary evidences adduced by the learned AR in the shape of paper books. 5.4.1. At this point of time, we would like to recall that a similar issue to that of the present issue has been considered by the earlier Bench of this Tribunal in the case of Kishan Discretionary Family Trust v. ACIT in ITA No.1850/Ahd/2007 dated 2.11.2007 [courtesy: P 7 - 61 of PB - 'B']. The relevant portion of the finding of the Tribunal is as under: "(On Page 65) 27. Therefore, the assessee on its part, in our opinion, succeeded in establishing the change of bona fide because it has ceased to have any business income and had adopted the change well before the search as well as completion of assessment for block period and also before coming of Circular of No.2 of 2002 on the Statute. Since the assessee has followed the same system in all the subsequent years, we see no reason as to why the assessee's choice/preference to adopt the changed system of accounting be n....
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.... 2091 DDBs dated 10.5.2001. This DDB Series A of Nirma Limited was listed in National Stock Exchange and was made available for dematerialization as on 24.9.2001. 6.2. Out of this total 2091 DDBs of Nirma Limited, 700 DDBs were repurchased by Nirma itself dated 1.10.01 and another 1391 DDBs were sold on 19.3.2002. Further, it was noticed by the AO that this DDB Series -A of Nirma Limited was result of the terms of the Debenture Trust Deed dated 27.4.2001 which was entered into between the companies i.e., Nirma Limited, the company which issued DDBs and the IFCI Limited as trustee. Nirma Limited issued the Certificate of holding to the assessee on 10.5.2001. This DDB Series - A of Nirma Limited was listed in National Stock Exchange on 20.9.2001 and was made available for dematerialization as on 24.9.2001. Though the letter of allotment was issued to the assessee as on 23.9.2000 for 1936 DDBs and on 5.3.2001 for 155 DDBs, the Certificate of holding could be issued to the assessee as on 10.5.2001. Since the 700 DDBs of Nirma Limited had been repurchased by it, the income on the same was interest income. For the rest of the DDBs since the Letter of allotment was different in its natur....
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.... the same, though Nirma Limited had claimed the interest on the same. On this context, the assessee was asked to explain as to why the accrued gain should be added on the same on accrual basis. 6.6. It was, further, observed by the AO that from the above, though the value of a security increases in the market on day-to-day basis because as the time passes, the maturity date nears down. In a case of a secured debenture, the liquidity is highly assured. Therefore, it can be safely concluded that the gain in a security accrues on annual basis even though the expenditure may not accrue in the hands of the issuer of the security. In case of Nirma Group, the story is exactly opposite. Nirma Limited, the issuer of DDB Series -A had claimed the interest expenditure on accrual basis, though the liability had not arisen before the maturity date and the holders of DDBs of this Group have not offered the gain on these securities which was automatically accruing in the same because of their high liquidity and nearing down of the maturity date. 6.7. After taking into account of the assessee's submission as recorded in the impugned order, the AO disallowed the claim of the assessee for LTCG of ....
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....e of the assessee on a Press Note dated 20.3.2002 is misplaced because as per Circular 783 dated 18.11.2001, the claims made on the basis of press notes are not sustainable, especially when the circular itself was clarifying the existing provisions of the Act. 5.8. In the light of above observations, it is concluded that the income generating from the repurchase of 700 DDBs Series - A of Nirma Ltd dated 01.10.01 of ₹ 1,19,00,000/- is interest income. The TDS credit of ₹ 24,27,600 is allowed on the same." 6.8. On appeal, the CIT (A), after considering the submissions of the assessee, dismissed both the grounds of the assessee on the reasoning that - "(on page 10) I have considered the above submissions and do not find any force in them. The tax treatment given by Nirma Ltd by deducting TDS and mentioning the nature of payment as 'interest' other than interest on security has a direct bearing on the issue. Interest income by the payer cannot suddenly turn into capital gain in the hands of the payee without proper explanation It is seen that all the other arguments taken by the appellant have been dealt with in the appellate order No.CIT (A)-I/CC 1(1)/35/05-06 dated....
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....se records. 7.1. At this point of time, we would like to recall that an identical issue to that of the present issue under consideration came up before the Hon'ble Mumbai Bench in the case of Kulgam Holding Private Limited (supra) and also before the earlier Bench of this Tribunal in the case of Kisan Discretionary Family Trust (supra). After due consideration, the issue has been decided in favour of the assessee. Incidentally, the earlier Bench of this Tribunal had, in the case of Karsanbhai K Patel (HUF) (supra) after due consideration of rival submissions and also elaborately analyzing a similar issue, observed thus: [Paper Book Page No.73] "15. We have carefully considered the rival contentions presented before us. In our opinion, it appears difficult to uphold the contention of the Revenue to the effect that the holding period of 12 months should be reckoned from the date on which the debenture certificate was issued i.e., on 10.5.2001 or from the date on which the debenture trust deed came into effect i.e., on 27.4.2001 or from the date on which the debentures were listed in the National Stock Exchange i.e., on 20.9.2001. we may straight away clarify that the Circular No....
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....nt bonds - series A issued by Nirma Ltd on 23.9.2000 which is the date on which the letter of allotment was issued. A copy of the letter of allotment has been placed at page 96 of the paper book filed by the assessee. We reproduce below the letter of allotment. "NIRMA LIMITED Registered Office: Nirma House, Ashram Road, Ahmedabad - 380 009 LETTER OF ALLOTMENT SECURED REDDEMABLE DEEP0 DISCOUNT BONDS (DDB SEDRIES - 1 OF ₹ 1,00,000/- EACH FOR CAST AT PAR This is to certify that the person named below or the last transferee(s) whose name(s) is/are the holders of the within mentioned DDB-Series A, subject to the information Memorandum dated 28.7.2000 and Memorandum and Articles of Association of the company and that the amount endorsed herein has been paid up on each DDB - Series A. DDB-SERIES A EACH OF Rs.1,00,000/- AMOUNT PAID UPON APPLICATION Rs.1,00,000/- Registered Folio No.DDBAK03 Letter of allotment No;DA005 Name(s) of holder(s) KARSANBHAI K PATEL Number of DDB held One thousand one hundred eight only (**1180*) Distinctive No(s) DA05682 to DA06861 Given at Ahmedabad this 23rd September, 2000 The instructions for dealing with the Letter of Allotment are set....
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.... the letter of allotment was issued, the company became the debtor to the assessee and that relationship stood defined at that moment itself. The issue of the debenture certificate at a later date after the completion of the formalities such as the debenture trust deed etc., did not improve the matters and brought about no change in the relationship. The letter of allotment merely got exchanged for the issue of the debenture certificates on 10.5.2001. The assessee cannot be said to have acquired the capital asset twice, first when the letter of allotment was issued and thereafter when the debenture certificates were issued. There was only one capital asset and that was acquired on 23.9.2000 when the letter of allotment was issued. 17. The learned counsel for the assessee had referred to section75 of the Companies Act, 1956 which speaks of 'return as to allotment'. This section applies to allotment of shares. However, the meaning of the word 'allotment' has been explained at page 687 of 'Guide to the Companies Act', a treatise by A Ramaiya (14th Edn. 1998. There is reference in this page to the judgment of the Supreme Court in Sri Gopal Jalam & Co v. Calcutta Stock Exchange Assn. ....
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.... time of acquisition was not a capital asset under the Income-tax Act. The land was later converted as non-agricultural land and sold. The argument of the assessee was that the value of the land on the date of conversion to non-agricultural purposes should be taken as the cost of acquisition of the capital asset. Repelling the argument, it was held that there can be only one acquisition of a capital asset and, therefore, the cost of the agricultural land at the time of purchase of the fair market value of the said land as on 1.1.1954, at the option of the assessee, was to be deducted and not the market value of the land on the date on which it was converted for non-agricultural purposes. It must be remembered that the judgment was rendered in the context of an asset which was not a capital asset according to the Act at the time of acquisition. The ratio of the judgment applies with stronger force to the case before us where the bonds or the debentures were capital assets at both points of time under the Act. the judgment of the Bombay High court in the case of Keshvji Karsondas v; CIT (supra) and the order of the Pune Bench (Third Member) in the case of Kalyani Exports & Investment....
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....'ble High court further referred to section 48 which provided for the computation of the capital gains and held that there was no condition in this section that the asset sold should satisfy the definition of the capital asset at the date of acquisition also. It was observed that the expression 'capital asset' is to be understood only as a demonstrative noun to refer to the property transferred and cannot be understood as imposing a condition for the charge that the asset should have been a capital asset as defined by the Act even at the point of acquisition. If the ratio of this judgment is applied to the present case, as we are respectfully bound to, it seems to us that the expression 'any other security list in a recognized stock exchange in India' appearing in proviso to section 2(42A) is merely demonstrative of the asset the sale of which has given rise to capital gains and it does not impose any condition that the security should have also been listed in the stock exchange when it was acquired by the assessee. Apart from the judgment of Hon'ble Gujarat Court cited supra on this point, there is also the judgment of the Bombay High Court in Keshvji Karsondas v. CIT (supra) whic....
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....uld apply only where the listed bonds were allotted to the assessee without any payment and on the basis of holding of any other financial asset. Even assuming that the listed bonds (debenture certificates) were allotted to the assessee without any payment when they were allotted, they cannot be said to have been allotted to the assessee on the basis of holding of any other financial asset. The argument of the learned CIT-DR was that the letter of allotment is a financial asset and that has been exchanged for the debenture certificates and, therefore, the debenture certificates were allotted to the assessee on the basis of holding of the letter of allotment and, accordingly, the date of issue of the debenture certificates as such shall be taken as the date of allotment which shall be the starting point of the period of holding. Here, we have to go back to the fundamental proposition that the debt due to the assessee from Nirma Ltd was first evidenced by the letter of allotment and, thereafter, the letter of allotment was surrendered and in lieu thereof, the company issued debenture certificates to the assessee. Thus, there was change only in the nature of the document which acknowl....
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....rm capital gains. It is to be noted that in this case the High Court held that when the assessee gave up the debentures and acquired the shares, he acquired an asset which was quite distinct and separate from the debentures and further that the rights as a shareholder which the assessee enjoyed were quite different from the rights that the assessee had as a debenture holder. Thus, two separate capital assets were involved. It was, therefore, held that the sale of shares within a period of 12 months from the date of conversion of the debentures gave rise to short term capital gains. In the present case, we have already held that there were no two or more distinct or separate capital assets and what the assessee held throughout was a single capital asset with changes that did not affect the real nature and character thereof. The assessee enjoyed the same rights substantially throughout the period commencing from the letter of allotment and ending with the sale of the bonds. There lies the distinction between the cited judgment and the present case. 23. The judgment of the Bombay High Court in CIT v. Santosh L Chowgule and Others (supra) can also be distinguished on the same footing....
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....s on the sale of the land were long term or short term, it is the date of conversion that should be taken as the starting point for computing the period of holding of the asset. The question was answered in the affirmative. This case is wholly distinguishable on facts from the present case and the nature of the controversy is also different. We are not herein concerned with any conversion of stock in trade into investment. This order is also not helpful to the revenue. 26. For the aforesaid reasons, we are of the view that the assessee is right in claiming that the capital gains arising on the sale of the deep discount bonds should be assessed as long term capital gains on the footing that he held them for a period of more than 12 months starting from 23.9.2000 before they were sold on 20.3.2002. Consequently, we also hold that the assessee is entitled to exemption under section 54EC as claimed…………….." 7.2. The facts of the present case and that of the issues involved in the above referred case being identical, in conformity with the findings of the Co-ordinate Bench of the Tribunal (supra), we are of the considered view that the learned CIT (A....
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....transaction in DDBs has been upheld, there is no question of allowing deduction under section 54EC. Hence, ground of appeal No.4(c) is dismissed." 8.2. Before us, the learned AR submitted, in short, that these issues are covered in favour of the assessee by the findings of the earlier Bench of this Tribunal in the case of Karsanbhai Khodidas Patel [HUF] v. ACIT (supra). It was, therefore, pleaded that the issue requires to be decided in favour of the assessee. 8.2.1. However, the learned D R supported the stand of the authorities below. 8.3. We have carefully considered rival submissions and also perused the relevant materials on case record. 8.3.1. At the outset, we would like to reiterate that these issues have been decided in favour of the assessee while adjudicating the ground Nos.2 and 3 raised in favour of the assessee by following the findings of the earlier Bench of this Tribunal in the case of Karsanbhai Khodidas Patel (HUF) supra. Since the facts and circumstances of the case and the issues involved in these grounds being identical, the AO is directed to treat the income of the assessee arising out of sale of 1391 DDBs by the assessee as LTCG and, consequently, to all....
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....9 crores arising on transfer of 700 DDBs - A Series of Nirma Limited. Accordingly, this issue also goes in favour of the assessee. It is ordered accordingly. 10. Let us now turn our attention to the additional ground raised by the assessee. 10.1 The additional ground raised relates to the addition of accrued interest income of ₹ 1,13,123/- on Optionally Fully Convertible Premium Notes [OFCPN] of Nirma Industries Limited. This issue involved being a legal one, the same is, after due consideration, admitted for adjudication. 10.1.1. The facts relating to the issue involved in the additional ground are that the AO observed that the assessee filed a letter dated 11.8.2004 offering accrued interest on OFCPN of Nirma Industries Limited stating that the same was offered as per the Board's Circular No.2/2002/F.No.149/233/2001-TPL dated 15.2.2002 due to abundant precaution, though the same was not applicable in case of OFCPN, but was related to DDBs. 10.1.2. The assessee had purchased 3814 OFCPN of Nirma Industries Limited on 25.3.2002 at ₹ 9,53,50,000/- and the interest accrued thereon amounting to ₹ 1,13,123/- was, therefore, offered by the assessee. 10.1.3. The AO ....
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....ar cited above equally applies to OFCPNs since they are in no way different from deep discount bonds. 29. The issue stands covered by the order of the Ahmedabad Bench of the Tribunal in the case of Kisan Discretionary Family Trust v. ACIT in ITA No.1850/Ahd/2007 (AY 2003-04) dated 2.11.2007. in this order, it has been held that as per Circular No.2 of 2002 it is applicable only to deep discount bonds purchased after 15.2.2002. Therefore, if it is held that the OFCPNs are similar in nature to deep discount bonds, they having been purchased after 15.2.2002, the circular is applicable and the interest must be held to have been rightly offered and assessed. The contention before us however is that the assessee follows the cash system of accounting and, therefore, the interest is assessable only in the year in which the OFCPNs are encashed. We find that the interest has been assessed in the assessment order under the head 'income from other sources'. Under section 145(1) of the Act, income chargeable under this head 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. As alre....
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....ra), the issue goes in favour of the assessees. It is ordered accordingly. ITA NO.1247/Ahd/2006 - Smt. Rajalben H Patel - A.Y 2002-03: 14. Other than the common grounds which have been dealt by us in the case of Shri Hirenbhai K. Patel - ITA No.1252/Ahd/2006 (AY: 2002-03) supra, the assessee has raised yet another additional ground which reads as under: "In law and in the facts of appellant's case, the ld. AO has erred in making addition on account of interest income ₹ 51,50,000/-." 14.1. After due consideration of the learned A.R's submission on the issue, the additional ground is admitted and taken up for adjudication. 14.2. The AO had observed that the assessee had shown STCG of ₹ 2,50,000/- from the DDBs of Vimpson investment Pvt. Ltd and shown Nil STCG from the DDBs of Shree Developers Pvt. Ltd. From the details furnished by the assessee with regard to DDBs of Vimpson Investment Pvt. Ltd, the AO noticed that 5 DDBs of the said party each of ₹ 50 lakhs, totaling to ₹ 2.5 crores were originally allotted to Nirma Industries Limited. The letter of allotment was transferred to the assessee by this party on 8.2.2001 for ₹ 2.7 crores. The debentur....
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....granted. The argument of the learned AR has force. At the outset, we would like to recall the ruling of the Hon'ble High Court of Punjab and Haryana in the case of CIT v. Smt. Sonal Bansal reported in (2008) 167 Taxman 311 (P & H) wherein, on a similar issue to that the present issue under consideration, the Hon'ble Court has held as under: "A perusal of the provisions of section 199 shows that any deduction made of tax at source and paid to the Central Government is required to be treated as payment of tax on behalf of the person from whose income the deduction was made. However, with effect from 1.4.1997, amendments were introduced by Finance Act, 1996 which resulted in addition of words 'depositor' or 'owner of property' or 'owner of security' or 'unit holder' as the case may be. Therefore, it is clear that any deduction made of tax at source and paid to the Central Government is required to be treated as payment of tax on behalf of 'owner of security' or 'unit holder'. In the instant case, it was obviously the assessee-secondary purchaser who was owner of security and, therefore, tax deducted at source had to be regarded as payment made on her behalf. Moreover, certificate un....
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....come was earned which was exempt and on capital gains, no such expenses were allowable and expense on agriculture was not allowable since agricultural income was also exempt. Accordingly, the assessee was required to explain as to why the net interest expenses of ₹ 1,18,415/- [Rs.1,50,754 - 32339 shown as interest income] and the payments and provisions for employees of ₹ 2,91,911 [Rs.3,88,867 - 96,956 (disallowed in the statement of income)] should not be disallowed. 15.1.2. The AO had rejected the assessee's contention as untenable since against STCG, no interest expense can be claimed as per the provisions of the Act. The AO had also not acceded to the assessee's contention that the other expenses were required to be incurred for the very existence of the assessee company and, accordingly, disallowed the same as they were in the nature of audit fees, consultancy fees and other related accounting expenses. According to the AO, since the assessee had not earned any taxable income other than capital gains, the expenses incurred in respect of provisions for employees salary, leave encashment etc., amounting to ₹ 2,91,911/-, were disallowed as per the provisions of....
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....o. Ltd - (1981) 6 Taxman 241 (All); (ii) CIT v. New Savan Sugar & Gur Refining Co. Ltd (1991) 55 Taxman 189 (Cal) (iii)CIT v. Ganga Properties Ltd - (1992 ) 62 Taxman 285 (Cal); (iv) Nakodar Bus Service (P) Ltd v. CIT (1989) 45 Taxman 290 (P & H); & (v) Chinai & Co. (P) Ltd v. CIT (1994) 206 ITR 616 (Bom). 15.4. The learned D.R, on the other hand, supported the stand of the authorities below and pleaded that the findings of the CIT(A) require to be sustained. 15.5. We have carefully considered the rival submissions and also perused the relevant case records. 15.5.1. We find there is force in the argument of the learned AR that the provisions of s.14A of the Act are clear that the allow-ability of expenses which have been incurred only to the extent in relation to the income. 15.6. We shall now analyze the judicial pronouncements, as relied upon by the learned AR, on a similar issue. (i) In the case of CIT v. Ganga Properties Ltd (supra), the Hon'be Calcutta High Court has ruled that "A limited company even if it does not carry on business, even if it derives income from other sources, has to maintain its establishment for complying with statutory obligation so long as....
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....rm of dividends also. Therefore, the assessee would be entitled to establishment expenses in the form of salary etc., necessary for it to maintain its status as a company and to earn income in the form of interest and dividends……….." 15.7. Taking into account the facts and circumstances of the issue as deliberated upon in the fore-going paragraphs and also in conformity with the rulings of judiciary (supra), we are of the considered view that the CIT (A) was not justified in his findings. In essence, the issues are decided in favour of the assessee. It is ordered accordingly. 16. ITA NO.1254/Ahd/2006 - Jethiben K Patel Discretionary Trust - A.Y 2002-03: Other than the common grounds which have been dealt by us in the case of Shri Hirenbhai K. Patel - ITA No.1252/Ahd/2006 (AY: 2002-03) supra, the assessee has raised the following ground, namely: (Ground No.3) - Adopting the status of the assessee as 'Trust' as against 'Individual'. (Ground No.12) - Learned CIT(A) has erred in disallowing interest expenses of ₹ 20.72 lacs and service charges of ₹ 3.15 lacs u/s 14A of the Act. 16.1. (Ground No.3) - Adopting the status of the assessee as 'Trust' ....
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....hat the said section was available only to individuals and/or Hindu undivided families as they are the only assessees contemplated by that section for the purpose of the benefit conferred by it. The Appellate Assistant Commissioner held that the trust should be treated as an individual and, thus, it would be entitled to the relief under section 80L. The Tribunal held that section 161 and not section 164 is the basis for assessment of the representative assessee and as the trustee is only vicariously liable as a representative assessee and as the tax has to be levied upon and recovered from him in the like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him, in the assessment of the representative assessee, exemptions, deductions and benefits have to be given as the beneficiary would have been entitled to in case of direct assessment. The Tribunal held that the trustees of a trust take colour of their status from that of the beneficiary and it cannot be different from the persons they represent. The Tribunal, relying upon the observations made by the Supreme Court in matters arising under the Wealth-tax Act, 1957, held that t....
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.... ground raised by the assessee was dismissed with an observation that all the grounds of appeal have been dealt with in the appellate orders in the cases of Harsiddh Specific Family Trust and Shri Karsanbhai K Patel (HUF). 17.2. At this point of time, we would like to point out that the assessee in its communication dated 27.9.2004 addressed to the AO had stated under the caption 'Interest expense' that the trust had paid interest of ₹ 20,72,915/- to Nirma Specific Family Trust for the net borrowings made during the year which has been utilized wholly and exclusively for the purpose of earning income. The above referred interest expense is thus incurred for the purpose of earning income which is taxable and, therefore, there is no question for applicability of s. 14A in our case. With regards to Service charges of ₹ 3,15,000/- was concerned, the assessee in its letter dated 15.9.2004 drew the attention of the AO to the effect that the same was paid to Nirma Management Services Private Limited towards accounting, investment and other related matters. However, as could be seen from the assessment order, it appears that the AO had not taken cognizance of the assessee's con....