TaxTMI 
TaxTMI 
2024 (4) TMI 1152
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.... facts relating to the above said issues are discussed in brief. The assessee is a director in M/s Capricorn Realty Ltd and is deriving salary from there. Besides the above, the assessee is also engaged in the business of trading in Shares & securities and is carrying on business in Artwork & Painting under the trade name "The Luxury Company". During the year under consideration, the assessee declared Long term capital gains on redemption of NCDs issued by two companies, viz., (a) Bhishma Realty Ltd and (b) Capricon Realty Ltd. The assessee invested the maturity proceeds in purchase of a flat under construction and also in REC bonds. Accordingly, the assessee claimed exemption u/s 54F and 54EC of the Act in his return of income. 3. The AO noticed that the deduction u/s 54F is allowed against the capital gain arising on sale of capital asset other than a residential house, if the assessee has purchased within two years and constructed within 3 years a residential house, from the date of transfer of the capital asset. He noticed that the NCDs were redeemed by the assessee in October, 2009 and the agreement for purchase of flat was entered on 16th July, 2012. Further, it was notice....
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....inst their outstanding loans in the year 2004/2005. The terms and conditions of issuing NCDs were governed by a Debenture Trust Deed dated 22.07.2005 and M/s IDBI Trusteeship Services Ltd was appointed as "Trustee" for the management of NCDs. Each NCD was having face value of Rs.1.00 lakh. Two types of NCDs, viz., NCD-I for the creditors holding first charge and NCD-II for the creditors holding second charge were issued. 6. During the year 2006, the banks started pressurizing the directors of the SPVs for payment of NCDs. Hence the assessee, being one of the directors along with other individuals purchased the NCDs from the nationalized banks. The assessee purchased the NCDs issued by M/s Bhishma Realty Ltd and M/s Capricorn Realty Ltd and the details thereof are given below:- (A) Bhishma Realty Ltd:- NCD -I - 213.35 NCDs having face value of Rs.1.00 lakh each was purchased for Rs.1,30,380.26 per debenture. NCD-II - 731.50 NCDs having face value of Rs.1.00 lakh each was purchased for Rs.1,32,367.05 per debenture. (B) Capricorn Realty Ltd:- NCD-I - 29.69 NCDs having face value of Rs.1.00 lakh each was purchased for Rs.1,30,379.72 per debenture. ....
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....bsp; =============== Thus, the assessee made a gain of Rs.908.30 lakhs (Rs.2359.62 (-) Rs.1451.32 lakhs). The assessee offered the same as Long term capital gains. We noticed earlier that the provisions of sec.54F allows a deduction against capital gains, when an assessee invests the long term capital gains arising from sale of a capital asset other than a residential house in purchase/construction of a residential house. The assessee booked a flat in the building promoted by M/s Capricorn Realty Ltd and developed by M/s Genext Hardware & Parks P Ltd. Accordingly, the assessee claimed a sum of Rs.2,77,15,801/- as deduction u/s 54F of the Act on the reasoning that he has invested the long term capital gains arising on redemption of NCDs in constructing a residential house. As noticed earlier, it appears that the assessee has also invested in REC bonds and claimed deduction u/s 54EC of the Act in respect of the same, but there was no discussion on that issue by the AO. 8. We noticed earlier that the AO rejected the claim for deduction u/s 54F of the Act. The Ld CIT(A), however, examined the issue....
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.... a sum of Rs.12,59,52,660/-, being the difference between the sale value and face value of NCDs. However, the fact remains that the assessee was not original allottee of NCDs and he has purchased them from banks. Hence, the difference between the sale value and purchase cost amounting to Rs.9,09,25,505/- was the actual amount of gain earned by the assessee and the same should have been directed by him to be assessed as interest income. This is an apparent mistake in mentioning the income that is required to be assessed and we have given appropriate direction infra. 12. Now, the question that requires our consideration is whether the gain arising to the assessee on redemption of debentures is in the nature of Capital gains as claimed by the assessee or it is in the nature of interest income as held by Ld CIT(A). The question relating to deduction claimed by the assessee u/s 54F of the Act would require examination only if we hold that the impugned gain is assessable as long term capital gains. 13. In the instant case, the Special Purpose Vehicles, viz., Bhishma Realty Limited, Capricorn Realty Limited and Chaitra Realty Limited have issued Non Convertible Debentures - i.e., 0%....
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....ins arising on transfer, redemption or maturity of "market linked debentures" shall be deemed to be capital gains arising on transfer of short term capital asset. He also invited our attention to the fourth proviso to sec.48, wherein it is stated that the benefit of indexation will not be available to debenture. Accordingly, the Ld A.R submitted that the Income tax Act itself recognizes "debentures" as capital asset. Accordingly, the Ld A.R contended that the redemption of debentures would result in transfer of a capital asset and the gain arising thereon would give raise to Capital gains as mentioned in sec.45 of the Act. 16. On the contrary, the Ld D.R submitted that the NCDs are debt instruments and issuing of debentures is one of the ways of borrowing money either from market or through private placement. In the present case, the NCDs have been issued initially by HSWML to the banks in settlement of loan taken by it from banks. The said NCDs carried 0% interest rate, but are redeemable at a premium. It is specifically stated that the premium amount payable on redemption is calculated in a particular manner, meaning thereby, the premium is nothing but the interest amount paya....
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....banks, being initial allottees. The debentures were not listed/traded in any of the stock exchanges. As per Section 2(30) of Companies Act, 2013 "debenture" includes debenture stock, bonds, or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not. Hence, even though the debentures would fall under the definition of "securities", yet they are essentially debt instruments evidencing a debt. 19. The Ld D.R relied on a circular issued by CBDT, i.e., Circular No.002 of 2002, wherein the tax treatment to be given on the gains realized on redemption of Deep Discount Bonds (DDB) has been explained. The DDBs are issued by discounting the face value of debenture/bond and the same will be redeemed at par value. For example, the DDB with tenure of five years and having a face value of Rs.1000/- may be issued at Rs.600/-. They will be redeemed at Rs.1,000/- upon maturity. The NCDs issued by SPVs are opposite to DDBs. The NCDs were issued by the SPVs at a face value of Rs.1.00 lakh and they are redeemable after a period of five years at a premium so as to yield an IRR of 12.50% in the case of NCD-I and 11% in the case of NCD-II.....
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....holder and hence the amount paid to the shareholder is exigible to Capital gains tax. We notice that the all the said case laws are related to Preference shares/equity shares and not to debentures. There should not be any dispute that the "shares" and "debentures" are two different types of instruments having different types of rights and liabilities. Hence, both cannot be equated with. A shareholder holds a share in the Share capital of a company and he is considered to be one of the owners of the company. He is having right over the surplus available on liquidation of the company. While the preference shares may be of a particular tenure, the equity shares are held on a perpetual basis. Both kinds of shares can only be sold in the open market. The question of redemption of shares does not arise in the case of equity shares. However, a company may buy back its equity shares subject to complying with the conditions imposed by the Statue. Similarly, subject to compliance of conditions imposed by the statue, the par value of equity shares may be reduced, split etc. On the contrary, a debenture holder is a financial creditor to the company, since debenture is a debt instrument. Furthe....
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.... Let us assume that a debt instrument having face value of Rs.1000/- was issued and it carried interest rate of 12% p.a.. Let us further assume that the market rate of interest has fallen to 6% subsequently. In that case, the market forces will recognize the higher interest yield available in the above said debt instrument. Accordingly, the market value of debt instrument may increase to say Rs.1300/-. If the holder of the said debt instrument having face value of Rs.1000/- sells it for Rs.1300/-, then the gain of Rs.300/- obtained by that person is assessable as Capital gain. So far as the company which had issued the debt instrument is concerned, the above said market value is irrelevant. It would be paying interest on the face value of Rs.1000/- only and further, at the time of redemption of the same, the said company would be redeeming the debt instrument at its face value of Rs.1000/- only. We have held earlier that such kind of redemption will not give rise to any capital gains. 23. In the instant case, the NCDs under consideration are privately placed debentures and they are not listed in the stock exchange. Further, the assessee herein has not sold the NCDs in the open m....