2013 (2) TMI 787 - AT - Income Tax

Summary

Issues Involved:
1. Method of accounting.
2. Treating Long Term Capital Gain (LTCG) as interest income.
3. Non-allowing the claim u/s 54EC on LTCG.
4. Treating LTCG on sale of DDBs as Short Term Capital Gains (STCG).
5. Addition of accrued interest on DDBs.
6. Addition of accrued interest on OFCPNs.
7. Status of assessee as 'Trust' vs. 'Individual'.
8. Disallowance of expenses u/s 14A.

Summary:

1. Method of Accounting:
The AO observed that the assessee was following a cash system of accounting but treated it as mercantile based on a block assessment order. The CIT (A) upheld the AO's decision. The Tribunal, however, decided in favor of the assessee, conforming to an earlier Tribunal decision in a similar case, allowing the assessee to adopt the cash method of accounting.

2. Treating LTCG as Interest Income:
The AO treated LTCG of Rs. 1.19 crores on the repurchase of 700 DDBs as interest income, supported by a CBDT Circular. The CIT (A) upheld this view. The Tribunal, referring to earlier decisions, concluded that the gains should be treated as LTCG and not interest income, thus deciding in favor of the assessee.

3. Non-Allowing the Claim u/s 54EC on LTCG:
The AO disallowed the claim of Rs. 1.19 crores u/s 54EC on the LTCG, treating the gain as interest income. The CIT (A) upheld this decision. The Tribunal reversed this, allowing the assessee's claim u/s 54EC, treating the gains as LTCG.

4. Treating LTCG on Sale of DDBs as STCG:
The AO treated LTCG of Rs. 3,01,35,849/- on the sale of 1391 DDBs as STCG, disallowing the claim u/s 54EC. The CIT (A) upheld this view. The Tribunal, following earlier decisions, directed the AO to treat the income as LTCG and allow the claim u/s 54EC.

5. Addition of Accrued Interest on DDBs:
The AO added Rs. 48,83,858/- as accrued interest on 1250 DDBs Series-B, applying a CBDT Circular retrospectively. The CIT (A) upheld the addition. The Tribunal, consistent with its earlier ruling, decided in favor of the assessee, deleting the addition.

6. Addition of Accrued Interest on OFCPNs:
The AO added Rs. 1,13,123/- as accrued interest on OFCPNs, applying the CBDT Circular. The CIT (A) upheld this addition. The Tribunal, referring to an earlier decision, ruled that the interest cannot be assessed on an accrual basis for an assessee following the cash system of accounting, thus deleting the addition.

7. Status of Assessee as 'Trust' vs. 'Individual':
The AO adopted the status of the assessee as 'Trust' instead of 'Individual.' The CIT (A) upheld this without providing reasons. The Tribunal, citing jurisdictional High Court rulings, decided that the status should be 'Individual.'

8. Disallowance of Expenses u/s 14A:
The AO disallowed interest expenses of Rs. 20.72 lakhs and service charges of Rs. 3.15 lakhs u/s 14A, considering them related to exempt income. The CIT (A) upheld the disallowance. The Tribunal, following judicial precedents, ruled that such expenses are allowable if incurred for maintaining the establishment, thus deciding in favor of the assessee.

Conclusion:
The Tribunal's consolidated order largely favored the assessees, allowing the adoption of the cash method of accounting, treating gains as LTCG, allowing claims u/s 54EC, and deleting additions of accrued interest, while also clarifying the status of the assessee and allowing certain expenses.