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2014 (2) TMI 469 - HC - Income TaxAccrual of income on Kisan Vikas Patra - Rectification of error apparent on record Promissory note OR not - Held that - The Tribunal was correct in confirming the opinion that the KVP did not amount to a promissory note and which, at the end of the period, the authority promise to pay a fixed sum of money only - It was a case where even premature exit from the scheme was permissible - After completion of two years and six months from the date of issuance of the certificate, the investor could withdraw his investment at the rate of return specified in the rules. The authorities correctly relied on Circular No. 687 dated 19th August 1994 in which it was stated that, the interest on Kisaan Vikas Patras has to be assessed to income tax on accrual basis, the amount of interest accrued on these patras during initial two and half years has to be determined in consultation with the department of Economic Affairs - The amount of interest accrued on investment in Kisaan Vikas Patra by an assessee is to be calculated on the basis of the table received from the Department of Economic Affairs wherein rates of interest and maturity amount for Rs. 1000 denomination of Kisaan Vikas Patra are given Thus, the authorities correctly recorded that the assessee was entitled to encash KVPs after two years and six months and the period was over Decided against Assessee.
Issues Involved:
1. Whether the interest accrued on Kisan Vikas Patras (KVPs) should be added to the total income of the assessee for the relevant assessment year. 2. Whether KVPs should be considered as capital assets under Section 214 of the Income Tax Act, 1961, and the gains should be taxed on maturity with the benefit of indexation. Issue-wise Detailed Analysis: 1. Accrual of Interest on Kisan Vikas Patras (KVPs): The appellant, who argued in person, challenged the judgment of the Income Tax Appellate Tribunal (Tribunal) dated 26th April 2013. The appellant had filed a return of income for the Assessment Year 2007-08, declaring a total income of Rs. 7.23 lakhs. During scrutiny, the Assessing Officer (AO) noticed that the appellant had shown an investment of Rs. 1 Crore in KVPs but had not reported any income from accrued interest on these KVPs. The appellant followed the mercantile system of accounting. The AO added Rs. 21.09 lakhs as accrued interest on the KVPs to the total income of the appellant. The appellant contended that KVPs are capital assets under Section 214 of the Income Tax Act, 1961, and should be accounted for at maturity with cost indexation. However, the AO, CIT (A), and Tribunal rejected this contention, relying on Circular No. 687 dated 19th August 1994, which mandates that interest on KVPs be assessed on an accrual basis. 2. Classification of KVPs as Capital Assets: The Tribunal referred to the case of Kantilal Sanghvi v. ACIT [2004] 89 ITD 282, which held that the purchase of Indira Vikas Patra (IVP) is akin to depositing money in the post office for a specific period at a specified interest rate. On maturity, the holder receives the principal with accrued interest, and there is no transfer of an asset. Therefore, IVPs cannot be considered capital assets, and the benefit of indexed cost of acquisition under Explanation (iii) to Section 48 does not apply. Similarly, in Dr. R.P Patel v. CIT [2009] 26 DTR 266 (Ker), it was held that IVPs are deposit schemes and not bonds, having no market value but only maturity value, which includes the principal amount with accrued interest. Therefore, the scheme of long-term capital gains with indexed cost of acquisition does not apply to IVPs. Applying this reasoning to KVPs, the Tribunal concluded that KVPs are issued by post offices, and the holder is entitled to interest at stipulated intervals. The KVPs have no market value and only maturity value, which is the invested amount with accrued interest. Therefore, KVPs are not capital assets, and the repayment of the deposited amount with interest on maturity cannot be treated as consideration for the transfer of KVPs by the holder. Conclusion: The Tribunal upheld the AO's decision to tax the accrued interest on KVPs and dismissed the appellant's appeal. The appellant's contention that KVPs should be considered as capital assets under Section 214 of the Act was rejected based on the terms and conditions of KVP issuance and the Departmental Circular. The Tribunal found that the interest on KVPs accrues year after year and must be accounted for in the mercantile system of accounting maintained by the appellant. The High Court, upon reviewing the Tribunal's decision and the relevant rules and circulars, agreed with the Tribunal's findings. The Court noted that KVPs allow for premature encashment after two years and six months, with returns specified in the rules. Therefore, KVPs do not amount to promissory notes payable only at maturity. The interest on KVPs must be assessed on an accrual basis, as stated in Circular No. 687. In conclusion, the High Court dismissed the tax appeal, finding no question of law arising in the case.
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