2013 (7) TMI 31 - AT - Income Tax

Capital gain on sale of 330 Deep Discount Bonds series - Long term v/s short term - claim of deduction u/s.54EC - Held that - As the period of holding has to be counted form the date of allotment in the present case when we count the period of holding from the date of allotment, the same is more than 12 months and, therefore, the resultant capital gain is taxable as LTCG and consequently, the assessee is entitled to the deduction u/s 54EC. In favour of assessee. Salary paid to the employee as company secretary disallowed - Held that - This is an admitted position that as per the requirement of the Company s Act, any company having paid up capital of ₹ 25 lacs or more is compulsorily required to employ a qualified CS and, therefore, this cannot be said that the salary paid to the CS employed by the assessee to fulfill the requirement of the Companies Act is an expenditure to earn exempt income and, therefore, to be disallowed u/s 14A of the Income tax Act, 1961. In favour of assessee. Disallowance u/s 14A - Held that - This interest expenditure was incurred mainly on the borrowings for repayment of loan which was availed for investment in DDBs of Nirma Ltd. Series A and, therefore, interest expenditure was incurred wholly and exclusively for the purpose of earning such income which is taxable and hence, rightly claimed. As neither CIT(A) nor D.R. could establish that this contention of the assessee is not factually correct disallowance deleted. In favour of assessee. Notional accrued interest on optionally fully convertible premium notes (OFCPNs) - Additions to income - Held that - It is not the case of the A.O. that the assessee has sold or transferred these OFCPNs in the present year, thus in the absence of this, it cannot be said that any income has accrued to the assessee even if it is accepted that the market value of these OFCPNs till the last date of the present year is more than cost price i.e. issue price which can be issue price proportionate accretion and the difference between the face value and issue price. As the nature of OFCPN is not that of FD and it is also not of the nature of DDB because of convertibility option and uncertainty about receipt of any extra amount over and above the issue price. Even on conversion, shares are to be allotted at par and not at a premium i.e. face value, thus it cannot be said that any income has accrued to he assessee on account of these OFCPNs of Nirma Industries Ltd. because no sale has taken place and there is no guaranteed income to the assessee even after five years in case the assessee opts for conversion into shares at par. Hence, this ground of the assessee is allowed. Disallowance on account of advances written off as the assessee is not engaged in the business of money lending - Held that - Failure to understand when the A.O. himself is stating that the assessee has advanced an amount of ₹ 4 crores as deposit, how it can be said that the assessee is not engaged in the business of financing and money lending. The assessee has made available a copy of the certificate issued by RBI which is dated 20.03.1998 and as per this certificate, the assessee has been registered as NBFC Company. Thus no merit in the disallowance made by the A.O. In favour of assessee Interest u/s 234D - Held that - This issue is now covered in favour of the assessee by the decision of Ekta Promoters 2008 (7) TMI 452 - ITAT DELHI-E .

Issues Involved:
1. Classification of capital gains as short-term or long-term.
2. Eligibility for deduction under Section 54EC.
3. Allowability of salary paid to the company secretary.
4. Appropriation of expenses between taxable and exempt income.
5. Charging of interest under Section 234B.
6. Initiation of penalty proceedings under Section 271(1)(c).
7. Addition of notional accrued interest on optionally fully convertible premium notes (OFCPNs).

Detailed Analysis:

1. Classification of Capital Gains as Short-term or Long-term:
The primary issue was whether the gains from the sale of Deep Discount Bonds (DDBs) issued by Nirma Ltd. should be classified as short-term capital gains (STCG) or long-term capital gains (LTCG). The Assessing Officer (A.O.) held that the holding period should start from the date of listing on NSE, classifying the gains as STCG. However, the Tribunal, relying on a previous decision, held that the holding period should start from the date of allotment, thereby classifying the gains as LTCG. Consequently, the gains were taxable as LTCG, and the assessee was entitled to the deduction under Section 54EC.

2. Eligibility for Deduction under Section 54EC:
Related to the classification of capital gains, the Tribunal also had to decide on the eligibility for deduction under Section 54EC. Since the gains were classified as LTCG, the Tribunal held that the assessee was entitled to the deduction under Section 54EC.

3. Allowability of Salary Paid to the Company Secretary:
The Tribunal examined whether the salary paid to the company secretary (CS) was allowable as a deduction. The A.O. had disallowed this expense, but the Tribunal, following previous High Court judgments, held that even if a company does not carry out business activities, it must maintain its establishment to comply with statutory requirements. Therefore, the salary paid to the CS was considered an allowable deduction.

4. Appropriation of Expenses Between Taxable and Exempt Income:
The issue was whether the interest expenses incurred should be appropriated between taxable and exempt income. The Tribunal, following a previous decision, held that if the interest expenditure was incurred for earning taxable income, no disallowance could be made under Section 14A. The Tribunal found that the interest expenses were incurred mainly for borrowing to repay loans for investment in DDBs, which generated taxable income. Hence, the disallowance was deleted.

5. Charging of Interest Under Section 234B:
The Tribunal held that the charging of interest under Section 234B was consequential and should be determined based on the final tax liability.

6. Initiation of Penalty Proceedings Under Section 271(1)(c):
The Tribunal rejected the ground related to the initiation of penalty proceedings under Section 271(1)(c) as premature.

7. Addition of Notional Accrued Interest on OFCPNs:
The Tribunal examined whether notional accrued interest on OFCPNs issued by Nirma Industries Ltd. should be added to the income. The Tribunal found that the issue price of the OFCPNs was Rs. 25,000 with a face value of Rs. 33,750, and the tenure was five years. The Tribunal held that no income accrued to the assessee on a year-to-year basis as the income would only accrue if the assessee did not opt for conversion into equity shares at the end of the fifth year. Hence, the addition of notional interest was not justified, and the ground was allowed in favor of the assessee.

Conclusion:
The appeals were partly allowed, with the Tribunal providing relief to the assessees on several grounds, including the classification of capital gains, eligibility for deductions, allowability of expenses, and the addition of notional interest. The Tribunal's decisions were based on previous judgments and interpretations of relevant statutory provisions.

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