Clarificatory Note - Income Tax - 318/1982

Circular No. 318/1982 Dated 1/1/1982 Special Bearer Bonds (Immunities and Exemptions) Act, 1981 Special Bearer Bonds Clarificatory Note 1. The Special Bearer Bonds (Immunities and Exemptions) Ordinance, 1981 ('the Ordinance'), was promulgated by the President on January 12, 1981. The Ordinance was replaced by the Special Bearer Bonds (Immunities and Exemptions) Act, 1981 ('the Act') which received the assent of the President on March 27, 1981. 2. The Bonds were placed on sale from February 2, 1981 in India and from February 9, 1981, abroad. The sale of Bonds was, however, suspended with effect from May 1, 1981. 3. The constitutional validity of the Ordinance and the Act which replaced it was challenged in some writ petitions filed in the Supreme Court. These writ petitions were, however, dismissed by the Court on September 2, 1981. The sale of the Bonds has since been resumed with effect from December 1, 1981 and will continue uptil January 9, 1982. 4. In connection with the Special Bearer Bonds Scheme, several letters and articles have appeared in the Press. Suitable clarifications have been issued in the form of brochure and otherwise from time to time. The following further clarifications are issued for information : Question 1 : How does the Special Bearer Bonds Scheme affect taxation under the Income-tax, Wealth-tax and Gift-tax Acts? Answer : The Special Bearer Bonds Scheme is independent of the tax system. The assessments under these Acts will be made in the normal course without taking into account the subscription to, or acquisition of, special bearer bonds by any person. Question 2 : Is it necessary to disclose the holding of the special bearer bonds in the wealth-tax return? Answer : Section 3(1) of the Act specifically provides that, notwithstanding anything contained in any other law, the holder of the Bonds will not be required to disclose the nature and source of acquisition of the Bonds. Further, section 4 of the aforesaid Act provides that the subscription to or the acquisition of the Bonds shall not be taken into account for the purpose of any proceedings under the Income-tax Act, the Wealth-tax Act and the Gift-tax Act. In view of these provisions, it will not be necessary to declare the holding of the Bonds in the wealth-tax return. Question 3 : Is it necessary to declare the gift of the Bonds in the gift-tax return? Answer : For the reasons given in the answer to Question 2, it will not be necessary to declare the gift of the Bonds in the gift-tax return. Question 4 : Can the officer question a person regarding the nature and source of acquisition of special bearer bonds? Answer : No. Section 3(1)( a ) of the Act provides that, notwithstanding anything contained in any other law for the time being in force, no person who has subscribed to or has otherwise acquired special bearer bonds shall be required to disclose for any purpose whatsoever, the nature and source of acquisition of the Bonds. This is, however, subject to the exceptions mentioned in section 3(2) of that Act. Question 5 : Can an inquiry or investigation be commenced against any person on the ground that he has subscribed to or has otherwise acquired the Bonds? Answer : No. Please see section 3(1)( b ) of the Act. Question 6 : During the course of search under section 132 or survey under section 133A of the Income-tax Act, can the authorised officer inventorise the special bearer bonds that he may find on the premises? Answer : No. The subscription to or acquisition of the Bonds is not to be taken into account for the purposes of any proceeding under the Income-tax Act, the Wealth-tax Act and the Gift-tax Act [ vide section 4 of the Act]. No attempt should, therefore, be made to note down the distinctive numbers of the Bonds or the total value of the Bonds found during the course of search or survey operations. Question 7 : Can special bearer bonds be seized in the course of an operation under section 132 of the Income-tax Act? Answer : For the reasons given in the answer to Question 6, the Bonds cannot be seized in the course of search operations. Question 8 : If the Income-tax Officer in the course of assessment proceedings detects concealment of income, of say, Rs. 1 lakh and the assessee proves to the satisfaction of the Income-tax Officer that he has invested the entire amount of concealed income in the acquisition of special bearer bonds, what should the Income-tax Officer do? Answer : The Income-tax Officer should ignore the explanation of the assessee and frame the assessment in the normal course as if the assessee had not purchased special bearer bonds. This follows from the specific provision in section 4( a ) of the Act. Question 9 : If a person was assessed to wealth-tax on wealth of Rs. 10 lakhs and in the course of assessment proceedings for the next year he claims that there has been no change in his wealth except that he has purchased special bearer bonds, for say, Rs. 2 lakhs, will he be assessed to wealth-tax on Rs. 10 lakhs or on Rs. 8 lakhs keeping in view the exemption contained in section 5(1)( xvib ) of the Wealth-tax Act? Answer : He will be assessed to wealth-tax on Rs. 10 lakhs, because according to section 4( b ) of the Act, no person who has subscribed to or has otherwise acquired the Bonds shall be entitled to claim, in relation to any period before the date of maturity of the Bonds, that any asset which is includible in his net wealth for any assessment year under the Wealth-tax Act has been converted into Bonds. Question 10 : If there is a credit in the books of account of an assessee and he explains the source of the credit as sale-proceeds of special bearer bonds, can this explanation be accepted? Answer : No. No person who has subscribed to or otherwise acquired the Bonds shall be entitled to claim, in relation to any period before the date of maturity of the Bonds, that any sum credited by him in his books of account or otherwise held by him represents the consideration received by him for the transfer of the Bonds. Please see section 4( c ) of the Act. Question 11 : Is the premium receivable on redemption of the Bonds taxable? Answer : No. It is exempt from income-tax under section 10( 15 )( ib ) of the Income-tax Act. Question 12 : On redemption of Bond, cannot the Income-tax Officer question the Bond-holder regarding the source of money invested in acquisition of the Bond? Answer : No, section 3(1)( a ) of the Act provides that no person who has subscribed to or has otherwise acquired special bearer bonds shall be required to disclose for any purpose whatsoever, the nature and source of acquisition of such Bonds. In other words, on redemption of each Bond of the face value of Rs. 10,000 on maturity, the Bond-holder would be repaid Rs. 12,000 including premium of Rs. 2,000 and the entire sum of Rs. 12,000 will be exempt from income-tax. Question 13 : If an assessee informs the Income-tax Officer that he has purchased or otherwise acquired Bonds of a certain face value, what should the Income-tax Officer do? Answer : The Income-tax Officer should ignore the fact of acquisition of the Bonds by the assessee. Question 14 : If, before the date of maturity of the Bonds, a Bond-holder transfers the Bonds at a premium, would not the premium be liable to capital gains tax? Answer : No, because the definition of 'capital asset' in section 2( 14 ) of the Income-tax Act has been amended to exclude the Special Bearer Bonds, 1991 from its purview. Question 15 : Is any exemption or concession available under the Estate Duty Act in respect of special bearer bonds? Answer : No. No exemption or concession has been provided under the Estate Duty Act in respect of the special bearer bonds. Question 16 : Can an assessee in arrears of tax offer the special bearer bonds to the department for satisfaction of his tax arrears? Answer : The Income-tax Officer and Tax Recovery Officer will not accept special bearer bonds in full or part-payment of arrears of tax. Source : Circular No. 318, dated 1-1-1982 .