9911796707
TMI Blog2007 (11) TMI 622X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst column 11A of Form 3-CD which was required to be furnished along with return under the statutory provisions of Section 44AB of the Act. It is also an admitted fact that the Revenue had not framed assessment for this assessment year, i.e. no assessment u/s 143(3) or u/s 147 of the Act has been made by the AO. This fact goes to show that the assessee's returned income shown on the cash system of accounting was accepted by virtue of provisions of Section 143(1)(a) of the Act and that being the case the assessee's preference to change the system of accounting from mercantile to cash for asst. yr. 2001-02 stood accepted. To conclude, we, provisions relating to system of accounting, are of the opinion that: (i) Return of income for asst. yr. 2001-02 showing income from other sources on cash system was filed on 31st July, 2001 which stood accepted, though under Section 145(1)(a) of the Act, and this conclusion is on the basis that Revenue had not preferred to make assessment under Section 143(3) of the Act. (ii) Return of income for asst. yr. 2002-03 showing income from other sources and capital gain on cash system was filed on 9th Aug., 2002 which was again before the date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , was not applicable either for bonds purchased prior to this circular or purchased after this circular and the reasons for our view, are as under: (i) In our opinion, results in changing the head of income, at least in case of those persons who were original subscribers to the bonds and were holding the same as investments and, therefore, creates problem instead of mitigating the same and this is supported by the stand of the Board itself whereby the Board has, in para No. 9 of this circular, tried to exempt the so-called small investors. There is no dispute as to the powers of Board to issue a benevolent circular for granting relief to a particular class of assessees, but when a circular is found to treat two assessees differently, then such a circular cannot be said to be circular as per law and at least cannot bind the assessees who are deprived of benefits as a result of such circular. (ii) So far as binding nature is concerned, first of all, we are of the opinion that it is only benevolent circular which is binding on the authority, but so far assessee is concerned, the assessee can prefer not to take or seek benefits of the circular, irrespective of the fact as to whether th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 2 of 2002 being contrary to the provisions of law providing different treatments to same type of income, providing different treatments to similar income in the hands of different persons, without there being any provisions of law on the point, cannot be held to be binding on the assessee and, hence, we are of the opinion that the income from DDBs was taxable as per first Board's letter dated 12th March, 1996. The additions made by following the Circular No. 2 of 2002 are, therefore, directed to be deleted. Without prejudice to our aforesaid view, that the Circular No. 2 of 2002 was invalid and could not bind the assessee, we are, further of the opinion that in view of language of para No. 3 of this circular and the press note/release dt. 20th March, 2002, the Circular No. 2 of 2002 was not applicable to the DDBs purchased/subscribed before 15th Feb., 2002 and, therefore addition on account of income from such bonds is deleted. This disposes of ground Nos. 1, 2 and 3 of the assessee's appeal. We are of the opinion that the press note dt. 20th March, 1992 being for clarifying the date of applicability of Circular No. 2 of 2002 was not a normal press note, i.e. a press n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount); Section 44AB (compulsory audit of accounts); Section 44AD; Section 44AE, Section 44AF, etc., each of which has stood the test of time as well as of constitutional challenge in some cases. Thus, I opine that the impugned Circular (No. 2 of 2002) dt. 15th Feb., 2002 issued by CBDT is a valid circular in the eyes of law. However, since the assessee's appeal would stand allowed on the ground of system of accounting followed by it, this issue, i.e., the validity Of the circular becomes academic in nature for the present appeal. - I.S. VERMA, J.M. AND SANJAY ARORA, A.M. For the Appellant : S. N. Soparkar, Hemanshu Shah For the Respondent : K. Sridhar ORDER I.S. Verma, J.M. 1. In this appeal, the assessee has objected to the order of the CIT(A)-II, Ahmedabad dt. 26th Feb., 2007 passed for asst. yr. 2003-04, by way of following grounds: 1. In law and in facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in points of law and facts. 2. In law and in facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in holding that the appellant is not following cash method of accounting. 3. In law and in facts and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;s paper-book). 2.4 The sources of income shown in this return were 'long-term capital gain' and 'income from other sources'. 2.5 Note No. 4 of notes forming part of return of income duly showed the system of accounting followed by the assessee for asst. yr. 2002-03 as cash system . The note in question, reads as under: 4. The assessee trust is following cash method of accounting. 2.6 The return of income for asst. yr. 2003-04 (copy placed at page Nos. 54 and 55 of the assessee's paper-book) declaring an income of Rs. 36,02,080 from 'short-term capital gain' and 'income from other source' on cash basis was furnished on 30th Sep., 2002. 2.7 Note No. 3 of notes forming part of return of income appended just below the computation of total income for asst. yr. 2003-04, which is reproduced hereunder, showed the system of accounting followed by the assessee as cash system . Note No. 3 : The assessee trust is following cash method of accounting. 2.8 As a result of search and seizure action under Section 132 having been carried on in Nirma group of cases on 27th Sep., 2001, the assessee's assessment for block period from 1st April, 1995 to 27th Sep. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng note: Note No. 6: The return of income is revised to offer interest income of Rs. 77,95,691 on investment in OFCPN of Nirma Industries Ltd. held as on 31st March, 2003 to avoid litigation. The said revision is without prejudice to the validity of the Circular No. 2 of 2002 F. No. 149/235/2001-TPL dt. 15th Feb., 2002 [(2002) 173 CTR (St) 217] issued by CBDT. During the year 3925 OFCPN has been sold on which capital gain of Rs. 49,88,607 has been offered. The interest income offered in earlier year has been correspondingly reduced from the said capital gain offered in original return. 3.2 The assessee had further given a note with respect to taxability of income from Bonds of Rural Electrification Corporation (hereinafter referred to as REC ) against note No. 4 which is in the following terms: Note No. 4 : Investment of the assessee trust includes Rs. 352.20 lacs in bonds of Rural Electrification Corporation made in financial yr. 2002-03. The assessee is advised that income from such notes/bonds is taxable only on actual realization and consequently the income therefrom will be offered for tax upon actual realization at the time of redemption thereof. 3.3 The assessment for asst. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee filed revised return of income dt. 31st March, 2004 in which the interest income of Rs. 77,95,691 from investment in OFCPN of Nirma Ind. Ltd. has been offered. In a note written in the revised Rol, it has been mentioned that the revised return is filed without prejudice to the validity of the Circular No. 2 of 2002. But the validity of circular is reiterated in this regard and the revision is accepted. It is also clarified that the nature of OFCPN is similar as that of DDB therefore this Circular dt. 15th Feb., 2002 is applicable in the OFCPN also. 3.6 The CIT(A) decided this issue against the assessee as per his findings contained in para No. 3.2 of his order after relying on the decision of Hon'ble Supreme Court in the case of Goetze (India) Ltd. v. CIT [2006] 204 CTR (SC) 182 ; [2006] 284 ITR 323 (SC) which will be reproduced at the appropriate place of this order. 3.7 The AO further disallowed the assessee's claim of an expenditure of Rs. 10.30 lacs claimed on account of consultancy charges and another expenditure of Rs. 5.25 lacs claimed on account of accounting charges as per his findings contained in para Nos. 7 to 7.9 of the assessment order: 7. Claim of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke to clarify that the expenses of Rs. 5.25 lacs are not only in respect of accounting services but also includes for investment, taxation and other related services as well. The same have been paid to Nirma Management Services (P) Ltd. by account payee cheque and are reasonable in view of the services availed. Your good office have required us to prove that these expenses have been incurred to earn business income, otherwise the same will be disallowed. As is evident from the computation of income attached to return of income, that the said expenses have been claimed against income from other sources and are allowable under Section 57(iii) of the Act. These expenses have been incurred for the purpose of making or earning of income and for protecting the assets of the trust. We request reference to Section 57 (iii) of the IT Act, which reads as under: 57. The income chargeable under the head 'Income from other sources' shall be computed after making the following deductions namely: (iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income. To sum up, we submit tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of Section 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of Section 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure. It may be pointed out that an identical view was taken by this Court in Eastern Investments Ltd. v. CIT, where interpreting the corresponding provision in Section 12(2) of the IT Act, 1922 which was ipsissima verba in the same terms as Section 57(iii). Bose, J., speaking on behalf of the Court observed : 'It is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned'. It is indeed difficult to see how, after this observation of the Court, there can be any scope for controversy in regard to the interpretation of Section 57(iii). In view of above, the expenses claimed are allowable. 7.2 It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest on OFCPN/DDB/NCD offered due to the Circular No. 2 of 2002 because there is no need of such expenditure for the same. The remaining income is Rs. 66,918 which has been earned as brokerage. There is no justification of incurring such unrelated expenditure against this income. Thus it is very clear that these expenses have not been incurred wholly and exclusively for the purpose of the business. 7.4 The assessee has tried to justify its claim of Rs. 10.30 lacs by saying that these are in the form of statutory expenditure as the same are relating to the income-tax proceedings, preparing Rol and attending assessment but this contention is incorrect since the claim of Rs. 5 lacs for consultancy in the income-tax matters is also factually incorrect since as per the nature of the incomes earned by the assessee there is no need to pay such huge expenses for earning no income out of consultancy or for conducting any business activities. Basically whatever income has been earned is from the investment and that is due to the assets already owned by the assessee. From the activities of the assessee also, it is clear that these expenditure have not been incurred wholly and exclusively f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e its claim the assessee could not give any written agreement based on which the payments have been made to these persons. It has been tied to give these exp. the name of statutory exp. but the same is not connect. There is no requirement to pay such huge amounts without any commercial expediency. The assessee cannot claim the expenditure which are not wholly and exclusively for the purpose of the business. By giving the expenses statutory names the same cannot become justifiable and without commercial justification the same cannot be allowed as business expenditure. 7.9 When the expenditure is not incurred wholly and exclusively for the purpose of the business and when there is no commercial expediency to incur such expenditure the same is not allowable at all. In this regard, reliance is placed on the following decisions: (i) Andrew Yule Co. Ltd. v. CIT [1963] 49 ITR 57 (Cal); (ii) CIT v. Globe Theatres (P) Ltd. [1979] 8 CTR (Bom) 134 : [1980] 122 ITR 240 (Bom); (iii) Smt. Sushila Devi Rampuria v. CIT [1981] 21 CTR (Cal) 311 : [1982] 137 ITR 272 (Cal); (iv) Rambilas Chandram v. CIT [1985] 156 ITR 344 (Raj); (v) Pratap Cotton Trading Co. v. CIT [1985] 49 CTR (Raj) 41 : [1986] 159 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of the circular in the assessee's case and offering income on the basis of valuation at the end of the year as stipulated in the Circular dt. 15th Feb., 2002. The appellant also placed reliance on the Board's press release dt. 20th Feb., 2002. I have carefully considered the contentions of the appellant as well as gone through the records available on file. The AO has discussed various aspects of Boards Circular No. 2 of 15th Feb., 2002 followed by CBDT's press release dt. 20th March, 2002. The contention of the appellant that the interests have not been actually received during the year and they have no right to receive the income during the year, there is no question of offering any interest income is not acceptable as the value of the DDB increases automatically in the market depending on the current PLR and the appellant can recover the accrued value of interest by selling the same at any time. CBDT's Circular No. 2 of 15th Feb., 2002 explains in detail the method for arriving at the discounted value or maturity value of bonds and determining the accrued income. Therefore the contention of the assessee, that there is no income which has accrued is not cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irma Ltd., I further observe that the AO has not discussed this in the assessment order presumably because in the revised return the assessee had herself offered it for tax. Presumably, claim for exclusion of this sum from the total income was not made before the AO. At any rate, another revised return was not filed for claiming exclusion of that sum from the total income offered for tax in the revised return on 31st March, 2004. Be as it may, it is clear that as per the latest revised return available with the AO this amount stood offered for taxation by the assessee. Even if a claim for exclusion of the same was made before the AO without filing correspondingly a revised return of income the AO would be entitled not to entertain any such claim in view of the Supreme Court decision in Goetze (India) Ltd. v. CIT [2006] 204 CTR (SC) 182 : [2006] 284 ITR 323 (SC). Apart from this, from the papers whose copies are filed with the assessee's submissions dt. 13th Feb., 2002 to this office the said DDBs were issued on or about 7th June, 2002 and certainly after 15th Feb., 2002. On the basis of information and papers furnished by the assessee even by applying the principles of the Circ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 10.30 lacs on account of consultation charges and claim of expenditure of Rs. 5.25 lacs on account of account charges. 6. Learned Counsel for the assessee's arguments: (i) As per the learned Counsel for the assessee, the appellant, a family trust, was till 28th March, 2000 engaged in the business of manufacturing and for the said business, it was following mercantile method of accounting. On 28th March, 2000, appellant sold away the said business as a going concern (reference was made to Note No. 1 on p. 129 which is notes to accounts for asst yr. 2000-01 filed along with the return of income). Thereafter, it has no business and the only income is from investments. (ii) It was, further, submitted that for the year ending on 31st March, 2001 i.e. asst. yr. 2001-02, appellant filed its return of income (pp. 167-169) along with tax audit report (pp. 155-166) where on p. 157, it was clearly stated that its method of accounting was cash. Since no order of assessment was passed on this return therefore, the return and system of accounting stand accepted by virtue of the provisions of Section 144(1)(a) of the Act. (iii) The Authorised Representative further submitted that for ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant's assessment for asst. yr. 2002-03 was taken up for hearing. The appellant's argument that it is following cash method of accounting came to be rejected on the ground that in the block assessment, it is found that appellant has been following cash method of accounting (pp. 64-66). The said order was challenged before learned CIT(A) who vide his order dt. 7th March, 2006 (pp. 91-98) dismissed appellant's appeal, partly on the ground that in the block assessment, the same has been accepted as mercantile method of accounting (pp. 94-97). The appellant has preferred appeal against this order which is pending before Hon'ble Tribunal. (viii) Apart from the controversy as to the method of accounting, controversy pertains to the question as to whether appellant is liable to pay tax on interest alleged to have accrued to it. This issue is in two parts and therefore, considered separately. However, before discussing controversy in two parts, cause of controversy needs to be stated. The Authorised Representative, therefore, submitted that the appellant has invested amounts in the purchase of financial instruments. Majority [ICICI Bonds, Deep Discount Bonds (DDBs) of ILFS a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 40 para 1). It further stated that the Board have decided to change the system and such income may hereafter be treated as follows, (p. 40 para 3). Briefly stated, according to this new system DDBs which would not carry any interest on a year to year basis, would have to be valued on a year to year basis and difference between cost/value at the beginning of the year and value at the end of the year would be treated as income of the appellant on a year to year basis. In the year of maturity of bonds, the same would be treated as short-term capital asset irrespective of period of holding as income on a year to year basis till 31st March prior to the date of redemption has already been taxed as interest income. (iii) It was clarified by a press note dt. 20th March, 2002 (pp. 44-45) that earlier Circular dt. 15th Feb., 2002 did not have retrospective effect and does not seek to impose modified treatment to existing bond holders. Present appeal involves the question of validity of the interpretation of these circulars. Some of the DDBs are acquired by the appellant after the second Circular dt. 15th Feb., 2002. Therefore, question would arise before the Tribunal as to the effect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, did not arise. In any case, for the block period, for substantial part, such finding would be correct inasmuch as upto asst. yr. 2000-01, appellant was following mercantile method of accounting. Second finding that method of accounting for the normal and the block period has to be same is irrelevant finding for the simple reason that the two methods have to be same for the same period. There is nothing in law that, after the block period is over till eternity appellant has to follow the same method of accounting which is found in the block period. Block period ended on 27th Sep., 2001. We are concerned with asst. yr. 2003-04. There is nothing to show that appellant has to follow the same method of accounting in subsequent period. Further the Revenue has not established even a single transaction which justifies its stand that appellant is following mercantile method of accounting. Barring the disputed items, not a single adjustment of either income or expenditure is made by the AO on the ground that appellant must follow mercantile method of accounting. In other words, what Revenue trying to do is to foist a mixed method of accounting; cash method of accounting for all tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether it is capital expenditure or revenue would have to be determined having regard to the nature of transaction and other relevant factors. (124 ITR 1 at 7). (d) It was, therefore, pleaded that in view of (sic) also, even third finding given by the learned CIT(A) is not correct. In the circumstances, appellant submits that it be held that appellant is following cash method of accounting. (e) If this ground is accepted, rest of the grounds 3 and 4 would become academic inasmuch as undisputedly, the appellant has received nothing during the year and therefore, question of making any addition on the basis of accrual of interest would not arise. (iii) Ground Nos. 3 and 5 : Addition of Rs. 24,03,33,662 The learned Authorised Representative submitted that the addition is made on account of interest alleged to have accrued to the appellant on three instruments as stated above. ICICI bonds Rs. 1,697.80 lacs, DDBs of ILFS Rs. 684.54 lacs and REC investment bonds Rs. 21 lacs. Of these three instruments, first two instruments were acquired prior to 15th Feb., 2002 whereas third instrument was acquired after 15th Feb., 2002. In view of this, the submissions are broken up in two parts (A) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; (ix) Vidit Kumar Ram Krishan Agarwala, Deepak Kumar Agarwala ( AOP) v. Dy. CIT [2005] 95 TTJ (Agra) 117; (x) 278 ITR 536 (Del)( sic); (xii) CCE v. Dhiren Chemical Industries [2002] 172 CTR (SC) 670 : [2002] 10 SCC 64. (iv) According to the Revenue, first circular would not apply because of second circular, but the learned Authorised Representative was of the view that for the following reasons, the said argument of the Revenue is incorrect: As stated in the second circular, the same is to be applied prospectively. See para 4. Third circular itself clarifies that 2nd circular would apply to the instalments issued after the date of second circular. In view of this, Revenue cannot argue that first circular cannot govern when the second circular is issued. Bombay Tribunal in the group case [Kulgam Holding (P) Ltd.) (pp. 49-53) has accepted appellant's contention that second circular cannot govern instrument prior to the date of second circular. In any case, it is well-settled that circular of CBDT can be withdrawn only prospectively and not retrospectively. We rely on the following decisions in this regard: (i) Unit Trust of India v. P.K. Unny, ITO [2001] 168 CTR (Bom) 99 : [2001 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Co. v. CIT (supra), Board cannot preempt a judicial interpretation of scope and ambit of a provision of the Act by issuing a circular on the subject. It is also well-settled in law that Tribunal is not bound to take judicial notice of the circulars, issued by the Board, as is held in the case of Motor Industries Co. Ltd. v. CIT (1986) 55 CTR (Kar) 36 : (1987) 163 ITR 659 (Kar) by the Hon'ble jurisdictional High Court. It was, therefore, submitted that in view of the above, the second circular is invalid and should not be relied upon. (ii) The Authorised Representative, further, submitted that if the appellant is right in its submission that second circular cannot be foisted upon the appellant the question arises under which provisions of law, the income of Rs. 21 lacs be taxed in the hands of the appellant ? First contention of the appellant that it is following cash method of accounting and therefore, in absence of receipt, it is not liable to pay tax. Assuming, without admitting that appellant is not permitted to follow cash method of accounting even then (there) is no accrual of Rs. 21 lacs in favour of the appellant during the year. Bonds do not contain any term as to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atter was carried to learned CIT(A), specific ground was raised before him for exclusion of such income. However, learned CIT(A) in para 3.2 of his order holds that inasmuch as appellant had offered this income in the revised return of income, which was not subsequently revised, following the decision of the Supreme Court in the case of Goetze (India) Ltd. v. CIT (supra) appellant is not entitled to plead for its exclusion. He further held that as the investments were subsequent to 15th Feb., 2002, appellant's case is governed by the second circular. (ii) Insofar as second finding given by the CIT(A) namely the acquisition being subsequent to 15th Feb., 2002 the case of the appellant is governed by the second circular, the appellant has already submitted earlier as to why second circular is invalid, illegal and contrary to law. Appellant has also given reason as to why assessment is to be framed independently i.e. income is not required to be taxed. (iii) Coming to the first finding that after offering income in the revised return, which was not withdrawn by the appellant, it is respectfully submitted that the fact that appellant has offered income in the revised return of inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the method of accounting followed by the assessee as being mercantile. As has been rightly held by the CIT(A) while deciding appeal of the assessee for the asst. yr. 2002-03 (kindly refer p. 96 of assessee's paper book) the appellant cannot change the method of accounting arbitrarily and without proper and adequate justification. The learned Authorised Representative has argued that there is nothing in law that after the block period, till eternity the assessee has to follow the same method of accounting. What the learned Authorised Representative says is correct, but the assessee has to state the reasons for the change and justify the change in method of accounting. Even otherwise as per the CBDT Circular dt. 15th Feb., 2002, the assessee has to account interest income on DDBs on accrual basis. Similar types of income for e.g. interest on cumulative deposit schemes of private sector undertakings is taxable on accrual basis annually as per Circular No. 409 dt. 12th Feb., 1985 [(1985) 46 CTR (St) 4 : (1985) 153 ITR (St) 4]. 9.1 With respect to validity and applicability of Circular No. 2 of 2002: It was further submitted that, as has been rightly held by CIT(A) in the case of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to a communication from the assessee or any other person who is not an authority within the meaning of Section 116 cannot be treated as a circular within the meaning of Section 119 and will not be binding on the Revenue authorities. (c) In the case of CIT v. Kerala Financial Corporation Ltd. [1985] 47 CTR (Ker) 297 : [1985] 155 ITR 246 (Ker) it was discussed as to which document can be regarded as a circular. It was held that, To say that a particular document or letter is a circular issued by the Board, it is necessary that the party who presses that into service shall establish that copies of the said letter/document have been sent to the CITs in the various States and that unless copies of the circulars are addressed to the other authorities mentioned in Section 116, the letter/document which is said to be circular cannot be treated as such, (p. 257) (d) In the case of Bharat Vijay Mills Ltd. v. ITO [1985] 45 CTR (Guj) 60 : [1985] 154 ITR 786 (Guj), wherein the Hon'ble Court has held that Benevolent circulars issued by the CBDT, even if they deviate from the legal position, are required to be followed by the ITO since the circulars would go to the assistance of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... K 128 (SC), wherein it was held that CBDT has power to issue circulars to tone down the rigours of the law and ensure fair enforcement of its provisions. In view of the provisions of Section 119 of the Act, so long as such a circular is in force it would be binding on the Departmental authorities to ensure a uniform and proper administration and application of the IT Act. (b) In the case of CIT v. Jain Construction Co [1999] 156 CTR (Raj.) 290 : [2000] 245 ITR 527 (Rag) wherein it has been held that the CBDT has power to tone down the rigours of the law and ensure a fair enforcement of its provisions by issuing circulars. Such circulars are binding on the authorities in the administration of the Act. 9.4 With respect to the effect of press note dt. 20th March, 2002, the learned Departmental Representative submitted that the learned Authorised Representative has submitted that third letter or clarification dt. 20th March, 2002 clearly classifies the prospective nature of the circular; the learned Departmental Representative submitted that it is neither a circular nor it was issued by CBDT. It is a press release issued by PIB (Press Information Bureau), hence, has no binding force as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 9.5 Effect of circular vis-a-vis assessment year : With respect to applicability of the Circular No. 2 of 2002, the learned Departmental Representative submitted that Circular No. 2 of 2002 dt. 15th Feb., 2002 is on force as on 1st April., 2002, so it is valid for asst. yrs. 2002-03 and 2003-04. According to him, the circular issued by the CBDT as it stands at beginning of assessment year will be applicable, notwithstanding its subsequent modification. Reliance was placed on the decision in following cases: (i) CAT v. Geeva Films [1983] 141 ITR 632 (Ker), wherein it has been held that modifications of the above circular during the pendency of the assessment were not relevant. (ii) Shakti Roj Films Distributors v. CAT [1995] 124 CTR (Bom) 243 : [1995] 213 ITR 20 (Bom), wherein it has been held that if a circular is in force on 1st of April, of relevant assessment year, benefit obtained under it by the assessee cannot be withdrawn on the basis of another circular which was issued before completion of assessment and superseding earlier circular. (iii) CAT v. Prasad Productions (P) Ltd. [1989] 76 CTR (Mad) 173 : [1989] 179 ITR 147 (Mad). 9.6 Effect of circular vis-a-vis provisions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt as here assessee had consciously offered the income and thereafter at appellate stage changed its mind and claimed exclusion. Further it is not a statutory deduction as in the case cited by the learned Authorised Representative. Further the Hon'ble Tribunal has held at p. 274 in the cited case that the CIT(A) should have entertained the claim of the assessee if other conditions of the provisions of the law were established. The Tribunal has also observed that decision of apex Court in Goetze India Ltd. (supra) is binding. 10.2 In view of the above submission, it was submitted that the decision of CIT(A) should be sustained. 11. The learned Counsel for the assessee, in rejoinder, submitted that so far as decision relied upon by the learned Departmental Representative is concerned, there is no dispute as to the proposition of law laid down by them, but since the facts and circumstances of the present case are different, so applicability of those propositions of law should be seen in the context of facts and circumstances of the present case. He, therefore, submitted that assessee's claim of following cash system of accounting be accepted. The learned Counsel, further, subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounting ? (c) Whether the Revenue can change the system of accounting disclosed by the assessee in the return of income suo motu without complying with the requirement of the law that the change adopted by the assessee was not bona fide or that the assessee was not following the changed system regularly ? (d) Can the Revenue impose its choice of following a particular method of accounting ? B. (i) The second issue for our decision is the validity of Board's Circular No. 2 of 2002 dt. 15th Feb., 2002. (ii) The third issue for our decision is as to whether Circular No. 2 of 2002 (supra), was applicable retrospectively or prospectively, i.e. whether the DDBs purchased prior to date of this circular i.e. prior to 15th Feb., 2002, were covered by this circular or DDBs purchased after 15th Feb., 2002 only were covered by this Circular ? C. Whether, the assessee having once disclosed some income in the return is barred from claiming that income to be exempt during the assessment or appellate proceedings ? 13. We have considered the rival submissions, facts and circumstances of the case, provisions of law relating to the issues involved in this appeal as well as various decisions r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well as the provision of block period vis-a-vis the system of accounting for that purpose and, therefore, the same are reproduced as under: Section 145(1) Income chargeable under the head 'Profits and gains of business or profession' or 'Income from other sources' shall, subject to the provisions of Sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the AO is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in Sub-section (1) or accounting standards as notified under Sub-section (2), have not been regularly followed by the assessee, the AO may make an assessment in the manner provided in Section 144. 158BB Computation of undisclosed income of the block period-(1) The undisclosed income of the block period shall be the aggregate of the total income of the previous years falling within the block period computed, (in accordanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he total income or loss of each previous year shall, for the purpose of aggregation, be taken as the total income or loss computed in accordance with the provisions of this Act without giving effect to set off of brought forward losses under Chapter VI or unabsorbed depreciation under Sub-section (2) of Section 32: Provided that in computing deductions under Chapter VI-A for the purposes of the said aggregation, effect shall be given to set off of brought forward losses under Chapter VI or unabsorbed depreciation under Sub-section (2) of Section 32; (b) of a firm, returned income and total income assessed for each of the previous years falling within the block period shall be the income determined before allowing deduction of salary, interest, commission, bonus or remuneration by whatever name called (to any partner not being a working partner): Provided that undisclosed income of the firm so determined shall not be chargeable to tax in the hands of the partners, whether on allocation or on account of enhancement; (c) assessment under Section 143 includes determination of income under Sub-section (1) or Sub-section (IB) of Section 143. (2) In computing the undisclosed income of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ections (2) and (3) of Section 143, Section 144 and Section 145 shall, so far as may be, apply; (c) the AO, on determination of the undisclosed income of the block period in accordance with this chapter, shall pass an order of assessment and determine the tax payable by him on the basis of such assessment; (d) the assets seized under Section 132 or requisitioned under Section 132A shall be dealt with in accordance with the provisions of Section 132B. 14.3 After having gone through the Chapter XTV-B, it is observed that the legislature has not provided anywhere in the provisions of Chapter XTV-B as to which of the system of accounting is to be followed for computing the assessee's undisclosed income for the purpose of this chapter. However, we are of the opinion that some help can be sought from the provisions of Section 158BB of the Act which prescribe the way out for computation of undisclosed income of the block period and also from provisions of Section 158BC which prescribe the procedure for completing block assessment and that is why that we have preferred to reproduce these two sections. Section 145 of the IT Act, 1961 14.4 After the analysis of provisions of Section 145, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he aforesaid provisions that the method of accounting adopted by the assessee (subject to the condition that the same is followed regularly) cannot be disturbed by the Revenue, i.e. if an assessee adopts 'cash system' instead of mercantile, e.g. assessable under Section 56; he cannot be assessed for that income on accrual basis [Juggilal Kamlapat Bankers v. CIT [1975] 101 ITR 40 (All)}. Similarly, if the assessee follows mercantile system of accounting, it. is not open to the AO to make the assessment on cash basis [Mrs. B.N. Pinto v. CIT [1972] 85 ITR 448 (Mysore)]]. 14.7 We are further of the opinion that since choice to adopt a particular system of accounting one of two is with the assessee, the choice to change the system of accounting is also with the assessee, but this changeover from one system to another system; choice is subject to the following: (i) The changeover is bonafide. (ii). The second condition to be satisfied is that the assessee is to establish that the method of accounting employed (originally or on change) is being followed regularly in the subsequent years and this fact can be established by showing the regularity from accounts of subsequent years. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unting [provided Sub-section (i) regularly or has not followed the accounting standard notified by the Government regularly], but has not been given power to impose his own method of accounting. He can only compute the income in the manner provided under Section 144 of the Act. This view of ours supported by the decision in the case of CIT v. K. Sankarapandia Asari Sons (1980) 19 CTR (Mad) 264 : (1981) 130 ITR 54.1 (Mad), 544) 18. If we consider the case of the present assessee in the light of above proposition of law and the provisions, first of all. we are of the opinion that: (i) Choice to employ any one of the two methods of accounting, subject, however, to the fact that such a method should be followed regularly in subsequent years, is with the assessee. (ii) It is the assessee who has the choice even to change the system of accounting, but again subject to the fact that it is for him to establish that change was bona fide and changed system was being followed regularly. 19.1 Coming to the facts of the present case, there is no dispute that till 28th March, 2000, the assessee was following mercantile system of accounting, but at the same time there is no dispute that the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counting as mercantile. (ii) As per Section 145 of the Act, the assessee can adopt only one system of accounting on the regular basis, the assessee cannot change the same. According to AO, the assessee is bound to follow the same system of accounting on continuous basis and is not permitted to change the same. The relevant part of the assessment order appearing at page Nos. 2 and 3 for asst. yr. 2002-03 placed at page No. 65 of the assessee's paper book, reads as under: From the notes forming part of the Rol, it has been found that the assessee has mentioned that he is following the cash system of accounting. But from the block assessment order dt. 30th June, 2004 it has been found that the AO has considered the method of accounting in the case of the assessee as 'mercantile'. The assessee has not filed any appeal before learned CIT(A) against this order. Therefore it is clear that the assessee has no objection with this finding of the AO and it has accepted that it is following the mercantile system of accounting. The assessee was given the show-cause notice dt. 18th March, 2005 to explain as to why in the light of the Section 145 of IT Act the method of accounting sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same. The assessee is bound to follow the same method of accounting on continuous basis and he is not permitted to change the same. Hence the method of accounting is considered in the case of the assessee as 'mercantile'. (iii) The assessee had appealed the assessment order for asst. yr. 2002-03 and the issue relating to assessee's claim of system of accounting was rejected by the CIT(A) by observing as under: I have considered the above submissions of the appellant and do not find any force in them for the following reasons: (i) it is, no doubt, true that the method of accounting cannot be thrust on the assessee by the AO. But it is also incorrect to state that the appellant can change the method of accounting arbitrarily and without proper and adequate justification. In the present case, no reasons or adequate justification for adopting the cash method of accounting is given by the appellant. (ii) The AO's reasoning that the mercantile method of accounting has been adopted in the block period assessment proceedings and the appellant has not filed an appeal against such an adoption by the AO, cannot be faulted on legal or logical grounds. The method of accounting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d at page No. 56 of the assessee's paper-book). (c) The assessment for asst. yr. 2003-04 was completed on 2nd Feb., 2006 after adopting the method of accounting as mercantile on the same reasonings as were for asst. yr. 2002-03 and read as under: 3. Method of accounting: From the notes forming part of the Rol, it has been found that the assessee has mentioned that it is following the 'cash' system of accounting. But from the block assessment order dt. 30th June, 2000, it has been found that the AO has considered the method of accounting in the case of the assessee as 'mercantile'. The assessee has not filed any appeal before learned CIT(A) against this order. In the asst. yr. 2002-03 the method of accounting was considered to be 'mercantile' due to the same. The appeal of the assessee is still lying before learned CIT(A), in this issue in asst. yr. 2002-03, therefore in this year also on consistent basis, method of accounting is considered as 'mercantile'. 21. If we consider the above case in the light of settled principles of law, first of all, we are of the opinion that the AO's decision to adopt the method of accounting in regular assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pting the procedure prescribed under Sections 158BA, 158BB and 158BC of the Act. Had the AO proceeded to make the assessment for block period as per the provisions of the Act, he would have definitely not taken the system of accounting for the period 1st April, 2000 to date of search, i.e. upto 27th Sept., 2001 as mercantile, because, assessee had, by that time, furnished its return of income for asst. yrs. 2001-02, 2002-03 and 2003-04 disclosing the system of accounting as cash . (v) In addition to above, the undisclosed income for the block period having been assessed at NIL, it is quite clear that the income retained or assessed as per returns filed by the assessee or as per regular assessments, as the case may be, stood accepted as it is and since the income for regular assessments for the asst. yr. 2001-02 was declared on cash system, the system adopted by the assessee stood accepted. (vi) The block assessment being for the period ending on the day of search, i.e. 27th Sept., 2001, cannot bind the assessee for all times to come because not only the assessee had right to change the system of accounting but the provisions for assessment for block period and for regular assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot borne out even from the facts on record. 24.1 If we consider the Section 145 of the Act, it will be revealed that all that Section 145(1) lays down is that if an assessee regularly employs any of the method of accounting mentioned therein, i.e. cash system or mercantile system; his income under two specified heads, i.e. business or profession or other sources should be computed in accordance of law therewith. The section, in its terms, does not require any enquiry into the bona fides of the assessee in following regular method and it is so because following any one of the methods specified therein regularly would necessarily result in a proper computation of assessee's real income. Even if one regular method of accounting is substituted by another regular method, the same result will follow. Only in a case where the assessee changes his regular method of accounting by another method and does not follow the changed method regularly thereafter, it might be possible for the assessee by introducing successive changes in his method of accounting to exclude items of its income from being included in the computation of his total income, otherwise not. Therefore, when an assessee ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -B of the Act only and that too to apply Circular No. 2 of 2002 which was not available on 1st Oct., 2000 when the assessee had preferred to change its system of accounting from mercantile to cash and, therefore, the Revenue's reliance on the decision in block period being not only illegal and unjustified but unwarranted also cannot be allowed to penalize the assessee for not following it. 24.4 Revenue has not alleged non-compliance of any of the requirements of Sub-section (1) or Sub-section (2) of Section 145 of the Act and, therefore, in absence of clear findings on this account, i.e. it being not the Revenue's case; the action of the AO adopting the method of accounting as mercantile for asst yr. 2003-04, in our opinion, is illegal and bad in law for want of jurisdiction and, therefore, cannot be sustained. 24.5 Without prejudice to the above, in the given circumstances, what the AO could at the most do was to make the assessment in the manner as provided under Section 144 of the Act and nothing else, but could not, in any case change the system of accounting independent of these proceedings. Therefore, that fact cannot snatch away the assessee's right to claim duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessment for block period. (iii) Similarly, the return of income for asst. yr. 2003-04 showing income from capital gain and other sources on the basis of mercantile system was furnishing on 30th Sept., 2003 before completion of assessment under Section 158BC of the Act and, therefore, system adopted by the assessee for this year was also not effected by the assessment for block period. (iv) Even otherwise, in our opinion, the change adopted by the assessee in the system of accounting was bona fide because the assessee had ceased to have income from business and has been following the changed system consistently in subsequent years. 27. Therefore, the assessee on its part; in our opinion, succeeded in establishing the change as bona fide because it has ceased to have any business income and had adopted the change well before the search as well as completion of assessment for block period and also before coming of Circular No. 2 of 2002 on the statute. Since the assessee has followed the same system in all the subsequent years, we see no reason as to why assessee's choice/preference to adopt the changed system of accounting be not accepted. In view of the totality of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred to in your letter shall be communicated in due course. 29.3 The second document is to be considered is Circular No. 2 of 2002 copy of which is placed at page No. 39 of the assessee's paper-book and reads as under: CBDT Circulars Circular No. 2 of 2002, dt. 15th Feb., 2002. To, All the Chief CITs/Directors-General of IT. Subject: Tax treatment of deep discount bonds and STRIPS- reg. A review of the tax treatment of income arising from Deep Discount Bonds has been under consideration in the Board for sometime. The Board had earlier clarified by way of certain letters issued to the Reserve Bank of India and others that the difference between the bid price (subscription price) and the redemption price (face value) of such bonds will be treated as interest income assessable under the IT Act. On transfer of the bonds before maturity, the difference between the sale consideration and the cost of acquisition would be taxed as income from capital gains where the bonds held as investment, and as business income where the bonds were held as trading assets. On final redemption, however, no capital gains will arise. It was further clarified that tax would be deducted at source on the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rading assets). 4.2 In a case where the bond is acquired during the year by an intermediate purchaser (a person who has acquired the bond by purchase during the term of the bond and not. as original subscription) the difference between the market value as on the valuation date and the cost for which he acquired the bond, will be taxed as interest income of business income, as the case may be, and no capital gains will arise as there would be no transfer of the bond on the valuation date. 5. Transfer before maturity Where the bond is transferred at any time before the maturity date, the difference between the sale price and the cost of the bond will be taxable as capital gains in the hands of an investor or as business income in the hands of a trader. For computing such gains, the cost of the bond will be taken to be the aggregate of the cost of which the bond was acquired by the transferor and the income, if any, already offered to tax by such transferor (in accordance with para 4 above) upto the date of transfer. 5.1 Since the income chargeable in this case is only the accretion to the value of the bond over a specific period, for the purposes of computing capital gains, the perio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be subject to tax deduction at source under Section 193 of the IT Act. Under the existing provisions of that section, no tax is deductible at source on interest payable on Government securities. Further, the Central Government is empowered to specify any such bonds issued by an institution, authority, public sector company or co-operative society by way of notification, exempting them from the requirement of tax deduction at source. 9. Option to investors Considering the difficulties which might be faced by small non-corporate investors in determining market values under the RBI guidelines and computing income taxable in each year of holding, it has further been decided that such investors holding Deep Discount Bonds upto an aggregate face value of rupees one lakh may, at their option, continue to offer income for tax in accordance with the earlier clarifications issued by the Board referred to in para 1 above. 10. The contents of this Circular may be brought to the notice of all the officers working in your region. (Sd.) Batsala Jha Yadav, Under Secretary (TPL-IV)] (Notification No. F. 149/235/2001 -TPL) 29.4 The third document is to be considered as the press note/release from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that a circular issued by CBDT cannot have a retrospective tax effect. The present circular on deep discount bonds, therefore, specifies the tax treatment in respect of bonds which are issued after the issue of the circular, and does not seek to impose the modified, treatment on existing bond-holders. Further, non-corporate persons who invest small amounts in new issues (face value upto Rs. 1 lakh) can still opt for the old system. Valuing the bonds every year on the basis of RBI guidelines will not pose any problem as such values can be obtained from the issuers themselves, who will invariably be the RBI or a public financial institution. The amount received on redemption would always be liable to tax deduction at source as per normal provisions of the IT Act. However, no TDS is required on interest payable on Government securities, and bonds issued by an institution, authority, public sector company or cooperative society can also be exempted from the requirement by notification. [Source : PIB Press Release, dt. 20 March, 2002.] 30. We have considered the aforesaid circulars/press notes/releases and would, first of all, like to comment on the issues involved in these circulars/pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to the Board were as under: (i) According to Board, taxing the entire income received in the year of redemption as interest income was to give rise to sudden and huge tax liability in one year irrespective of the fact that value of the bond was progressively increasing over the period of holding. (ii) The second problem according to the Board's was that where the bond was redeemed by a person other than the original subscriber i.e. by a person who had purchased the bond, before the date of redemption, such person was to pay the tax on the entire difference between the subscribed price and bond (bid price) and the redemption price as interest income. According to the Board such person was not able to deduct his cost of acquisition from such income. (iii) The third problem according to Board, likely to be faced was that the company issuing such bonds and following the mercantile system of accounting might have evolve a system of accounting of actual accrual of the liability in respect of interest on such bond and claim of deduction year after year, though the corresponding income in the hands of the subscriber was to be taxed only at the time of maturity. (iv) The fourth prob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate of redemption was to be taxed as interest income in the case of investor and business income in the case of trader. (3) So far as press note dt. 20th March, 2002 is concerned, we are of the opinion that this press note issued by the Board has simply clarified the applicability of Circular No. 2 of 2002 and is not a press note spelling out any proposed action likely to be taken by the Board. 31. The parties have been heard and the respective arguments have been incorporated in para Nos. 7 to 12 of this order. 32. The assessee's case is that: (i) The Circular No. 2 of 2002 is not applicable to the persons who have subscribed to DDBs for the purpose of keeping the same as investment because Board has no power to tax any income taxable under a particular head as income under any other head. (ii) In any case, para No. 3 of this circular read with press note dt. 20th March, 2002 clarifies beyond doubt that this circular is applicable only to the DDBs purchased on or after the date of this circular which was 15th Feb., 2002 and, therefore, so far as DDBs purchased before 15th Feb., 2002 were not covered by this circular. In support of the aforesaid proposition put forward by the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibers to the bonds and were holding the same as investments and, therefore, creates problem instead of mitigating the same and this is supported by the stand of the Board itself whereby the Board has, in para No. 9 of this circular, tried to exempt the so-called small investors. There is no dispute as to the powers of Board to issue a benevolent circular for granting relief to a particular class of assessees, but when a circular is found to treat two assessees differently, then such a circular cannot be said to be circular as per law and at least cannot bind the assessees who are deprived of benefits as a result of such circular. (ii) So far as binding nature is concerned, first of all, we are of the opinion that it is only benevolent circular which is binding on the authority, but so far assessee is concerned, the assessee can prefer not to take or seek benefits of the circular, irrespective of the fact as to whether the circular is benevolent or not and, therefore, if an assessee chooses not to seek benefit of a circular, the Revenue cannot impose the same. (iii) So far as appellate authority, Tribunal and Courts are concerned, circulars issued by the Board even if benevolent are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be held to be binding on the assessee and, hence, we are of the opinion that the income from DDBs was taxable as per first Board's letter dated 12th March, 1996. The additions made by following the Circular No. 2 of 2002 are, therefore, directed to be deleted. 33.1 Without prejudice to our aforesaid view, that the Circular No. 2 of 2002 was invalid and could not bind the assessee, we are, further of the opinion that in view of language of para No. 3 of this circular and the press note/release dt. 20th March, 2002, the Circular No. 2 of 2002 was not applicable to the DDBs purchased/subscribed before 15th Feb., 2002 and, therefore addition on account of income from such bonds is deleted. This view is supported by the decision of Tribunal Mumbai Bench C Mumbai in the case of ITO v. M/s Kulgam Holdings (P) Ltd. for asst. yr. 2001-02 in ITA No. 3785/Mum/2004, dt. 25th April, 2007, wherein the Hon'ble Mumbai Bench had occasion to consider the date of applicability of Circular No. 2 of 2002 and after considering the circular and the press note dt. 20th March, 2002 has held that Circular No. 2 of 2002 was applicable to DDBs purchased after 15th Feb., 2002 and the relevant part as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tter in question, we are of the opinion that even if it is taken that the Board's letter dt. 12th March, 1996 written to IDBI was not a circular under Section 119 of the Act, then also the assessee's case is not effected and it is so because if this letter is excluded, then there being no contract for payment of interest on DDBs on yearly basis, the Board had no jurisdiction to make the interest payable at the time of redemption is taxable on accrual basis, more so in a case where the accounts were maintained as cash system or the bonds were kept as investment. These decisions, therefore, in our opinion, do not. support the Revenue's case. The learned Departmental Representative had, further relied on the decisions referred to in para Nos. 10.2(d) and 13.3 (a) and (b) in support of his submission that benevolent circulars issues by the CBDT were binding on the Revenue authorities. 35.2 Having considered the decisions, we are of the opinion that there; cannot be any dispute as to the binding nature of benevolent circulars on the Revenue authorities, but it is also settled that the assessee and Courts including the Tribunals are not bound by such requirements and, therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are of the opinion that this decision, instead of helping the Revenue's case supports the assessee's case and, therefore, is of no use to the Revenue. Decisions relied upon by the learned Counsel for the assessee 38. The various decisions relied upon by the learned Counsel for the assessee have been referred to in para Nos. 9(ii)(a), (c), para Nos. 9(A)(a)(iii) and (iv), para Nos. 9 (iii)(B)(a)(i), para Nos. 9(iii)(3)(i) and (iii) of this order. 38.1 After having gone through all the aforesaid decisions, we are of the opinion that some of the decisions support the assessee's relevant plea directly, whereas some of the decisions support the decisions indirectly, but since we have allowed the assessee's various grounds after going through these decisions, consideration of the same separately, in our opinion, is not required. Ground No. 4 39. So far as ground No. 4 of assessee's appeal is concerned, we have considered the rival submissions, facts and circumstances of the case and various decisions relied upon by the parties. First of all, we prefer to consider the various decisions relied upon by the parties. (a) So far as Revenue is concerned, it has relied on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by modifying an application at the assessment stage without revising the return. This appellant's appeal before the CIT(A) was allowed. However, the order of the further appeal of the Department before the Tribunal was allowed. The appellant has approached this Court and has submitted that the Tribunal was wrong in upholding the AO's order. He has relied upon the decision of this Court in National Thermal Power Co. Ltd. v. CIT [1999] 157 CTR (SC) 249: [1998] 229 ITR 383 (SC), to contend that it was open to the assessee to raise the points of law even before the Tribunal. The decision in question is that the power of the Tribunal under Section 254 of the IT Act, 1961, is to entertain for the first time a point of law provided the facts on the basis of which the issue of law can be raised are before the Tribunal. The decision does not in any way relate to the power of the AO to entertain a claim for deduction otherwise than by filing a revised return. In the circumstances of the case, we dismiss the civil appeal. However, we make it clear that the issue in this case is limited to the power of the assessing authority and does not impinge on the power of the Tribunal under Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n for decision of Hon'ble High Court in Tax Appeal No. 157 of 2000 (supra) was as under: Whether in the facts and circumstances of the case, the Tribunal was right in law in holding that the assessee was not entitled to the deduction of interest paid by it on the debentures issued by it ? 40.2 The relevant part of the decision of Hon'ble High Court in Tax Appeal No. 157 of 2000 (supra) contained in para Nos. 8 to 17, reads as under: Tax Appeal No. 157 of 2000 8. As the facts narrated hereinbefore go to show the case of the respondent -assessee in Tax Appeal No. 328 of 2000 and the appellant assessee in Tax Appeal No. 157 of 2000 is primarily based on the debenture issued by the company; namely, tax treatment of interest which is payable by the company and receivable by the individual debenture holder under the debenture. The relevant portion of the debenture certificate shows that debentures are issued in terms of the debenture trust deed dt. 31 March, 1995 in pursuance of resolutions passed by the board of directors of the company on 24th March, 1995 as well as by the general body at the; extraordinary general meeting held on 24th March, 1995. Accordingly, the company has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e allowed in respect of the matters dealt with in the respective clauses while computing the income referred to in Section 28 i.e. income from profits and gains of business or profession. Clause (iii) of Sub-section (1) of Section 36 reads, 'the amount of interest paid in respect of capital borrowed for the purposes of the business or profession. The proviso and the Explanation thereunder are not reproduced as they are not relevant for the present. Therefore, on a plain reading for an assessee to become entitled to deduction under Section 36(l)(iii) of the Act while computing income under the head 'Profits and gains of business and profession' the assessee has to establish that it has paid interest in respect of capital borrowed for the purposes of business. In the present case, it is an admitted position between the parties that, the payer company is carrying on business, it had borrowed capital by way of debenture issued for such business, and it had paid interest in respect, of such capital borrowing. The payer company, therefore, has satisfied all the conditions necessary for involving Section 36(l)(iii) of the Act and is thus, entitled to deduction of interest paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Section 37(1) or the Act. There is one more aspect of the matter. The company issuing the debenture, under which the borrowing is made, has entered into a contract with the debenture holder. It is nobody's case that the contract is sham or not acted upon. In the circumstances, the parties are bound by the terms of the contract and it is not open to any third party, including Revenue or the Court, to rewrite the terms of the contract. During course of hearing, on behalf of Revenue, attention was invited to observation made by the AO regarding applicability of ratio of McDowell Co. Ltd. v. CTO, [1985] 47 CTR (SC) 126 : [1985] 154 ITR 148 (SC) to contend that there was a transaction entered into between the parties so as to take double advantage. Whether the transaction is entered into with the object of tax planning or not is an entirely different matter than the contract being sham or not being acted upon by parties. At the cost of repetition it requires to be stated that both the assessees, namely, the payer company as well as the recipient on one side and Revenue on the other side have relied upon the terms of the contract so as to suit their convenience while bringing to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of the jurisdictional High Court what we have been able to understand is that income from DDBs is taxable on the basis of contract between the parties; meaning thereby that if the contract provides the payment of interest in a particular way i.e. either at the time of transaction or quarterly or half-yearly or yearly or at the time of squaring of the transaction the interest income is to be taxed accordingly. The Hon'ble jurisdictional High Court has distinguished the decision of Madras High Court in the case of Madras Industrial Investment Corporation Ltd. (supra) in para No. 29 of its order. 41. After careful consideration of the decision (supra), we are of the opinion that so far interest on OFCPN of Nirma Industries Ltd. is concerned, admittedly, there being no agreement for payment of interest on yearly basis, the same was not taxable either on mercantile basis or on cash basis. (ii) Decision Tribunal Mumbai Bench K in the case of Chicago Pneumatic India Ltd. v. Dy. CIT (supra). 42. The facts in this case were that the assessee claimed deduction under Sections 80HH and 80HHI in the original return of income. Thereafter, the assessee filed revised return of income, but t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efund and reliefs to the assessees. The subject circular is reproduced below for the purpose of ready reference: V. Miscellaneous - Refund and reliefs due to assessees - Departmental attitude towards - The Board have issued instructions from time to time in regard to the attitude which the officers of the Department should adopt in dealing with assessees in matters affecting their interest and convenience. It appears that these instructions are not being uniformly followed. 2. Complaints are still being received that while ITOs are prompt in making assessments likely to result into demands and in effecting their recovery, they are lethargic and indifferent in granting refunds and giving reliefs due to assessees under the Act. Dilatoriness or indifference in dealing with refund claims (either under Section 48 or due to appellate, revisional, etc. orders) must be completely avoided so that the public may feel that the Government are actually prompt and careful in the matter of collecting taxes and granting refunds and giving reliefs. 3. Officers of the Department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stakes should be rectified as soon as they are discovered without waiting for an assessee to point them out. (g) Section 60(2) : Cases where relief can properly be given under this subsection should be reported to the Board. In this circular, the Board has recognised the fact that responsibility for claiming refunds and reliefs rests with the assessee. As imposed by law even then the Board has directed the officers to draw the attention of the assessees in respect of any refunds or reliefs to which they are eligible, which they have not claimed for some reason or the other. The Board has also given few examples in this regard and has specifically clarified that these examples are not exhaustive. Further, the Board also issued Circular F. No. 81/27/65-IT(B), dt. 18th May, 1965 defining the duties of P.R.Os. in providing assistance to the public. In this circular, the Board has also advised the P.R.Os. to visit the Government/commercial establishments to provide them assistance in filing correct returns and making eligible claims. These circulars issued by the Board almost 4-5 decades before cast a duty on the assessing authorities to collect only the legitimate tax. Starting from la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, circulars of same nature which have been already issued would not become irrelevant or can be ignored. Admittedly, the circular issued in 1995 has not been withdrawn, hence, it has got binding force on the subordinate authorities even as on date. Accordingly, we hold that the AO is bound to assess the correct income and for this purpose, the AO may grant reliefs/refunds suo motu or can do so on being pointed out by the assessee in the course of assessment proceedings for which assessee has not filed revised return, although, as per law, the assessee is required to file the revised return. Having stated so, in our view, the learned CIT(A), having coterminous powers with the powers of AO and the fact that appellate proceedings are the continuation of original proceedings, should have entertained the claim of assessee and allowed if other conditions of the provisions of the law were satisfied. In this view of the matter, we accept both the grounds of the assessee and direct the learned CIT(A) to consider the claim of the assessee at the revised figures on merits and decide the same according to the provisions of Sections 80HH and 80-1 of the Act after hearing the assessee. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that only legitimate taxes due are collected. This Court, in an unreported decision in the case of Vinay Chandulal Satia v. NX). Parekh, CIT Special Civil Application No. 622 of 1981, rendered on 20th Aug., 1981, has laid down the approach that the authorities must adopt in such matters in the following terms: The Supreme Court has observed in numerous decisions, including Ramlal v. Rewa Coalfields Ltd. AIR 1962 SC 361; State of West Bengal v. Administrator, Howrah Municipality, AIR 1972 SC 749 and Babhutmal Raichand Oswal v. Laxmibal R. Tarte AIR 1975 SC 1297, that the State authorities should not raise technical pleas if the citizens have a lawful right and the lawful right is being denied to them merely on technical grounds. The State authorities cannot adopt the attitude which private litigants might adopt. 45.1 (b) After careful consideration of the aforesaid extract of the decision, we are of the opinion that there is no doubt about the proposition of law that IT authorities are under obligation to charge, levy and collect only the legitimate tax and if an assessee due to any reason fails to claim deduction/exemption available to it under the law or commits a mistake in sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... N of Nirma Industries Ltd. amounting to Rs. 77,95,691, which was declared by the assessee in the revised return, is also deleted. (iv) The: Circular No. 2 of 2002 is an invalid circular and, therefore, income/interest from DDBs, in assessee's case who has held the same as investments, cannot be taxed on accrual basis as proposed by this circular. (v) Without prejudice to our findings at Sl. No. (iv) above, even if the circular is considered to be valid, then also the same being, in our opinion, applicable only to the DDBs purchased after 15th Feb., 2002, the income/interest from DDBs purchased prior to 15th Feb., 2002, in assessee's case who has held the same as investment, was not liable to be taxed on accrual basis. (vi) The income/interest from OFCPN of Nirma Industries Ltd. could not be taxed only because the assessee had declared the same in the revised return because once the assessee's system of accounting has been held to be cash system , the income, even if shown by the assessee in the return on accrual basis, has to be excluded and to be taxed on cash basis, because Circular No. 2 of 2002, so far as assessee's case is concerned, is not applicable to the DD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing and on transfer would be assessable and, further, also on whether the same is held as a trading asset or by way of an investment. With regard to the operationalization of the aforesaid principles, the circular suggests the following mechanism: (i) DDBs, being actively traded securities in the debt/money market, the valuation as declared by the RBI and/or the participating institutions (in consonance with the RBI guidelines) would form the basis of their valuation as at each (financial) year end. The difference in the value of a particular bond between two successive valuation dates would represent the accretion to the value of the bond during the intervening financial year, and would be taxable as interest income (where held as investment) and as business income (where held as a trading asset). (ii) Where acquired during the year, the difference in the value between the cost of acquisition and the value as at the ensuing valuation date would be interest or business income, as the case may be. (iii) Where the bond is transferred prior to the maturity date, the difference between the sale value and the cost of the bond would be a capital gain or business income, in the case of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year; or (c) accrues or arises to him outside India during such year: Provided that, in the case of a person not ordinarily resident in India within the meaning of Sub-section (6) of Section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India. (2) ... 57. A DDB is a bond i.e., issued at a price (issue price), i.e., discounted vis-a-vis its par value at which it is to be redeemed at a future date. For example, a bond of face value of Rs. 1,000, to be redeemed five years from the issue date, is issued at a discounted price of Rs. 667 (say). Conceptually, therefore, it would not be any different from a bond (or any debt instrument) which is issued at par (say for Rs. 1,000), redeemable five years hence at Rs. 1,500 (say). 58. As such, two questions would arise. Whether the difference between the redemption and the issue price (Rs. 333 in our example) can be said to be interest income, and if so, can it be taxed under separate heads o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that there is accretion in value to the proportionate extent, say one-fifth, after a lapse of a year on a five year term. Again, it could be argued that this amount (Rs. 66.60 or Rs. 333 x 1/5) is only to be received after four years, so that its present value could not be in linear proportion, i.e., at Rs. 66.60, and the same would also be subject to discounting. It is for this reason that the concept of compound rate (of interest) gains ground, so that income accrues at a uniform rate over the defined time period, implying a greater proportion of accrual with the, approach of the maturity date, and thus, addresses the aforesaid concern. In the context of our example, it could mean an accrual of (say) Rs. 55, Rs. 60, Rs. 65.50, Rs. 72.50 and Rs. 80, for the five consecutive years. Further, true, in practice, other factors, such as the going rate of interest in the debt (money) market would also influence the rate which the bond may fetch on its transfer, so that it is not necessary that the value of the bond increases in these steps. If the yield to maturity ('ytm') of a bond is (say) 15 per cent per annum, an investment of Rs. 100 therein would fetch Rs. 115 after a year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue). However, the market value is a composite value, factoring all such concern/issues. In fact, the bond (contract) itself specifies the ytm. In some case, the interest rate is specified, with the bond holder given an option to exercise the same and receive annual (periodical) interest, rather than deferring it to the end of the term, and getting cumulative interest, so as to suit varying liquidity needs of different constituent groups. It is in this context that the CBDT's earlier Circular No. 409 (on Cumulative Deposit Scheme) dt. 12th Feb., 1985 becomes relevant, and its applicability is also emphasized, being only harmonious with the impugned circular. Of the portfolio held by the assessee, some bonds, viz., REC Ltd., ILFS Ltd., ICICI Ltd., as it appears, also specify the interest rate, even as the same, being a matter of fact, could be subject to verification. 62. The comparison with shares, however, is illustrative and clarifying, inasmuch as it demonstrates that both the regular income and capital gain can arise on a particular property; the same yielding both dividend income and capital gains. Also, real estate could give both the regular (rental) income as also capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly a valuation model, though a robust, comprehensive and real one at that, to capture the change in the intrinsic value of the bond due to lapse of time on account of the underlying contract. 65. The next infirmity pointed in the circular is that the bond, a capital asset (where held as an investment), though held for 36 months, yet would yield short-term capital gains on its transfer. However, this again flows directly from the cost of the bond being thereon upto the last valuation date, or its valuation upto the last valuation date. Once it is recognized that the variation in the intrinsic value (at any point of time) of the bond, which (i.e., value) is sought to be realized by way of transfer, is only on account of the underlying contract (of which time is of essence), the said argument would fail; the transfer, or the accrual of interest, being only the different mode per which the value of the bond is realized. A ready example would be of a capital asset employed in business and subject to depreciation allowance; its transfer would, though held over 36 months prior to the transfer date, always yield a short-term capital gain; the economic rationale being that the investment in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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