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TMI Blog2006 (12) TMI 508X X X X Extracts X X X X X X X X Extracts X X X X ..... to tax with reference to its book profit under section 115JA of the Income-tax Act, 1961 ('the Act'). While so computing, the Assessing Officer did not exclude the income by way of interest on zero coupon bonds accounted by assessee in its profit and loss account. An appeal is being preferred to the Tribunal which are (1) allocation of expenditure against income which is otherwise exempt and thereby disallowing the allocated expenditure; and (2) add back of interest on zero coupon bonds amounting to Rs. 33,78,94,141 in arriving at the book profit for levy of tax under section 115JA. Having found that the total income computed under the Act was less than 30 per cent of the book profit and as such attracting the provision of section 115JA wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipt of income. The assessee acquired certain zero coupon bonds at a discount as per the scheme of allotment. In its books of account, the assessee declared the investment at its book value and the difference between book value and acquisition price was shown by way of interest being interest on zero coupon bonds. The assessee is not otherwise to receive any interest on such bonds. The CBDT by its Circular F. No. 225/56/94-ITA-II dated (sic) March, 1994 clarified the position in respect of zero coupon bonds and taxability of interest thereon, wherein it was opined as under : "XIX. Zero coupon bonds Taxability of interest Regarding We are considering furnishing a clarification to the Department of Economic Affairs on certain issues rais ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Act, interest means interest payable in any manner in respect of any monies borrowed or debt in current including a deposit claim or other similar right or obligation and includes any service fee or other charges in respect of the monies borrowed or the debts incurred. It is felt, that the discount under consideration may not fit into this definition for being treated as interest. Also section 2 (28B) of the Income-tax Act states that interest on securities means interest on any security of the Central Government or a State Government. Here again by virtue of clause 15 of the Scheme which states that no interest will be payable on the bonds, any payment in the nature of interest is ruled out. Comparison with Indira Vikas Patras m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as well as the extinguishments of right in an asset and by paying cash for the cancelled bond we may attempt to categorise it as an exchange. Bond in this case takes the same character as a debenture, and the issue whether on final redemption of a debenture whether there is any transfer is already under reference to the Ministry of Law in F.No. 207/4/93-ITA-II. The final opinion in this regard is yet to be obtained. 7. In the result the questions raised by the Department of Economic Affairs may be answered as under :- (i) the discount will not be treated as interest under the Income-tax Act. However, whether the amount paid at redemption gives rise to any capital gains will be clarified in due course; (ii) in the light of answer to qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been accounted as income by the assessee, the assessee cannot have on its own version saying that it is not an income or otherwise required to be excluded while computing book profits. 5. We have carefully considered the relevant facts and arguments advanced. The CBDT by its circular aforesaid opined that interest on zero coupon bonds is not an interest in strict sense as it encompasses over certain period of time. The circular issued by CBDT are binding upon the authorities working under it. Similar view has been adopted by Hon'ble Supreme Court in the case of UCO Bank v. CIT [1999] 237 ITR 889, in the case of CCE v. Dhiren Chemical Industries [2002] 254 ITR 554 and in the case of Commissioner of Customs v. Indian Oil Corpn. Ltd. 267 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X
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