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TMI Blog2016 (11) TMI 1710X X X X Extracts X X X X X X X X Extracts X X X X ..... that these four appeals raise a common issue of taxation of assessees' profits arising from redemption of 400 Deep Discount Bonds of Sardar Sarovar Nigam Ltd. purchase @3600 per bond on 11.01.1994 and redeem at a price of Rs. 50,000/- each on 10.01.2009. We thus treat former assessee Manankumar M. Patel appeal ITA No.1558/Ahd/2013 along with Revenue's cross appeal ITA No.1702/Ahd/2013 as the lead cases. 3. We come to relevant facts first. There is no dispute that the assessee acquired and redeemed the above Deep Discount Bonds on the dates and prices stated in the preceding paragraph. The assessee at the first instance claimed that these profits arising from the above redemption were in the nature of long term capital gains u/s.10(38) of the Act. The Assessing Officer sought to know as to whether the same had been subjected to the Securities Transaction Tax or not. The reply came was in negative. The Assessing Officer observed in assessment order dated 24.12.2011 that assessees' above claim u/s.10(38) of the Act was not admissible since its capital assets was not in the nature of an equity share in a company or a unit of an equity orient fund subject to various other stipulations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ering those bonds which fell in the accounting year relevant to A.Y. 2009-10. Since the said bonds in question were 'Capital Assets' of the appellant, the surplus earned by the appellant on the surrender of the bonds was disclosed by the appellant as 'Long Term Capital Gains' and claimed as exempt from taxation by virtue of provisions of section 10(38) of the Act. 4.2 In the course of the assessment proceedings, the A.O. has rejected the claim of the appellant, and has taxed the surplus arising as 'Interest on Securities' relying upon a letter of Sardar Sarovar Narmada Nigam Ltd. (purportedly relying upon CBDT circular by the latter), and has denied benefit of exemption u/s 10(38) of the Act. 4.3 As submitted in para 3 above, the A.O. has neither supplied a copy of alleged letter of Sardar Sarovar Narmada Nigam Ltd. to the appellant nor specified date and number of particular circular of CBDT. The Courts have held, time and again, that when evidence/material/statements are collected at the back of the appellant and are used in the assessment proceedings, the Principle of natural justice requires that the appellant should be given a fair opportunity, prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence the excess amount received by the appellant was not liable to be taxed as Business Income. On reference, the High Court held that it was not disputed by the appellant before the Tribunal that the bonds in question, which is surrender, resulted in a gain to the appellant. In view of such findings, the profit earned by the appellant on the surrender of the bonds was rightly held by the Tribunal as liable to be taxed as Capital Gains. The Facts of this case are applicable to the appellant's case in as much as in the books of accounts of the appellant these bonds are being shown as Capital assets and they are surrendered, resulting in a gain lease to be taxed as long as Long Term Capital Gain but for exemption provided u/s 10(38) of the Act. (2) Perviz Wang Chuk Basi Vs. 3CIT [20061102ITD 123 (Mumbai) Facts: The appellant claimed long term capital loss on redemption of bonds matured in the year. According to the CIT(A) there was not a transfer and hence he confirmed the decision of the A.O. of nonallowance of long term capital loss. On the appeal, the Tribunal held that redemption of these bonds does give raise to capital gain/loss and the appellant deserves to succeed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on High Court/ITAT. (6) CIT v. Swadesh East Asia Co. Ltd. [1981] 127 ITR 148 (Cal). A Board's circular which disallows a benefit/curtails benefit to the assessee otherwise admissible under the Act, is not binding. (7). Bhartia Industries Ltd. v. CIT [2011] 201 Taxman 180/12 Taxman.com 409 (Cal). On a plain reading of the provision of section 119, it is clear that the circular issued by the Board under the aforesaid provision is meant for guiding the officers of the revenue for administrative purpose of enforcing the provisions of the Act. But when an authority under the Act is required to perform quasi-judicial functions, such authorities should be guided by the law of the land as enunciated by various judicial authorities which has a binding effect. If an existing circular is a conflict with the law of the land laid down by Supreme Court, the revenue authorities, while acting quasi-judicially, should ignore such circulars in discharge of their quasi-judicial functions. 5. In the view of the above stated facts and submissions made in the preceding paragraphs, your Honour may kindly appreciate that the disallowance made by the A.O. in regard to the claim of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mercantile' then it is chargeable on "accrual basis". 3.4 Us submitted earlier, it is undisputedly proved on record that the department accepted the 'mercantile method' of accounting being regularly employed by the appellant, in earlier years on the same set of facts and circumstances of the case of the appellant. It is well settled that the principle of res-judicial doesn't apply to I.T, Proceedings, but the principle of consistency shall have to be followed by the revenue department while making the assessment. 3.5 i In may kindly be appreciated that in relation to deep discount bonds the difference between the market valuations as on two successive valuation dates will represent the accretion to the value of the bond, during the relevant financial years and will be taxable as 'interest' income where the bonds are held as investments or business income where the bonds are held as trading assets. Similarly, where the bond is redeemed by the original subscriber, the interest income will be proportionately taxed on accrual basis in that year. Therefore, in the case of the appellant, the appellant having regularly employed 'mercantile system' of ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aced under the category of "listed securities". 4.2 As is evident from the records, the appellant had invested out of his unutilized surplus funds in DD bonds way back in F.Y. 1993-94 and the same being held as investment in all these years and stood accepted as such in the wealth tax return, the surplus on redemption thereof should be taxed as Long term capital gains. The factum of the bonds being held as investment is not disputed by the A.O. as no adverse remark is passed in the assessment order though it was specifically brought on record by the letter dated 15.12.2011 filed with the A.O. and as noted in Para 5.1 of the assessment order coupled with the finding of the A.O.(though contested as taxed in one year) that the income arising out of investment made in such bonds is taxed as "interest on securities". Further, under the proviso to section 112(1), rate of income tax on long term capital gains arising from transfer of listed securities or unit or bonds will be 10% of the gain so computed. Thus, the appellant is eligible to be charged the tax at the flat rate of tax u/s. 112 of the Act. Besides, since no security transaction tax paid by the "Nigam", the benefit of indexat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 70, nut without the benefit of indexation. No such requirement is legislated upon by the Parliament either under section 70 or in section 112. During the relevant assessment year the assessee entered into eight sale transactions of shares. In one transaction shares being bonus shares their cost acquisition was nil and, therefore, the entire sale consideration was considered as a long term capital gain. Out of the remaining seven transactions, one sale result in long term capital gain with indexation whereas in the remaining transaction the assessee reported a loss with indexation. The assessee set off long term capital gain loss from long term capital gains and paid a tax of 10 percent on net long term capital gain. Held that during the relevant assessment year the assessee entered into eight sale transaction of shares. In one transaction, share being bonus shares their cost acquisition was nil and, therefore, the entire sale consideration was considered as a long term capital gain. Out of the remaining seven transactions, one sale result in long term capital gain with indexation whereas in the remaining transaction the assessee reported a loss with indexation. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t tax payable at the flat rate of 10% and Surcharge etc. if any, u/s. 112 of the Act." 6.3 I have carefully gone through the facts of the case, the assessment order, the submissions, the circulars issued by the CBDT, the case law on the issue. The following pertinent observations/decisions are made after thorough consideration of all material facts: (i) Undisputedly, the investment in SSNNL Bonds have been made on 11/1/1994 relevant to A.Y. 1994-95. These were called Deep Discount Bonds of Rs. 3600/- each and would have matured on 11/01/2014 as per the Certificate issued. These carried fixed maturity value. The appellant since then had not shown any interest income in the returns filed. The appellant has shown capital gains on these in the current year and claimed the same exempt u/s 10(38) of the Act. (ii) Therefore, the applicants clearly were applying for Bonds maturing in 2014 when they made the applications. (iii) However, the Government of Gujarat passed the Sardar Sarovar Narmada Nigam Limited (Conferment of Power to Redeem Bonds) Act, 2008 (hereinafter referred to as the "Act"). The Act amends the financial covenants and conditions for DDBs by providing an option to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's case as the Bonds were issued much earlier. (vi) The background part of Circular No.2 of 2002 dated 15/2/2002 clearly shows that there were no clear circulars before that and there were only letters written to RBI etc., conveying that the entire income would be taxed as interest income in the year of redemption on maturity but in case of transfer before maturity these would be taxed as capital gains if held as investments. Because there is no circular on this issue, the letters would only be having at the most guidance value and would not be binding. (vii) Clearly, all the bond holders were forced to take the amount offered by the SSNNL after the Gujarat Government Act. The Bonds did not mature on the maturity date in 2014 as initially contemplated in the offer which was accepted by the applicants. (viii) The forced redemption/payment would not amount to payment received on maturity and in my considered opinion amounts to transfer of a capital asset as defined in section 2(47) of the Act. I would rely on the decisions of Hon'ble Madhya Pradesh High Court in M.P. Financial Corpn. v. CIT [1981] 132.UR 884, according to which, bonds are held to be capital asset and an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ority ought to have granted it indexation benefit u/s.48 of the Act. It further raises an alternative plea seeking assessment of its capital gain at a flat rate of 10% after indexation. The Revenue's sole substantive ground on the other hand avers that the CIT(A) has wrongly treated assessee's redemption income hereinabove as capital gains instead of interest on securities as assessed in the course of above regular assessment. We have heard both the parties. Case file perused. 6. We first come to common issue raised in both the appeals as to whether the impugned redemption income is to be treated as capital gains or interest income from securities. There is no dispute that assessee had acquired the Deep Discount Bonds in question way back on 11.01.1994. It has come on record that the CBDT Circular dated 15.02.2002 applicable from prospective effect only has directed the field authorities to treat such bonds redemption income as interest income. The CIT(A) relied upon the Board's press note dated 20.03.2002 that the above circular would have prospective effect only. We further notice that a co-ordinate bench decision in C. S. Goslla vs. ITO (2008) 15 DTR (Mumbai-trib) 271 ho ..... X X X X Extracts X X X X X X X X Extracts X X X X
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