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TMI Blog2024 (4) TMI 1152X X X X Extracts X X X X X X X X Extracts X X X X ..... not the case of debenture issued on private placement basis. Accordingly, the redemption of debentures is nothing but repayment of debt and the same, in our view, cannot fall under the category of extinguishment as interpreted by the Courts in the case of Shares/Preference shares. The market value of debentures would depend upon the fluctuation in the prevailing general interest rates. We may explain this with an example. Let us assume that a debt instrument having face value of Rs.1000/- was issued and it carried interest rate of 12% p.a. Let us further assume that the market rate of interest has fallen to 6% subsequently. In that case, the market forces will recognize the higher interest yield available in the above said debt instrument. Accordingly, the market value of debt instrument may increase to say Rs.1300/-. If the holder of the said debt instrument having face value of Rs.1000/- sells it for Rs.1300/-, then the gain of Rs.300/- obtained by that person is assessable as Capital gain. So far as the company which had issued the debt instrument is concerned, the above said market value is irrelevant. It would be paying interest on the face value of Rs.1000/- only and further, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether the surplus amount should be Rs.9.08 crores or Rs.12.59 crores? (c) If it is held as Long term Capital gains , whether the assessee s claim for deduction u/s 54F of Rs.2.77 crores and sec.54EC should be allowed or not? 2. The facts relating to the above said issues are discussed in brief. The assessee is a director in M/s Capricorn Realty Ltd and is deriving salary from there. Besides the above, the assessee is also engaged in the business of trading in Shares securities and is carrying on business in Artwork Painting under the trade name The Luxury Company . During the year under consideration, the assessee declared Long term capital gains on redemption of NCDs issued by two companies, viz., (a) Bhishma Realty Ltd and (b) Capricon Realty Ltd. The assessee invested the maturity proceeds in purchase of a flat under construction and also in REC bonds. Accordingly, the assessee claimed exemption u/s 54F and 54EC of the Act in his return of income. 3. The AO noticed that the deduction u/s 54F is allowed against the capital gain arising on sale of capital asset other than a residential house, if the assessee has purchased within two years and constructed within 3 years a residenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nctioned by BFIR, all the three special purpose vehicles issued 0% secured Redeemable nonconvertible Debentures payable at a premium (hereinafter called as NCDs to the secured lenders, i.e., Nationalised banks against their outstanding loans in the year 2004/2005. The terms and conditions of issuing NCDs were governed by a Debenture Trust Deed dated 22.07.2005 and M/s IDBI Trusteeship Services Ltd was appointed as Trustee for the management of NCDs. Each NCD was having face value of Rs.1.00 lakh. Two types of NCDs, viz., NCD-I for the creditors holding first charge and NCD-II for the creditors holding second charge were issued. 6. During the year 2006, the banks started pressurizing the directors of the SPVs for payment of NCDs. Hence the assessee, being one of the directors along with other individuals purchased the NCDs from the nationalized banks. The assessee purchased the NCDs issued by M/s Bhishma Realty Ltd and M/s Capricorn Realty Ltd and the details thereof are given below:- (A) Bhishma Realty Ltd:- NCD I - 213.35 NCDs having face value of Rs.1.00 lakh each was purchased for Rs.1,30,380.26 per debenture. NCD-II - 731.50 NCDs having face value of Rs.1.00 lakh each was purch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Income . According to Ld A.R, the AO had assessed the long term capital gains as declared by the assessee, but he has only denied the deduction claimed u/s 54F of the Act. On the contrary, the Ld CIT(A) had directed the AO to assess the gain received on redemption of NCDs as interest income under the head Income from Other sources, which would amount to assessment of new source of income by Ld CIT(A). The Ld A.R submitted that the Ld CIT(A) is not empowered to assess any new source of income in the appellate proceedings. In support of this contentions, the Ld A.R placed his reliance on the decisions rendered by Hon ble Delhi High Court in the case of CIT vs. Union Tyres (240 ITR 556)(Delhi) and CIT vs. Sardari Lal Co (2002)(102 Taxman 595)(Delhi). 10. We heard the parties on this legal issue. We noticed that the assessee has purchased NCDs for an amount of Rs.1451.32 lakhs and received a sum of Rs.2359.62 lakhs on their redemption. Thus, the assessee made a gain of Rs.908.30 lakhs on the redemption of NCDs. We notice that the taxability of above said income has only been examined both by the assessee/AO and Ld CIT(A). While the assessee has declared the same as Long term capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnually during the tenure of NCDs, but premium shall be paid on redemption. We noticed earlier that the above said NCDs were initially allotted to the nationalized banks in September, 2004. The assessee herein has purchased the NCDs in June, 2006 from those nationalized banks. Thereafter, they were redeemed in October, 2009. 14. The case of the assessee is that the debenture is a capital asset. Further its redemption is results in extinguishment of rights therein. However, the Ld CIT(A) has taken the view that the redemption will not fall under the definition of transfer given under the Act. In this regard, the Ld A.R submitted that the expression transfer includes sale, exchange or relinquishment of asset or extinguishment of rights as stated in sec.2(47)(i) of the Act. The Ld A.R submitted that the extinguishment of rights in preference shares has been held to be a case of transfer by various Courts. In support of this proposition, the Ld A.R placed his reliance on the decisions rendered by Hon ble Supreme Court in the case of Anarkali Sarabhai vs. CIT (1997)(90 Taxman 509)(SC), Kartikeya V Sarabhai vs. CIT (1997)(95 Taxman 164)(SC) and by Hon ble Bombay High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3-ITAT-KOL. She also referred to the decision rendered by ITAT in the case of Bennett Coleman Co Ltd vs. ACIT (ITA No.569/Mum/2009 dared 21-01-2010), wherein it was held that the premium received on redemption of debenture is taxable under the head Income from other sources. 17. The Ld D.R further submitted that the assessee herein is an intermediate purchaser and not the original subscriber of NCDs. With regard to tax treatment to be given to the gain arising on redemption of Deep Discount Bonds, the Ld D.R referred to the Circular No.002 of 2002 issued by CBDT, wherein the tax treatment to be given in respect of Deep Discount Bonds and STRIPS upon its redemption has been explained. He submitted that the above cited CBDT Circular states that the difference between the redemption price and the cost of purchase of bond by the intermediate purchaser will be taxable as interest or business income, as the case may be. Accordingly, the Ld D.R submitted that the Ld CIT(A) has rightly held that the gain received by the assessee on redemption of NCDs is taxable as interest income. With regard to the computational error, the Ld D.R agreed that the correct amount may be directed to be assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest expenditure and their claim has been allowed. 20. We think that there is no dispute with regard to the fact that the Debentures fall under the category of Capital asset under the Income tax Act. In this regard, the Ld A.R took us to sec.50AA of the Income tax Act, wherein the gains arising on sale/redemption of certain kinds of debentures is stated to be taxable as short term capital gain. We notice that section 50AA is applicable to a case of market linked debentures (MLD). In case of Market linked debentures, the interest rate payable on them is not determined at the time of issuing them. Instead, the return on those market linked instruments is determined on the basis of performance of an underlying market index or instrument. Normally, in case of MLD, interest may not be payable every year and it may be payable in lump sum at the end of its tenure. The Parliament, by a legal fiction introduced in sec.50AA of the Act, has stated that the said gain is taxable as short term capital gains, even though the MLD might have been held for more than three years. The reason may be that the tax is payable on short term capital gains under regular rates, as applicable to interest in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard to redemption of preference shares and reduction of capital in case of equity shares have been rendered considering the rights and liabilities attached to shares. Hence, in our view, the ratio of decisions rendered in the case of equity shares/preference shares cannot be applied to debt instruments. We notice that the decision in the case of Mrs. Perviz Wang Chuk basi (supra) was related to Capital investment Bond issued by Government of India and not the case of debenture issued on private placement basis. Accordingly, the redemption of debentures is nothing but repayment of debt and the same, in our view, cannot fall under the category of extinguishment as interpreted by the Courts in the case of Shares/Preference shares. 22. We may explain as to how the incidence of capital gain may arise in the case of debentures. We noticed earlier that the holder of debenture is only entitled to receive interest from it. The said interest income is taxable under the head Income from other sources or under the head business. In case of shares, the shareholder would get dividend income and the same is taxable as stated above. Thus the face value of shares/debentures would remain static a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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