Shri Rakeshbhai K.Patel, Ahmedabad v. The ACIT., Cent.Circle-1(1),, Ahmedabad

ITA 1249/AHD/2006 | 2002-2003
Pronouncement Date: 29-01-2010 | Result: Allowed

Appeal Details

RSA Number 124920514 RSA 2006
Assessee PAN AGGPP2910C
Bench Ahmedabad
Appeal Number ITA 1249/AHD/2006
Duration Of Justice 3 year(s) 8 month(s) 12 day(s)
Appellant Shri Rakeshbhai K.Patel, Ahmedabad
Respondent The ACIT., Cent.Circle-1(1),, Ahmedabad
Appeal Type Income Tax Appeal
Pronouncement Date 29-01-2010
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted A
Tribunal Order Date 29-01-2010
Date Of Final Hearing 11-01-2010
Next Hearing Date 11-01-2010
Assessment Year 2002-2003
Appeal Filed On 17-05-2006
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH A BEFORE SHRI T.K.SHARMA JUDICIAL MEMBER AND SHRI N.S. SAINI ACCOUNTANT MEMBER DATE OF DRAFTED ON ITA NO.1249/AHD/2006 ASSESSMENT YEAR : 2002-2003 SHRI RAKESHBHAI K PATEL NIRMA HOUSE ASHRAM ROAD AHMEDABAD VS. THE ASSISTANT COMMISSIONER OF INCOME-TAX CENTRAL CIRCLE- 1(1) AHMEDABAD PAN/GIR NO. : A GGPP 2910 C (APPELLANT) .. (RESPONDENT) APPELLANT BY: SHRI S N SOPARKAR WITH SHRI HIMANSHU SHAH RESPONDENT BY: SHRI RAJEEV AGARWAL CIT - DR O R D E R PER N.S.SAINI (ACCOUNTANT MEMBER):- THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF THE LEAR NED COMMISSIONER OF INCOME-TAX (APPEALS)-I AHMEDABAD [THE CIT(A) FOR SHORT] DATED 08-03-2006 IN APPEAL NO. CIT[A]-I/CC.I(1)/51/ 05-06. 2 GROUND NO.1 IS GENERAL IN NATURE AND DOES NOT RE QUIRE ANY ADJUDICATION BY US. 3 GROUND NOS.2 RAISED BY THE ASSESSEE IN THIS APPE AL IS AS UNDER: 2 IN LAW AND IN FACTS AND CIRCUMSTANCES OF THE APPELL ANTS CASE THE LD. COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED IN C ONFIRMING THE ACTION OF LD. ASSESSING OFFICER HOLDING THAT THE METHOD OF ACCOUNTING AS MERCANTILE AS AGAINST CASH METHOD OF ACCOUNTING REG ULARLY FOLLOWED BY THE APPELLANT. THE LEARNED ASSESSING OFFICER OBSERVED AS UNDER: - 2 - 2.1 METHOD OF ACCOUNTING. 4 FROM THE NOTES FORMING PART OF THE RETURN OF INC OME IT HAS BEEN FOUND THAT THE ASSESSEE HAS MENTIONED THAT HE IS FOLLOWING THE CASH SYSTEM OF ACCOUNTING. BUT FROM THE BLOCK A SSESSMENT ORDER DATED 28-10-03 IT HAS BEEN FOUND THAT THE AO HAS C ONSIDERED THE METHOD OF ACCOUNTING IN THE CASE OF THE ASSESSEE AS MERCANTILE. FROM THE APPELLATE ORDER DATED 16-12-04 IT HAS BEE N FOUND THAT THE ASSESSEE HAS NOT TAKEN ANY GROUND BEFORE LD. CIT(A) AND NO FINDING HAS BEEN GIVEN BY HIM IN THIS REGARD. SINCE THE ORD ER OF LD. CIT(A) MERGES WITH THE ORDER OF THE AO IT IS CLEAR THAT TH E ASSESSEE HAS NO OBJECTION WITH THIS FINDING OF THE AO AND HE HAS AC CEPTED THAT HE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING. THE ASSESSEE WAS GIVEN THE SHOW CAUSE NOTICE DATED 14-03-05 TO EXPLA IN AS TO WHY IN THE LIGHT OF THE SEC. 145 OF IT ACT THE METHOD OF A CCOUNTING SHOULD BE CONSIDERED AS MERCANTILE IN THE CASE OF THE AS SESSEE IN THIS YEAR ALSO. THE RELEVANT PORTION OF THIS SHOW CAUSE NOTIC E IS PRODUCED AS UNDER: PLEASE REFER TO THE BLOCK ASSESSMENT ORDER DATED 2 8-10-03 IN THIS ORDER THE AO HAS DECIDED THAT THE METHOD OF AC COUNTING IN YOUR CASE IS MERCANTILE; YOU HAVE NOT TAKEN ANY GRO UND OF APPEAL BEFORE LD. CIT(A) THIS MEANS THAT YOU HAVE ACCEPTED THE SAME. BUT IN THE ROI OF THIS YEAR ON THE NOTES FORMING PART OF THE ROI YOU HAVE STATED THAT THE ASSESSEE IS FOLLOWING THE CASH SYSTEM OF ACCOUNTING. THIS ROI WAS FILED O N 09-08- 02 AND THEREFORE IT IS CLEAR THAT THE AO HAS PASSE D THE BLOCK ORDER AFTER THIS DATE. EXPLAIN AS TO WHY AS PER SEC. 145 OF IT ACT THE SYS TEM OF ACCOUNTING SHOULD NOT BE CONSIDERED AS MERCANTILE S INCE IT HAS TO BE TAKEN ON CONTINUOUS BASIS AND IT CANNOT BE CH ANGED. IN HIS SUBMISSION THE REPRESENTATIVE OF THE ASSESSE E TRIED TO JUSTIFY THAT THE SAME SHOULD BE CONSIDERED AS CASH BUT TH E CONTENTION AND THE SUBMISSION OF THE ASSESSEE IS NOT TENABLE SINCE AS PER SEC. 145 OF IT ACT THE ASSESSEE CAN ADOPT ONLY ONE SYSTEM O F ACCOUNTING ON THE REGULAR BASIS. THIS SECTION 145 OF THE ACT IS P RODUCED AS UNDER: 145 METHOD OF ACCOUNTING. (1) INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION OR INCOME FROM OTHER SOURC ES SHALL SUBJECT TO THE PROVISIONS OF SUB-SECTION (2) BE - 3 - COMPUTED IN ACCORDANCE WITH EITHER CASH OR MERCANTI LE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSE SSEE. (2) THE CENTRAL GOVERNMENT MAY NOTIFY IN THE OFFICIAL G AZETTE FROM TIME TO TIME ACCOUNTING STANDARDS TO BE FOLLOW ED BY ANY CLASS OF ASSESSEES OR IN RESPECT OF ANY CLASS O F INCOME. (3) WHERE THE AO IS NOT SATISFIED ABOUT THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE OR WH ERE 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 T HE AO MAY TAKE AN ASSESSMENT IN THE MANNER PROVIDED IN SE CTION 144. SINCE IN THE BLOCK ASSESSMENT ORDER THE AO HAS DECI DED THE METHOD OF ACCOUNTING IN THE CASE OF THE ASSESSEE AS MERCA NTILE AND THE ASSESSEE HAS NOT CHALLENGED THE SAME ON APPEAL THE LD. CIT(A) HAS ALSO PASSED THE ORDER DATED 16-12-04 IT IS CONCLUD ED THAT AS PER THE PROVISIONS OF THE ACT THE ASSESSEE CANNOT CHANGE T HE SAME. THE ASSESSEE IS BOUND TO FOLLOW THE SAME METHOD OF ACCO UNTING 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. 4 GROUND NO.3 IN THE APPEAL READS AS UNDER: IN LAW AND IN FACTS AND CIRCUMSTANCES OF THE APPEL LANTS CASE THE LD. COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED IN HAS ERRED IN UPHOLDING THE ACTION OF LD. ASSESSING OFFICER IN CO NSIDERING THE LONG TERM CAPITAL GAIN OF RS.1 44 50 000/- ARISING ON TR ANSFER IN PURSUANCE TO RE-PURCHASE OF 850 DEEP DISCOUNT BONDS (DDB) SERIES-A ISSUED BY NIRMA LIMITED AS INTEREST INCOME . 5 THE LEARNED ASSESSING OFFICER OBSERVED AS UNDER: - 4. INCOME SHOWN AS LTCG INSTEAD OF STCG FROM THE ANNEXURE 1 OF STATEMENT OF INCOME IT WAS FOUND THAT THE ASSESSEE HAS SHOWN LTCG OF RS.3 66 00 222/- FROM TH E TRANSACTIONS OF THE DDBS OF NIRMAL LIMITED PURCHASE COST OF THE SAME HAS BEEN SHOWN AT RS.18 52 00 000/- AND THE SAME HAS BEEN SH OWN TO HAVE BEEN SOLD AT RS.22 18 00 222/-. ASSESSEE HAS CLAIME D THE DEDUCTION U/S 54EC OF I.T. ACT SINCE HE HAS MADE INVESTMENTS IN THE BONDS OF RURAL ELECTRIFICATION CORPORATION OF RS.3 66 00 000 /-. THEREFORE THE NET LTCG OF ONLY RS.222/- HAS BEEN OFFERED BY THE A SSESSEE. - 4 - FROM THE PRIMARY DETAILS FURNISHED BY THE ASSESSEE IT HAS BEEN FOUND THAT 1852 DDBS OF NIRMA LIMITED EACH AMOUNTIN G TO RS.1 00 000/- WERE ALLOTTED TO THE ASSESSEE ON 28-0 7-2000 THE LETTER OF ALLOTMENT FOR THE SAME WAS ISSUED TO THE ASSESSE E DATED 23-09- 2000. THE DEBENTURE CERTIFICATE WAS ISSUED TO THE A SSESSEE DATED 10- 05-2001. THIS DDB SERIES A OF NIRMA LIMITED WAS LIS TED IN NATIONAL STOCK EXCHANGE ON 20-09-2001 AND WAS MADE AVAILABLE FOR DEMATERIALIZATION AS ON 19-09-2001. OUT OF THESE TOTAL 1852 DDBS OF NIRMA LIMITED 850 DDBS WERE REPURCHASED BY NIRMA LIMITED ITSELF DATED 01-10-20 01 AND ANOTHER 1002 DDBS WERE SOLD ON 19-03-2002. FROM THE DETAILS FURNISHED BY THE ASSESSEE IT WAS FOUND THAT THIS DDB SERIES A OF NIRMA LIMITED WAS RESULT OF THE TER MS OF THE DEBENTURE TRUST DEED DATED 27-4-2001 WHICH WAS ENT ERED INTO BETWEEN THE COMPANIES I.E. NIRMA LIMITED THE COMPA NY WHICH ISSUED THE DDBS AND THE IFCL LTD. NIRMA LIMITED IS SUED THE CERTIFICATE OF HOLDING TO THE ASSESSEE ON 10-5-2001 . THIS DDB SERIES A OF NIRMA LIMITED WAS LISTED IN NATIONAL STOCK EXC HANGE ON 20-9- 01 AND WAS MADE AVAILABLE FOR DEMATERIALIZATION AS ON 24-9-2001. THOUGH THE LETTER OF ALLOTMENT WAS ISSUED TO THE AS SESSEE AS ON 23- 09-00 THE CERTIFICATE OF HOLDING COULD BE ISSUED T O THE ASSESSEE AS ON 10-5-2001. SINCE THE 850 DDBS OF NIRMA LIMITED H AD BEEN REPURCHASED BY IT THE INCOME ON THE SAME IS INTERE ST INCOME. FOR THE REST OF THE DDBS SINCE THE LETTER OF ALLOTMENT IS D IFFERENT IN ITS NATURE AND CHARACTER THE SALE OF THIS SCRIP CAN BE CONSIDERED TO HAVE TAKEN PLACE ONLY FROM THE DATE OF ISSUANCE OF CERTI FICATE OF HOLDING THEREFORE THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY THIS GAIN SHOULD NOT BE CONSIDERED AS STCG SINCE THE ASSESSEE WAS GIVEN OWNERSHIP OF THESE DDB SERIES A OF NIRMA LIMITED ON 10-5-2001 AS PER THE TERMS OF DEBENTURE TRUST DEED DATED 27-4-20 01 AND THE SAME WERE SOLD ON 19-3-2002. ON 850 DDBS OF NIRMA LIMITED THE SAME HAS BEEN REP URCHASED BY THE ISSUER ITSELF AND TDS OF RS.29 47 800/- HAS BEE N DEDUCTED @ 20.4% ON THE INTEREST INCOME OF RS.1 44 50 000/-. FROM THE ABOVE TRANSACTIONS IT IS VERY CLEAR THAT THE DDBS HAVE BEEN REPURCHASED BY THE ORIGINAL ISSUER. THEREFORE AS PER CIRCULAR DATED 15-02-2002 AS WELL AS AS PER LETTER DATED 12 -05-96 OF THE BOARD THE INCOME ACCRUING ON THE SAME SHOULD BE TR EATED AS INTEREST INCOME. THE ASSESSEE HAS SHOWN LTCG OF RS.3 66 00 222/- ON THESE TRANSACTIONS AND ALSO CLAIMED THE BENEFIT OF SEC. 5 4EC OF I.T. ACT BY MAKING THE INVESTMENT IN RURAL ELECTRIFICATION CORP ORATION BONDS OF RS.3 66 00 000/-. THE ASSESSEE WAS ASKED TO PROVE T HE GENUINENESS - 5 - OF CLAIM OF THIS GAIN AS LTCG AND THE CLAIM OF BENE FIT OF SEC. 54EC OF I.T. ACT. THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY THE INC OME GENERATING FROM THIS TRANSACTION SHOULD NOT BE CONSIDERED AS S TCG INCOME IN THE LIGHT OF CIRCULAR 2 OF 2002 OF CBDT. AS PER THE PROVISIONS OF THE I.T. ACT ONLY FOR A LISTED SECURITY THE PER IOD OF HOLDING OF LONG TERM CAPITAL ASSET IS MORE THAN 12 MONTHS OTH ERWISE IT IS MORE THAN 36 MONTHS. SINCE IN CASE OF HE ASSESSEE THE SECURITY I.E. DDB SERIES-A OF NIRMA LIMITED COULD BE LISTED ONLY ON 20-9-01 BEFORE THIS ITS NATURE IS SUCH THAT IT CANNOT BE CO NSIDERED IN THE DEFINITION OF AN ASSET FOR WHICH THE PERIOD OF HOLD ING AS LONG TERM CAPITAL ASSET IS MORE THAN 12 MONTHS. THEREFORE THE RE IS MATERIAL DIFFERENCE IN A LETTER OF ALLOTMENT BEFORE IT IS LI STED IN A STOCK EXCHANGE AND AFTER TO THE SAME. MOREOVER THE LETTE R OF ALLOTMENT IS NOT COVERED IN THE DEFINITION OF THE SECURITY AS PER ACT THEREFORE IT IS VERY DIFFERENT FROM THE DEBENTURE CERTIFICATE. THE ASSESSEE HAS ALSO PURCHASED THE DDB SERIES B O F NIRMA LIMITED AMOUNTING TO RS.12 50 00 000/- AS ON 08-10- 01 BUT THE ACCRUED INTEREST HAS NOT BEEN OFFERED ON THE SAME THOUGH NORMA LIMITED HAS CLAIMED THE INTEREST ON THE SAME. THE A SSESSEE WAS ALSO ASKED TO EXPLAIN AS TO WHY THE ACCRUED GAIN SHOULD BE ADDED ON THE SAME ON ACCRUAL BASIS. THE VALUE OF A SECURITY INCREASES IN A MARKET ON DA Y TO DAY BASIS BECAUSE AS THE TIME PASSES THE MATURITY DATE NEARS DOWN. IN CASE OF A SECURED DEBENTURE THE LIQUIDITY IS HIGHLY ASSURED. THEREFORE IT CAN BE SAFELY CONCLUDED THAT THE GAIN IN A SECURITY ACC RUES ON ANNUAL BASIS EVEN THOUGH THE EXP. MAY NOT ACCRUE IN THE HA NDS OF THE ISSUER OF THE SECURITY. IN CASE OF NIRMA GROUP THE STORY IS EXACTLY OPPOSITE. NORMA LIMITED THE ISSUER OF DDB SERIES- A HAS CLAIMED THE INTEREST EXP. ON ACCRUAL BASIS THOUGH THE LIAB ILITY HAS NOT ARISEN BEFORE THE MATURITY DATE AND ALSO THE HOLDER OF DDB S OF THIS GROUP HAVE NOT OFFERED THE GAIN ON THESE SECURITIES WHICH IS AUTOMATICALLY ACCRUING IN THE SAME BECAUSE OF THEIR HIGH LIQUIDIT Y AND NEARING DOWN OF THE MATURITY DATE. SUBMISSION OF THE ASSESSEE IN HIS SUBMISSION DATED 10-03-05 THE ASSESSEE FURN ISHED ITS AS UNDER: I HAVE RECEIVED YOUR ABOVE REFERRED FINAL SHOW CAUS E NOTICE ON 15/02/2005 REQUIRING US TO EXPLAIN THE ISSUES AS R EFERRED TO IN THE NOTICE. SOME OF THE ISSUES REFERRED IN THE SHOW CAUSE NOTICE ARE RAISED FOR THE FIRST TIME. OUR PARA WISE SUBMISSIONS ARE AS UNDER: - 6 - DISCOUNT BONDS OF NIRMA LIMITED SERIES-B YOUR GOODSELF HAS REFERRED TO OUR INVESTMENT OF RS. 12.5 CRORES IN DEEP DISCOUNT BONDS (DDB) OF NIRMA LIMITE D SERIES-B AND REQUIRED US TO EXPLAIN IN THE LIGHT O F CIRCULAR NO.2 OF 2002 OF CBDT AS TO WHY INTEREST INCOME AS WORKED OUT ON THE BASIS OF THE PRESENT VALUE OF THESE BOND S AS ON 31- 03-2002 SHOULD NOT BE CHARGED AS INTEREST INCOME. IN ORDER TO UNDERSTAND ISSUE COMPREHENSIVELY I FURN ISH HEREUNDER THE DETAILS OF INVESTMENT IN THE SAID DDB S. DATE OF ALLOTMENT INVESTMENT AMOUNT (IN LACS) AMOUNT PAID BY CHEQUE DRAWN ON CHEQUE NO. DATE AMOUNT (IN LACS) 08/10/01 1250 829649 08/10/01 1250 THE KCCB LTD. I ENCLOSE HEREWITH COPY OF ALLOTMENT LETTER DATED 1 2/10/01 RECEIVED IN RESPECT OF ABOVE INVESTMENT MARKED ANNE XURE-A. I REQUEST REFERENCE TO PRESS RELEASED DATED MARCH 2 0 2002 ISSUED AFTER ISSUE OF CIRCULAR NO.2/2002 OF CBDT RE FERRED BY YOUR GOODSELF WHEREIN IT IS MENTIONED THAT IT IS ALSO ESTABLISHED PRINCIPLE THAT A CIRCULAR ISSUED BY THE CBDT CANNOT HARE A RETROSPECTIVE TAX EFFECT. THE PRESENT CIRCULAR (I.E. NO.2 OF 2002) ON DEEP DISCOUNT BONDS THEREFO RE SPECIFIES THE TAX TREATMENT IN RESPECT OF BONDS WHI CH ARE ISSUED AFTER THE ISSUE OF THE CIRCULAR AND DOES NO T SEEK TO IMPOSE THE MODIFIED TAX TREATMENT ON EXISTING BONDS -HOLDERS. THUS IN OUR CASE SINCE THE REFERRED INVESTMENTS H AVE BEEN MADE PRIOR TO ISSUE OF CIRCULAR NO.2/2002 DATED 15/ 02/02 THE SAME IS NOT APPLICABLE TO YOUR ASSESSEE AND THEREFO RE THE QUESTION OF OFFERING INTEREST INCOME IN RESPECT OF REFERRED INVESTMENT CONSIDERING CIRCULAR NO.2 / 2002 DOES NO T ARISE IN YOUR ASSESSEES CASE. I REQUEST REFERENCE TO CLARIF ICATION ISSUED BY CBDT VIDE LETTER NO.225/45/96/ITA IF DATED 12.03 .96 REPORTED AT (1996) 88 TAXMAN 146 (ST) WHEREIN THE T AX IMPLICATION OF THIS KIND OF DEBENTURES HAS BEEN CLE ARLY SPELT OUT AND THE SAME IS RELEVANT. COPY OF THE SAID LETT ER NO.225/45/96-ITA-II DATED 12/03/96 IS ENCLOSED HERE WITH MARKED ANNEXURE-B. - 7 - THE SAID LETTER UNAMBIGUOUSLY DEFINES TAX TREATMENT OF DDBS WHICH IS THAT ON TRANSFER OF BONDS BEFORE MATURITY TO BE TREATED AS CAPITAL GAINS / LOSS IF HELD AS INVESTMENT AND A S INTEREST INCOME IF HELD TILL MATURITY. THE SAID CLARIFICATIO N PROVIDED THAT THE DIFFERENCE BETWEEN THE ISSUE PRICE AND THE REDEMPTION PRICE OF DDBS WOULD BE AS INTEREST INCOME ON MATURI TY. IN VIEW OF ABOVE THERE IS NO REQUIREMENT AS TO OFF ERING INTEREST INCOME AS WORKED OUT ON THE BASIS OF PRESE NT VALUE OF THESE BONDS AS INTEREST INCOME. (II) TO (IV) YOUR GOOD OFFICE HAS RAISED CERTAIN IS SUES ON THE REALIZATION OF CAPITAL GAIN FROM INVESTMENT IN DEEP DISCOUNT BONDS (DDB) OF NIRMA LTD. W. R. T. (A) 850 BONDS REPURCHASED BY NIRMA LTD. ON 01-10-01. (B) 1002 BONDS WERE SOLD ON 19-03-02. WITH REFERENCE TO ABOVE TRANSACTION YOUR GOOD OFFI CE HAS RAISED FOLLOWING QUESTIONS: I) IN VIEW OF CIRCULAR 2 OF 2002 INCOME OFFERED ON 19 00 BONDS UNDER THE LONG TERM CAPITAL GAIN SHOULD BE TAXED AS INTEREST INCOME. II) TDS OF RS.29.48 LACS CLAIMED IN THE RETURN FOR AY 2 002- 03 BUT CORRESPONDING INCOME I.E. RS.1 44 50 000/- REFLECTED IN THE SAID CERTIFICATE HAS NOT BEEN OFFE RED AS INCOME WHICH IS IN CONTRAVENTION OF SEC. 199. III) THOUGH THE LETTER OF ALLOTMENT WAS GIVEN ON 23-09-0 0 THE CERTIFICATES OF BONDS WERE GIVEN ON 10-05-01. T HE LETTER OF ALLOTMENT IS DIFFERENT FROM CERTIFICATE O F BOND AND BOTH ARE SEPARATELY TRADABLE AND THEREFORE THE PERIOD OF HOLDING FOR BOND CERTIFICATE SHOULD BE COUNTED F ROM 10-05-01 AND THEREFORE THE SALE OF SUCH CERTIFICATE S WOULD BE A SHORT TERM CAPITAL GAIN. IV) ALSO THE INTEREST AND CONSEQUENTIAL SHORT TERM CAPI TAL GAIN TO BE TAXED AS PER ABOVE REFERRED CIRCULAR NO. 2 OF 2002 AND NOT LONG TERM CAPITAL GAIN. I MENTION HEREUNDER THE FACTS OF THE CASE IN BRIEF FOR THE QUICK UNDERSTANDING OF THE MATTER. FACTS OF THE CASE - 8 - DATE OF CLEARANCE OF CHEQUE NO.81821 OF RS.1807 LAC S 28.07.2000 DATE OF CLEARANCE OF CHEQUE NO.818215 OF RS.15 LACS DATE OF CLEARANCE OF CHEQUE NO.818216 OF RS.30 LACS TOWARDS APPLICATION FOR 1852 DEBENTURES. DATE OF ALLOTMENT BY WAY OF BOARD RESOLUTION ON 2 3-09- 2000 (EFFECTIVE) DEEMED DATE OF ALLOTMENT 28-07-2000 DATE OF LETTER OF ALLOTMENT (TRADABLE AND TRANSFERA BLE) 23-09- 2000 DATE OF DEBENTURE CERTIFICATE (ISSUE ON SURRENDER OF LOA) 10-05- 2001 DATE OF DEMATERIALIZATION 19-09- 2001 FROM 1852 BONDS AT THE OPENING OF THE AY 850 BONDS REPURCHASED BY NIRMA LIMITED ON 01-10- 2001 1002 DEBENTURES SOLD ON 19-03- 2002 IN SUPPORT OF ALL ABOVE FACTS I ENCLOSE HEREWITH TH E FOLLOWING DOCUMENTS. 1. COPY OF INFORMATION MEMORANDUM ISSUED BY NIRMA L IMITED. 2. COPY OF BANK STATEMENT EVIDENCING CLEARANCE OF C HEQUE TOTALING TO RS.1852 LACS ON 28-07-00. 3. COPY OF BOARD RESOLUTION DATED 23-09-2000. 4. COPY OF LETTER OF ALLOTMENT CONFIRMING ALLOTMEN T ON 28-07- 2000 5. COPY OF DEBENTURE CERTIFICATE DATED 10-05-01 6 COPY OF DEMAT ACCOUNT STATEMENT EVIDENCING CREDI T OF 1852 BONDS ON ACCOUNT OF DEMATERIALIZATION. - 9 - 7. COPY OF LETTER DATED 25-05-01 FOR INVITATION FO R THE REPURCHASE OF DDB SERIES-A ADDRESSED TO ALL DEBENTURE HOL DERS 8. COPY OF LETTER DATED 01-10-01 REGARDING PAYMENT FOR REPURCHASE OF DDB. 9. COPY OF LETTER DATED 03-01-02 REGARDING TDS AND REPURCHASE OF DDB. OUR SUBMISSIONS ON THE ISSUES RAISED BY YOUR GOOD O FFICE IN THE LIGHT OF ABOVE FACTS. I) YOUR GOOD OFFICE HAS REFERRED CIRCULAR NO.2 OF 2 002 DATED 15/02/02 AND RELYING ON THE SAID CIRCULAR YO UR GOOD OFFICE IS OF OPINION THAT THE INCOME SHOULD BE TAXE D AS INTEREST INCOME. WITHOUT PREJUDICE TO THE VALIDITY OF ISSUE OF CIRCU LAR NO.2 / 2002 OF CBDT REFERRED TO BY YOUR GOODSELF IT IS ST ATED THAT THE SAME IS EFFECTIVE FROM THE DATE OF ISSUE OF CIR CULAR I.E. 15/02/2002 AND NOT WITH RETROSPECTIVE EFFECT. SINCE IN OUR CASE 1852 DDBS SERIES-A HAVE BEEN ACQUIRED ON 28-07 -2000 THE CIRCULAR REFERRED BY YOUR GOODSELF IS NOT APPLI CABLE TO OUR CASE. I REQUEST REFERENCE TO PARA-3 OF THE SAME CIRCULAR WHERE IN THE LAST LINE IT HAS BEEN MENTIONED THAT THE BOAR D HAVE DECIDED THAT SUCH INCOME MAY HEREAFTER BE TREATED A S FOLLOWS. THIS IS FURTHER STRENGTHENED BY A PRESS RELEASE DAT ED MARCH 20 2002 ISSUED AFTER ISSUE OF CIRCULAR NO.2/2002 OF CB DT REFERRED BY YOUR GOODSELF. THIS PRESS RELEASE WAS REQUIRED TO BE GIVEN BECAUSE THERE HAD BEEN CERTAIN REPORTS THAT THE TREATMENT OF DDB AS S PECIFIED IN THE CIRCULAR DATED FEBRUARY 15 2002 ISSUED BY THE CBDT IS ANOMALOUS AS IT PROVIDES FOR TAXATION OF INCOME FR OM SUCH BONDS ON AN ANNUAL BASIS EVEN THOUGH NO INCOME IS RECEIVED BY THE BOND-HOLDER BEFORE MATURITY. IT HAS BEEN OPI NED THAT A HEAVY TAX BURDEN IS BEING PLACED ON PERSONS WHO HAV E BEEN HOLDING SUCH BONDS FOR A WHILE AND A CUMBERSOME OBL IGATION OF VALUING THE BONDS EVERY YEAR ON THE BASIS OF RES ERVE BANK OF INDIA GUIDELINES IS BEING CAST ON SMALL INVESTOR S. THERE IN THE PRESS RELEASE IN PARA-4 IT HAS BEEN CLARIFIED T HAT // IS ALSO ESTABLISHED PRINCIPLE THAT A CIRCULAR ISSUED BY THE CBDT - 10 - CANNOT HAVE A RETROSPECTIVE TAX EFFECT. THE PRESENT CIRCULAR (LE NO.2 OF 2002) ON DEEP DISCOUNT BONDS THEREFORE SP ECIFIES THE TAX TREATMENT IN RESPECT OF BONDS WHICH ARE ISSUED AFTER THE ISSUE OF THE CIRCULAR AND DOES NOT SEEK TO IMPOSE THE MODIFIED TAX TREATMENT ON EXISTING BONDS-HOLDERS. THUS IN OUR CASE SINCE THE SAID DEBENTURES WERE I SSUED BY NIRMA LTD. / ACQUIRED BY US MUCH PRIOR TO ISSUE OF CIRCULAR NO.2/2002 DATED 15-02-02 THE SAME IS NOT APPLICABL E TO YOUR ASSESSEE AND THEREFORE THE QUESTION OF OFFERING INT EREST INCOME IN RESPECT OF REFERRED INVESTMENT CONSIDERING CIRCU LAR NO.2/2002 DOES NOT ARISE IN YOUR ASSESSEES CASE. I REQUEST REFERENCE TO CLARIFICATION ISSUED BY CBDT VIDE LETTER NO.225/45/96-IAT 11 DATED 12-03-96 REPORTED AT (199 6) 88 TAXMAN 146 (ST) WHEREIN THE TAX IMPLICATION OF THIS KIND OF DEBENTURES HAS BEEN CLEARLY SPELT OUT WHICH IS RELE VANT TO FACTS OF OUR CASE. FURTHER IT IS SUBMITTED THAT AS DEFINED IN SUB-SECT ION 42(B) OF THE SECTION 2 OF THE IT ACT SHORT TERM CAPITAL GA IN MEANS CAPITAL GAIN ARISING FROM THE TRANSFER OF A SHORT T ERM CAPITAL ASSETS. AS PER THE PROVISION OF SUB-SECTION (42 A) OF SECTI ON 2 OF THE IT ACT SHORT TERM CAPITAL ASSET MEANS CAPITAL AS SET HELD BY AN ASSESSEE FOR NOT MORE THAN THIRTY SIX MONTHS IMM EDIATELY PRECEDING THE DATE OF ITS TRANSFER. PROVIDED THAT IN THE CASE OF A SHARE HELD IN A COMP ANY OR ANY OTHER SECURITY LISTED IN A RECOGNIZED STOCK EXCHANG E IN INDIA OR A UNIT OF UNIT TRUST OF INDIA ESTABLISHED UNDER THE UNIT TRUST OF INDIA ACT 1963 (52 OF 1963) OR A UNIT OF A MUTUA L FUND SPECIFIED UNDER CLAUSE (23D) OF SECTION 10 THE PRO VISION OF THIS CLAUSE SHALL HAVE EFFECT AS IF FOR THE WORDS THIRTY SIX MONTHS THE WORDS TWELVE MONTHS HAD BEEN SUBSTITU TED. THUS IN OUR CASE THE PERIOD OF HOLDING OF CAPITAL ASSET NAMELY DEBENTURES WHICH ARE LISTED IN RECOGNIZED S TOCK EXCHANGE HAD BEEN DETERMINED AS FOLLOW: DATE OF ALLOTMENT - 28.07.00 1936 BONDS DATE OF TRANSFER - 01-10-01 FOR 850 BONDS PURCHASE D BY THE CO. 19.03.02 FOR 1002 BONDS SOLD - 11 - AS THE SAID ASSET HAD BEEN HELD FOR A PERIOD OF MOR E THAN TWELVE MONTHS IT IS NOT A SHORT TERM CAPITAL ASSE T AND IN TERMS OF PROVISION OF SUB-SECTION (29B) OF SECTION 2 OF THE IT ACT LONG TERM CAPITAL ASSET MEANS A CAPITAL ASSE T WHICH IS NOT A SHORT TERM CAPITAL ASSET AND THEREFORE CONSI DERING FACTS OF THE CASE AND PROVISIONS OF THE ACT CLAIM AS LON G TERM CAPITAL GAIN HAS RIGHTLY BEEN MADE BY US WHICH MAY PLEASE BE NOT DISTURBED. II) TDS ON REPURCHASE OF 850 DDES OF NIRMA LTD. SER IES-A AS REGARDS TO TDS ON REPURCHASE OF 850 DDB BY NIRMA LTD. I STATE THAT THE COMPANY HAS REPURCHASED THE SAME AT THE PRICE OFFERED BY NIRMA LIMITED AND PAID THE PROCEEDS WITH OUT DEDUCTING TDS. SUBSEQUENTLY Y WAY OF ABUNDANT CAUTI ON NIRMA LIMITED OPTED TO PAY THE TDS AFTER RECOVERI NG FROM US. SINCE FOR US IT WAS NATURAL TRANSACTION I.E. I WAS TO GET CREDIT FROM GOVERNMENT I DID NOT OBJECT TO SAME. I N ANY CASE THE REQUIREMENT OF SEC.199 I.E. (A) DEDUCTION IS IN ACCORDANCE WITH LAW AND (B) THE PERSON FROM WHOSE INCOME THE D EDUCTION WAS MADE FOR CLAIMING CREDIT ARE FULLY COMPLIED I WAS LEGALLY ENTITLED FOR THE CREDIT. SO THE AMOUNT OF TDS HAS T O BE GIVEN AS CREDIT TO OUR ACCOUNT. AS FAR AS INCOME IS CONCERNED I HAVE OFFERED THE R EAL INCOME EARNED BY US TO TAX. NOWHERE IN THE SCHEME OF INCO ME-TAX ACT AS I UNDERSTAND THERE IS CONCEPT OF TAXING NO N-REAL INCOME BASED ON THIRD PARTY TDS CERTIFICATE. AS PER THE PROVISIONS OF THE ACT IT IS NOT THE REQ UIREMENT OF THE LAW THAT THE CORRESPONDING AMOUNT OF INCOME I S REQUIRED TO BE OFFERED. WHAT IS STATED IN THE PROVISION IS THAT ANY DEDUCT ION MADE SHALL BE TREATED AS A PAYMENT OF TAX ON BEHALF OF T HE PERSON FROM WHOSE INCOME THE DEDUCTION WAS MADE AND CREDIT SHALL BE GIVEN TO HIM FOR THE AMOUNT SO DEDUCTED ON THE P RODUCTION OF THE CERTIFICATE FURNISHED U/S 203 IN THE ASSESS MENT MADE UNDER THIS ACT FOR THE ASSESSMENT YEAR FOR WHICH SU CH INCOME IS ASSESSABLE. THUS CREDIT IS TO BE GIVEN IN THE ASSESSMENT YEAR F OR WHICH INCOME IS ASSESSABLE AND NOT NECESSARILY THE CORRES PONDING AMOUNT OF INCOME AND UNDER THE CORRESPONDING HEAD O F THE INCOME. - 12 - IT IS WELL SETTLED PRINCIPLE OF TAX LAW THAT THE HE AD AND NATURE OF EXPENDITURE MAY BE DIFFERENT BOTH IN THE HANDS O F THE PAYER AND THE RECIPIENT. THE TAX HAS BEEN DEDUCTED ON RS.1 44 50 000/- AT RS.29 47 800/- CONSIDERING THE PAYMENT AS INTEREST. WHERE THE SAME AMOUNT IN THE HANDS OF RE CIPIENT I.E. YOUR ASSESSEE IS INCLUDED UNDER THE HEAD CAPITAL GA IN. THUS CLAIM MADE BEING IN TERMS OF THE PROVISION OF THE ACT CREDIT OF TDS MAY KINDLY BE GRANTED. FURTHER I REQUEST YOUR GOODSELF TO KINDLY INTIMATE US REGARDING THE PROVISION OF THE ACT UNDER WHICH YOU PROPOSE TO ADD INCOME AS SHOWN IN THE TDS CERTIFICATE AND THEN TO GIVE CREDIT OF TDS MADE. AS I UNDERSTAND THERE IS NO SUCH PROVISION AND THER EFORE PROPOSED ADDITION CAN NEVER BE MADE FOR WHICH YOUR ASSESSEE STRONGLY OBJECTS TO AND RESERVE RIGHT TO MAKE FURTH ER SUBMISSION AFTER GETTING THE PROVISIONS UNDER WHICH YOUR GOODSELF INTEND TO ADD AND ASSESS THE INCOME IF AN Y. I) YOUR GOODSELF HAS REFERRED TO THE CERTIFICATE OF BONDS ISSUED ON 10-05-01 AND STATED THAT LETTER OF ALLOTMENT ISS UED ON 23- 09-00 IS DIFFERENT FROM CERTIFICATE OF BOND AND BOT H ARE SEPARATELY TRADABLE AND THEREFORE THE PERIOD OF HOL DING THE BOND CERTIFICATE SHOULD BE COUNTED FROM 10-05-01. THE ASSET IN QUESTION I.E. THE DEBENTURES HAVE BEEN ACQUIRED BY YOUR ASSESSEE ON 28-07-2000 BY ORIGINAL SUBSCRIP TION WHICH IS BASED ON THE APPLICATION MADE IN PURSUANCE TO THE INFORMATION MEMORANDUM WHICH IS A DOCUMENT SPECIFY ING THE TERMS CONDITIONS ETC. OF THE DEBENTURES. THE COM PANY ISSUED LETTER OF ALLOTMENT (LOA) WHICH IS TRADABLE AND TR ANSFERABLE AS EVIDENT FROM THE BACK SIDE OF THE LOA FURTHER C LARIFIED BY CONDITION NO.1. SO FAR AS TRANSFERABILITY AND TRADA BILITY ONE NEED NOT EVEN RESORT TO LEGAL PROVISIONS WHICH ARE CLEARLY PERMITTING THE SAME. AFTER COMPLETION OF ALLOTMENT PROCEDURE AND FORMALITY IN LIEU OF SAID LOA DEBENTURE CERTI FICATES ARE ISSUED AND AT THIS IN TIME THE RIGHT UNDER LOA SEI ZES AND IS REPLACED BY DEBENTURE CERTIFICATE. THE BASIC RIGHT IN PROPERTY REMAIN THE SAME AS LOA AS FOR DEBENTURES AND AFTER ISSUE OF DEBENTURE CERTIFICATE ONLY THE LATER ONE SURVIVES. SO IT IS FACTUALLY INCORRECT TO SAY THAT BOTH ARE SEPARATELY TRADABLE. AS GIVEN POINT IN TIME THERE CAN BE TRADING ONLY IN ON E ONLY. ISSUANCE OF DEBENTURE CERTIFICATE DATED 10-05-2001 IS MERELY A PROCEDURAL PART AND IS IN EXCHANGE OF LOA WHICH GE TS CANCELLED SO UNDERLYING ASSET REMAINS ONE AND SAME . THE ASSET IN TERMS OF SEC. 2 (42A) OF THE IT ACT WHICH SPEAKS - 13 - ABOUT ASSET HELD BY THE ASSESSEE DEFINITELY COMES I NTO PLAY FROM THE DATE OF ALLOTMENT. THE SAME IS ALSO DEMONS TRATED BY SUB-SECTION (D) OF THE SECTION WHICH CLEARLY STATE S THE PERIOD SHALL BE RECKONED FROM THE DATE OF ALLOTMENT OF SUC H FINANCIAL ASSET. I ALSO REPRODUCE HEREUNDER SEC. 108 OF THE COMPANIE S ACT 1956 WHICH IS RELEVANT FOR THE PURPOSE. TRANSFER NOT TO BE REGISTERED EXCEPT ON PRODUCTION OF INSTRUMENT OF TRANSFER. 108.(1) A COMPANY SHALL NOT REGISTER A TRANSFER OF SHARES IN OR DEBENTURES OF THE COMPANY UNLESS A PROPER INSTRUMENT OF TRANSFER DULY STAMPED AND EXECUTED BY OR ON BEHALF OF THE TRANSFEROR AND BY OR ON BEHALF OF THE TRANSFEREE AND SPECIFYING THE NAME ADDRESS AND OCCUPATION IF ANY OF THE TRANSFEREE HAS BEEN DEL IVERED TO THE COMPANY ALONGWITH THE CERTIFICATE RELATING T O THE SHARES OR DEBENTURES OR IF NO SUCH CERTIFICATE IS IN EXISTENCE ALONG WITH THE LETTER OF ALLOTMENT OF TH E SHARES OR DEBENTURES. OBSERVATION THAT DATE THE PERIOD OF HOLDING THE CAP ITAL ASSET VIZ. DEEP DISCOUNT BONDS OF NIRMA LTD. SERIES-A SHO ULD BE COUNTED FROM THE DATE OF ISSUE OF CERTIFICATE I.E. 10/05/2001 AND NOT FROM THE DATE OF ALLOTMENT IS FACTUALLY INC ORRECT. FROM ABOVE YOUR GOOD OFFICE WILL APPRECIATE THE FA CT THAT THE UNDERLYING AMOUNT IN LOA AND DEBENTURE IS SAME AND THERE IS NO DIFFERENCE WHAT SO EVER. EVEN NO NEW ASSET CAME INTO PICTURE AT ANY POINT IN TIME. YOUR GOOD OFFICE WOULD APPRECIATE THAT BASED ON THE FACTS IT IS TRANSPARENTLY CLEAR THAT ASSET IN QUES TION HAS BEEN ACQUIRED CLEARLY ATLEAST ON THE DATE AT WHICH THE BOND HAS BEEN ALLOTTED EVEN IF THE DEEMED DATE OF ALLOTMENT IS NOT BEING RECOGNIZED BY THE DEPARTMENT . IV) YOUR GOOD OFFICE HAS REFERRED CIRCULAR NO.2 OF 2002 DATED 15/02/2002 AND RELYING ON THE SAID CIRCU LAR YOUR GOOD OFFICE IS OF OPINION THAT THE INCOME SHOU LD BE TAXED AS INTEREST INCOME AND CONSEQUENTIALLY SHORT TERM CAPITAL GAIN. THOUGH THE SAME HAS BEEN REPLIED HEREINABOVE IN CASE OF DEBENTURES OF TATA FINANCE FOR THE SAKE OF BREVITY THE SAME IS NOT REPRODUCED ONCE AGAIN. HOWEVER IN NUTSHELL I SUBMIT THAT AS PER TH E PRESS RELEASE DATED 20-03-02 IT HAS BEEN MADE ABSOL UTELY CLEAR THAT THE CIRCULAR NO.2 OF 2002 IS APPLICABLE ONLY IN - 14 - RESPECT OF BONDS WHICH ARE ISSUED AFTER THE ISSUE O F THE CIRCULAR AND DOES NOT SEEK TO IMPOSE THE MODIFIED TAX TREATMENT ON EXISTING BOND HOLDERS. THE BONDS UNDER QUESTION ARE ISSUED IN CALENDAR YEAR 2000. I REQUEST REFERENCE TO CLARIFICATION ISSUED BY CBDT VIDE LETTER NO.225/45/96-ITA II DATED 12-03-96 REPORTED AT (1996) 88 TAXMAN 146 (ST) WHEREIN THE TAX IMPLICATI ON OF THIS KIND OF DEBENTURES HAS BEEN CLEARLY SPELT O UT WHICH IS RELEVANT TO FACTS OF OUR CASE. SINCE THE ASSESSEE HAS EARNED LONG TERM CAPITAL GA IN DEDUCTION U/S 54EC OF THE ACT IS AVAILABLE. 4.2 BACKGROUND : A SEARCH AND SEIZURE ACTION U/S 132 OF THE ACT WAS CARRIED ON 27-9-2001 IN CASE OF NIRMA GROUP OF ENTITIES. IN TH E BLOCK ASSESSMENT OF THE NIRMA LTD. AND OTHER ENTITIES OF THIS CONCERN LIKE NIRMA CHEMICAL WORKS LTD. ETC. THE FACT HAS B EEN ALREADY BROUGHT OUT THAT ALL THE IMPORTANT DECISION S AFFECTING THE ENTIRE GROUP HAVE BEEN TAKEN BY SOME IMPORTANT PERSONS INCLUDING SHRI K. K. PATEL THE CMD OF NIRMA LTD. AN D THE MAIN PERSON OF ENTIRE GROUP. THE ASSESSEE IS SON OF CMD OF NORMA LTD. I.E. SHRI KARSANBHAI K. PATEL AND IS A LSO DIRECTOR OF NIRMA LTD. THIS NIRMA GROUP OF ENTITIES HAS PLAN NED A NUMBER OF TRANSACTIONS IN SUCH A WAY THAT THE TAX H AS BEEN AVOIDED AT VERY LARGE SCALE. THE SEIZED RECORDS CLE ARLY SHOWED AS TO HOW THE TAX PLANNING IS CARRIED OUT IN CASE O F NIRMA GROUP OF ENTITIES. 4.3 THE GROUP ENTITIES OF NIRMA HAVE PLANNED THE AV OIDANCE OF TAX BY ARTIFICIALLY CONVERTING THE STCG ARISING OUT OF SALE OF DDB SERIESA OF NIRMA LTD. INTO LTCG. THE ASSESS EE IS SON OF CMD OF NIRMA LTD. AND IS ALSO DIRECTOR OF NO RMA LTD. WHICH IS FLAGSHIP CONCERN OF THIS NIRMA GROUP OF EN TITIES. THE PLANNING INVOLVES DEEMING OF DATE OF ACQUISITION OF DDB SERIES-A OF NIRMA LTD. ALMOST ONE YEAR PRIOR TO THE DATE OF ACTUAL ISSUE OF CERTIFICATE OF BOND. AS NIRMA LTD. IS PART OF THIS GROUP IT WILLINGLY TOOK OUT THE CERTIFICATE O F DDB ON 10- 5-2001 WITH A NOTE IN THIS CERTIFICATE THAT THE DEE MED DATE OF ALLOTMENT WOULD BE 28-07-00. THIS DEEMING PROVISION WAS INCORPORATED TO HELP THE NIRMA GROUP OF ENTITIES TO ARTIFICIALLY INCREASE THEIR PERIOD OF HOLDING OF DDB SERIES-A CE RTIFICATE BY MORE THAN ONE YEAR WHICH THEY HAD ACTUALLY HELD FRO M MAY 2001 TO MARCH 2002 (I.E. LESS THAN ONE YEAR). 4.4 FACTS OF THE PRESENT CASE : - 15 - THE ASSESSEE IS SON OF CMD OF NIRMA LTD. I.E. SHR I KARSANBHAI K.PATEL. HE IS ALSO THE DIRECTOR OF THE NIRMA LTD. FROM THE FACTS OF THE CASE MENTIONED ABOVE IT HAS B EEN FOUND THAT THE ASSESSEE HAS NOT OFFERED THE INTEREST INCO ME ON THE DDBS REPURCHASED BY THE ASSESSEE COMPANY THOUGH IN THE ABOVE SUBMISSION HE HAS CLEARLY BROUGHT OUT INTO TH E LIGHT THE PROVISIONS OF THE LAW AS PER LETTER OF THE BOARD DA TED 12-03-96 AND THE CIRCULAR DATED 15-02-02. THIS MEANS THAT TH E ASSESSEE HAS AVOIDED THE TAX CLEARLY KNOWING ALL THE PROVISI ONS OF THE LAW. 4.5 CIRCULAR NO.2 OF 2002 & LETTER NO.225 DATED 12-3-19 96 OF CBDT: IT WILL BE RELEVANT HERE TO DISCUSS THE PROVISIONS OF CIRCULAR NO.2 OF 2002 OF CBDT DATED 15-2-2002. THIS CIRCULAR IS PRODUCED AS UNDER: A REVIEW OF THE TAX TREATMENT OF INCOME ARISING FR OM DEEP DISCOUNT BONDS HAS BEEN UNDER CONSIDERATION IN THE BOARD FOR SOME TIME. THE BOARD HAD EARLIER CLAR IFIED BY WAY OF CERTAIN LETTERS ISSUED TO THE RESERVE BAN K OF INDIA AND OTHERS THAT THE DIFFERENCE BETWEEN THE BI D PRICE (SUBSCRIPTION PRICE) AND THE REDEMPTION PRICE (FACE VALUE) OF SUCH BONDS WILL BE TREATED AS INTEREST IN COME ASSESSABLE UNDER THE INCOME-TAX ACT. ON TRANSFER OF THE BONDS BEFORE MATURITY THE DIFFERENCE BETWEEN THE S ALE CONSIDERATION AND THE COST OF ACQUISITION WOULD BE TAXED AS INCOME FROM CAPITAL GAINS WHERE THE BONDS WERE H ELD AS INVESTMENT AND AS BUSINESS INCOME WHERE THE BON DS WERE HELD AS TRADING ASSETS. ON FINAL REDEMPTION HOWEVER NO CAPITAL GAINS WILL ARISE. IT WAS FURTHE R CLARIFIED THAT TAX WOULD BE DEDUCTED AT SOURCE ON T HE DIFFERENCE BETWEEN THE BID PRICE AND THE REDEMPTION PRICE AT THE TIE OF MATURITY. 2 SUCH TAX TREATMENT OF DEEP DISCOUNT BONDS HOWEVE R HAS POSED THE FOLLOWING PROBLEMS: (I) TAXING THE ENTIRE INCOME RECEIVED FROM SUCH A BOND IN THE YEAR OF REDEMPTION AS INTEREST INCOME GIVES RIS E TO A SUDDEN AND HUGE TAX LIABILITY IN ONE YEAR WHEREAS T HE VALUE OF THE BOND HAS BEEN PROGRESSIVELY INCREASING OVER THE PERIOD OF HOLDING. (II) WHERE THE BOND IS REDEEMED BY A PERSON OTHER THAN T HE ORIGINAL SUBSCRIBER SUCH PERSON BECOMES TAXABLE ON THE - 16 - ENTIRE DIFFERENCE BETWEEN THE BID PRICE AND THE REDEMPTION PRICE AS INTEREST INCOME SINCE HE IS NO T ABLE TO DEDUCT HIS COST OF ACQUISITION FROM SUCH INCOME. (III) A COMPANY ISSUING SUCH BONDS AND FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING MAY EVOLVE A SYSTEM FOR ACCOUNTING OF ANNUAL ACCRUAL OF THE LIABILITY I N RESPECT OF SUCH A BOND AND CLAIM A DEDUCTION IN ITS ASSESSMENT FOR EACH YEAR EVEN THOUGH THE CORRESPOND ING INCOME IN THE HANDS OF THE INVESTOR WOULD BE TAXED ONLY AT THE TIME OF MATURITY. (IV) TAXING THE ENTIRE INCOME ONLY AT THE TIME OF MATURI TY AMOUNTS TO A TAX DEFERRAL. 3 THE MATTER HAS NOW BEEN EXAMINED IN CONSULTATION WITH THE RESERVE BANK OF INDIA AND THE MINISTRY OF LAW. THE PRACTICE FOLLOWED IN SEVERAL COUNTRIES OUTSIDE INDI A HAS ALSO BEEN EXAMINED. WITH A VIEW TO REMOVE THE ANOMALIES IN THE EXISTING SYSTEM OF TAXATION OF INCOME FROM DEEP DIS COUNT BONDS AND TO FORMULATE A SYSTEM WHICH IS MORE IN L INE WITH INTERNATIONAL PRACTICE THE BOARD HAVE DECIDED THAT SUCH INCOME MAY HEREAFTER BE TREATED AS FOLLOWS. 4 GENERAL TREATMENT: EVERY PERSON HOLDING A DEEP DISCOUNT BOND WILL MAKE A MARKET VALUATION OF THE BOND AS ON THE 31 ST MARCH OF EACH FINANCIAL YEAR (HEREAFTER REFERRED TO AS THE VALUAT ION DATE) AND MARK SUCH BOND TO SUCH MARKET VALUE IN ACCORDANCE W ITH THE GUIDELINES ISSUED BY RESERVE BANK OF INDIA FOR VALU ATION OF INVESTMENTS. FOR THIS PURPOSE MARKET VALUES OF DIF FERENT INSTRUMENTS DECLARED BY THE RESERVE BANK OF INDIA O R BY THE PRIMARY DEALERS ASSOCIATION OF INDIA JOINTLY WITH T HE FIXED INCOME MONEY MARKET AND DERIVATIVES ASSOCIATION OF INDIA MAY BE REFERRED TO. 4.1 THE DIFFERENCE BETWEEN THE MARKET VALUATIONS AS ON TWO SUCCESSIVE VALUATION DATES WILL REPRESENT THE ACCRE TION TO THE VALUE OF THE BOND DURING THE RELEVANT FINANCIAL YEA R AND WILL BE TAXABLE AS INTEREST INCOME (WHERE THE BONDS ARE HELD AS INVESTMENTS) OR BUSINESS INCOME (WHERE THE BONDS AR E HELD AS TRADING ASSETS). 4.2 IN A CASE WHERE THE BOND IS ACQUIRED DURING THE YEAR BY AN INTERMEDIATE PURCHASER (A PERSON WHO HAS ACQUIRE D THE BOND BY PURCHASE DURING THE TERM OF THE BOND AND NOT AS ORIGINAL - 17 - SUBSCRIPTION) THE DIFFERENCE BETWEEN THE MARKET VAL UE AS ON THE VALUATION DATE AND THE COST FOR WHICH HE ACQUIR ED THE BOND WILL BE TAXED AS INTEREST INCOME OR BUSINESS INCOME AS THE CASE MAY BE AND NO CAPITAL GAINS WILL ARISE AS THE RE WOULD BE NO TRANSFER OF THE BOND ON THE VALUATION DATE. 5. TRANSFER BEFORE MATURITY: WHERE THE BOND IS TRANSFERRED AT ANY TIME BEFORE TH E 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 TR ADER. FOR COMPUTING SUCH GAINS THE COST OF THE BOND WILL BE TAKEN TO BE THE AGGREGATE OF THE COST FOR WHICH THE BOND WAS AC QUIRED BY THE TRANSFEROR AND THE INCOME IF ANY ALREADY OFFE RED TO TAX BY SUCH TRANSFEROR (IN ACCORDANCE WITH PARA 4 ABOVE) U PTO THE DATE OF TRANSFER. 5.1 SINCE THE INCOME CHARGEABLE IN THIS CASE IS ONL Y THE ACCRETION TO THE VALUE OF THE BOND OVER A SPECIFIC PERIOD FOR THE PURPOSES OF COMPUTING CAPITAL GAINS THE PERIOD OF HOLDING IN SUCH CASES WILL BE RECKONED FROM THE DATE OF PUR CHASE / SUBSCRIPTION OR THE LAST VALUATION DATE IN RESPECT OF WHICH THE TRANSFEROR HAS OFFERED INCOME TO TAX WHICHEVER IS LATER. SINCE SUCH PERIOD WOULD ALWAYS BE LESS THAN ONE YEAR THE CAPITAL GAINS WILL BE CHARGEABLE TO TAX AS SHORT-TERM CAPIT AL GAINS. 6. REDEMPTION: WHERE THE BOND IS REDEEMED BY THE ORIGINAL SUBSCRIB ER THE DIFFERENCE BETWEEN THE REDEMPTION PRICE AND THE VAL UE AS ON THE LAST VALUATION DATE IMMEDIATELY PRECEDING THE M ATURITY DATE WILL BE TAXED AS INTEREST INCOME IN THE CASE O F INVESTORS OR BUSINESS INCOME IN THE CASE OF TRADERS. 6.1 WHERE THE BOND IS REDEEMED BY AN INTERMEDIATE PURCHASER THE DIFFERENCE BETWEEN THE REDEMPTION PR ICE AND THE COST OF THE BOND TO SUCH PURCHASER WILL BE TAXABLE AS INTEREST OR BUSINESS INCOME AS THE CASE MAY BE. FOR THIS PU RPOSE AGAIN THE COST OF THE BOND WILL MEAN THE AGGREGATE OF THE COST AT WHICH THE BONDS WERE ACQUIRED AND THE INCOME ARI SING FROM THE BOND WHICH HAS ALREADY BEEN OFFERED TO TAX BY T HE PERSON REDEEMING THE BOND. 7. STRIPS APART FROM ORIGINAL ISSUE OF DEEP DISCOUNT BONDS S UCH BONDS CAN ALSO BE CREATED BY STRIPPING I.E. THE PROCES S OF - 18 - DETACHING THE INTEREST COUPONS FROM A NORMAL COUPON BEARING BOND AND TREATING THE DIFFERENCE COUPONS AND THE ST RIPPED BOND AS SEPARATE INSTRUMENTS OR SECURITIES (STRIPS ) CAPABLE OF BEING TRADED IN INDEPENDENTLY. SUCH A MECHANISM RE FERRED TO AS STRIPS (SEPARATE TRADING OF REGISTERED INTEREST AND PRINCIPAL OF SECURITIES) CREATES INSTRUMENTS WHICH ARE IN THE NATURE OF DEEP DISCOUNT OR ZERO COUPONS BONDS FROM OUT OF THE NORMAL INTEREST BEARING BONDS. ACCORDINGLY THE TAX TREATMENT OF THE DIFFERENT COMPONENTS OF PRINCIPAL AND INTEREST CREATED BY SUCH STRIPPING WILL BE ON THE SAME LINES AS CLARIFIED IN THE PRECEDING PARAGRAPHS IN RESPECT OF DEEP DISC OUNT BONDS. 7.1 THE PROCESS OF STRIPPING OF A NORMAL INTEREST-B EARING BOND INTO ITS VARIOUS COMPONENTS WILL NOT AMOUNT TO A TRANSFER WITHIN THE MEANING OF THE INCOME-TAX ACT AS IT MERE LY INVOLVES THE CONVERSION OF THE UNSTRIPPED BOND INTO THE CORRESPONDING SERIES OF STRIPS. SIMILARLY THE RECO NSTITUTION OF STRIPS TO FOR A COUPON BEARING BOND WILL NOT AMO UNT TO A TRANSFER. 8. TAX DEDUCTION AT SOURCE: THE DIFFERENCE BETWEEN THE BID PRICE OF A DEEP DISC OUNT BOND AND ITS REDEMPTION PRICE WHICH IS ACTUALLY PAID AT THE TIME OF MATURITY WILL CONTINUE TO BE SUBJECT TO TAX DEDUCT ION AT SOURCE UNDER SECTION 193 OF THE INCOME-TAX 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 COOPERATIVE SOCIETY BY WAY OF NOTIFICATION EXEMPTI NG THEM FROM THE REQUIREMENT OF TAX DEDUCTION AT SOURCE. 9. OPTION TO INVESTORS: CONSIDERING THE DIFFICULTIES WHICH MIGHT BE FACED B Y SMALL NON-CORPORATE INVESTORS IN DETERMINING MARKET VALUE S UNDER THE RBI GUIDELINES AND COMPUTING INCOME TAXABLE IN EACH YEAR OF HOLDING IT HAS FURTHER BEEN DECIDED THAT SUCH I NVESTORS HOLDING DEEP DISCOUNT BONDS UPTO AN AGGREGATE FACE VALUE OF RUPEES ONE LAKH MAY AT THEIR OPTION CONTINUE TO O FFER INCOME FOR TAX IN ACCORDANCE WITH THE EARLIER CLARIFICATIO NS 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. - 19 - FROM THE ABOVE PROVISIONS OF THIS CIRCULAR IT IS V ERY CLEAR THAT THE CENTRAL BOARD OF DIRECT TAXES HAS GI VEN DETAILED INSTRUCTIONS ON THE MANNER IN WHICH THE ACCRUED INT EREST / STCG HAS TO BE CALCULATED ON THE INCOME ACCRUING AN D ARISING FROM THE DDB. THIS CIRCULAR 2 OF 2002 CLARIFIES THE LETTER F.NO.225/45/96-IT.II DATED 12-3-1996. IT IS CLARIFIED THAT THE DIFFERENCE BETWEEN THE ISS UE PRICE AND REDEMPTION PRICE OF DDBS WILL BE TREATED AS INT EREST INCOME ASSESSABLE UNDER THE INCOME-TAX ACT. ON TRAN SFER OF BONDS BEFORE MATURITY THE DIFFERENCE BETWEEN THE SA LE CONSIDERATION AND ISSUE PRICE WILL BE TREATED AS CA PITAL GAINS / LOSSES IF THE ASSESSEE PURCHASED THEM BY WAY OF INV ESTMENT. HOWEVER IN THE CASE OF AN ASSESSEE WHO DEALS IN PU RCHASE AND SALE OF BONDS SECURITIES ETC. THE PROFIT OR LOSS SHALL BE TREATED AS TRADING PROFIT OR LOSS. FROM THE ABOVE PROVISION OF CIRCULAR NO.2 OF 2002 A ND THIS LETTER F.NO.225 DATED 12-3-1996 IT IS CLEAR TH AT THE BOARD TRIED TO TAX THE INCOME ACCRUING AND ARISING FROM T HE TRANSACTION OF DDBS. IN THE LETTER DATED 12-3-1996 NOTHING HAS BEEN SAID ABOUT LONG TERM OR SHORT TERM TREATMENT O F THE GAINS ARISING FROM THE TRANSACTIONS OF THESE DDBS. THIS O BSCURE / GREY AREA HAS BEEN COVERED IN THE CIRCULAR DATED 15 -2-2002. PIB PRESS RELEASE OF CBDT DATED 20-3-2002 THE ASSESSEE HAS RELIED ON THE PIB PRESS RELEASE OF CBDT DATED 20-03-02 THEREFORE IT WILL BE RELEVANT TO PRODUCE THE SAME THIS IS PRODUCED AS UNDER: TAX TREATMENT OF DEEP DISCOUNT BONDS AND STRIPS. PIB PRESS RELEASE DATED MARCH 20 2002. THERE HAVE BEEN CERTAIN REPORTS IN THE PRESS RECENT LY SUGGESTING THAT THE TAX TREATMENT OF DEEP DISCOUNT BONDS AS SPECIFIED IN THE CIRCULAR DATED 15-02-02 PUBLISHED AT (2002) 173 CTR (ST.) 217] ISSUED BY THE CENTRAL BOARD OF D IRECT TAXES IS ANOMALOUS AS IT PROVIDES FOR TAXATION OF INCOME FROM SUCH BONDS ON AN ANNUAL BASIS EVEN THOUGH NO INCOM E IS RECEIVED BY THE BOND-HOLDER BEFORE MATURITY. IT HAS BEEN OPINED THAT A HEAVY TAX BURDEN IS BEING PLACED ON P ERSONS WHO HAVE BEEN HOLDING SUCH BONDS FOR A WHILE AND A CUM BERSOME OBLIGATION OF VALUING THE BONDS EVERY YEAR ON THE B ASIS OF RBI GUIDELINES IS BEING CAST ON SMALL INVESTORS THE RE PORTS ARE MISCONCEIVED AND BASED ON AN INCORRECT UNDERSTANDIN G AND - 20 - INADEQUATE KNOWLEDGE OF FACTS AND LAW. THE MODIFIED TAX TREATMENT NOW SPECIFIED FACT CORRECTS THE ANOMALIES IN THE EXISTING SYSTEM BY PROVIDING A MECHANISM FOR TAXING INCOME ACCRUING FROM YEAR TO YEAR ON DEEP DISCOUNT BONDS ON THE SAME LINES AS INCOME FROM NORMAL COUPON BEARING BON DS IS TAXED. TRANSFER OF THE BONDS BEFORE MATURITY WILL A TTRACT CAPITAL GAINS TAX AS IN THE EXISTING SYSTEM. THE EARLIER SYSTEM OF TAXING THE ENTIRE INCOME RECE IVED FROM SUCH BONDS IN THE YEAR OF REDEMPTION AS INTEREST IN COME WAS ANOMALOUS IN THAT IT GAVE RISE TO A SUDDEN AND HUGE TAX LIABILITY IN ONE YEAR WHEREAS THE VALUE OF THE BOND HAD BEEN PROGRESSIVELY INCREASING OVER THE PERIOD OF HOLDING . FURTHER WHERE THE BOND WAS REDEEMED BY A PERSON OTHER THAN THE ORIGINAL SUBSCRIBER SUCH PERSON WAS TAXED ON THE E NTIRE DIFFERENCE BETWEEN THE BID PRICE AND THE REDEMPTION PRICE AS INTEREST INCOME. SUCH A SYSTEM ALSO CREATED TAX-IND UCED DISTORTIONS IN THE DEBT MARKET AND WAS AN IMPEDIME NT TO THE DEVELOPMENT OF A MARKET IN STRIPS WHICH ARE ESSENT IALLY ZERO COUPON INSTRUMENTS DERIVED FROM NORMAL COUPON BEARING BONDS. TAXATION OF INCOME ON ACCRUAL BASIS IS AN ESTABLISH ED PRINCIPLE OF LAW AND ALWAYS RESULTS IN TAXING INCOME THAT HA S NOT YET BEEN RECEIVED. INCOME FROM DEEP DISCOUNT BONDS ACCR UES CONTINUOUSLY OVER THE PERIOD OF HOLDING AND CAN BE REALIZED AT ANY TIME BY SELLING THE BOND. TAXING INCOME FROM SU CH BONDS ON ACCRUAL BASIS ANNUALLY IS IN FACT A PRACTICE F OLLOWED WORLD-WIDE. IT IS ALSO AN ESTABLISHED PRINCIPLE THAT A CIRCULAR ISSUED BY CBDT CAN NOT HAVE A RETROSPECTIVE TAX EFFECT. THE PRESENT CI RCULAR ON DEEP DISCOUNT BONDS THEREFORE SPECIFIES THE TAX TREATM ENT IN RESPECT OF BONDS WHICH ARE ISSUED AFTER THE ISSUE OF THE CIRCU LAR AND DOES NOT SEEK TO IMPOSE THE MODIFIED TREATMENT ON EXISTING B ONDHOLDERS. FURTHER NON- CORPORATE PERSONS WHO INVEST SMALL AM OUNTS IN NEW ISSUES (FACE VALUE UPTO RS.L LAKH) CAN STILL OPT FO R THE OLD SYSTEM. VALUING THE BONDS EVERY YEAR ON THE BASIS OF RBI GU IDELINES WILL NOT POSE ANY PROBLEM AS SUCH VALUES CAN BE OBTAINED FRO M THE ISSUERS THEMSELVES WHO WILL INVARIABLY BE THE RBI OR A PUB LIC FINANCIAL INSTITUTION. THE AMOUNT RECEIVED ON REDEMPTION WOUL D ALWAYS BE LIABLE TO TAX DEDUCTION AT SOURCE AS PER NORMAL PRO VISIONS OF THE INCOME-TAX ACT. HOWEVER NO TDS IS REQUIRED ON INTE REST PAYABLE ON GOVERNMENT SECURITIES AND BONDS ISSUED BY AN INSTIT UTION AUTHORITY PUBLIC SECTOR COMPANY OR COOPERATIVE SOCIETY CAN AL SO BE EXEMPTED FROM THE REQUIREMENT BY NOTIFICATION. - 21 - THE PURPOSE OF THIS PRESS RELEASE IS TO MAKE IT CLE AR THAT NO HEAVY BURDEN OF TAX IS BEING CAST UPON THE HOLDERS OF THE BONDS AND ALSO THAT THE SMALL INVESTORS NEED NOT WORRY OR GET PANI CKED FROM SUCH PROVISIONS WHICH ARE VERY SCIENTIFIC AND PREVALENT WORLDWIDE. IT HAS BEEN REEMPHASIZED THAT THE MODIFIED TAX TREATMENT WILL C ORRECT ALL THE ANOMALIES OF THE EXISTING SYSTEM. THIS HAS ALSO MADE IT CLEAR THAT THERE WILL BE NO SUDDEN AND HUGE TAX LIABILITY AND THE LAST BOND HOLDER WILL NOT BE LIABLE TO ENTIRE TAX LIABILITY. THIS RELEASE HAS EXPRESSED THAT THE ACCRUAL SYSTEM OF ACCOUNTING IS ESTABLISHED PRINCIPLE OF LAW AND IS ADOPTED WORLD WIDE. IT IS R EASSURING THAT THE VALUATION WILL NOT POSE ANY PROBLEM SINCE THE SAME CAN BE OBTAINED FROM THE ISSUERS AND MANDATED THAT THE TDS WILL BE DONE ON EVERY REDEMPTION. THE ASSESSEE HAS CLAIMED THAT THIS PRESS RELEASE HAS GIVEN THE CLEAN CHIT TO IT THAT THE EXISTING BOND HOLDERS CAN ADOPT THE OLD SYSTEM. BUT OLD SYSTEM NO WHERE PROVIDES FOR THE DOUBLE TRE ATMENT OF THE ACCRUAL OF THE EXPENSE/INCOME. ON THE ONE HAND THE SAME MANAGEMENT HAS ADOPTED THE ACCRUAL OF EXP. IN THE H ANDS OF NIRMA LTD. ON ANNUAL BASIS AND THE SAME MANAGEMENT IS ADO PTING THE SECOND STANDARD FOR ACCRUAL OF INCOME BY TAKING REC OURSE OF THE EARLIER LETTER. THIS SHOWS THE DELIBERATE PLANNING AND TAX AVOIDANCE BY THE SAME GROUP BY FORMING THE HOLDING COMPANIES THE BASIC PURPOSE OF WHICH IS TO INVEST IN THE SHARES OF *HE FLAGSHIP COMPANY NIRMA LTD. AND CLAIM THE EXP. ON ANNUAL BASIS AND N OT TO OFFER THE INCOME ON THE HAND OF THE FOLDERS OF THESE BONDS. 4.7 MACRO-VIEW OF ENTIRE GROUP CLARIFIES THE PLANNI NG TO AVOID TAX: FROM THE BALANCE SHEET OF A.Y.2001-02 & A.Y. 2002-0 3 OF NIRMA LTD. IT HAS BEEN FOUND THAT IT IS A VERY CASH RICH COMPANY. IT HAS A GENERAL RESERVE OF RS.743.05. THIS IS A HIGH PROFIT EARNING COMPANY . IT HAS EXTENDED LOANS AND ADVANCES OF RS.224.26 CRO RES. BUT STILL IT HAS ISSUED THE DDB SERIES-A OF RS.350 CRORES AND D DB SERIES B OF RS.100 CRORES. IT HAS ALSO BEEN FOUND FROM THE DETA ILS CALLED FOR THAT ALL THESE DDB SERIES-A AND SERIES-B HAVE BEEN ISSU ED TO ONLY THE PERSONS BELONGING TO NIRMA GROUP. IT IS STRIKING TO NOTE THAT OUT OF 35000 DDBS SERIES A OF NIRMA LTD 11045 HAVE BEEN I SSUED TO SHRI K.K. PATEL CMD SHRI RAKESH PATEL HIS SON AND DIR ECTOR SHRI HIREN K. PATEI AGAIN HIS SON AND DIRECTOR AND SHANT ABEN K. PATEL HIS WIFE. SIMILARLY OUT OF TOTAL 10000 DDB SERIES B OF NIRMA LTD. 2500 HAS BEEN ISSUED TO SHRI HIREN K. PATEL AND SHR I RAKESH K. PATEL AGAIN THE DIRECTORS. IT IS VERY STRANGE TO OB SERVE THAT WHEN THE OPTION OF TAKING LOANS AND ADVANCES FROM THESE PERS ONS WAS AVAILABLE WITH NIRMA LTD. WHY DID THIS COMPANY ISS UED THESE DDBS WHICH BEAR A COST OF SECURITY ALSO. IN THE BALANCE SHEET THE UNSECURED LOANS PERTAINING TO DD3 SERIES-A HAVE BE EN SHOWN AT RS.525 CRORES AND FOR DDB SERIES-B OF RS.115.50 CRO RES. THE - 22 - INTEREST HAS BEEN CLAIMED ON THESE ON ANNUAL ACCRUA L BASIS. BUT IN THE HANDS OF THE HOLDERS OF THESE DDBS NO INTEREST HAS BEEN SHOWN ON THE ACCRUAL BASIS EVEN THOUGH THEY ARE ADOPTING THE MERCANTILE SYSTEM OF ACCOUNTING. THE SAME MANAGEMENT HAS INTER PRETED THE LAW IN CASE OF NIRMA LTD. THAT THE EXP. CAN BE CLAIMED ON ACCRUAL BASIS BUT THE INCOME HAS NOT BEEN OFFERED ON ACCRUAL BASI S. THOUGH THE SITUATION IS EXACTLY OPPOSITE THE VALUE OF A SECUR ITY INCREASES IN A MARKET ON DAY TO DAY BASIS BECAUSE AS THE TIME PASS ES THE' MATURITY DATE NEARS DOWN. IN CASE OF A SECURED DEBENTURE THE LIQUIDITY IS HIGHLY ASSURED. THEREFORE IT CAN BE SAFELY CONCLUDE D THAT THE GAIN IN A SECURITY ACCRUES ON ANNUAL BASIS EVEN THOUGH THE EXP. MAY NOT ACCRUE IN THE HANDS OF THE ISSUER OF THE SECURITY. IN CASE OF NIRMA GROUP THE EXACTLY OPPOSITE HAS BEEN DONE. NIRMA LT D. THE ISSUER OF DDB SERIES-A HAS CLAIMED THE INTEREST EXP. ON ACCR UAL BASIS THOUGH THE LIABILITY HAS NOT ARISEN BEFORE THE MATU RITY DATE THE HOLDERS OF DDBS OF THIS GROUP HAVE NOT OFFERED THE GAIN ON THESE SECURITIES WH.V~H IS AUTOMATICALLY ACCRUING IN THE SAME BECAUSE OF THEIR HIGH LIQUIDITY AND NEARING DOWN OF THE MATURI TY DATE. 4.8 THE RELIANCE IN THIS REGARD IS PLACED IN THE DE CISION OF GUJRAT HIGH COURT IN THE CASE OF CIT VS. SAKARLAL BALABHAI (1968) 69ITR186 THIS WAS LATER ON APPROVED BY HON'BLE SUP REME COURT IN 86ITR2. IN THIS IT HAS BEEN STATED THAT THE TAX AVO IDANCE POSTULATES THAT THE ASSESSEE IS IN RECEIPT OF THE AMOUNT WHICH IS REALLY AND IN TRUTH HIS INCOME LIABLE TO TAX BUT ON WHICH HE AVOI DS PAYMENT OF TAX BY SOME ARTIFICE OR DEVICE. SUCH ARTIFICE OR DEVICE MAY APPARENTLY SHOW THE INCOME AS ACCRUING TO ANOTHER PERSON AT TH E SAME TIME MAKING IT AVAILABLE FOR USE AND ENJOYMENT TO THE AS SESSEE OR MASK THE CHARACTER OF THE INCOME BY DISGUISING IT AS A C APITAL RECEIPTS. IT IS WRONG TO ENCOURAGE OR ENTERTAIN THE BELIEF THAT IT IS HON'BLE TO AVOID THE PAYMENT OF TAX BY RESULTING TO DUBIOUS ME THODS AND SUBTERFUGES. THE ABOVE PRONOUNCEMENTS OF COURTS HAV E BEEN DISCUSSED ELABORATELY IN CASE OF MCDOWELL & CO. LTD. VS CTO 154 ITR 148. THE VIEW OF THE HON'BLE SC IS PRODUCED AS UNDER'. 'WE MAY ALSO RECALL THE OBSERVATIONS OF VISCOUNT SI MON IN LATILLA V. IRC [1943] 25 TC 107 (HL) P. 117: OF RECENT YEARS MUCH INGENUITY HAS BEEN EXPENDED IN CERTAIN QUARTERS IN ATTEMPTING TO DEVISE METHODS OF DISPOSI TION OF INCOME BY WHICH THOSE WHO WERE PREPARED TO ADOPT THEM MIGHT E NJOY THE BENEFITS OF RESIDENCE IN THIS COUNTRY WHILE RECEIVI NG THE EQUIVALENT OF SUCH INCOME WITHOUT SHARING IN THE APPROPRIATE BURDEN OF BRITISH TAXATION JUDICIAL DICTA MAY BE CITED WHICH POINT O UT THAT HOWEVER ELABORATE AND ARTIFICIAL SUCH METHODS MAY BE THOSE WHO ADOPT THEM ARE 'ENTITLED' TO DO SO. THERE IS OF COURSE NO DO UBT THAT THEY ARE WITHIN THEIR LEGAL RIGHTS BUT THAT IS NO REASON WH Y THEIR EFFORTS OR THOSE OF THE PROFESSIONAL GENTLEMEN WHO ASSIST THEM IN THE MATTER - 23 - SHOULD' BE REGARDED AS A COMMENDABLE EXERCISE OF IN GENUITY OR AS A DISCHARGE OF THE DUTIES OF GOOD CITIZENSHIP. ON THE CONTRARY ONE RESULT OF SUCH METHODS IF THEY SUCCEED IS OF CO URSE TO INCREASE PROTANTO THE LOAD OF TAX ON THE SHOULDERS OF THE GR EAT BODY OF GOOD CITIZENS WHO DO NOT DESIRE OR DO NOT KNOW HOW TO ADOPT THESE MANOEUVRES. ANOTHER CONSEQUENCE IS THAT THE LEGISLA TURE HAD MADE AMENDMENTS TO OUR INCOME-TAX CODE WHICH AIM AT NULL IFYING THE EFFECTIVENESS OF SUCH SCHEMES. TAX PLANNING MAY BE LEGITIMATE PROVIDED IT IS WITHI N THE FRAMEWORK OF LAW. COLOURABLE DEVICES CANNOT BE PART OF TAX PL ANNING AND IT IS WRONG TO ENCOURAGE OR ENTERTAIN THE BELIEF THAT IT IS HONOURABLE TO AVOID THE PAYMENT OF TAX BY RESORTING TO DUBIOUS ME THODS. IT IS THE OBLIGATION OF EVERY CITIZEN TO PAY THE TAXES HONEST LY WITHOUT RESORTING TO SUBTERFUGES.' 4.9 THE NIRMA GROUP HAS TRIED TO INTERPRET THE SECT ION 37(1) IN SUCH A WAY THAT THE CLAIM OF INTEREST ON THESE DDBS IS A VAILABLE TO NIRMA LTD. ON ACCRUAL BASIS BUT IN CASE OF THE HOLDERS OF THE DDBS THE SAME GROUP HAS INTERPRETED THE LETTER OF BOARD DATE D 12-3-1996 CIRCULAR OF THE BOARD DATED 15-2-2002 AND PRESS REL EASE DATED 20-3- 2002 IN DIFFERENT MANNER. IN THIS REGARD THE RELIA NCE IS PLACED IN CASE OF CWS(INDIA) LTD. VS. CIT 208 ITR 649 IN WHIC H IT HAS BEEN OBSERVED THAT WHEN A LITERAL INTERPRETATION LEADS T O AN ABSURD OR UNINTENDED RESULT EVEN THE LANGUAGE OF THE STATUTE CAN BE MODIFIED TO ACCORD WITH THE INTENT OF LEGISLATION AND TO AVO ID ABSURDITY. IN THE CASE OF INDIAN HOTELS LTD. VS. ITO 245 ITR (SC) A S IMILAR VIEW HAS BEEN AFFIRMED. IN THE CASE OF GOVINDAN (K) AND SONS VS. CIT 247 ITR 192 AND OXFORD UNIVERSITY PRESS VS. CIT 247 ITR 658 THE HON'BLE SC HAS HELD THAT INTERPRETATION MUST AVOID ABSURDLY AND IF LITERAL CONSTRUCTION LEADS TO UNREASONABLE OR ABSUR D CONSEQUENCES THE SAME SHOULD NOT BE ADOPTED. 4.10 THE RELIANCE IS ALSO PLACED IN CIRCULAR NO. 78 3 DATED 18-11- 1999 OF CENTRAL BOARD OF DIRECT TAXES IN WHICH A CL ARIFICATION RELATING TO WAIVER OF INTEREST U/S. 234A 234B 234 C HAS BEEN MADE. FROM THIS CIRCULAR IT IS CLEAR THAT WHEN A PRESS RE LEASE LEADS TO UNINTENDED RESULTS OR IF THE PROVISIONS OF A PRESS RELEASE ARE NOT COHERENT AND ARE CONTRADICTORY THESE PROVISIONS DI D NOT PREVAIL. THE SAME IS PRODUCED AS UNDER: 'THE BOARD BY AN ORDER (VIDE F.NO. 400/234/95-IT(B) ) DATED 23-5-1966 INDICATED THE CLASS OF INCOME OR CLASS O F CASES IN WHICH REDUCTION OR WAIVER OF INTEREST U/S. 234A 23 4B AND 234C WOULD BE CONSIDERED BY THE CHIEF CIT AND DGIT. PRIOR TO THE ISSUE OF THE ORDER A PRESS NOTE WAS RELEASED ON 21-5- 1996 -WITH A VIEW TO GIVE WIDE PUBLICITY TO THE MA JOR STEP - 24 - CONTEMPLATED BY THE BOARD TOWARDS MITIGATING HARDSH IP IN GENUINE CASES. HOWEVER THE INSTANCES HAVE COME TO THE NOTICE OF T HE BOARD WHERE CERTAIN CLAIMS HAVE BEEN MADE ON THE BASIS OF PARA- 2(V) OF THE PRESS NOTE SEEKING WAIVER OF INTEREST F OR NON- PAYMENT OF ADVANCE TAX. PARA-2(E) OF THE ORDER DATE D 23-5- 1996 CONTAINS NO SUCH STIPULATION. IT IS HEREBY CL ARIFIED THAT MAKING ANY CLAIM FOR WAIVER OF INTEREST BASED ON TH E PRESS NOTE DATED 21-5-1996 IS NOT SUSTAINABLE. A PRESS NO TE IS BASICALLY INTENDED TO GIVE A BOND IDEA IN ADVANCE T O THE PUBLIC AT LARGE REGARDING POLICY / STEP UNDER FORMULATION. TO TREAT A PRESS NOTE AS A FINAL LEGAL DOCUMENT AND TO MAKE AN Y CLAIM ON THE BASIS OF IT AS AGAINST THE CONTENTS OF THE FINA L DOCUMENT IS NOT MAINTAINABLE. THE BOARD HEREBY REITERATES THAT ALL REQUESTS FOR W AIVER OF INTEREST ARE TO BE CONSIDERED BY THE CHIEF CIT AND THE DGIT WITHIN THE PARAMETERS LAID DOWN BY THE BOARD'S ORDE R DATED 23-5-1996 READ WITH THE ORDER DATED 30-1-197. ' FROM THE ABOVE CIRCULAR THOUGH IT DOES NOT RELATE WITH THE CLAIM OF INTEREST AND ACCRUAL OF INTEREST INCOME/STCG ON DDB S IT IS VERY CLEAR THAT WHEN A PRESS RELEASE AND A CIRCULAR LEAD TO UNINTENDED RESULTS OR IF THE PROVISIONS OF A PRESS RELEASE ARE NOT COHERENT AND ARE CONTRADICTORY THE PROVISIONS OF CIRCULAR PREVA IL. IT IS AGAIN CLARIFIED THAT IN THE LETTER DATED 12-3-1996 THERE WAS NO MENTION OF SHORT TERM OR LONG TERM ACCRUAL OF INCOME. THE GREY AREAS WERE COVERED BY CIRCULAR DATED 15.02.02. BUT NIRMA GROUP BEFORE ISSUANCE OF THE CIRCULAR DATED 15.02.02 INTERPRETED THE LAW IN SUCH A WAY THAT THE INTEREST EXPENSE HAS BEEN CHIMED ON AC CRUAL BASIS IN THE HANDS OF NIRMA LTD. THEN IT WAS OBLIGATORY IN IT TO APPLY IHE SAME INTERPRETATION IN CASE OF HOLDERS OF DDBS IN C ASE OF ACCRUAL OF EXP. AND INCOME. THE CLARIFICATION IN THIS REGARD E MERGES FROM THE PROVISIONS OF CIRCULAR DATED 15-2-2002. AND FOR THE SAKE OF COHERENCY AGAIN NO RESORT OF PRESS RELEASE DATED 2 0-3-2002 SHOULD BE TAKEN BY IT. 4.11 INTENTION OF LEGISLATURE SUPPORTS THE CLARIFIC ATION OF THE BOARD: HERE IT WILL BE RELEVANT TO DISCUSS THE INTENTION O F THE LEGISLATURE ABOUT TAXING THE INTEREST ACCRUING ON THE SECURITIE S. FOR THIS PURPOSE THE SEC.145 OF I.T. ACT IS VERY IMPORTANT. IN THE R ELEVANT YEAR THIS SECTION IS AS UNDER: 145. METHOD OF ACCOUNTING. - 25 - (1) INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND G AINS OF BUSINESS OR PROFESSION' OR 'INCOME FROM OTHER SOURC ES' SHALL SUBJECT TO THE PROVISIONS OF SUB-SECTION (2) BE CO MPUTED IN ACCORDANCE WITH EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. (2) THE CENTRAL GOVERNMENT MAY NOTIFY IN THE OFFICI AL GAZETTE FROM TIME TO TIME ACCOUNTING STANDARDS TO BE FOLLOW ED BY ANY CLASS OF ASSESSEES OR IN RESPECT OF ANY CLASS OF IN COME. (3) WHERE THE ASSESSING OFFICER IS NOT SATISFIED A BOUT THE CORRECTNESS OR 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 AS SESSING OFFICER MAY MAKE AN ASSESSMENT IN THE MANNER PROVID ED IN SECTION 144. FROM THE ABOVE IT IS CRYSTAL CLEAR THAT THE LEGISLA TURE HAS MADE IT MANDATORY ON ASSESSEE TO ADOPT THE REGULARLY EMP LOYED METHOD OF ACCOUNTING. AS HAS BEEN OBSERVED ABOVE THE ASSESSEE IS BOUND TO EMPLOY THE MERCANTILE SYSTEM OF ACCOUNTING THIS YEA R. THEREFORE THE INTEREST ON THESE DDBS AUTOMATICALLY ACCRUES. EVEN IF THE ASSESSEE TRIES TO CHANGE THE SAME THIS YEAR HE CAN NOT DO T HE SAME SINCE THE UNDERSIGNED CAN NOT PERMIT HIM TO DO SO. IN THIS RE GARD TO UNDERSTAND THE INTENTION OF THE LEGISLATURE IT WILL BE RELEVANT TO PRODUCE THE PROVISIONS OF THE ACT WHICH WERE AMENDE D BY FINANCE ACT 1995 W.E.F. 01.04.1997 BEFORE THIS AMENDMENT THERE WERE TWO PROVISOS THESE ARE PRODUCED AS UNDER'. PROVIDED FURTHER THAT WHERE NO METHOD OF ACCOUNTING IS REGULARLY EMPLOYED BY THE ASSESSEE ANY INCOME BY W AY OF INTEREST ON SECURITIES SHALL BE CHARGEABLE TO TAX A S THE INCOME OF THE PREVIOUS YEAR IN WHICH SUCH INTEREST IS DUE TO THE ASSESSEE. PROVIDED ALSO THAT NOTHING CONTAINED IN THIS SECTIO N SHALL PRECLUDE AN ASSESSEE FROM BEING CHARGED TO INCOME T AX IN RESPECT OF ANY INTEREST ON THE SECURITIES RECEIVED BY HIM IN A PREVIOUS VEAR IF SUCH INTEREST HAD NOT BEEN CHARGED TO INCOME TAX FOR ANY EARLIER PREVIOUS YEAR. THE ABOVE PROVISION OF THE PROVISOS VERY CLEARLY ME NTION THAT THE LEGISLATURE WAS MUCH CONCERNED ABOUT THE TAXATI ON OF THE INTEREST ACCRUING ON THE SECURITIES. THIS HAS CATEGORICALLY PROVIDED THAT THE INTEREST ON THESE SECURITIES HAS TO BE CHARGED ON A CCRUAL BASIS IF THE ASSESSEE DOES NOT EMPLOY THE REGULAR METHOD OF ACCO UNTING MEANING THEREBY IF THE ASSESSEE TAKES THE RESORT OF SOME PL ANNING TO AVOID TAX - 26 - OR POSTPONE TAX ON THESE SECURITIES BY CHANGING THE METHOD OF ACCOUNTING. NOW WHEN THE ASSESSEE EMPLOYS THE MERCANTILE SYSTEM OF ACCOUNTING AT THE END OF THE YEAR THE INTEREST ON THE DDBS AUTOMATICALLY ACCRUES AS PER THE RELEVANT PROVISION S OF SEC.145 BECAUSE THE ASSESSEE CAN RECOVER THE ACCRUAL VALUE OF INTEREST BY SELLING SUCH BONDS. HOWEVER THE GAIN IN SELLING MA Y BE MORE OR LESS THAN THE ACCRUED INTEREST AS CALCULATED ON THE BASI S OF ISSUE PRICE MATURITY VALUE AND PERIOD OF BOND. THE CURRENT VALU E OF BOND DEPENDS ON THE CURRENT PRIME LENDING RATE AND NOT O N THE INTEREST RATE AT WHICH THE MATURITY VALUE OF THE BOND WAS CA LCULATED AT THE TIME OF ISSUE. THE CIRCULAR 2 OF 2002 OF BOARD HAS FOLLOWED THE METHOD OF DISCOUNTED VALUE OF MATURITY VALUE OF BON DS AT PRESENT PRIME LENDING RATE AND THE ACCRUED INCOME HAS TO BE DETERMINED ACCORDINGLY. THEREFORE THIS CONTENTION OF THE ASSE SSEE IS NOT CORRECT THAT THERE IS NO INCOME WHICH HAS ACCRUED. THE INCR EASE IN MARKET VALUE OF THE SECURITY IS DETERMINED BY THE METHOD O F DISCOUNTED MATURITY VALUE ON 31 ST MARCH THIS IS IN FACT THE ACCRUED INCOME DURING THE YEAR IN ACCORDANCE WITH THE PREVAILING M ARKET CONDITIONS. IT WILL BE RELEVANT TO DISCUSS HERE THE PROVISION O F SECTION 94(2) AND SECTION 94(3) OF THE ACT. THE RELEVANT PO RTION OF THIS SECTION IS PRODUCED AS UNDER: IT WILL BE RELEVANT TO DISCUSS HERE THE PROVISION O F SECTION 94(2) AND SECTION 94(3) OF THE ACT. THE RELEVANT PO RTION OF THIS SECTION IS PRODUCED AS UNDER 94.AVOIDANCE OF TAX BY CERTAIN TRANSACTIONS IN SECU RITIES. ........ (2) WHERE ANY PERSON HAS HAD AT ANY TIME D URING ANY PREVIOUS YEAR ANY BENEFICIAL INTEREST IN ANY SECURI TIES AND THE RESULT OF ANY TRANSACTION RELATING TO SUCH SECURITI ES OR THE INCOME THEREOF IS THAT IN RESPECT OF SUCH SECURITI ES WITHIN SUCH YEAR EITHER NO INCOME IS RECEIVED BY HIM OR T HE INCOME RECEIVED BY HIM IS LESS THAN THE SUM TO WHICH THE I NCOME WOULD HAVE AMOUNTED IF THE INCOME FROM SUCH SECURIT IES HAD ACCRUED FROM DAY TO DAY AND BEEN APPORTIONED ACCORD INGLY THEN THE INCOME FROM SUCH SECURITIES FOR SUCH YEAR SHALL BE DEEMED TO BE THE INCOME OF SUCH PERSON. (3) THE PROVISIONS OF SUB-SECTION (1) OR SUB-SECTIO N (2) SHALL NOT APPLY IF THE OWNER OR THE PERSON WHO HAS HAD A BENEFICIAL INTEREST IN THE SECURITIES AS THE CASE MAY BE PRO VES TO THE SATISFACTION OF THE ASSESSING OFFICER- (A) THAT THERE HAS BEEN NO AVOIDANCP OF INCOME-TAX OR - 27 - (B) THAT THE AVOIDANCE OF INCOME-TAX WAS EXCEPTIONA L AND NOT SYSTEMATIC AND THAT THERE WAS NOT IN HIS CASE IN AN Y OF THE THREE PRECEDING YEARS ANY AVOIDANCE OF INCOME-TAX B Y A TRANSACTION OF THE. NATURE REFERRED TO IN SUB-SECTI ON (1) OR SUB- SECTION (2). IN SUBSECTION (2) OF THIS SECTION THIS HAS BEEN PR OVISIONED THAT IF THE RESULT OF ANY TRANSACTION RELATING TO SUCH S ECURITIES IS THAT THE INCOME RECEIVED BY THE ASSESSEE IS LESS THAN THE SU M TO WHICH THE INCOME WOULD HAVE AMOUNTED IF THE INCOME FROM SUCH SECURITIES HAD ACCRUED FROM DAY TO DAY AND BEEN APPORTIONED ACCORD INGLY THEN THIS PROVISION MAY BE INVOKED. IN THIS SECTION THE INTE NTION OF LEGISLATURE IS CLEAR THAT THE ASSESSEE CAN NOT RESO RT TO SUCH TRICKS BY WHICH IT CAN AVOID THE TAX. HERE IN THIS SECTION TH E INCOME OBVIOUSLY MEANS AND INCLUDES THE 'NATURE OF INCOME' ALSO. NO INCOME CAN EXIST WITHOUT ITS 'NATURE'. THE 'NATURE' OF ANY INCOME IS BASIC CHARACTERISTIC WHICH IS ESSENTIALLY ASSOCIATED WITH ITS EXISTENCE. THERE CAN BE NO INCOME WITHOUT ITS 'NATURE'. THE ASSESSEE HAS RESOR TED TO SUCH MEANS BY WHICH IT HAS TRIED TO CHANGE THE 'NATURE OF INCO ME' AND THUS AVOIDED THE TAX AS TO WHICH WOULD HAVE BEEN LIABIL ITY OF THE ASSESSEE. FROM THIS SECTION IT IS CLEAR THAT THE IN TENTION OF LEGISLATURE HAS ALWAYS BEEN TO TAX THE INTEREST ACCRUING BONDS ON ANNUAL BASIS BECAUSE IF THE ASSESSEE SELLS A BOND AND SHOWS THE LTCG ON THE SAME IT WILL BE NOTHING BUT THE AVOIDANCE OF THE TA X BY TAKING THE BENEFIT OF LESS TAX RATE. BY NOT ACCRUING THE INTER EST AT 31 ST OF MARCH AND THEN NOT SHOWING THE STCG FOR THE REST OF THE PERIOD THE ASSESSEE HAS CHANGED THE NATURE OF INCOME AND AVOID ED THE TAX. THE SAME INTENTION OF LEGISLATURE HAS BEEN CLARIFIED IN CIRCULAR 2 OF 2002 BY THE BOARD. FOR BETTER UNDERSTANDING OF THE INTENTION OF THE LE GISLATURE IT IS RELEVANT TO DISCUSS THE PROVISIONS OF CURRENT FI NANCE BILL WHICH WAS PRESENTED ON 28-2-2005 IN THE PARLIAMENT. THIS BILL HAS PROVIDED THAT THE CLAIM OF DEDUCTION ON 'PRORATA' ' DISCOUNT' ON THE 'ZERO COUPON BONDS' SHALL BE ALLOWED. IN SEC. 36 OF THE ACT IN SUB SEC. (1) AFTER CLAUSE (III) THE FOLLOWING CLAUSE (IIIA) SHALL BE INSERTED W. E. F. 01.03.06: (IIIA) THE PRORATA AMOUNT OF DISCOUNT ON A 'ZERO CO UPON BOND' HAVING REGARD TO THE 'PERIOD OF LIFE OF SUCH BOND C ALCULATED IN THE MANNER AS MAY BE PRESCRIBED. ~ EXPLANATION:- FOR THE PURPOSE OF THIS CLAUSE THE EXPREJFIONS- (I) 'DISCOUNT' MEANS THE DIFFERENCE BETWEEN THE AMOUNT RECEIVED OR RECEIVABLE BY THE INFRASTRUCTURE CAPITA L COMPANY OR INFRASTRUCTURE CAPITAL FUND OR PUBLIC SECTOR COM PANY ISSUING THE BOND AND THE AMOUNT PAYABLE BY SUCH COM PANY OR - 28 - FUND OR PUBLIC SECTOR COMPANY ON MATURITY OR REDEMP TION OF SUCH BOND. (II) 'PERIOD OF LIFE OF THE BOND' MEANS THE P ERIOD COMMENCING FROM THE DATE OF ISSUE OF THE BOND AND E NDING ON THE DATE OF THE MATURITY OR REDEMPTION OF SUCH BOND . (III) 'INFRASTRUCTURE CAPITAL COMPANY' AND' INFRASTRUCTURE CAPITAL FUND' SHALL HAVE THE SAME ME ANINGS RESPECTIVELY ASSIGNED TO THEM IN CLAUSES (A) AND 9B ) OF EXPLANATION 1 TO CLAUSE (23G) OF SECTION 10. THE ' ZERO COUPON BONDS' HAVE BEEN DEFINED IN SECTI ON 2(48) AS UNDER- '(48) 'ZERO COUPON BOND' MEANS A BOND- (A) ISSUED BY ANY INFRASTRUCTURE CAPITAL COMPANY OR INFRASTRUCTURE CAPITAL FUND OR PUBLIC SECTOR COMPAN Y ON OR AFTER THE 1 ST DAY OF JUNE 2005; (B) IN RESPECT OF WHICH NO PAYMENT AND BENEFIT IS R ECEIVED OR RECEIVABLE BEFORE THE MATURITY OR REDEMPTION FROM INFRASTRUCTURE CAPITAL COMPANY OR INFRASTRUCTURE CA PITAL FUND OR PUBLIC SECTOR COMPANY; AND (C) WHICH THE CENTRAL GOVT. MAY BY NOTIFICATION IN THE OFFICIAL GAZETTE SPECIFY IN THIS BEHALF. ' IN SECTION 112 OF THE ACT IN SUBSECTION (1) IN TH E PROVISO OCCURRING BELOW CLAUSE (D) AFTER THE WORDS 'BEING L ISTED SECURITIES OR UNIT 1 THE WORDS 'OR ZERO COUPON BONDS' SHALL BE INSERTED W.E.F. 01.03.06. THE EFFECT OF THIS IS THAT THE 'ZERO COUP ON BONDS' SHALL BE CONSIDERED AS LONG TERM ASSETS IF THESE ARE HELD MO RE THAN TWELVE MONTHS. IT HAS ALSO BEEN PROPOSED TO AMEND THE SECTION 194A SO AS TO PROVIDE THAT NO TAX WILL BE DEDUCTED AT SOURCE IN R ESPECT OF INCOME PAYABLE ON ZERO COUPON BONDS. THE CUMULATIVE EFFECT OF ALL THESE PROVISIONS IS TH AT ONLY THE HOLDERS OF DDBS OF INFRASTRUCTURE COMPANIES/FUNDS O R PUBLIC SECTOR COMPANIES CAN CLAIM THE CAPITAL GAIN AS LONG TERM C APITAL GAIN IN RESPECT OF SUCH BONDS WHICH ARE ISSUED AFTER 1-6-20 05. AND AT THE SAME TIME THE COMPANY AS IS ISSUING THESE BONDS CAN CLAIM THE DISCOUNT EACH YEAR ON PRO RATA BASIS. - 29 - HENCE THE LEGISLATURE ALWAYS PROHIBITED THE TREATM ENT OF SALE OF DDBS AS LONG TERM CAPITAL GAIN. THIS CONCESSION HAS NOW BEEN MADE AVAILABLE TO THE 'ZERO COUPON BONDS' OF ONLY I NFRASTRUCTURE COMPANIES/FUNDS AND PUBLIC SECTOR COMPANIES FOR BON DS ISSUED AFTER 1-6-2005 FROM A.Y. 2006-07 ONLY. NO SUCH CONCESSION IS THEREFORE AVAILABLE ON DDB OF NIRMA LTD. ISSUED ON F.Y.1999-0 0 SINCE NIRMA LTD. IS NEITHER AN INFRASTRUCTURE COMPANY' 'INFR ASTRUCTURE FUND' OR A 'PUBLIC SECTOR COMPANY NOR THE BONDS WERE ISSUED AFTER 1-4-2005. 5. PREPONEMENT OF DATE OF PURCHASE OF DDBS S ERIES A OF NIRMA LTD. FROM THE DETAILS FURNISHED BY THE ASSESSEE IT WAS F OUND THAT THIS DDB SERIES A OF NIRMA LTD. WAS RESULT OF THE T ERMS OF THE DEBENTURE TRUST DEED DATED 27-4-2001 WHICH WAS ENT ERED INTO BETWEEN THE COMPANIES I.E. NIRMA LTD. THE COMPANY WHICH ISSUED THE DDBS AND THE IFCI LTD. AS TRUSTEE. NIRMA LTD. I SSUED THE CERTIFICATE OF HOLDING TO THE ASSESSEE ON 10-5-2001 . THIS DDB SERIES A OF NIRMA LTD. WAS LISTED IN NATIONAL STOCK EXCHAN GE ON 2-F- IM/AND WAS MADE AVAILABLE FOR DEMATERIALIZATION AS ON 24-9-2001. THOUGH THE LETTER OF ALLOTMENT WAS ISSUED TO THE AS SESSEE EARLIER THE CERTIFICATE OF HOLDING COULD BE ISSUED TO THE ASSES SEE AS ON 10-5- 2001. SINCE THE LETTER OF ALLOTMENT IS DIFFERENT IN ITS NATURE AND CHARACTER THE SALE OF THIS SCRIP CAN BE CONSIDERED TO HAVE TAKEN PLACE ONLY FROM THE DATE OF ISSUANCE OF CERTIFICATE OF HOLDING THEREFORE THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY THIS GAIN SHOULD NOT BE CONSIDERED AS STCG SINCE THE ASSESSEE WAS GIVEN OWNERSHIP OF THESE DDB SERIES A OF NIRMA LTD. ON 10 -5-2001 AS PER THE TERMS OF DEBENTURE TRUST DEED DATED 27-4-2001. 5.1 DEBENTURE CERTIFICATE DATED 10-5-2001 DIFF ERENT FROM LETTER OF ALLOTMENTS DATED 23-9-2000: THE ASSESSEE'S SUBMISSION DATED 10-3-2005 HAS BEEN PRODUCED ABOVE. THE CONTENTIONS OF THE ASSESSEE ARE NOT TENA BLE. THE LETTER OF ALLOTMENT IS DIFFERENT IN ITS NATURE AND CHARACTER FROM THE DEBENTURE CERTIFICATE. THE LETTER OF ALLOTMENT IS SEPARATELY TRADABLE IN THE MARKET. AS PER THE DEFINITION OF 'SHORT TERM CAPITA L ASSET' FOR THE LETTER OF ALLOTMENT THE PERIOD OF HOLDING IS 36 MO NTHS HOWEVER IN CASE OF A SECURITY WHICH IS LISTED IN RECOGNIZED ST OCK EXCHANGE THIS PERIOD IS 12 MONTHS AS PER THE PROVISIONS OF THE AC T. THE LETTER OF ALLOTMENT IS NOT EMANATING OUT OF THE MAIN TRUST DE ED BETWEEN NIRMA LTD. AND IFCI WHICH WAS IN CASE OF DEBENTURE CERTI FICATE. IN THE BOND CERTIFICATE ISSUED BY NIRMA LTD. TO THE ASSESS EE COMPANY DATED 10-5-2001 IT IS VERY CLEAR THAT THESE BOND CERTIFI CATES ARE ISSUED IN TERMS OF DEBENTURE TRUST DEED DATED 27-4-2001. THE RELEVANT PORTION OF THIS CERTIFICATE IS PRODUCED AS UNDER: - 30 - THESE DDE SERIES - A ARE ISSUED IN TERMS OF THE D EBENTURE TRUST DEED DATED 2 7-4-2001 (HEREINAFTER REFERRED T O AS THE TRUST DEED) ENTERED INTO BETWEEN THE COMPANY AND IF CI LIMITED AS TRUSTEES ' HEREINAFTER REFERRED TO AS 'THE TRUSTEES ') AND ARE SECURED IN THE MANNER MENTIONED IN THE SAID TRUST DEED.................................... ...... GIVEN AT AHMEDABAD UNDER THE COMMON SEAL OF THE COMPANY AS 10 TH MAY 2001.' 5.2 PROVISIONS OF DEBENTURE TRUST DEED DATED 27 -4-2001 FROM THE CAREFUL PERUSAL OF THE PROVISIONS OF DEBEN TURE TRUST DEED DATED 27-4-2001 IT WAS FOUND THAT THE DEBENTU RE CERTIFICATE ISSUED DATED 10-5-2001 WAS BASED ON THIS TRUST DEED . IN CLAUSE-8.& 9 OF THIS TRUST DEED IT HAS BEEN CLARIFIED THAT TH E DDBS SERIES-A HAVE BEEN SECURED BY IFCI AS PER THIS TRUST DEED. T HIS SECURITY IS THE MAIN FEATURE OF THESE DDBS IN ABSENCE OF WHICH THE NATURE AND CHARACTER OF THESE DDBS IS NOT DETERMINED. THESE CL AUSES ARE PRODUCED AS UNDER: ' CLAUSE-8: THE REPAYMENT / REDUCTION OF THE PRINCI PAL AMOUNT DDE SERIES A TOGETHER WITH OTHER MONIES DUE IN RESP ECT THEREOF PAYMENT OF INTEREST REMUNERATION OF THE TRUSTEES A ND ALL COSTS CHARGES EXPENSES AND OTHER MONIES PAYABLE BY THE CO MPANY IN RESPECT OF THE DDE SERIES A SHALL BE SECURED BY WAY OF PARI PASSU FIRST MORTGAGE AND CHARGE IN FAVOUR OF THE TRUSTEES ON THE BHAVNAGAR COMPLEX PROPERTY ONLY OF THE COMPANY SUCH MORTGAGE AND CHARGE SHALL RANK PARI PASSU WITH THE MORTGAGES AND CHARGES CREATED TO BE CREATED ON THE SAID IMMOVABLE AND MOV ABLE PROPERTIES IN RESPECT OF THE BHAVNAGAR COMPLEX PROPERTIES OF T HE COMPANY BOTH PRESENT AND FUTURE IN FAVOUR OF IFCI AS THE TR USTEES OF THE NCD SERIES-A. NCD SERIES-B. NCD SERIES-C AS WELL AS TOW ARDS THE TERM LOANS SANCTIONED / TO BE SANCTIONED TO THE COMPANY BY THE BANKS AND OTHER TERM LENDERS / INSTITUTIONS AND THE FURTH ER BORROWINGS OF THE COMPANY. CLAUSE-9: THE COMPANY PROPOSES TO CONSTITUTE ISSUE AND SECURE THE SAID DDB SERIES - A TOGETHER WITH INTERE ST REMUNERATION OF TRUSTEES AND ALL COSTS CHARGES EXPENSES AND AL L OTHER MONIES PAYABLE IN RESPECT THEREOF INTER ALIA BY WAY OF A FIRST MORTGAGE AND CHARGE ON THE BHAVNAGAR COMPLEX PROPERTY CREATED HE REUNDER AND ANKING PARI PASSU WITH THE MORTGAGE AND CHARGES CRE ATED IN FAVOUR OF IFCI IN THEIR CAPACITY AS TRUSTEES FOR HOLDERS O F NCD SERIES-A NCD SERIES-B AND NCD SERIES-C HOLDERS. IN SECTION-2 OF THIS DEBENTURE TRUST DEED IT HAS B EEN VERY CATEGORICALLY STATED THAT THESE DEBENTURES ARE CONS TITUTED AND ISSUED - 31 - AS PER THIS TRUST DEED. THE TERMS AND CONDITIONS OF THE ISSUANCE ARE ALSO DEFINED IN THIS SECTION. THIS SECTION-2 IS PRO DUCED AS UNDER: 'THE DDB SERIES-A CONSTITUTED AND ISSUED HEREUNDER ARE 35000. SECURED REDEEMABLE DDBS SERIES-A OF A FACE V ALUE OF RS.1 50 000 ISSUED AT A PRICE OF RS.1 00 000 (HEREI NAFTER REFERRED TO AS DDB SERIES-A) AGGREGATING TO RS.3.50 CRORES. THE COMPANY COVENANTS WITH THE TRUSTEES THAT IT SHA LL PAY TO THE DDB SERIES-A HOLDERS THE PRINCIPLE AMOUNT OF T HE DDB SERIES- A ON THE DATES MENTIONED IN THE FINANCIAL COVENANTS AND CONDITIONS MENTIONED IN THE THIRD SCHEDULE WRITTEN HEREUNDER AND SHALL ALSO PAY INTEREST (INCLUSIVE OF COMPOUND INTEREST WHERE APPLICABLE) ON THE DDB SERIES-A IN ACCORDANCE WITH THE FINANCIAL C OVENANTS AND CONDITIONS AND THE TERMS OF ISSUE OF THE SAID DDB S ERIES-A. ALL INTEREST ON THE DDE SERIES-A FOR THE TIME BEING UNPAID (OTHER THAN UNCLAIMED) SHALL CARRY FATHER INTEREST AT THE RATE OF 12.25% OR AS SPECIFIED IN THE FINANCIAL COVENANTS A ND CONDITIONS OR SUCH OTHER RATE AS MAY BE PRESCRIBED COMPUTED FROM THE RESPECTIVE DUE DATES AND SHALL BECOME PAYABLE UPON THE FOOTING OF THE COMPOUND INTEREST WITH REST TAKEN YEARLY. THE COMPANY SHALL MAKE PAYMENTS AS AFORESAID TO OR TO THE ORDER OF OR FOR THE ACCOUNT OF THE DDE SERIES - A H OLDERS AND SUCH PAYMENT SHALL BE DEEMED TO BE IN PROTANTO SATISFACT ION OF THE AFORESAID COVENANT OF THE COMPANY TO MAKE SUCH PAYM ENTS TO THE DDE SERIES-A HOLDERS. IN CASE OF DEFAULT IN PAYMENT OF PRINCIPAL AMOUNT O F THE DDE SERIES-A INTEREST AND ALL OTHER MONIES ON THEIR RE SPECTIVE DUE DATES THE COMPANY SHALL PAY ON THE DEFAULTED AMOUNTS LIQ UIDATED DAMAGES AT THE RATE OF 2% P.A. FOR THE PERIOD OF DEFAULT.' FROM THESE PROVISIONS OF DEBENTURE TRUST DEED DATED 27-4- 2001 IT IS VERY CLEAR THAT THE NATURE AND CHARACTE R OF THE ARTICLES (DDBS) UNDER CONSIDERATION WHICH WERE TRANSFERRED T O THE HOLDERS WAS DEFINED AND DETERMINED ONLY AS PER THIS TRUST D EED. 5.3. PROVISIONS OF SALES OF GOODS ACT 1930 AS PER CHAPTER-3 OF SALES OF GOODS ACT 1930 THE CONDITIONS OF TRANSFER OF PROPERTY BETWEEN SELLER AND BUYER AR E GIVEN. AS PER SECTION 18 OF THIS ACT IT HAS BEEN PROVIDED THAT W HERE THERE IS A CONTRACT FOR THE SALE OF THE UNASCERTAINED GOODS TH E PROPERTY IN THE GOODS IS NOT TRANSFERRED. THE RELEVANT SECTION IS P RODUCED AS UNDER: 'TRANSFER OF PROPERTY AS BETWEEN SELLER AND BUYER' - 32 - 18. GOODS MUST BE ASCERTAINED. -WHERE THERE IS A CONTRACT FOR THE SALE OF UNASCERTAINED GOODS NO PROPERTY IN THE GOO DS IS TRANSFERRED TO THE BUYER UNLESS AND UNTIL THE GOODS ARE ASCERTAINED.' AS HAS BEEN DISCUSSED ABOVE THE NATURE AND CHARACT ER OF THE BONDS COULD BE DETERMINED ONLY AFTER DEBENTURE TRUST DEED ISSUED DATED 27- 4-2001 THEREFORE THESE BONDS CAN NOT BE TRANSFERR ED BEFORE THIS DATE. HENCE THE CONTENTION OF THE ASSESSEE THAT TH E LETTER OF ALLOTMENT SHOULD BE CONSIDERED AS DATE OF TRANSFER IS NOT ACCEPTED. 5.4 THE ASSESSEE HAD RELIED IN SUB-SECTION-(D) OF SECTI ON 2(42A) OF IT. ACT BUT THIS SUB-SECTION DEALS WITH THE RIGHTS SHARES THEREFORE THE CONTENTION OF THE ASSESSEE IS NOT ACCEPTED. IT IS RELEVANT TO MENTION HERE THAT IN SECTION 2(42A) THE DATE OF TRANSFER IN CASE OF GENERAL DEBENTURES HAS NOT BEEN DEALT WITH. THOUGH IN CASE OF RIGHT SHARES AND BONUS SHARES IT HAS BEEN MADE CLEAR THA T THE DATE OF ALLOTMENT SHOULD BE CONSIDERED AS DATE OF TRANSFER BUT THE SITUATION IN THE CASE OF FRESH ISSUANCE IS DIFFERENT FROM THE RIGHT SHARES AND BONUS SHARES BECAUSE IN CASE OF RIGHT BONUS SHARES THE NATURE AND CHARACTER OF THE ARTICLES UNDER CONSIDERATION (BONU S SHARES RIGHT SHARES) IS WELL DEFINED. THE NATURE OF THE BONUS SH ARES AND THE RIGHT SHARES IS IDENTICAL IN NATURE TO THE MAIN SHARES A LREADY ISSUED BY THE COMPANY THEREFORE THERE IS NO NEED TO SEPARATELY I DENTIFY AND RECORD THE TERMS AND CONDITIONS IN THESE CASES. THIS AGAIN MAKES THIS CONTENTION STRONG THAT IN CASE OF ISSUANCE OF FRESH DEBENTURES OR BONDS THE LEGISLATURE DID NOT INTEND TO CONSIDER TH E DATE OF ALLOTMENT AS THE DATE OF TRANSFER OF THE PROPERTY IN THE ASSE TS (DDBS) BECAUSE OTHERWISE THE LEGISLATURE HAD ALSO INTRODUCED THESE PROVISIONS IN THE ACT. FURTHER A BOND CAN BE CALLED A LONG TERM ASSE T ONLY WHEN IT IS HELD FOR MORE THAN ONE YEAR AND IT IS LISTED IN A R ECOGNIZED STOCK EXCHANGE AS PER SECTION 2(42A) OF IT. ACT. IN THIS CASE IF THE PERIOD OF HOLDING IS COUNTED FROM THE DATE OF LISTING IN N ATIONAL STOCK EXCHANGE TO THE DATE OF SALE THE SAME IS LESS THAN 12 MONTHS THEREFORE PERIOD OF HOLDING OF THESE ASSETS IN NO W AY CAN BE CONSIDERED TO FULFILL THE CONDITION OF RECOGNIZING THESE AS LONG TERM CAPITAL ASSETS. 5.5 THE ASSESSEE HAS RELIED ON SECTION 108 OF COMP ANIES ACT 1956 BUT THAT IS NOT RELEVANT AT ALL SINCE THE SAM E DEALS WITH THE PRODUCTION OF INSTRUMENT OF TRANSFER AND IT HAS BEE N PROVISIONED THAT THE COMPANY SHALL NOT REGISTER TRANSFER OF SHARES O R DEBENTURES EXCEPT ON PRODUCTION OF PROPER INSTRUMENT OF TRANSF ER. IT HAS BEEN FACILITATED THAT IF SUCH CERTIFICATE IS NOT IN EXIS TENCE THEN THE LETTER OF ALLOTMENT MAY BE CONSIDERED AS A VALID DOCUMENT FOR AFFECTING THE TRANSFER IN THE REGISTERS OF THE COMPANY. THIS IS A GAIN VERY IMPORTANT TO NOTE HERE THAT THE COMPANY ACT HAS PROVISIONED F OR THE - 33 - REGISTERING OF THE TRANSFER ONLY WHEN THE CERTIFICA TES HAVE BEEN ISSUED. THE COMPANY ACT HAS PROVIDED THE REMEDY WHE N THE CERTIFICATE IS LOST BY SOME ONE. THIS REMEDY CAN NE VER GIVE THE LETTER OF ALLOTMENT THE SAME LEGAL STATUS AS IS THAT OF CE RTIFICATE OF DEBENTURE BEFORE THE VERY ISSUANCE OF THE SAME. IT IS ALSO NOTEWORTHY THAT AS PER SECTION 75 OF COMPANIES ACT 1956 THE ALLOTMENTS OF THE DEBENTURES CAN BE RETURNED BUT THE SAME CAN NOT BE DONE ONCE THE DEBENTURE CERTIFICATES ARE ISSUED BY THE COMPANY. 5.6 DURING THE HEARING GIVEN TO THE REPRESENTATIVE OF THE ASSESSEE IT HAS BEEN ARGUED THAT THE EXECUTION OF THE TRUST DEE D IS O CONTRACTUAL OBLIGATION AS PER THE TERMS OF OFFER AND MERELY A F ORMALITY AND THE PROCEDURE PART OF THE LEGAL TERMS OF OFFER. HIS SUB MISSION IS PRODUCED AS UNDER: 'THE CAPITAL ASSET WHICH HAS BEEN SOLD BY YOUR ASSE SSEE IS A DEBENTURE. DEBENTURE PER SE IS A BUNDLE OF RIGHTS WHICH ARE CONTRACTED AS PER THE TERMS OF THE ISSUE. THE DEBEN TURE IS AN INTANGIBLE ASSET. CERTIFICATE IS ONLY A REPRESENTAT ION OF HOLDING OF DEBENTURE. THE RIGHT IN DEBENTURE ARE ACQUIRED I MMEDIATELY UPON ALLOTMENT OF THE SAME BY THE BOARD AND THE NAM E IS ENTERED IN THE REGISTER OF DEBENTURE HOLDERS. IT IS A FORM OR A SHAPE IS GIVEN TO THE SUBSTANCE. THE SAME HAS COME INTO EXISTENCE THE MOMENT IT IS ALLOTTED AND NOT AT THE TIME WHEN A SHAPE IS GIVEN TO THE SUBSTANCE 'THE DEBENTURE' IN THE FORM OF A CERTIFICATE. ............... IN THIS REGARD OVER AND ABOVE THE SUBMISSION MADE HEREINABOVE FURTHER IT IS SUBMITTED THAT THE EXEC UTION OF TRUST DEED IS A CONTRACTUAL OBLIGATION AS PER THE T ERMS OF OFFER AND IS MERELY A FORMALITY AND THE PROCEDURE PART OF THE LEGAL TERMS OF OFFER. THE SAME CAN NOT DETERMINE THE DATE OF ACQUISITION OF ASSET WHICH IS DEBENTURE THE DATE O F ACQUISITION OF THE ASSET IS THE DATE OF ALLOTMENT I.E. DATE WHE N THE INVESTOR IS VESTED WITH THE RIGHTS IN THE CAPITAL ASSET WHI CH IS 28-7- 2000 IN THE PRESENT CASE AND THE DATE OF EXECUTION OF THE TRUST DEED I.E. 27-4-2001 IS MERELY A PROCEDURAL FORMALIT Y AND CAN NOT DETERMINE THE DATE OF ALLOTMENT. WE ALSO REQUES T REFERENCE TO OUR REPLY IN PARA-3 HEREINABOVE WHEREIN WE HAVE CLEARLY STATED THAT A SUBSTANCE I.E. THE DATE WHEN THE ASSE T COMES INTO THE EXISTENCE WHICH IS THE DATE OF ALLOTMENT WHICH ONLY IS TO BE CONSIDERED FOR DETERMINING THE PERIOD OF HOLDING OF DEBENTURE AND NOT THE FORM I.E. THE DATE WHEN THE D EBENTURE CERTIFICATE ARE ISSUED OR THE DEBENTURE TRUST DEED IS EXECUTED.' THE ABOVE CONTENTIONS OF THE ASSESSEE ARE NOT TENAB LE. THE OBSERVATION OF THE ASSESSEE THAT DEBENTURE PER SE IS A BUNDLE OF RIGHTS IS CORRECT BUT THE FINAL NATURE AND CHARACTE R OF THESE - 34 - DEBENTURES HAS EMERGED ONLY AFTER SIGNING OF DEBENTURE TRUST DEED DATED 27-4-2001. ALL THE TERMS AND CONDITIONS OF TH IS TRANSACTION COULD NOT BE DECIDED AT THE TIME OF ALLOTMENT OF TH ESE DEBENTURES BECAUSE THEIR VERY NATURE WAS NOT KNOWN. AS PER SEC TION 84 OF COMPANIES ACT 1956 ONLY A CERTIFICATE UNDER THE C OMMONS SEAL OF THE COMPANY SHALL BE PRIMA FACIE EVIDENCE OF THE TI TLE OF THE MEMBER ON SUCH SHARES. THIS IS A CERTIFICATE OF TRANSFER O F TITLE AND BEFORE ISSUANCE OF THIS THE TRANSFER CAN NOT BE COMPLETE. THE DEBENTURE TRUST DEED IS NOT MERELY A FORMALITY AND PROCEDURE PART OF THE LEGAL TERMS OF OFFER. THIS IS A BASIC DOCUMENT BASED ON W HICH THESE DEBENTURES HAVE GOT THE CREDIBILITY AND TRADABILITY IN THE MARKET. IF THESE DEBENTURES HAD NOT BEEN SECURED BY AN INSTITU TION LIKE IFCI THESE WOULD HAVE NOT GOT THAT MUCH VALUE AND LIQUID ITY AS WAS AVAILABLE TO THESE. SINCE THE BASIC CHARACTER OF T HESE DEBENTURES COULD BE FINALLY DECIDED BY THIS DEBENTURE TRUST DE ED DATED 27-4- 2001 THEIR TRANSACTION COULD NOT BE PRE-PONED BEFO RE THIS DATE. FURTHER THE BASIC CONDITION OF A CAPITAL ASSET BEI NG A LONG TERM CAPITAL ASSET IF IT IS HELD MORE THAN 12 MONTHS I S THAT IT MUST BE LISTED IN A RECOGNIZED STOCK EXCHANGE. THE DDB SER IES-A WAS LISTED IN NATIONAL STOCK EXCHANGE ONLY ON 20-9-01). THEREF ORE FROM THIS DATE TILL THE DATE OF SALE THE PERIOD OF HOLDING I S LESS THAN ONE YEAR. HENCE THIS ASSET CAN NOT BE SAID AS LONG TERM CAPIT AL ASSET. 5.7 THE ABOVE TREATMENT OF CAPITAL GAIN AS SHORT TE RM CAPITAL GAIN IS ALSO SUPPORTED BY THE CIRCULAR NO.2 OF 2002 WHICH WAS PUBLISHED ON 15-2-2002. THE ASSESSEE WAS VERY WELL AWARE OF THIS CIRCULAR PRIOR TO FILING OF THE RETURN OF INCOME. AS PER PARA 5.1 OF THIS CIRCULAR THE CAPITAL GAIN IN CASE OF SALE OF DDBS WILL ALWAYS BE A SHORT TERM CAPITAL GAIN. THE RELIANCE OF THE ASSESSEE ON A PRE SS NOTE DATED 20-3- 2002 IS MISPLACED BECAUSE AS PER CIRCULAR 783 DATED 18-11-2001 THE CLAIMS MADE ON THE BASIS OF PRESS NOTES ARE NOT SUS TAINABLE ESPECIALLY WHEN THE CIRCULAR ITSELF WAS CLARIFYING THE EXISTING PROVISIONS OF THE ACT. 5.8 IN THE LIGHT OF ABOVE OBSERVATIONS IT IS CONCL UDED THAT THE INCOME GENERATING FROM THE PURCHASE OF 850 DDBS SERIES-A OF NIRMA LTD. DATED 01.10.01 OF RS.1 44 50 000 IS IN TEREST INCOME. THE TDS CREDIT OF RS.29 47 800 IS ALLOWED ON THE SA ME. (ADDITION OF INTEREST INCOME 1.44.50 000) 6 GROUND NO.5 OF THE APPEAL READS AS UNDER: IN LAW AND IN FACTS AND CIRCUMSTANCES OF THE APPELL ANTS CASE THE LD. COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED IN U PHOLDING THE ACTION OF LD. ASSESSING OFFICER IN CONSIDERING THE LONG TE RM CAPITAL GAIN OF RS.2 21 55 222/- ON SALE OF 1002 DEEP DISCOUNT BOND S OF NIRMA LIMITED AS SHORT TERM CAPITAL GAIN. - 35 - 7 THE LEARNED ASSESSING OFFICER OBSERVED AS UNDER: - 5.9. THE ASSESSEE SOLD THE REST OF 1002 DDBS AS O N 19.03.02 AT A TOTAL CONSIDERATION OF RS.12 23 55 222 MEANIN G THEREBY EACH BOND WAS SOLD AT RS.1 22 111. THE PURCHASE CONSIDERATION OF THE SAME WAS RS.10 02 00 000. THER EFORE THE STCG ON THE SAME IS COMPUTED AT RS.2 21 55 222. (ADDITION OF STCG 2.21.55.222) 8 GROUND NO.4 AND 6 OF THE APPEAL READ AS UNDER:- 4 IN LAW AND IN FACTS AND CIRCUMSTANCES OF THE APPELL ANTS CASE THE LD. COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED IN UPHOLDING THE ACTION OF LD. ASSESSING OFFICER IN NOT ALLOWING CLA IM U/S 54EC OF THE I.T. ACT ON LONG TERM CAPITAL GAIN REFERRED TO IN GROUND NO.3 ABOVE. 6 IN LAW AND IN FACTS AND CIRCUMSTANCES OF THE APPE LLANTS CASE THE LD. COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED IN UPHOLDING THE ACTION OF LD. ASSESSING OFFICER IN NOT ALLOWING CLA IM OF DEDUCTION U/S 54EC OF THE ACT ON LONG TERM CAPITAL GAIN REFERRED TO IN GROUND NO.5. 9 THE LEARNED ASSESSING OFFICER OBSERVED AS UNDER: - 5.10 THE CLAIM OF DEDUCTION U/S. 54EC OF IT. ACT O F RS.3 66 00 000 IS NOT ALLOWED TO THE ASSESSEE SINCE THE SAME CAN BE CLAIMED ONLY AGAINST THE LTCG AS PER THE PROVISIONS OF THE ACT. 10 GROUND NO.7 OF THE APPEAL READS AS UNDER:- 7 IN LAW AND IN FACTS AND CIRCUMSTANCES OF THE APPELL ANTS CASE THE LD. COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED IN UPHOLDING THE ACTION OF LD. ASSESSING OFFICER IN CONSIDERING RS.4 8 83 858/- AS ACCRUED INTEREST ON HOLDING OF 1250 DEEP DISCOUNT BONDS SE RIES-B OF NIRMA LIMITED EACH OF RS.1 00 000/- ACQUIRED ON 08-10-01 AND HELD TILL END OF THE YEAR APPLYING THE CIRCULAR DATED 15-02-02 OF CBDT O N THE BASIS OF ASSUMPTION AND SURMISE AND IGNORING SUBMISSIONS IN CLUDING PRESS NOTE ISSUED BY CBDT IN THIS REGARD. LD. CIT(A) HAS FURTHER ERRED IN UPHOLDING THE ASSES SING OFFICERS ACTION WHILE MAKING THE ADDITION OF RS.48 83 858/- RELYING ON CIRCULAR NO.2 OF 2002 OF CBDT DATED 15-02-02 AND IGNORING TH E PRESS NOTE DATED 20-03-02 ISSUED IN THIS REGARD BY CBDT. - 36 - LD. CIT(A) HAS FURTHER ERRED IN UPHOLDING THE ASSES SING OFFICERS ACTION WHILE MAKING THE ADDITION OF RS.48 83 858/- MAKING THE CIRCULAR APPLICABLE WITH RETROSPECTIVE EFFECT WHIC H IS ILLEGAL AND AGAINST THE INTEREST OF THE APPELLANT. LD. CIT(A) HAS FURTHER ERRED IN UPHOLDING THE ASSES SING OFFICERS ACTION WHILE MAKING THE ADDITION OF RS.48 83 858/- ASSUMING THE DISCOUNT RATE FOR THE YEARS 2005 TO 2010 AND GROSS ERROR IN MAKING CALCULATIONS PURELY BASED ON ASSUMPTION CONJECTURE AND SURMISE. 11 THE LEARNED ASSESSING OFFICER OBSERVED AS UNDE R:- 5.11 IN THE MATTER OF DDB SERIES-B THE ASSESSEE WAS ALLOTTED THE 1250 DDBS OF RS.1 00 000 EACH. THE MAT URITY VALUE OF THE SAME AFTER 20 MONTHS IS RS.1 15 500. T HE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY THE INTEREST SHOULD NOT BE ADDED ON THE SAME. THE VALUE OF A SECURITY INCREASE S IN A MARKET ON DAY TO DAY BASIS BECAUSE AS THE TIME PASS ES THE MATURITY DATE NEARS DOWN. IN CASE OF A SECURED DEBE NTURE THE LIQUIDITY IS HIGHLY ASSURED. THEREFORE IT CAN BE SA FELY CONCLUDED THAT THE GAIN IN A SECURITY ACCRUES ON AN NUAL BASIS EVEN THOUGH THE EXP. MAY NOT ACCRUE IN THE HANDS OF THE ISSUER OF THE SECURITY. AS HAS BEEN PRODUCED ABOVE FROM THE CIRCULAR OF TH E BOARD DATED 15.02.02 IT II VERY CLEAR THAT THE INTEREST SHOULD BE OFFERED BY THE ASSESSEE ON ACCRUAL BASIS IRRESPECTI VE OF THE FACT WHAT METHOD OF ACCOUNTING IS ADOPTED BY HIM. I N THIS CASE IT HAS BEEN ESTABLISHED THAT THE ASSESSEE HAS TO AD OPT THE MERCANTILE SYSTEM OF ACCOUNTING THEREFORE IT IS THE DUTY CAST ON THE ASSESSEE BY LAW TO SHOW THE INTEREST ON ACCR UAL BASIS. THE RESORT OF THE ASSESSEE ON THE PRESS RELEASE OF CBDT IS OF NO USE BECAUSE THE INTENTION OF LEGISLATURE HAS ALW AYS BEEN TO TAX THE INCOME ON SECURITIES ON ACCRUAL BASIS AS HA S BEEN ESTABLISHED ABOVE. FURTHER IT HAS BEEN SHOWN ABOVE THAT THERE IS A COL LISION BETWEEN THE ISSUER OF THESE BONDS AND THE DIRECTOR THAT THE COMPANY WILL CLAIM THE INTEREST ON THE ACCRUAL BASI S AND THE HOLDERS WILL NOT OFFER THE INCOME ON ACCRUAL BASIS. THE ASSESSEE WAS ASKED TO FURNISH THE EXPLANATION A S TO WHY THE INTEREST SHOULD NOT BE ADDED ON THESE BONDS ON ACCRUAL BASIS BUT AS DISCUSSED ABOVE NO COGENT EXPLANATION IN THIS REGARD COULD BE FURNISHED BY THE ASSESSEE THEREFOR E THE SAME IS COMPUTED AS UNDER ON THE BASIS OF DISCOUNTED PRI CE. THE DISCOUNTED VALUE IS TAKEN AS PER THE FOLLOWING TABL E. THE VALUE - 37 - AS ON 31.03.2002 IS 15 MONTHS BACK TO THE REDEMPTIO N DATE WHICH IS 20 MONTHS FROM THE DATE OF ALLOTMENT I.E. AS ON 06- 06-03. THE DISCOUNTED VALUE OF THESE DDBS AS ON 31- 03-02 IS COMPUTED AS UNDER: MATURITY VALUE (FACE VALUE) [1+R/100]N HERE R IS PREVAILING DISCOUNTING RATE IN INDIAN ECO NOMY AND N IS THE REMAINING PERIOD BEFORE MATURITY. THE RANGE OF PREVAILING DISCOUNTING RATE R IS AS UNDER: 1999 10.05.-11.50 2000 10.00-12.00 2001 8.75-11.25 2002 7.41-10.25 2003 6.00-7.75 2004 4.70-6.50 THUS THE AVERAGE OF RANGE FOR 2002 IS 8.83. THE DISCOUNTED VALUE IS AS UNDER: DISCOUNTED VALUE = 1 15 500 X 1250 = 14 43 75 000 = 12 98 83 858 (1+0.0883)15/12 1.11157 THUS THE ACCRUED INTEREST / GAIN ON THE SAME IS CO MPUTED AT RS.48 83 858/-. IN THE LIGHT OF THE ABOVE OBSERVATI ONS THE ADDITION OF THIS AMOUNT IS MADE IN THE HANDS OF THE ASSESSEE . (ADDITION OF ACCRUED INTEREST 48 83 858) 12 GROUND NO.8 OF THE APPEAL READS AS UNDER:- 8 IN LAW AND IN FACTS AND CIRCUMSTANCES OF THE APPELL ANTS CASE THE LD. COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED IN CONFIRMING THE ASSESSING OFFICERS ACTION IN LEVYING INTEREST OF R S.44 27 137/- U/S 234B OF THE I.T. ACT. 13 THE LEARNED ASSESSING OFFICER OBSERVED AS UNDER :- THUS THE INCOME IS ASSESSED U/S 143(3) OF THE ACT. DEMAND NOTICE IS ISSUED AFTER GIVING CREDIT FOR TAXES PAID / ADJUSTE D AFTER DUE VERIFICATION. INTEREST U/S 234A 234B & 234C IS CHARGED. 14 GROUND NO.9 IN THE APPEAL READS AS UNDER:- - 38 - 9. IN LAW AND IN FACTS AND CIRCUMSTANCES OF THE AP PELLANTS CASE THE LD. COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED IN NOT INTERFERING ON THE GROUND RELATING TO INITIATION OF PENALTY PROCEE DINGS U/S 271(1)(C) OF I.T. ACT. 15 THE LEARNED ASSESSING OFFICER OBSERVED AS UNDER :- 6 THE PENALTY PROCEEDINGS U/S 271(1)(C) ARE INITIA TED IN THIS CASE FOR FURNISHING THE INACCURATE PARTICULARS OF I NCOME AND THEREBY CONCEALING THE INCOME. 16 THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS ) HAS DECIDED THE ABOVE ISSUES SIMPLY BY OBSERVING AS UNDER:- ALL THE GROUNDS OF APPEAL HAVE BEEN DEALT WITH IN THE APPELLATE ORDER NO.CIT(A)-I/CC.1(1)/46/05-06 DATED 7/3/06 FOR AY 20 02-03 IN THE CASE OF HARSIDDH SPECIFIC FAMILY TRUST AND JSHRI KARSANBHAI K PATEL (HUF) FOR AY 2002-03 IN APPEAL NO.CIT(A)-I/CC.1(1)(/35/05-06 DATED 2/3/06. HENCE FOLLOWING THE ABOVE APPELLATE ORDERS GROUND OF APPEAL NO.1 TO 7 ARE DISMISSED. 17 WE FIND THAT THE LEARNED COMMISSIONER OF INCOME -TAX (APPEALS) HAS NOT GIVEN THE REASONS WHILE DECIDING THE APPEAL OF THE ASSESSEE. THUS THE ORDER PASSED BY THE LEARNED COM MISSIONER OF INCOME-TAX (APPEALS) IS A NON-SPEAKING ORDER. THE L EARNED COMMISSIONER OF INCOME-TAX (APPEALS) HAS RELIED ON HIS ORDER PASSED IN THE CASE OF HARSIDDH SPECIFIC FAMILY TRUS T AND SHRI KARSANBHAI K PATEL (HUF). IT IS THE DUTY OF THE LEA RNED COMMISSIONER OF INCOME-TAX (APPEALS) TO GIVE REASON S FOR EACH GROUNDS OF APPEAL DECIDED BY HIM SO THAT THE AGGRIE VED PARTY CAN PLEAD HIS CASE BEFORE THE HIGHER FORUM WHO CAN ALSO APPRECIATE THE DECISION OF THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS). THUS WE ARE UNABLE TO ADJUDICATE THE APPEAL OF THE ASSESSEE. HENCE THE ORDER OF THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) IS SET ASIDE AND THE MATTER IS REMANDED BACK TO HIS FI LE TO PASS A WELL- - 39 - REASONED AND SPEAKING ORDER AFTER ALLOWING REASONAB LE AND PROPER OPPORTUNITY OF HEARING. 18 IN THE RESULT THE APPEAL IS ALLOWED FOR STATIS TICAL PURPOSE. ORDER SIGNED DATED AND PRONOUNCED IN THE COURT 29- 01-2010. SD/- SD/- ( T.K. SHARMA ) ( N.S. SAINI ) JUDICIAL MEMBER ACCOUN TANT MEMBER AHMEDABAD; DATED 29 /01/2010 COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE LD. CIT(APPEALS)-XIV AHMEDABAD. 5. THE DR AHMEDABAD BENCH 6. THE GUARD FILE.