RAOUL THACKERSEY,MUMBAI vs. DCIT 12(1), MUMBAI

Next comes the assessee’s substantive issue seeking to assess his impugned interest income

In the instant case, the Special Purpose Vehicles, viz., Bhishma Realty Limited, Capricorn Realty Limited and Chaitra Realty Limited have issued Non Convertible Debentures - i.e., 0% secured and redeemable non- convertible debentures of Rs.1.00 lakh each. They were issued in two series, viz., NCD-I to first charge holders and NCD-II to second charge holders and both the series are to be redeemed within a period of 5 years from the date of sanction by BIFR along with redemption premium so as to yield an IRR of 12.5% and 11% respectively. Thus, the above said SPVs are not required to pay interest either quarterly, half yearly or annually 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.

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 9 ITA.No.1262/MUM./2017 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 Sath Gwaldas Mathurdas Mohata Trust vs. CIT (1987) (33 Taxman 328) (Bom). The Ld A.R also invited our attention to the decision rendered by Mumbai bench of ITAT in the case of Mrs. Perviz Wang Chuk basi vs. JCIT (2006)(102 ITD 123), wherein the redemption of capital investment bond after maturity is held to be a "transfer" within meaning of sec. 2(47) and accordingly, it was held that the same would give rise to Capital Gain or loss. He submitted that the same analogy should be applied to the case of redemption of debentures also, as the same results in extinguishment of rights in debentures.

The Ld A.R drew our attention to the provisions of sec.50AA of the Act introduced from 1.4.2023, wherein it is stated that the gains arising on transfer, 10 ITA.No.1262/MUM./2017 redemption or maturity of "market linked debentures" shall be deemed to be capital gains arising on transfer of short term capital asset. He also invited our attention to the fourth proviso to sec.48, wherein it is stated that the benefit of indexation will not be available to debenture. Accordingly, the Ld A.R submitted that the Income tax Act itself recognizes "debentures" as capital asset. Accordingly, the Ld A.R contended that the redemption of debentures would result in transfer of a capital asset and the gain arising thereon would give raise to Capital gains as mentioned in sec.45 of the Act.

On the contrary, the Ld D.R submitted that the NCDs are debt instruments and issuing of debentures is one of the ways of borrowing money either from market or through private placement. In the present case, the NCDs have been issued initially by HSWML to the banks in settlement of loan taken by it from banks. The said NCDs carried 0% interest rate, but are redeemable at a premium. It is specifically stated that the premium amount payable on redemption is calculated in a particular manner, meaning thereby, the premium is nothing but the interest amount payable on the NCDs (loan amount). The ld D.R submitted that the Delhi bench of Tribunal has examined the nature of premium payable by the issuer of debentures in the case 11 ITA.No.1262/MUM./2017 of ACIT vs. Cleta Real Estate (P) Ltd (2022) (145 taxmann.com 76) (Delhi) and it has been held that the premium amount is an expenditure and it could be spread over the tenure of debenture period and could be claimed as deduction accordingly. Similar view has been expressed in the case reported in 2017-TIOL-183- 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.

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 12 ITA.No.1262/MUM./2017 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 assessed as interest income. The Ld D.R further submitted that the question of allowing deduction u/s 54F and 54EC will not arise, since the gain is taxable as interest income.

We heard rival contentions and perused the record. The facts peculiar to this case may first be noted here. The three SPVs, viz., viz., Bhishma Realty Limited, Capricorn Realty Limited and Chaitra Realty Limited are related concerns of the assessee. The assessee is a director in Capricorn Realty Limited. We noticed earlier that the NCDs were issued by above said R a o u l S. T h ac k er s e y three SPVs on private placement basis and they were allotted initially to nationalized banks in lieu of outstanding loans. The assessee, herein, has purchased them from those banks, being initial allottees. The debentures were not listed/traded in any of the stock exchanges. As per Section 2(30) of Companies Act, 2013 "debenture" includes debenture stock, bonds, or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not. Hence, even though the debentures would fall under the definition of 13 ITA.No.1262/MUM./2017 "securities", yet they are essentially debt instruments evidencing a debt.

The Ld D.R relied on a circular issued by CBDT, i.e., Circular No.002 of 2002, wherein the tax treatment to be given on the gains realized on redemption of Deep Discount Bonds (DDB) has been explained. The DDBs are issued by discounting the face value of debenture/bond and the same will be redeemed at par value. For example, the DDB with tenure of five years and having a face value of Rs.1000/- may be issued at Rs.600/-. They will be redeemed at Rs.1,000/- upon maturity. The NCDs issued by SPVs are opposite to DDBs. The NCDs were issued by the SPVs at a face value of Rs.1.00 lakh and they are redeemable after a period of five years at a premium so as to yield an IRR of 12.50% in the case of NCD-I and 11% in the case of NCD-II. Thus, in the case of DDB, the face value of the bonds is discounted by applying a particular interest rate, so that the maturity proceeds equal to the face value. On the contrary, in the case of NCDs redeemable at premium, the premium amount is determined by applying a particular interest rate. Thus, both the amount of discount and the amount of premium, in effect, are "interest amounts" only. Hence, the companies issuing both types of bonds/debentures 14 ITA.No.1262/MUM./2017 usually claim discount/premium as interest expenditure and their claim has been allowed.

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 income. In the instant case, the assessee has purchased NCDs and they are materially different from MLDs. Hence, we are of the view that the legal fiction 15 ITA.No.1262/MUM./2017 introduced in sec. 50AA to deal with the cases of MLDs cannot be taken support of by the assessee, in the facts of the present case.

The Ld A.R also placed reliance on the fourth proviso to sec.48 of the Act, wherein it is stated that the indexation benefit will not be available to bond or debenture. He also placed reliance on certain case laws, wherein it has been held that the redemption of Preference shares or reduction of face value of shares would result in extinguishment of rights/proportionate rights in shares held by a shareholder and hence the amount paid to the shareholder is exigible to Capital gains tax. We notice that the all the said case laws are related to Preference shares/equity shares and not to debentures. There should not be any dispute that the "shares" and "debentures" are two different types of instruments having different types of rights and liabilities. Hence, both cannot be equated with. A shareholder holds a share in the Share capital of a company and he is considered to be one of the owners of the company. He is having right over the surplus available on liquidation of the company. While the preference shares may be of a particular tenure, the equity shares are held on a perpetual basis. Both kinds of shares can only be sold in the open market. The question of redemption of shares does not arise in the 16 ITA.No.1262/MUM./2017 case of equity shares. However, a company may buy back its equity shares subject to complying with the conditions imposed by the Statue. Similarly, subject to compliance of conditions imposed by the statue, the par value of equity shares may be reduced, split etc. On the contrary, a debenture holder is a financial creditor to the company, since debenture is a debt instrument. Further, the debentures are redeemable at the end of the tenure. A debenture holder is entitled to receive interest as per agreed terms and the principal amount upon its maturity. He does not have right to receive anything extra and cannot have any right over the surplus arising on liquidation of company. Thus the shares carry more right over and above its face value, while the debentures do not carry such kind of rights. Hence, "shares" and "debentures" stand on different footing. In our view, the decisions with 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 17 ITA.No.1262/MUM./2017 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.

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 and is the capital amount, while the dividend/interest income is the income generated from the above said capital amount. The possibility of generating capital gains/capital loss will arise only if their market value is different from their face value/par value. Such kind of variation will arise in the case of shares/debentures generally, only when they are sold in the open market and amount realized thereon is different from the face value. The market value of shares would depend upon various aspects considered by the market forces. 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 18 ITA.No.1262/MUM./2017 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, at the time of redemption of the same, the said company would be redeeming the debt instrument at its face value of Rs.1000/- only. We have held earlier that such kind of redemption will not give rise to any capital gains.

In the instant case, the NCDs under consideration are privately placed debentures and they are not listed in the stock exchange. Further, the assessee herein has not sold the NCDs in the open market. The assessee has only surrendered the NCDs to the SPVs, viz., M/s Bhishma Realty Ltd and M/s Capricorn Realty Ltd, for redemption. Thus, it is a case of realization of money 19 ITA.No.1262/MUM./2017 advanced by a creditor, since debentures are debt instruments only. Thus, the question of generation of capital gains will not arise, when the debentures are redeemed by the issuing companies. Further, what is received by the assessee in the form of premium is nothing but interest income only. Accordingly, we are of the view that the Ld CIT(A) was legally correct in holding that the premium/surplus received by the assessee is interest income assessable under the head Income from Other Sources.

We noticed earlier, the cost of purchase of debentures to the assessee was Rs.1451.32 lakhs and the redemption value was Rs.2359.62 lakhs. Hence the actual interest that has accrued to the assessee was Rs.908.30 lakhs only. Accordingly, we modify the order passed by Ld CIT(A) and direct the AO to assess the above said interest income of Rs.908.30 lakhs only.

Since we have held that the surplus/premium received by the assessee is in the nature of interest income, the contention of the assessee that the same was in the nature of capital gain is rejected. Hence the assessee will not be entitled for any deduction u/s 54F and 54EC of the Act in the absence of any capital gains income. We order accordingly.”

The assessee’s third substantive ground claiming set-off of long term capital loss against long term capital gains in view of foregoing adjudication, is restored back to the learned Assessing Officer for his afresh computation as per law in very terms once learned counsel is equally fair innot disputing the fact that the assessee had computed the impugned losses under the head “capital gains” long and short; and sought to set-off the same against the long term capital gains arising from redemption/transfer of non- convertible debentures (supra). Ordered accordingly.

Next comes sec.14A disallowance of Rs.6,94,931/- in assessee’s fourth and fifth substantive grounds wherein both the learned lower authorities have 21 ITA.No.1262/MUM./2017 invoked Rule 8D(2)(iii) indirect head of administrative expenses coming to the foregoing sum. We make it clear that there is no dispute inter alia, about the fact that the assessee had derived exempt income from dividends on shares/mutual funds of Rs.67,02,475/- and share of profits in a firm amounting to Rs.6,83,701/-; respectively, totaling to Rs.73,86,176/-. It is again an admitted fact that the Assessing Officer’s detailed discussion in paragraphs 6 to 6.9 had indeed expressed dissatisfaction qua the assessee’s books of accounts denying to have incurred any such expenditure in case of maintaining twin corresponding portfolios i.e., investment as well as stock-in-trade, as the case may be. Learned Assessing Officer thereafter calculated 0.5% of the average value of the corresponding investments for arriving at the impugned disallowance of Rs.6,93,931/- which stands upheld in the CIT(A)-NFAC’s lower appellate discussion.

Both the learned representatives reiterated their respective stands during the course of hearing. We first of 25 ITA.No.1262/MUM./2017 all note that there is no employer-employee relationship regarding the assessee’s purchase of the flat herein once it is a tripartite agreement amongst owner/company, developer and himself [director]. There is no material in the case file which could indicate that the owner/company had in any way unilaterally borne the corresponding difference figure in it’s books of accounts or otherwise; as the case may be. We wish to observe that the employer-employee relationship in service jurisprudence is always a bilateral one whereas the facts of the instant case involve a ‘developer’ as well. This tribunal’s learned coordinate bench’s order in [2018] 169 ITD 23 (Mum.) Keshavji Bhuralal Gala vs. ACIT has further rejected the Revenue’s very stand in the following terms :

The adoption of stamp duty valuation as the fair market value of an immovable property can be considered only for computation of capital gain arising in case of a seller of immovable property as per the deeming provisions of section 50C of the Act. Without making any enquiry or bringing material on record to demonstrate that the stamp duty value is the actual fair market value of the property, the Assessing Officer cannot make addition in case of a buyer of the property by treating it as perquisite as such deeming provision providing for adoption of stamp duty value as the deemed sale consideration is applicable under specific circumstances and cannot be applied to other provisions 28 ITA.No.1262/MUM./2017 of the Act. Further, to treat any sum as a perquisite in lieu of salary as per section 17(2)(iii) of the Act it is necessary and incumbent on the part of the Assessing Officer to establish on record that a benefit in the nature of salary was given by an employer to an employee. In the facts of the present case, the Shri Keshavji Bhuralal Gala Assessing Officer has not disputed the fact that neither the assessee is a shareholder of the company nor the whole time director. He was appointed as a director for specific purpose. Even, the Assessing Officer has accepted that the assessee is neither a managing director or executive director or a director with substantial interest. Therefore, merely because the assessee happens to be a director of the company, provisions of section 17(2)(iii) of the Act cannot be applied to the assessee without establishing the fact that the assessee is an employee of the company and the benefit given is in the nature of salary. The Assessing Officer, though, accepts the fact that the assessee has not been given any salary, at the same 29 ITA.No.1262/MUM./2017 time he has concluded that by selling the immovable properties at a value lesser than the stamp duty value a benefit in lieu of the salary has been provided to the assessee. In our view, without factually establishing the existence of employer-employee relationship between the company and the assessee it cannot be assumed that the assessee has been given a benefit in lieu of salary, even, in the absence of contract of employment between the company and the assessee. This is so because as per section 17(2)(iii)(a) of the Act, the director to whom any benefit or amenity is granted must be an employee of the company. In this context, we may refer to the following decisions:- i) CIT v/s Lady Navajvai R.J. Tata, 15 ITR 8; and ii) CIT v/s Laxmipati Singhania, 92 ITR 598.

Moreover, as observed by us earlier, merely on the basis of the difference between stamp duty valuation and actual sale consideration the Assessing Officer has concluded that a benefit in the nature of perquisite has 30 ITA.No.1262/MUM./2017 been given to the assessee by the company. However, there is nothing on record nor any positive finding by the Assessing Officer on the basis of any enquiry to suggest that the fair market value is the value determined for stamp duty purpose. There is no allegation by the Assessing Officer that any consideration over and above the sale value has changed hands. That being the case, the addition made by the Assessing Officer by treating the difference in value between stamp duty valuation and actual sale value cannot be treated as perquisite u/s 17(2)(iii) of the Act. In this context, we may refer to the decision of the Tribunal, Mumbai Bench, in ACIT v/s Sandeep Srivastava, ITA no.6409/Mum./2012 dated 8th July 2015. In any case of the matter, the legal fiction created u/s 50C of the Act insofar as it enables the Assessing Officer to adopt the value for stamp duty purpose as the deemed sale consideration cannot be extended to assess the buyer of the immovable properties to tax on the differential amount. In this context, it is profitable to 31 ITA.No.1262/MUM./2017 refer to the following observations of the Hon'ble Delhi High Court in CIT v/s Khubsurat Resorts Pvt. Ltd., 28 taxmann.com 93.

Though, the Assessing Officer has consciously not referred to the provisions of section 50C of the Act, however, there is no room for doubt that applying the deeming fiction of section 50C, the Assessing Officer has adopted the stamp duty value as the deemed sale 33 ITA.No.1262/MUM./2017 consideration while making the disputed addition. Therefore, in view of the aforesaid, we hold that the addition made of ` 1.95 crore is unsustainable in law. Accordingly, we delete the same.”

We accordingly find merit in assessee’s instant last substantive ground and delete the impugned addition on perquisites amounting to Rs.83,54,000/- in very terms. Necessary computation shall follow as per law. Ordered accordingly.