Decided on March 02,1994



Deepak R. Shah, A.M. - (1.) THIS appeal by assessee is directed against the order of learned Commissioner (Appeals), Mangalore dated 31-12-2001.
(2.) The appellant is a nationalised bank, having regard to the inadequacy of total income computed under the provision of the Act being less than 30 per cent of its book profits, the appellant became liable to tax with reference to its book profit under section 115JA of the Income Tax Act, 1961 (hereinafter referred to as 'the Act). While so computing, the assessing officer did not exclude the income by way of interest on zero coupon bonds accounted by assessee in its profit and loss account. An appeal is being preferred to the Tribunal which are (1) allocation of expenditure against income which is otherwise exempt and thereby disallowing the allocated expenditure; and (2) add back of interest on zero coupon bonds amounting to Rs. 33,78,94,141 in arriving at the book profit for levy of tax under section 115JA. Having found that the total income computed under the Act was less than 30 per cent of the book profit and as such attracting the provision of section 115JA warranting levy of tax on deemed income equal to 30 per cent of the book profit, the appellant computed the book profit by commencing the exercise with the net profits as shown in its profit and loss account prepared in accordance with the provisions of the Companies Act. The Board having authoritatively clarified that interest on zero coupon bonds would not be liable to income-tax, the appellant excluded the same while making adjustments to the net profit to arrive at the book profit. The amount of interest so adjusted was Rs. 33,78,94,141. The assessing officer however, disagreed with the appellant and added it back for which he drew support from the decision given by the Commissioner (Appeals) while disposing of the appellant's appeal against the intimation for the year in issue. In the appeal there against, the appellant contended that when any income is exempt altogether, the same has to be adjusted appropriately in arriving at the book profit. By considering the Board Circular and the context in which it clarified that the interest on zero coupon bonds would not be income chargeable to tax, the Commissioner (Appeals) came to the conclusion that while it may not be taxable 'per se' under the conventional method, it cannot qualify/merit for deduction or exclusion in arriving at the book profit. Learned counsel for assessee Shri K.P. Kumar submitted that though the appellant has accounted the interest on zero coupon bonds in its profit and loss account, the same is only a notional income and not actual receipt of income. The assessee acquired certain zero coupon bonds at a discount as per the scheme of allotment. In its books of account, the assessee declared the investment at its book value and the difference between book value and acquisition price was shown by way of interest being interest on zero coupon bonds. The assessee is not otherwise to receive any interest on such bonds. The CBDT by its Circular F. No. 225/56/94-ITA-II dated (sic) March, 1994 clarified the position in respect of zero coupon bonds and taxability of interest thereon, wherein it was opined as under : "XIX. Zero coupon bondsTaxability of interestRegardingWe are considering furnishing a clarification to the department of Economic Affairs on certain issues raised by them regarding the tax liability arising out of the investments in Zero Coupon Bonds announced by the Government on 7-1-1994. A copy of the Scheme is enclosed. The salient features of the scheme are that the bonds can be purchased by any person by bidding for the same in an auction, No interest will be payable in respect of the bonds, The bonds will be repaid at par after 5 years. The bonds are transferable. 2. The questions for clarifications are as under : (i) whether the difference between the purchase price and the amount of money received on redemption of the bonds will be treated as income under the Income Tax Act or it will be treated as capital gains; (ii) if the discount is treated as income, will be same be taxable on accrual basis for each accounting period for the 5 years or the total discount shall be treated as income of the year of redemption, at the option of the investor. (iii) will tax have to be deducted at source on the discount element when the Zero Coupon Bonds are repaid at maturity. 3. The matter was considered by the TPL section and they have opined that the discount is in the nature of interest. They have placed reliance upon a similar scheme of Indira Vikas Patras wherein, under the scheme itself, the difference between the issue price and the redemption price is deemed to be interest income. A copy of the TPL's noting is enclosed.
(3.) IT is felt that a different opinion is possible on the subject. According to section 2(28A) of the Income Tax Act, interest means interest payable in any manner in respect of any monies borrowed or debt in current including a deposIT claim or other similar right or obligation and includes any service fee or other charges in respect of the monies borrowed or the debts incurred. It is felt, that the discount under consideration may not fIT into this definITion for being treated as interest. Also section 2(28B) of the Income Tax Act states that interest on securITies means interest on any securITy of the Central Government or a State Government. Here again by virtue of clause 15 of the Scheme which states that no interest will be payable on the bonds, any payment in the nature of interest is ruled out. Comparison wITh Indira Vikas Patras may also be not correct as, under the provisions of Indira Vikas Patra Rules, 1986, interest at a specified rate is deemed to have accrued at the end of each year and also such interest payable has been kept specifically outside the provisions of TDS under section 194A of the Act. Inasmuch as similar provisions are absent in the present Zero Coupon Bonds Scheme IT cannot be said that the gain in respect of such bonds is in the nature of interest.;

Click here to view full judgement.
Copyright © Regent Computronics Pvt.Ltd.