SUMMARY OF CASE LAW
The Indira Vikas Patras are capital asset as per provisions of section 2(14) of Income-tax Act, 1961; the tax leviable on transferable/ tradable assets prior to the maturity is under the head capital gain tax in the case of the investor.
CASE LAW DETAILS
Decided by: ITAT, DELHI BENCH `I’ : NEW DELHI, In The case of: Ujagar Singh Oberoi v. ACIT, Appeal No.: ITA No. 3062/(Del.)/ 07, Decided on: May 29, 2009
12. After hearing both the sides at length we hold that the following facts are not in dispute:-
The assessee purchased the Indira Vikas Patra during the financial year 1997-98. The Indira Vikas Patras are shown as investment in the books of assessee since 1997-98. The Indira Vikas Patras are issued for certain denominations at half of the face value. The period of maturity varies on the basis of rate of interest and accumulation thereof. As per the provisions of Indira Vikas Patras Rule 1986 dated 5.11.1986 the Indira Vikas Patras are transferable.
13. At the time of encashment of Indira Vkas Patra at maturity there is no transfer involved. This view is also supported by the decision of ITAT D Bench of ITA No. 8395/BOM/95 dated 21.1.2003. On the maturity the difference between the investment and the maturity value are taxable as a normal income.
14. There are some similarities in the Indira Vikas Patras and Deep Discount Bonds :
The Indira Vikas Patras are issued on the half of the face value at the time Of maturity. However the maturity period varies. The face value is payable only at maturity. Similarly the deep discount bonds are also Issued below the redemption value. The interest on the Indira Vikas Patras is not payable in between the date of Issue and the date of maturity. Similarly no interest is payable on the Deep Discount Bonds till the date of maturity.
Both these instruments can be redeemed/encashed only at the time of maturity. Pre mature redemption is not allowed. The Indira Vikas Patras are capital asset as per provisions of section 2(14) of Income Tax Act 1961 as the name of the Indira Vikas Patras does not find place in the exclusions provided in the definition of the capital asset. The Central Board of Direct Taxes issued a circular No. 2/2002 wherein the treatment to be given to the Deep Discount Bonds has been narrated. As per this circular the treatment of tax on the transfer before maturity is as under :-
5. “Where the bond is transferred at any time before the 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 trader. For computing such gains, the cost of the bond will be taken to be the aggregate of the cost for which the and was acquired by the transferor and the income, if any, already offered to tax by such transferor (in accordance with para 4 above) upto the date of transfer.
5.1 Since the income chargeable in this case is only 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 purchase/subscripti on, 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 capital gains.”
15. But by the press release dated 20.3.2002 the Central Board of Direct Taxes has clarified that as per the established principle the circulars issued by the CBDT cannot have a retrospective tax effect. This circular was made applicable in respect of the Deep Discount Bonds issued after the issue of the circular and it was also specified that this circular does not seek to impose the modified treatment on the existing bond holders. Thus this circular was not applicable on the assessee. Prior to the issue of the circular, the treatment to the financial assets where the entire interest is accumulated and becomes payable to the last holder at the time of maturity. The tax leviable on transferable/ tradable assets prior to the maturity was under the head capital gain tax in the case of the investor.