AS-13 and Income Tax

CA AYUSH AGRAWAL (Kolkata-Pune-Mumbai) (26986 Points)
Replied 09 April 2010

Amir (Learner) (4016 Points)
Replied 09 April 2010

Hi Friends,

I would like to draw ur attention to this -

a) In the present case "Legal Form" - Assessee is in receipt of Interest & therefore should be charged under "Other Sources"

In support of this -

Legal effect prevails over substance of the transaction - In taxing a receipt to income-tax, the authorities are only concerned with the legal effect or character of the transaction and not the substance of the transaction - Pandit Lakshmikanta Jha v. CIT [1970](SC)

b) On the other hand if u look at the "Substance - Assessee has received an amount towards the Cost price paid to the previous owner & hence it should be deducted from Cost of Acquisition.

In support of this -

How assessee has treated the receipt is not relevant - It is not how an assessee treats any monies received but what is the nature of the receipt which is decisive of its being taxable - Delhi Stock Exchange Association Ltd. v. CIT [1961](SC).{Though this judgment can very well be used in support of the first ground as well}

Raj Saxena (1412th Tiger) (Struggling Student) (272 Points)
Replied 09 April 2010

Amir bhai though ur question is valid but still i think this Interest shud be charged under Other Sources,as general.

Amir (Learner) (4016 Points)
Replied 10 April 2010

Hi Raj,

I appreciate that u shared ur thougts but bhai would have appreciated even more had u given resons/justifications in support of ur answer.......:)

Anywaz this has been like a see-saw to me - One moment I think its this & then in a short while I feel other is looking correct.

But now I sumhow manage to control this see-saw but still it has not come to complete stop. ?(require ur help friends)

I think the treatment prescribed under AS-13 shall be followed under Income Tax also - Reason

Interest on borrowals is deductible only if it is not allowed under section 57 - The interest paid on borrowings for the acquisition of a capital asset must fall for deduction under section 48. But, if the same sum is already the subject-matter of deduction under other heads like those under section 57, it cannot find a place again for the purpose of computation under section 48 - CIT v. Maithreyi Pai https://www.indiankanoon.org/doc/1736123/

Error box - [Now pls dont think that I quoted this case law to say that present situation is exactly converse of this case law & hence can be applied..since both talks about Interest........:) ]

For me the ratio coming out of this judgment is that "Cost of acquisition" in relation to a capital asset is subject to change in future upon outflows/inflows relating to cost (whether the possibilty of their occurence has to exist on the date of acquisition or not remains unanswered.) But one thing is clear that COA is not something which becomes as hard as stone on the date of acquisition itself in such cases.

Now this ratio if we apply in the present situation then YES Interest for pre acquisition period should reduce the COA.

As far as judgment in case of Pandit Lakshmikanta Jha is concerned - I have something against it -

There is an undisputed Law - "Ignorance of Law is no excuse" but still we have so many cases figuring out the exceptions to this undisputed thing or rather making it disputable I should say.

Members pls share ur thoughts..................!

Max Payne (employed) (2569 Points)
Replied 10 April 2010

Hi Bhai,I guess you also thinking on same lines, but cant fix which line to choose

As per sec 55(2)(a)(ii) [Pls don’t confuse with 55(1)(b)(2)(ii) when you read the act], COA of a purchased asset is the price paid to previous owner.

That will mean that the accrued interest/dividend or pre-acquisition interest/dividend paid should be capitalized as well; which I also feel could be more beneficial because that will subject the accrued income component to indexation.

And, the interest received would be entirely taxable as IFOS u/s 56(2)(i) or 56(2)(id), since the pre-acquisition interest has to be capitalized as per sec 55, and no deduction can be claimed for the same.

So Maithreyii Pai's case holds good, as long as we apply the sec 55(2).

And you have got mail incoming by tomoro morning....

Nicky (Chartered Accountant) (245 Points)
Replied 12 April 2010

Hey Amir sorry for the late reply...

Intially I can't envisage a case where there would be pre-acquistion interest in case of shares...

Interest and shares don't seem hand-in-hand, however hence probably the need of discussion for bonds/debentures arises but they are not chargeable to Capital Gains in normal paralance i.e. they are debt instruments which attarct Other Sources Income. The difference between sale price and purchase price by the strict rule of law is no more than Interest income..

Amir probably i may ahve misconstrued the question or may be at mistake while replying, please correct me if either..

Amir (Learner) (4016 Points)
Replied 12 April 2010

Dear Nicky Sir,

Pls don't be sorry, its nice to see you responding to the query.....

Sir, obviously in case of shares there can only be dividend but I purposely din't enter in that zone becos dividends are exempt so not much an issue

Secondly the case of dividend (or pre acquisition dividend) is not simple as that of interest since dividend are not recognised on time basis & therefore there are other conditions required. so just to make discussion more meaningful I restricted it to interest only..

I agree that there is less chance when a person buys a bond/debenture from an existing holder but certainly its not that it is not possible.

As far as query goes let me try to put it in figures so that it becoms easy for understanding -

Mr. A subscribed to a 1 year 10% Bond of Rs. 1,00,000 at face value..

After holding it for 6 months Mr. A tansfer this Bond in favour of Mr. B for a consolidated consideration of Rs. 1,05,000.

Mr. B held this Bond till its maturity & got Rs. 1,10,000 from the company..

Now AS-9 also says that Interest is to be recognised on time basis -

So Mr. A & Mr. B both will recognise interest of Rs. 5,000 each.

Now rest I leave upto you to compute the capital gains in the hands of Mr. A & Mr. B???

Nicky (Chartered Accountant) (245 Points)
Replied 12 April 2010

Dear Amir,

Where is the question of computing Capital Gains in either hands

Amir (Learner) (4016 Points)
Replied 12 April 2010

Originally posted by : Nicky
	Dear Amir, Where is the question of computing Capital Gains in either hands

This was exactly my question................:)

That means the treatment prescribed under AS-13 will be followed under Income Tax also & the receipt of pre-acquisition interest will reduce the Cost of acquisition...isn't??

Nicky (Chartered Accountant) (245 Points)
Replied 12 April 2010

Dear Amir,

See there is no contention in the books of A

In the books of B, it can be stated that the accrued interest to him is nothing but only Rs. 5,000/- which we would anyways offer as Other Sources i.e. no deviation from Income Tax Act…

Now for the Rs. 1,05,000/- he pays to Mr. A is no more than Rs. 1,00,000/- towards the Bond and Rs. 5,000/- towards accrued interest (which would be charged in the hands of B) , so probably I T Authorities wouldn’t be interested in charging Rs. 10,000/- in the hands of Mr. A so the issue stands resolved..

Ye it also means compliance to AS -13

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