10 August 2010
In Nabhi's "Income-tax Guide" its Board of Editors have opined that redemption of debt instruments like debentures, fixed deposits and bonds are transfers resulting in capital gains as they involve extinguishment, termination, cessation or cancellation of rights in a capital asset on the authority of CIT v East India Charitable Trust (1994) 206 ITR 152 (Cal).
The decision referred by the reader relates to a charitable trust, which is allowed exemption under the law on sale of a capital asset, if proceeds are reinvested in any other capital asset. It is in this context the Board itself in Circular No. 52 dated December 30, 1970 has accepted fixed deposit for duration of more than six months as a capital asset. Similar view has been taken in CIT v Hindusthan Welfare Trust (1994) 206 ITR 138 (Cal).
Fixed deposits (FDs), debentures and bonds are ordinarily capital assets in the hands of an investor. Deep discount bonds which are of long duration can hardly ever be treated as anything other than capital asset. But the arbitrary treatment that is expected by the Income-tax Department has been the subject matter of discussion in this Column in The Hindu dated June 3, 2002. The Income-tax Department is of the view that the return on these instruments including FDs will have to be taxed on year-to-year basis as revenue and not as capital gains. For an average investor, the treatment that is expected by the Department is more relevant than the intricacies of the law, as no taxpayer can afford the cost of litigation and the delay before any such issue is finally resolved. Hopefully, the Board would recognise the correct meaning of accrual of income, so as to tax an income in the year in which the right to receive arises, giving the option to the taxpayer to spread-over the income in respective years as is done for salary under Sec. 89(1) and as was allowed in the statute in respect of interest on securities before Sec. 89(1) was amended with effect from April 1, 1989, when interest on securities as a separate head of income was omitted without retaining the right to spread-over, which should have been done as a consequential amendment.
As the law stands `explained' by the Board, it will be risky to follow the view expressed in the Guide, all the more so far in respect of fixed deposits.