COMMISSIONER OF INCOME TAX V vs KISAN DISCRETIONARY FAMILY TRUST

C/TAXAP/540/2012 JUDGMENT DATED: 15/10/2026
(GJHC240429592012)
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO. 540 of 2012

FOR APPROVAL AND SIGNATURE:


HONOURABLE MR. JUSTICE BHARGAV D. KARIA

and
HONOURABLE MR. JUSTICE NIRZAR S. DESAI

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Approved for Reporting Yes No
✓
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COMMISSIONER OF INCOME TAX V
Versus
KISAN DISCRETIONARY FAMILY TRUST
==========================================================
Appearance:
MR UTKARSH R SHARMA(6157) for the Appellant(s) No. 1
MR SN SOPARKAR SENIOR ADVOCATE WITH MR B S SOPARKAR(6851)
for the Opponent(s) No. 1
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CORAM: HONOURABLE MR. JUSTICE BHARGAV D. KARIA
and
HONOURABLE MR. JUSTICE NIRZAR S. DESAI

Date : 15/10/2026

JUDGMENT
(PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA)
1.Heard learned Senior Standing Counsel Mr.
Utkarsh R. Sharma for the appellant and
learned Senior Advocate Mr. S.N. Soparkar
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C/TAXAP/540/2012 JUDGMENT DATED: 15/10/2026
(GJHC240429592012)
with learned advocate Mr. B.S. Soparkar for
the respondent.
2.This Tax Appeal is filed by the Revenue under
section 260A of the Income Tax Act, 1961 (For
short “the Act”) against the judgment and
order dated 31.01.2012 passed by the Income
Tax Appellate Tribunal, “A” Bench, Ahmedabad
(For short “the Tribunal”) in ITA No.
1261/Ahd/2006 for Assessment Year 2002-2003.
Tax Appeal was admitted by this Court vide
order dated 05.09.2012 raising the following
substantial questions of law:
“1. Whether the Appellate Tribunal
has substantially erred in deleting
the addition of Rs. 45,15,49,625/-
in respect of accrued interest on
investment in DDBs of ICICI Ltd. and
Infrastructure Leasing and Financial
Services Ltd. ?
2. Whether the Appellate Tribunal
has substantially erred in deleting
capital gain of Rs. 4,51,34,165/-
whether short term or long term
capital gain and eligibility of
deduction under section 54EC of the
Act ?”
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C/TAXAP/540/2012 JUDGMENT DATED: 15/10/2026
(GJHC240429592012)
3.So far as question no.(1) is concerned, same
is answered in favour of the assessee and
against the Revenue in view of order of even
date passed in Tax Appeal No.209/2010 by this
Court.
4.Insofar as Question no.(2) is concerned,
brief facts of the case are that during the
year under consideration, the assessee was
allotted 47 Tata Finance Ltd. Non-convertible
debentures, Series I as on 23.03.2000 each of
Rs.1,00,00,000/-. Each debenture comprised
Principal strips Part-A, and five detachable
interest coupon strip namely, Part-B, Part-C,
Part-D, Part-E and Part-F being interest
coupon payable at a periodic intervals of 15,
27, 39, 51 and 63 months from the deemed date
of allotment. Similarly, the assessee was
allotted 2 Tata Finance Ltd. Non-Convertible
debentures, Series II as on 23.03.2000 each
of Rs.25,00,000/-. Each debenture comprised
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C/TAXAP/540/2012 JUDGMENT DATED: 15/10/2026
(GJHC240429592012)
Principal strips Part-A, and five detachable
interest coupon strip namely, Part- B, Part-
C, Part-D, Part-E and Part-F being interest
coupon payable at a periodic intervals of 15,
27, 39, 51 and 63 months from the deemed date
of allotment. The assessee sold the interest
coupon strips, Series-I Part-B as on
18.05.2001 to Birla Sun Life Mutual Fund and
rest of the interest coupon strips, Series-I
i.e. Part-C, D, E, and F as on 22.03.2002 to
Nirma Ind. Ltd. and reflected Long Term
Capital Gain on these transactions.
Similarly, the assessee sold the interest
coupon strips, Series-II Part-B as on
19.05.2001 to Ishan Consultancy Services and
rest of the interest coupon strips, Series-II
i.e. Part-C, D, E and F as on 20.03.2002 to
Nirma Ind. Ltd. and reflected Long Term
Capital Gain on these transactions.
5.A show cause notice was issued as to why
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C/TAXAP/540/2012 JUDGMENT DATED: 15/10/2026
(GJHC240429592012)
the accrued interest should not be considered
as on 31.03.2001 on the discounted value of
the strips and then from this date why short
term capital gain should not be considered on
the interest coupon strips in light of the
Board's Circular No.2 of 2002 dated
15.02.2002. The assessee submitted his reply
that the said Circular is not applicable and
relied on CBDT's letter dated 12.03.1996 and
Press Release dated 20.03.2002 issued by the
CBDT.
6.The Assessing Officer did not accept the
claim of the assessee and treated the capital
gains as Short Term Capital Gain.
7.The CIT(Appeals) confirmed the order of the
Assessing Officer.
8.Being aggrieved by the order passed by
CIT(Appeals), the assessee preferred appeal
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C/TAXAP/540/2012 JUDGMENT DATED: 15/10/2026
(GJHC240429592012)
before the Tribunal. The Tribunal followed
the decision in case of Karsanbhai Khodidas
Patel HUF v. ACIT (Order dated 09.10.2009
passed in ITA No. 1042/Ahd/2006) and held as
under:
“9. The Respected Co-ordinate Bench
has held that the capital gain
arising on sale of Deep Discount
Bond should be assessed as Long Term
Capital Gain on the footing that the
period of holding of Deep Discount
Bond is more than the period
prescribed. The Respected Bench has
also opined that the Circular No.2
of 2002 issued by CBDT on 15/02/2002
was not relevant for deciding the
issue whether the gain is long term
or not. The Respected Bench has
considered the provisions of section
2 (42A) also. Thus, the totality of
the circumstances warrants to follow
the aforesaid decision of the
Tribunal. In the result, this ground
of the assessee is hereby allowed.”
9. In view of above findings of the Tribunal,
the Tribunal held that the assessee is
entitled to exemption under section 54EC of
the Act in view of its finding that gain in
question was to be taxed as long term capital
gain.
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C/TAXAP/540/2012 JUDGMENT DATED: 15/10/2026
(GJHC240429592012)
10. We are in complete agreement with the
findings recorded by the Tribunal by relying
upon the decision in case of Karsanbhai
Khodidas Patel HUF (supra) wherein in similar
facts, it was held that the capital gain
arising on sale of Deep Discount Bond should
be assessed as long term capital gain on the
footing that same was held for a period of
more than 12 months and as a consequence, the
assessee is also entitled to exemption under
section 54EC of the Act as claimed.
11. Reliance is also placed on behalf of the
assessee on the Letter F.No.225/45/96 IT (A-
II) dated 12.03.1996 issued by the Central
Board of Direct Taxes for clarification of
capital gain chargeable as regarding the
taxability of the income relating to Deep
Discount Bonds which reads as under:
“It is clarified that the difference
between the issue price and the
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C/TAXAP/540/2012 JUDGMENT DATED: 15/10/2026
(GJHC240429592012)
redemption price of Deep Discount
Bonds will be treated as interest
income assessable under the Income-
tax Act. On transfer of Bonds before
maturity, the difference between the
sale consideration and issue price
will be treated as Capital
Gains/Loss if the assessee purchased
them by way of investment. However,
in the case of an assessee who deals
in purchase and sale of Bonds,
Securities, etc., the profit or loss
shall be treated as trading profit
or loss.
The decision on other issues,
referred to in your letter shall be
communicated in due course.”
12. Circular No.2/2002 dated 15.02.2002 has
also clarified as under:
“There have been certain reports in
the press recently, suggesting that
the tax treatment of Deep Discount
Bonds as specified in Circular
No.2/2002, dated February 15, 2002
[See [2002] 120 Taxman 127 (St.)]
issued by the Central Board of
Direct Taxes is anomalous, as it
provides for taxation of income from
such bonds on an annual basis, even
though no income is received by the
bond-holder before maturity. It has
been opined that a heavy tax burden
is being placed on persons who have
been holding such bonds for a while,
and a cumbersome obligation of
valuing the bonds every year on the
basis of RBI Guidelines is being
cast on small Investors. The reports
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C/TAXAP/540/2012 JUDGMENT DATED: 15/10/2026
(GJHC240429592012)
are mis-conceived and based on an
incorrect understanding and
inadequate knowledge of facts and
law. The modified tax treatment now
specified in fact corrects the
anomalies in the existing system by
providing a mechanism for taxing
income accruing from year to year on
deep discount bonds, on the same
lines as income from normal coupon
bearing bonds is taxed. Transfer of
the bonds before maturity will
attract capital gains tax, as in the
existing system.
The earlier system of taxing the
entire income received from such
bonds in the year of redemption as
interest income was anomalous in
that it gave rise to a sudden and
huge tax liability in one year
whereas the value of the bond had
been progressively increasing over
the period of holding. Further,
where the bond was redeemed by a
person other than the original
subscriber, such person was taxed on
the entire difference between the
bid price and the redemption price
as interest income. Such a system
also created tax-induced distortions
in the debt market, and was an
impediment to the development of a
market in STRIPS, which are
essentially zero coupon instruments
derived from normal coupon bearing
bonds.
Taxation of income on accrual basis
is an established principle of law,
and always results in taxing income
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C/TAXAP/540/2012 JUDGMENT DATED: 15/10/2026
(GJHC240429592012)
that has not yet been received.
Income from deep discount bonds
accrues continuously over the period
of holding and can be realized at
any time by selling the bond. Taxing
income from such bonds on accrual
basis annually is, in fact, a
practice followed world-wide.
It is also an established principle
that a circular issued by CBDT
cannot have a retrospective tax
effect. The present circular on deep
discount bonds, therefore, specifies
the tax treatment in respect of
bonds which are issued after the
issue of the circular, and does not
seek to impose the modified
treatment on existing bond- holders.
Further, non-corporate persons who
invest small amounts in new issues
(face value upto Rs.1 lakh) can
still opt for the old system.
Valuing the bonds every year on the
basis of RBI Guidelines will not
pose any problem as such values can
be obtained from the issuers
themselves, who will invariably be
the RBI or a public financial
institution.
The amount received on redemption
would always be liable to tax
deduction at source as per normal
provisions of the Income-tax Act.
However, no TDS is required on
interest payable on Government
securities, and bonds issued by an
institution, authority, public
sector company or co-operative
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C/TAXAP/540/2012 JUDGMENT DATED: 15/10/2026
(GJHC240429592012)
society can also be exempted from
the requirement by notification.”
13. By Press Note dated 20.03.2002, the
aforesaid clarification has been published.
14. In view of above clarification issued
by CBDT also, once the capital gain earned by
the assessee of Rs.4,51,34,165/- is to be
treated as a long term capital gain being
eligible for deduction under section 54EC of
the Act, question no.(2) is therefore,
answered in favour of the assessee and
against the Revenue.
15. The appeal is accordingly dismissed.
(BHARGAV D. KARIA, J)
(NIRZAR S. DESAI,J)
RAGHUNATH R NAIR
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