Gujarat HC Upholds Long-Term Treatment Of Trust’s ₹4.51-Crore Tata Finance Interest-Coupon Strip Gains, Allowing Section 54EC Deduction

For Assessment Year 2002–03, the assessee held Tata Finance non-convertible debentures comprising principal strips and detachable interest-coupon strips.

It sold the strips in 2001 and 2002 and reported long-term capital gains of Rs. 4,51,34,165.

The Assessing Officer treated the gains as short-term, and the Commissioner of Income Tax (Appeals) upheld that treatment.

The Income Tax Appellate Tribunal reversed, following Karsanbhai Khodidas Patel HUF v. ACIT, and held the gains to be long-term, with the assessee eligible for deduction under Section 54EC.

The Revenue appealed under Section 260A of the Income Tax Act, 1961, raising two substantial questions of law.

1. Whether the Tribunal erred in deleting the addition for accrued interest on investments in ICICI Ltd. and Infrastructure Leasing and Financial Services Ltd.

2. Whether the Tribunal erred in treating the gains from the sale of the Tata Finance interest-coupon strips as long-term capital gains and allowing the deduction under Section 54EC.

Section 2(42A) of the Income Tax Act governs the classification of a capital asset as short-term by reference to its period of holding; the Tribunal’s cited approach treated gains from deep-discount bonds as long-term where the holding period exceeded the prescribed period.

Section 54EC provides the claimed deduction in respect of eligible long-term capital gains.

The Court relied on Karsanbhai Khodidas Patel HUF v. ACIT, which had treated gains from the sale of deep-discount bonds as long-term where the holding period exceeded 12 months.

It also considered CBDT’s 12 March 1996 letter, which distinguished capital gains on transfer of investment bonds before maturity from interest income on redemption, and Circular No. 2/2002, which stated that its modified tax treatment for deep-discount bonds was not retrospective and applied to bonds issued after the circular.

On the second issue, the Court agreed with the Tribunal’s reliance on Karsanbhai Khodidas Patel HUF: the relevant gains were long-term because the strips had been held for more than 12 months.

The CBDT materials supported treating transfers before maturity as giving rise to capital gains and stated that Circular No. 2/2002 did not retrospectively impose its modified treatment on existing bondholders.

Having upheld the long-term characterization, the Court also upheld the assessee’s eligibility for Section 54EC relief.

On the first issue, it followed its order of the same date in Tax Appeal No. 209 of 2010 and answered the question for the assessee, without further analysis in this judgment.

It upheld the Tribunal’s treatment of the gains as long-term capital gains and the consequential Section 54EC deduction, and dismissed the Revenue’s appeal.