Law:

Section:

section 28 of the income-tax act, 1961-profits and gains of business or profession-assessee purchased two and a half per cent u.p. zamindary abolition rehabilitation grant bonds at a price much below face value-whether instalments received on the bonds represented only return of capital and accretion to capital or there was any profit element in it chargeable to tax-held that there was profit element chargeable to tax Facts On the abolition of zamindari system, the U.P. Government paid compensation by way of issue of bonds, viz., two and a half per cent U.P. Zamindary Abolition Compensation Bonds and U.P. Zamindari Abolition Rehabilitation Grant Bonds. Under the bonds, the Government was to pay a fixed sum of money every year on a specified date for a definite number of years. While the two and a half per cent bonds were interest bearing, the other bonds were not. The assessee, an investor, purchased two and a half per cent interest bearing bonds of the face value of Rs. 10 lakhs for Rs. 4,87,500 in November 1958 and non-interest bearing bonds of the face value of Rs. 7 lakhs for Rs. 2,82,750 in November 1960. In the assessment years 1961-62 to 1964-65, the assessee split up the receipts under the interest bearing bonds in each year into principal and interest and showed the interest amount only as income. The receipt under the non-interest bearing bonds were claimed to be entirely principal and were not disclosed as income. The ITO, however, considered the instalments received under the non-interest bearing bonds as annuities and on the basis of annuity tables, worked out the yield at 7.43 per cent and brought the same under tax. The yield, under the interest bearing bonds, was worked out at 7.40 per cent. The AAC upheld the ITO's order. The Tribunal, however, on a majority decision, concluded that only the interest as indicated in the interest bearing bonds could be considered as income of the assessee, and that receipts even though larger than investment under the non-interest bearing bonds were capital receipts without any interest element which could be taxed with the help of annuity tables. On reference, it was urged by the Revenue that although the…

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