2005 (1) TMI 62 - HC - Income Tax

Interest income accrued on FDRs accrual of income - Whether, Tribunal has erred in law in confirming the deletion of the impugned addition of Rs. 10,79,858 on account of interest income accrued on FDRs of the assessee even when the said interest income was free from all encumbrances and was liable to be taxed as per the provisions of the Income-tax Act, 1961? - interest amounting to Rs. 10,79,858 on the FDRs has already accrued and there was no lien or encumbrance created on this amount of interest. Moreover, the bank in the present case has also not provided any guarantee to the extent of interest accrued and thus there is no liability on the bank to deposit this amount - held that the Tribunal had erred in law in confirming the deletion of the impugned addition

Summary

Issues involved:
1. Whether the Income-tax Appellate Tribunal erred in confirming the deletion of interest income accrued on fixed deposit receipts (FDRs) of the assessee, which was free from encumbrances and liable to be taxed under the Income-tax Act, 1961?

Comprehensive Analysis:
The judgment pertains to an appeal under section 260A of the Income-tax Act, 1961, filed by the Revenue regarding the deletion of interest income accrued on FDRs of the assessee. The assessee, a surgeon, declared an income for the assessment year 1994-95, including interest accrued on FDRs in the total income. The Commissioner of Income-tax (Appeals) deleted the addition of Rs. 10,79,858, which was upheld by the Income-tax Appellate Tribunal, leading to the current dispute.

The controversy revolves around the acquisition of the assessee's land by the Government of Haryana, where the compensation amount was deposited in FDRs. The interest accrued on these FDRs became the subject of challenge in the appeal. The Revenue argued that the interest was free from encumbrances and should be taxed immediately to avoid limitation issues. On the other hand, the assessee contended that as the ownership of the principal amount itself was disputed, the interest should not be considered income until the case is finalized.

The court analyzed previous judgments, including the Supreme Court's decision in Hindustan Housing and Land Development Trust Ltd.'s case, which distinguished cases where the right to receive payment was in dispute from cases where only the quantification was in dispute. The court also considered the Gujarat High Court's decision in CIT v. Bavla Gopalak Vividh Karyakarisahakari Mandli Ltd., which emphasized that income does not accrue if the grant of subsidy itself is under dispute.

Ultimately, the court held that the interest accrued on the FDRs was not encumbered, as there was no lien or guarantee by the bank on the interest amount. Therefore, the Tribunal erred in confirming the deletion of the interest income. The appeal was allowed, and the substantial question of law was answered in the affirmative, directing the inclusion of the interest income in the assessee's total income for taxation purposes.

In conclusion, the judgment clarifies the taxability of interest income accrued on FDRs in a disputed acquisition scenario, emphasizing the absence of encumbrances as a key factor in determining tax liability.