2004 (10) TMI 67 - HC - Income Tax

Interest on deposit accrual taxability - Whether Tribunal was correct in law in holding that the interest on the deposit falling to the share of the assessee accrued from year to year and, therefore, the entire interest of Rs. 1,98,238 was not liable to tax in the assessment year 1975-76 only? - On the findings recorded by the Tribunal, we are of the considered opinion that the interest in question accrued from year to year as the bank has credited the amount of interest in the respective account. In this view of the matter, we answer the question of law referred to us in the affirmative, i.e., in favour of the assessee and against the Revenue.

Summary

Issues:
- Interpretation of tax liability on interest accrued over several years
- Determination of taxability of entire interest amount in a single assessment year

Interpretation of Tax Liability on Interest Accrued Over Several Years:
The case revolved around the question of whether the interest on a deposit, accruing to the share of the assessee, should be taxed in the assessment year 1975-76 only or whether it accrued from year to year. The Tribunal held that the interest accrued annually to the owners of the deposit, including the assessee, and not to the competent authority. The Tribunal emphasized that the interest accrued as and when it was made payable by the bank and credited to the deposit account. It was noted that court decisions regarding the property's ownership did not affect the accrual or ownership of the interest. The Tribunal rejected the argument that a compromise within the family members affected the accrual of interest, stating that the interest continued to accrue annually until it became payable by the bank to the owner of the deposit. The Tribunal concluded that the entire interest amount did not become taxable only in the year it was received, as the assessee was entitled to receive the interest as and when it accrued and became payable.

Determination of Taxability of Entire Interest Amount in a Single Assessment Year:
The Commissioner of Income-tax (Appeals) accepted the plea of the respondent-assessee that the interest had accrued from year to year, and therefore, the entire amount could not be taxed in the assessment year 1975-76. The Revenue's appeal before the Tribunal on this point was unsuccessful. The Tribunal directed the Income-tax Officer to compute the amount of interest related to the assessment year 1975-76. The High Court, based on the findings of the Tribunal, agreed that the interest in question accrued annually as evidenced by the bank crediting the interest amount in the respective account. Consequently, the High Court ruled in favor of the assessee, stating that the interest accrued from year to year, leading to the conclusion that the entire interest amount was not liable to tax in a single assessment year.

In summary, the judgment delved into the interpretation of tax liability concerning interest accrued over several years, ultimately determining that the interest accrued annually to the owners of the deposit and not to the competent authority. The decision highlighted that the interest became taxable as and when it accrued and became payable to the owner, rather than solely in the year of receipt. The Tribunal and the High Court concurred that the interest accrued from year to year, leading to the ruling in favor of the assessee regarding the taxability of the entire interest amount in a single assessment year.