2007 (1) TMI 128 - HC - Income Tax

Interest on securities - Method of accounting - Whether the Tribunal was right in law in holding that interest on securities is taxable only on specified dates when it became due for payment and not on accrued basis? - HELD THAT - In view of the deletion of section 18 of the Act with effect from April 1, 1989, the third proviso to section 145(1) was inserted with effect from April 1, 1989, which is a saving clause. Although the amendment was with effect from April 1, 1989, it clearly provides that any income by way of interest on securities shall be chargeable to tax as the income of the previous year in which such interest is due to the assessee only where no method of accounting is regularly employed by the assessee. In other words, if the assessee is maintaining cash system of accounting, the aforesaid proviso would not apply. The legislative intent is that when the assessee is maintaining the cash system of accounting, income by way of interest on securities will have to be charged to tax only when the assessee actually receives the interest and not on the date on which interest on such securities might become due. In the instant case, there is no change in the method of accounting by the assessee. The Assessing Officer accepted the method of accounting followed by the assessee during the earlier assessment years, but, without any change in circumstance, changed the method of accounting during the financial years in question, which in our considered opinion, is unsustainable. As already observed, even though section 18 of the Act was deleted, the assessee is taxable for interest on securities only on specified dates when it becomes due for payment, in view of the third proviso to section 145(1) of the Act, which was in force during the relevant assessment years, as well as in the light of the well settled principles laid down in the catena of decisions referred. In the result, these appeals are dismissed answering the substantial question of law raised against the Revenue and in favour of the assessee.

Summary

Issues:
1. Interpretation of tax law regarding the taxation of interest on securities.
2. Application of accounting method in determining taxable income.
3. Assessment of interest income based on accrual or receipt.

Analysis:
1. The judgment deals with tax case appeals challenging the Income-tax Appellate Tribunal's orders regarding the taxation of interest on securities for the assessment years 1989-90 and 1990-91. The central issue was whether interest on securities should be taxed on specified dates when due for payment or on an accrued basis. The Appellate Tribunal's decision was based on the interpretation of the relevant tax laws.

2. The assessee claimed exclusion of accrued interest for the respective assessment years, arguing that interest on securities should be taxed only when due for payment, not on a day-to-day basis. The Assessing Officer disallowed the claims, stating that interest accrued up to the end of the accounting year should be taxable. The Commissioner of Income-tax (Appeals) upheld the assessee's position, emphasizing that interest on securities falls due only on specified dates.

3. The Tribunal, in line with its earlier order, noted that the Assessing Officer had previously accepted the method of accounting where interest was taxed upon receipt. Changing this method without a valid reason was deemed unsustainable. The Revenue argued that interest on securities should be included in total income since the assessee maintained accounts on a mercantile basis. However, the assessee contended that the method of accounting on a due basis was recognized under section 145 of the Income-tax Act.

4. The High Court analyzed the relevant statutory provisions, highlighting the deletion of section 18 and the insertion of the third proviso to section 145(1) of the Act. The court emphasized that when the assessee maintains a cash system of accounting, interest on securities should be taxed only upon actual receipt. The judgment referenced various legal precedents to support the principle of taxing real income and the importance of considering the actual accrual of income.

5. Ultimately, the High Court dismissed the appeals, ruling in favor of the assessee. The court held that the assessee should be taxed for interest on securities only on specified dates when due for payment, as per the third proviso to section 145(1) of the Act and established legal principles. The judgment underscored the importance of consistency in applying accounting methods and the necessity of assessing income based on real accrual rather than hypothetical scenarios.