1999 (12) TMI 14 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of Section 145 of the Income-tax Act, 1961, to the computation of interest income under the Interest-tax Act, 1974.
2. Interpretation of "chargeable interest" under Section 5 of the Interest-tax Act in the context of the method of accounting employed by the assessee.

Issue-Wise Detailed Analysis:

1. Applicability of Section 145 of the Income-tax Act, 1961:

The primary issue was whether, due to the incorporation of Section 145 of the Income-tax Act, 1961, into Section 21 of the Interest-tax Act, 1974, the interest income should be computed based on the method of accounting regularly employed by the assessee. The assessee argued that since it maintained its books of account on a cash basis and was assessed under the cash system under the Income-tax Act, the chargeable interest should also be computed on a cash basis for the Interest-tax Act. The Assessing Officer, however, computed the interest on an accrual basis, rejecting the cash system of accounting. The Tribunal upheld the Assessing Officer's computation, stating that Section 5 of the Interest-tax Act mandates the interest to be assessed on an accrual basis.

2. Interpretation of "Chargeable Interest" under Section 5 of the Interest-tax Act:

The court examined the scope of "chargeable interest" under Section 5 of the Interest-tax Act, which states that the chargeable interest of any previous year of a credit institution shall be the total amount of interest accruing or arising in that previous year. The court noted that Section 5 of the Interest-tax Act differs from Section 5 of the Income-tax Act, which includes income received or deemed to be received in India. The Interest-tax Act specifically refers to interest accruing or arising, not received. The court cited several precedents to elucidate the distinction between "accrue" and "arise" and their implications for tax liability.

The court emphasized that the inclusion of Section 145 in Section 21 of the Interest-tax Act does not alter the fundamental requirement that interest must be computed on an accrual basis as per Section 5 of the Interest-tax Act. The proviso to Section 145 of the Income-tax Act allows the Assessing Officer to determine the computation method if the accounts are correct but the method employed does not properly deduce income. Therefore, the Assessing Officer was justified in computing the interest on an accrual basis, aligning with the statutory requirements of the Interest-tax Act.

Conclusion:

The court concluded that the Tribunal's decision to uphold the Assessing Officer's computation of interest on an accrual basis was correct. The first question was answered in the affirmative, in favor of the Revenue and against the assessee. Consequently, the second question, which was of academic interest, was also treated as answered in favor of the Revenue and against the assessee. The court's interpretation ensured that the charging section of the Interest-tax Act remained operative and effective, aligning with the legislative intent and statutory framework.