2011 (10) TMI 638 - AT - Income Tax

Interest on securities has to be taxed on due basis - Held that - Holder of the security cannot encash the security prematurely before the date of redemption like bank deposits. A fixed bank deposit can be redeemed even before the maturity date and the depositor may get a portion of the interest accrued on the deposit till the date of surrender. In such cases, the interest is generated on accrual basis. But in the case of a Government security, it is not possible to encash it prior to the due date. A holder of the security may be able to sell it to another person; but there is no provision for premature encashment. Encashment can be made only on the due date. When the principal amount involved in the instrument itself is redeemable only on due date, there is no reason to hold that the interest element would be generated on accrual basis. The interest also goes along with the principal amount in the case of securities. The fall out of the above position is that in the case of a Government security, the interest could be recognized only on due date and not on accrual basis. This fundamental character of a Government instrument itself is sufficient to justify the method of interest income recognition by the assessee-bank. We find that the order of the Commissioner of Income-tax (Appeals) is just and proper in law. The appeal filed by the Revenue fails.

Summary

Issues:
1. Deduction on actual payments towards pension, gratuity, and leave encashment for VRS employees.
2. Taxation of interest on securities on due basis.
3. Jurisdiction of the Assessing Officer to reopen the assessment under sec.147.

Analysis:
1. The first issue pertains to the deduction on actual payments made towards pension, gratuity, and leave encashment for employees who opted for VRS. The Revenue contended that sec.35DDA of the Income-tax Act, 1961 limited the deduction to 1/5th of such payments. However, the CBDT Circular No.14 of 2001 clarified that regular terminal benefits like pension, gratuity, and leave encashment are not covered by sec.35DDA. The ITAT, Hyderabad also supported this view in the case of Andhra Bank vs. DCIT. Consequently, the Commissioner of Income-tax (Appeals) was deemed justified in allowing the deduction. The Revenue's appeal was dismissed.

2. The second issue raised by the Revenue concerned the taxation of interest on securities on an accrual basis as opposed to a due basis. The Commissioner of Income-tax (Appeals) relied on decisions of the Hon'ble Madras High Court in similar cases to support taxing interest on securities only on a due basis. The fundamental nature of Government securities, which do not allow premature encashment, was highlighted to justify recognizing interest income only on the due date. The order of the Commissioner of Income-tax (Appeals) was considered lawful, and the Revenue's appeal failed.

3. The final issue was the jurisdiction of the Assessing Officer to reopen the assessment under sec.147 of the Income-tax Act, 1961. Although the Commissioner of Income-tax (Appeals) upheld the income escaping assessment, the issues were decided in favor of the assessee on merit. As these decisions were confirmed while addressing the Revenue's appeals, the question of reopening the assessment was deemed academic. Consequently, the assessee's appeal was dismissed as infructuous. Ultimately, both the Revenue's and the assessee's appeals were dismissed by the Tribunal.