1995 (7) TMI 9 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sum of Rs. 19,78,065 representing "rebated interest" should be added to the "cost of acquisition" of the assessee undertaking for computing "capital gains" for the assessment year 1970-71.

Issue-wise Detailed Analysis:

Issue 1: Addition of "Rebated Interest" to the "Cost of Acquisition" for Computing "Capital Gains"
The core issue revolves around whether the sum of Rs. 19,78,065, termed as "rebated interest," should be included in the "cost of acquisition" of the assessee undertaking, which was taken over by the Indian Overseas Bank under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970. This determination is crucial for computing the "capital gains" assessable for the assessment year 1970-71.

Background and Arguments:
- Assessee's Position: The assessee argued that the rebated interest represents accrued interest, which, due to a peculiar accounting system, was not directly debited to the profit and loss account but was instead credited to a separate "rebated interest account." The assessee maintained that this interest is not a bad debt or an irrecoverable amount and should be included in the cost of acquisition. They emphasized that they followed the mercantile system of accounting and had paid tax on this income.

- Income-tax Officer's Position: The Income-tax Officer initially reduced the cost of acquisition by Rs. 19,78,065, considering it uncertain due to the disputed nature of the loans and advances. They argued that the interest had not been credited as income due to its doubtful realization.

- Appellate Assistant Commissioner and Tribunal's Position: Both the Appellate Assistant Commissioner and the Tribunal found that the sum of Rs. 19,78,065 should not be deducted from the value of the advances. They concluded that this amount represented accrued interest and should be included in the cost of acquisition.

Legal Precedents and Analysis:
- Supreme Court Decision in State Bank of Travancore v. CIT [1986] 158 ITR 102: The Supreme Court held that interest on sticky advances, even if carried to a suspense account, is taxable as income if it has accrued according to the mercantile system of accounting. This principle supports the inclusion of rebated interest as part of the cost of acquisition.

- Supreme Court Decision in CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294: The Court emphasized that for levying capital gain tax under section 45 read with section 48, the cost of acquisition and cost of improvement must be deducted from the total value of the undertaking. If no cost of acquisition can be determined, capital gain tax cannot be levied.

- Karnataka High Court in Syndicate Bank Ltd. v. Addl. CIT [1985] 155 ITR 681: The Court held that a business undertaking constitutes a capital asset, and if the cost of acquisition or the date of acquisition cannot be determined, it cannot be taxed under "Capital gains."

Court's Conclusion:
The Court concluded that the sum of Rs. 19,78,065, representing rebated interest, should be included in the cost of acquisition. The Court reasoned that this interest, accrued but not credited due to the peculiar accounting system, was not a bad debt or irrecoverable. The assessee had paid tax on this amount, and it should be considered part of the cost of acquisition for computing capital gains.

Final Judgment:
The Court answered the question in the affirmative, holding that the Tribunal was correct in including the rebated interest in the cost of acquisition. The assessment was to be reduced by Rs. 19,78,065, and the Tribunal's order was upheld. The decision was made in favor of the assessee and against the Department.

Costs:
No costs were awarded, and counsel's fee was set at Rs. 1,000.