1995 (8) TMI 37 - HC - Income Tax

Accounting Year Accrual Of Income Deduction In Respect Mercantile System Special Reserve Total Income

Summary

Issues:
1. Interpretation of interest due on interest-bearing loans.
2. Application of mercantile system of accounting.
3. Inclusion of interest accrued in total income.
4. Quantification of deduction under section 36(1)(viii) of the Income-tax Act.

Interpretation of Interest Due on Interest-Bearing Loans:
The Income-tax Appellate Tribunal referred questions regarding the accrual of interest on interest-bearing loans during pending suits for recovery. The court noted previous judgments favoring the assessee in similar circumstances. Citing precedent, the court ruled in favor of the assessee, affirming that interest accrued on loans was not includible in the total income during the assessment year.

Application of Mercantile System of Accounting:
The Tribunal questioned the accrual of interest despite the assessee following the mercantile system of accounting. The court referenced a previous judgment in the assessee's favor, stating that interest accrual should not be considered until the loans were recovered. Following the precedent, the court ruled in favor of the assessee on this issue as well.

Inclusion of Interest Accrued in Total Income:
Regarding the inclusion of a specific interest amount in the total income of the assessee for a particular assessment year, the court relied on previous judgments in the assessee's favor due to similar circumstances. Following the established legal position, the court ruled in favor of the assessee, directing that the interest amount should not be included in the total income.

Quantification of Deduction under Section 36(1)(viii) of the Income-tax Act:
The dispute centered on the calculation of deduction under section 36(1)(viii) of the Income-tax Act. The Assessing Officer and the Appellate Assistant Commissioner differed on whether the deduction should be based on total income before or after the deduction itself. The court examined relevant provisions and legal precedents, ultimately agreeing with the view that the deduction should be calculated based on the total income before the deduction under section 36(1)(viii). Relying on established judgments, the court ruled in favor of the assessee on this issue as well, directing the Revenue to bear the costs of the reference.