1993 (6) TMI 48 - HC - Income Tax

Summary

Issues:
1. Taxability of interest on advance payment under the mercantile system of accounting.
2. Taxability of interest in the year of credit by the Excise Department.

Analysis:

Issue 1:
The case involved determining the taxability of interest on an advance payment under the mercantile system of accounting. The firm, an abkari contractor, had deposited a sum with the Government as advance kist, with interest accruing on the amount. The Income-tax Officer included the interest amount in the total income for the assessment year. However, the Commissioner of Income-tax (Appeals) held that interest calculation on accrual basis was not warranted as the interest was to be adjusted against subsequent kists. The Appellate Tribunal affirmed this decision, stating that interest accrues on deposits but the assessee becomes entitled to it only when the Excise Department gives credit. The High Court held that under the mercantile system, interest accrual is taxable in the year it accrues, regardless of actual payment or entitlement. The court deemed the interest taxable for the relevant accounting period, rejecting the notion that it becomes taxable only upon credit by the Excise Department.

Issue 2:
The second issue revolved around the taxability of interest in the year of credit by the Excise Department. The Tribunal had held that interest becomes taxable only when the Department gives credit to the assessee. However, the High Court disagreed, emphasizing that under the mercantile system of accounting, interest accrues annually and is taxable in the year of accrual. The court ruled that the mere fact that the Department credits the interest only upon final settlement does not delay its taxability. The judgment favored the Revenue, stating that interest becomes taxable the moment it accrues, irrespective of actual payment or credit by the Department.

In conclusion, the High Court answered both questions in the negative, ruling against the assessee and in favor of the Revenue. The judgment clarified the tax treatment of interest on advance payments under the mercantile accounting system, emphasizing that accrual triggers tax liability regardless of actual receipt or entitlement.