2011 (3) TMI 1062 - AT - Income Tax

Interest accrued but not due on the fixed deposits for a term exceeding more than one year - whether to be rendered to tax in the impugned assessment year following the mercantile system of accounting - Held that - In compliance to the provisions of the Income-tax Act and on the basis of CBDT Circular it is inclined to hold that the assessee was not to declare interest income accrued and not due to the assessee as well in view of the fact that the said sum was not to be acknowledged by the bank or by the assessee itself. The investment in fixed deposits could not have been inflated by the assessee as is to be considered in the case of investment in shares by assessees when the book value of the share as on the close of the financial year has to be inflated when the same is held as stock-in-trade. The valuation of the investment, therefore, cannot be subjected to tax under the mercantile system of accounting which has to follow the rigour of various statutes and law. Taxing income which has not been received and which has not been acknowledged as payable to an assessee cannot be taxed. Thus the interest income so brought to tax and confirmed by the CIT(A) is bound to be deleted. In favour of assessee.

Summary

Issues:
- Taxability of interest accrued but not due on fixed deposits under the mercantile system of accounting.

Analysis:
The judgment revolves around the issue of whether interest accrued but not due on fixed deposits for a term exceeding one year should be taxed in the impugned assessment year under the mercantile system of accounting. The assessee, a primary society engaged in milk procurement, filed a return declaring NIL income after adjusting brought forward losses. The Assessing Officer noted fixed deposits of Rs. 1.27 crores, with no interest income declared. The dispute arose when the Assessing Officer added an estimated 10% interest to the income, which was appealed before the CIT(A). The CIT(A) upheld the addition, stating that interest accrued but not due on fixed deposits for over a year should be taxed when the deposit matures, following the mercantile system of accounting.

The assessee argued that the bank credits the fixed deposit amount on maturity along with tax deducted at source (TDS) information, making it challenging for the assessee to compute accrued interest. The assessee contended that TDS should be considered for the entire term period, not just one year. Additionally, the assessee highlighted the CBDT's guidance on coordinating TDS with income generated, emphasizing the difficulty in taxing income not intimated by the bank. The assessee's policy aligned with the CBDT Circular to declare income when received and taxed at source, maintaining compliance with the mercantile system of accounting.

The Tribunal analyzed the situation, considering the CBDT's clarification on taxing term deposits exceeding one year or encashed mid-year based on TDS certificates. While agreeing that TDS does not impact income under the Income-tax Act, the Tribunal noted the discrepancy in how the total taxable amount upon maturity relates to the impugned assessment year's taxed income. Ultimately, the Tribunal ruled in favor of the assessee, emphasizing that under the mercantile system of accounting, income not received or acknowledged as payable should not be taxed. The Tribunal concluded that the interest income in question, confirmed by the CIT(A), should be deleted, thereby allowing the appeal of the assessee.

In conclusion, the judgment clarifies the tax treatment of interest accrued but not due on fixed deposits under the mercantile system of accounting, emphasizing the importance of aligning income declaration with actual receipt and acknowledging payable amounts.