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2012 (8) TMI 17 - HC - Income TaxAccrual of interest - period of holding - Held that - The right to receive interest on the Government securities vested in the respondent only on the due date mentioned in the securities. Consequently interest accrued on the securities only on the due dates and cannot be said to have accrued to the respondent on any date other than the date stipulated therein - As in respect of the securities held by the respondent on 31st March 2001 the due date for payment of interest thereon had not arrived on 31st March 2001 and that the respondent sold some of such securities prior to the next due date for payment of interest. It is only the holder of the security on such date to whom interest can be said to have accrued. In any event interest did not accrue to the respondent on 31st March 2001 as admittedly interest was not payable on that date as per the terms of the said securities - The appellate authorities therefore rightly deleted the addition made by AO as interest income. Receipt of consideration towards the sale of the securities - DTAA between India and Cyprus - the appellant s case is that the respondent s case does not fall within Article 14(4) only because it falls within Article 11(4) - Held that - The governing provision of Article 11(4) is that interest means income from a debt-claim of every kind and a debt-claim arises on account of a transaction that creates a debtor-creditor relationship and the consideration received by the respondent in respect of the sale of the said securities is a capital gain - rejecting the submission that the gain from the sale of the said securities falls under Article 11(4) it follows that the same falls under Article 14(4).
Issues Involved:
1. Accrual of interest on securities as of the last date of the financial year. 2. Taxation of gains from the sale of securities under the India-Cyprus tax treaty. Issue-wise Detailed Analysis: Issue I: Accrual of Interest on Securities as of the Last Date of the Financial Year Summary: The primary question was whether interest could be said to have accrued to the respondent/assessee on 31st March, 2001, for securities held on that date, even though the interest was not due or payable on that date. Detailed Analysis: - The respondent follows the mercantile system of accounting and had declared interest income from securities in its return for the assessment year 2001-2002. - The Assessing Officer taxed Rs. 1,21,57,517/- as interest accrued though not due on securities held as of 31st March, 2001. - The appellant's argument was that interest accrues from day to day and is included in the sale price of the securities. - The court, however, concluded that interest accrues only on the date stipulated in the security for payment of interest, not on any prior date. - The court relied on precedents, including the Supreme Court's decision in E.D. Sassoon & Co. Ltd., which emphasized that income accrues when there is a right to receive it. - The court also referenced Wigmore v. Thomas Summerson & Sons and Vijaya Bank Limited v. Additional Commissioner of Income Tax, which supported the view that interest does not accrue daily but only on the specified due dates. - Consequently, the appellate authorities rightly deleted the addition of Rs. 1,21,57,517/- by the Assessing Officer as interest income. Issue II: Taxation of Gains from the Sale of Securities Under the India-Cyprus Tax Treaty Summary: The second issue was whether the sale of securities by the respondent was covered by Article 14 of the tax treaty between India and Cyprus, thereby making the gains exempt from tax in India. Detailed Analysis: - The respondent argued that the gains from the sale of securities constituted capital gains under Article 14(4) of the DTAA and were therefore exempt from tax in India. - The Assessing Officer had treated the gains as interest under Article 11(4) of the DTAA, which includes income from Government securities and bonds. - The court analyzed Article 11(4) and concluded that the term "interest" means income from debt-claims and does not include the sale proceeds of the debt-claim itself. - The court emphasized that the sale price recovered in excess of the value of the security cannot be considered a premium "attaching to such securities" as per Article 11(4). - The court referred to the Model Tax Convention on Income Tax & on Capital, which supports the view that profits from the sale of securities do not constitute interest. - Consequently, the court held that the gains from the sale of securities are capital gains and fall under Article 14(4) of the DTAA. - As a result, the respondent was entitled to the benefit of the exemption under Article 14 of the DTAA. Conclusion: The questions were answered in favor of the respondent/assessee, and the appeal was dismissed with no order as to costs.
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