2013 (12) TMI 551 - HC - Income Tax

Taxability of interest from FDR - Held that - The interest income must be taken on receipt basis shown by the assessee from the F.D.Rs., Sahara and L.I.C. mutual funds - The assessee is maintaining the accounts on actual receipt basis and he is not maintaining any account on mercantile basis, as appears from the record - Decided in favour of assessee.

Summary

Issues:
1. Interpretation of Section 158 BG of the Income Tax Act, 1961 regarding the approval process for block period assessment.
2. Whether the Commissioner of Income Tax is empowered to issue directions under Section 158 BG detrimental to the interest of the assessee.
3. Validity of the assessment order when directions issued by the CIT are detrimental to the assessee's interest.
4. Taxation of interest income from F.D.Rs., Sahara, and L.I.C. Mutual Funds on a receipt basis.

Analysis:

Issue 1:
The appeals were filed under Section 260A of the Income-tax Act against judgments by the Income Tax Appellate Tribunal. The key questions of law revolved around whether the CIT needed to provide a hearing before granting approval under Section 158 BG. The Tribunal's decision was based on the lack of opportunity given by the CIT during the approval process, leading to the Department's appeals.

Issue 2:
The Department argued that the CIT's directions under Section 158 BG were based on the material available, and the AO passed the assessment order without providing an opportunity to the assessee. The Department contended that the CIT's directions were in line with legal provisions and relied on various case laws to support their stance.

Issue 3:
The assessee's counsel argued that the CIT's directions amounted to an enhancement in the addition, which was beyond the CIT's authority under Chapter XIV B of the Act. The Tribunal's decision was criticized for not examining the merit of the CIT's observations and directions, focusing more on a technical ground rather than the substance of the issue.

Issue 4:
Regarding the taxation of interest income from F.D.Rs., Sahara, and L.I.C. Mutual Funds on a receipt basis, the Tribunal's decision was upheld. It was noted that the assessee maintained accounts on an actual receipt basis, not on a mercantile basis, leading to a favorable decision for the assessee against the Department.

In conclusion, the High Court partially allowed the Department's appeal while upholding the Tribunal's decision on the taxation of interest income. The Court referred the matter back to the Tribunal for a detailed examination of the CIT's directions and observations, emphasizing the need for a fresh order based on merit and providing a reasonable opportunity to the assessee.