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2014 (11) TMI 221 - HC - Income TaxEffect of amendment to section 145 - Interest on broken period as interest not accrued Scope of total income - Held that - It is declared U/s.5 of the Act that when interest is accrued or deemed to have been accrued, it is liable to tax - The word accrued has defined the legal connotation - The interest that becomes due or liable to be payable whether or not it is paid, the interest is accrued or deemed to have been accrued - If the interest does not become due and not liable to pay such part of the interest arise, it cannot be said that the interest has become accrued - the income which has become due and payable should alone be considered as income accrue d and that should be offered as tax - The fact that the assessee in its internal books of accounting mentions the proportionate interest, which is entitled to receive, in its balance sheet for the purpose of profit and loss cannot be deemed as income accrued, unless such income has become due and payable there was no inconsistency between the amended provisions of Sections 145 and 5 of the I.T. Act - Merely because in the books of accounts, the interest income, which is not due and payable is shown in the account of the assessee - That itself will not give right to A.O to tax unless it has become due and payable as per provisions of Section 5 of the I.T. Act - the AO has to redo the assessment regarding interest on the Government securities Decided against revenue.
Issues:
1. Assessment of interest accrued for the year 1997-98. 2. Assessment of interest on Government securities for the years 1998-99 and 1999-2000. 3. Challenge to the orders passed in revision before the Tribunal. 4. Re-assessment of income earned on Government securities. 5. Legal questions raised in ITA No.433/06. 6. Legal questions raised in ITA No.434/06. 7. Substantial questions of law framed in ITA No.147/2008. 8. Substantial questions of law framed in ITA No.148/08. 9. Substantial questions of law framed in ITA No.149/08. Analysis: 1. The issue of assessing interest accrued for the year 1997-98 arose when the Commissioner of Income Tax (Appeals) set aside the AO's order, considering the interest for the broken period as not accrued. The Appellate Tribunal upheld this decision, leading to the Revenue filing an appeal (ITA No.148/05) challenging this order. 2. For the assessment years 1998-99 and 1999-2000, the AO did not assess the interest on Government securities for tax. However, the Commissioner of Income Tax, in a revision under Section 263 of the I.T. Act, held that interest accrued on Government securities should be offered as income and taxed. The Tribunal later set aside this revision order, leading to the Revenue filing appeals (ITA Nos.433-434/06). 3. The orders passed in revision were challenged before the Tribunal, which set them aside. The Revenue then appealed in ITA Nos.433-434/06 against these decisions. 4. Following the revision orders, the AO conducted re-assessment and taxed the income earned on Government securities. The assessee appealed against this decision, and the Appellate Tribunal confirmed the orders of the Commissioner of Income Tax (Appeals), leading to the Revenue filing appeals (ITA 149 and ITA 147/08). 5. In ITA No.433/06, questions of law were raised regarding the application of legal positions post the amendment to Section 145 of the Act, and the entitlement of the Assessee to follow a dual system of accounting. 6. ITA No.434/06 also raised similar legal questions as in ITA No.433/06. 7. Substantial questions of law framed in ITA No.147/2008 questioned the deletion of interest earned by the respondent-assessee on securities and its non-taxability. 8. Similarly, ITA No.148/08 and ITA No.149/08 raised substantial questions of law regarding the deletion of interest earned on securities and its non-taxability. In conclusion, the Court emphasized that income should only be considered accrued and taxable when it becomes due and payable, as per the provisions of the Income Tax Act. The Court found no inconsistency between the amended provisions of Sections 145 and 5 of the Act and ruled in favor of the assessee. The Assessing Authority was directed to reassess the interest on Government securities accordingly.
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