1985 (9) TMI 24 - HC - Income Tax

Summary

Issues Involved:

1. Taxability of interest income for assessment years 1970-71 to 1972-73.
2. Whether the interest amount was received or deemed to be received by the assessee in the respective assessment years.
3. Impact of the special arrangement with the bank and the suspense account on taxability.
4. Applicability of section 4 and section 5(2) of the Income-tax Act, 1961.
5. Method of accounting employed by the assessee and its impact on taxability under section 145 of the Act.

Detailed Analysis:

1. Taxability of Interest Income for Assessment Years 1970-71 to 1972-73:

The primary dispute centered around the taxability of interest income amounting to Rs. 61,788 for the assessment years 1970-71 to 1972-73. The assessee contended that this interest income should be assessed in the respective years it was earned, not in the assessment year 1973-74. The Revenue argued that the entire amount of Rs. 92,959, which included Rs. 31,171.10 for the year 1973-74, was received by the assessee in the assessment year 1973-74 and thus should be taxed in that year.

2. Whether the Interest Amount was Received or Deemed to be Received by the Assessee in the Respective Assessment Years:

The court examined whether the interest income was credited to the assessee's account during the relevant assessment years. The interest amounts were initially credited to the assessee's non-resident account and then transferred to a suspense account due to a pending decision from the Reserve Bank of India. The court concluded that the interest was indeed credited to the assessee's account before being moved to the suspense account, implying receipt or deemed receipt under section 5(2)(a) of the Income-tax Act.

3. Impact of the Special Arrangement with the Bank and the Suspense Account on Taxability:

The special arrangement between the assessee and the bank involved transferring the interest amounts to a suspense account to avoid tax deduction at source until the Reserve Bank clarified the status of the account. The court held that this arrangement did not alter the nature of the transaction. The interest amounts were considered received by the assessee when initially credited to the non-resident account, despite being subsequently moved to the suspense account.

4. Applicability of Section 4 and Section 5(2) of the Income-tax Act, 1961:

The court analyzed sections 4 and 5(2) of the Income-tax Act to determine the taxability of the interest income. Section 4, read with section 5(2), states that income received or deemed to be received in India by a non-resident is liable to tax. The court concluded that the interest amounts credited to the assessee's account constituted receipt or deemed receipt, making them taxable in the respective assessment years.

5. Method of Accounting Employed by the Assessee and Its Impact on Taxability Under Section 145 of the Act:

The Revenue argued that the assessee followed the cash system of accounting, implying that income should be taxed when actually received. However, the court noted that the interest amounts were credited to the assessee's account in the relevant years and carried to the capital account due to the special arrangement. The court held that the method of accounting did not change the fact that the interest was received in the respective assessment years.

Conclusion:

The court concluded that the interest income of Rs. 61,788 was received by the assessee in the respective assessment years 1970-71 to 1972-73 and should not be taxed in the assessment year 1973-74. The Tribunal's decision to tax the entire amount in 1973-74 was erroneous. The question referred to the court was answered in the negative, in favor of the assessee and against the Revenue. The reference was disposed of with no order as to costs.