9911796707
|
Home
Issues Involved:
1. Whether the interest credited to the Interest Suspense Account should be brought to tax for the assessment years 1974-75 and 1975-76. 2. Whether the change in the method of accounting by the assessee was bona fide and resulted in a cash system of accounting. 3. The applicability of the Reserve Bank of India circular and the letter from the Central Board of Direct Taxes (CBDT) to the Government of Haryana on the taxability of the interest credited to the Interest Suspense Account. Summary: Issue 1: Taxability of Interest Credited to Interest Suspense Account The High Court examined whether Rs. 2,39,010.66 and Rs. 2,44,737.13 credited to the Interest Suspense Account for the years ending March 31, 1974, and March 31, 1975, respectively, should be taxed. The assessee, Kerala Financial Corporation, maintained its accounts on a mercantile basis. The Reserve Bank of India advised financial corporations not to treat unrealised interest on sticky loans as income to avoid inflating distributable profits. The Commissioner of Income-tax, invoking s. 263 of the I.T. Act, 1961, directed the ITO to include these amounts in the total income, which the Tribunal initially reversed, stating the change in accounting was bona fide. Issue 2: Change in Method of Accounting The Tribunal found that the assessee changed its method of accounting by crediting unrealised interest to the Interest Suspense Account, which it considered bona fide. However, the High Court noted that the assessee did not switch from the mercantile to the cash system of accounting. The interest was credited to the Interest Suspense Account after being debited to the respective debtors' accounts, indicating that the income had accrued. The High Court emphasized that income under the mercantile system is charged when it accrues, not when it is received, and the mere crediting to a suspense account does not alter its taxability. Issue 3: Applicability of RBI Circular and CBDT Letter The Tribunal relied on the RBI circular and a letter from the CBDT to the Government of Haryana to argue that the interest credited to the Interest Suspense Account was not taxable. The High Court disagreed, stating the RBI circular aimed to prevent undue inflation of distributable profits but did not exempt such interest from tax. The CBDT letter was not considered a binding circular u/s 119 of the I.T. Act. The High Court concluded that neither the RBI circular nor the CBDT letter saved the accrued income from being taxed. Conclusion: The High Court ruled in favor of the Revenue, stating that real income arose when the interest became due and was assessable to tax according to the mercantile system of accounting maintained by the assessee. The amounts credited to the Interest Suspense Account for the assessment years 1974-75 and 1975-76 were taxable. The parties were directed to bear their respective costs, and a copy of the judgment was to be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.
|
