2009 (1) TMI 80 - HC - Income Tax

Interpretation of S. 5 (2) liability to assessment - Assessees, non-residents had subscribed to debentures issued by M/s O claim of the assessees is that the income of interest on debentures should be assessed on receipt basis, and not on accrual basis - Tribunal was right to hold that income from interest on debentures which was a foreign exchange asset was assessable on accrual basis and not on receipt basis held that non-resident is assessable on income which has accrued to him

Issues Involved:
1. Whether the interest income from debentures should be assessed on receipt basis or accrual basis for non-resident assessees.
2. Interpretation of Section 5(2) of the Income Tax Act, 1961.
3. Applicability of Section 195(1) of the Income Tax Act, 1961.
4. Relevance of judicial precedents in determining the assessment method.

Issue-wise Detailed Analysis:

1. Assessment of Interest Income: Receipt Basis vs. Accrual Basis
The primary issue in the judgment revolves around whether the interest income derived from debentures by non-resident assessees should be assessed on a receipt basis or an accrual basis. The assessees argued that the interest income should be taxed when actually received, while the Revenue contended that it should be taxed when it accrues. The court noted that interest on the debentures accrued biannually on 1st July and 31st December each year. The Assessing Officer, supported by the Appellate Authorities, held that the interest income should be assessed on an accrual basis, adding it to the taxable income for the financial year in which it accrued, regardless of actual receipt.

2. Interpretation of Section 5(2) of the Income Tax Act, 1961
The court's analysis of Section 5(2) of the Act was pivotal. Section 5(2) states that the total income of a non-resident includes all income that accrues or arises in India during the previous year. The court emphasized that the income once accrued to a non-resident must be included in the previous year's income, irrespective of actual receipt. Explanation 2 under Section 5(2) clarifies that income included on an accrual basis should not be included again on receipt. The court concluded that the provision mandates the inclusion of income on an accrual basis, rendering the actual date of receipt inconsequential.

3. Applicability of Section 195(1) of the Income Tax Act, 1961
The assessees argued that under Section 195(1), the liability to deduct income tax on the interest component rested with the company paying the interest, and hence, they should not be taxed twice. Section 195(1) requires the deduction of tax at the time of credit or payment of such income. The court rejected this argument, stating that the assessment of income tax is distinct from the actual payment of tax. The court clarified that the mandate of Section 5(2) requires income to be treated as accruing in the previous year, and any tax deducted at source could be claimed as a reduction during assessment.

4. Relevance of Judicial Precedents
The court considered the decisions in CIT v. Standard Triumph Motor Co. Ltd. and Standard Triumph Motor Co. Ltd. v. CIT, which dealt with the method of accounting for tax liability. The court acknowledged that while these cases primarily addressed accounting methods, they also affirmed that income accruing to a non-resident during the year must be treated as income for that year, irrespective of receipt. The court agreed with the Revenue's interpretation that these precedents supported the accrual basis of assessment for non-residents.

Conclusion:
The court concluded that the interest income from debentures must be assessed on an accrual basis for non-resident assessees. The references were disposed of in favor of the Revenue, affirming that the income should be included in the previous year's income when it accrues, regardless of actual receipt. The court also clarified that any tax deducted at source could be adjusted during the assessment, ensuring no double taxation.

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