2008 (4) TMI 305 - HC - Income Tax

Assessee had given an intercorporate deposit to M/s. PPL with interest - According to the assessee, the interest amount due for the entire period was not liable to be taxed, even though he was maintaining a mercantile system of accounting, since the income had not accrued to the assessee and the debt was a sticky debt - Tribunal found that not only has the assessee received the entire principal amount over a period of time but it has also received a part of the interest. - there is nothing to suggest that the financial condition of PPL was such that it was unable to pay its debts - Tribunal rightly concluded that income had accrued to the assessee and that the debt was not a sticky debt and liable to tax

Summary

Issues:
Interpretation of tax liability on interest income from intercorporate deposit, applicability of mercantile system of accounting, determination of sticky debt, relevance of income accrual, consideration of financial condition of debtor.

Analysis:
The case involved a dispute over the tax liability on interest income from an intercorporate deposit given by the assessee to a company. The assessee contended that the interest amount was not taxable as the income had not accrued due to the debt being classified as a sticky debt. The Assessing Officer, Commissioner of Income-tax (Appeals), and the Tribunal rejected this contention, stating that the debt was not sticky and income had accrued. The Tribunal highlighted that the debtor company had repaid the principal amount and part of the interest, and its financial condition was stable, indicating that income had indeed accrued to the assessee.

The assessee argued that the method of accounting, whether mercantile or cash basis, should not determine tax liability if income had not actually accrued. Citing precedents like CIT v. Ferozepur Finance P. Ltd., CIT v. Motor Credit Co. P. Ltd., and CIT v. Annamalai Finance Ltd., the assessee emphasized that income tax should only be levied when income has genuinely accrued, irrespective of the accounting method used. However, the court found that in the present case, based on the facts and the debtor's financial status, income had accrued to the assessee, justifying the tax liability on the interest income.

The Tribunal's decision was supported by the assessment orders for other years, confirming that interest income had accrued to the assessee during the relevant assessment periods. Ultimately, the court concluded that no substantial question of law arose for consideration, and the appeal was dismissed, upholding the tax liability on the interest income from the intercorporate deposit.