2008 (1) TMI 195 - HC - Income Tax

Assessee, banking Co. interest on govt. securities - Merely because the assessee has declared it as amount receivable in the course of time, it does not mean that interest on income had in fact accrued to the assessee only real income is assessable under the Act - Though interest due or receivable is assessable under the mercantile system, since the interest on securities involved in this case, was neither received nor receivable during the previous year, such interest cannot be assessed

Summary

Issues:
1. Assessability of interest on Government securities shown in profit and loss account for the assessment year 1989-90.

Analysis:
The primary issue in this case revolves around the question of whether the interest shown by the assessee in the profit and loss account in the form of interest on Government securities is assessable for the assessment year 1989-90. The Department argues that under the mercantile system of accounting followed by the assessee, interest on Government securities, once credited in the profit and loss account, constitutes income. On the contrary, the assessee contends that interest on securities is payable only upon maturity of the Government security, and the amount shown in the profit and loss account represents interest attributable for the relevant previous year, despite not being received. The crux of the matter lies in determining whether interest not due or received by the assessee can be subject to income tax, even if reflected in the profit and loss account.

The Revenue, represented by learned senior counsel, relies on a previous court decision to argue that interest on Government securities can be assessed on an accrual basis, even if not received by the assessee, as long as it is entitled at a later date for the relevant period. In contrast, the respondent's counsel cites Supreme Court and High Court decisions to assert that only actual income can be assessed, and since the securities had not matured or were payable during the previous year, the interest did not accrue. The crux of the legal debate lies in whether interest on securities can be deemed accrued income for tax assessment purposes.

Post the 1988 amendment, interest on securities is assessable as income from other sources unless chargeable to income tax under the head "Profits and gains of business or profession." In this instance, as the assessee is a banking company and the money applied is stock-in-trade, interest on securities falls under the head "Profits and gains of business or profession." However, the key issue remains whether interest shown in the profit and loss account on securities maturing in later years can be assessed during the relevant assessment year. Section 145 of the Act governs the computation of income under different heads and accounting systems, providing the framework for assessing income based on the cash or mercantile system regularly employed by the assessee.

The crux of the judgment lies in the interpretation of whether the interest shown in the profit and loss account truly accrued to the assessee. The court rejects the Department's argument that once an amount is reflected in the profit and loss account, it automatically becomes assessable income. Income accrued signifies income due or receivable by the assessee, and in this case, since the securities had not matured for payment during the relevant year, the assessee was not entitled to interest. Merely declaring an amount as receivable does not equate to the income actually accruing to the assessee. The court emphasizes that only real income is assessable under the Act, and since the interest on securities in question was neither received nor receivable during the previous year, it cannot be assessed as income. The Tribunal's decision to uphold the Commissioner of Income-tax (Appeals) is deemed correct, leading to the dismissal of the Revenue's appeal.