1993 (4) TMI 90 - AT - Income Tax

Summary

Issues:
1. Taxability of interest on securities under section 18 of the IT Act.
2. Accrual basis vs. cash basis accounting for interest on securities.
3. Impact of relief undertaking status on the taxability of interest.
4. Interpretation of "due to an assessee" in relation to interest on securities.
5. Application of s. 18(2) for taxing interest on securities on receipt basis.

Analysis:

The appeal before the Appellate Tribunal ITAT Ahmedabad-B centered around the taxability of interest on securities under section 18 of the IT Act. The assessee, a private limited investment company, contested the addition of Rs. 91,129 for interest on debentures of a public limited company, Shree Vallabh Glass Works Ltd. The Assessing Officer treated the interest as taxable under section 18 on an accrual basis, resulting in the impugned addition.

The CIT(A) rejected the assessee's contentions regarding the financial condition of Shree Vallabh Glass and upheld that the interest should be treated as accrued and taxable. The assessee, through its Chartered Accountant, argued that the interest should only be taxable if it is "due to an assessee," emphasizing the concept of real income. The Chartered Accountant relied on legal precedents and guidelines to support the argument that the interest had not become due due to the relief undertaking status of Shree Vallabh Glass.

The Departmental Representative highlighted the change in tax treatment under the new Act, emphasizing that interest on securities is now taxable on an accrual basis. Reference was made to legal decisions supporting the taxation of interest on securities under specific provisions of the Act, irrespective of State Government Notifications.

In its decision, the Tribunal acknowledged the arguments from both sides. While agreeing that interest on securities is taxable on an accrual basis under section 18, the Tribunal also recognized the requirement for the interest to be truly due to the assessee for taxation. Considering the circumstances, including the relief undertaking status of Shree Vallabh Glass, the Tribunal concluded that the interest had not genuinely fallen due and, therefore, overturned the addition of Rs. 91,129.

Ultimately, the Tribunal allowed the assessee's appeal, emphasizing the importance of the interest being truly due for taxation purposes. The decision highlighted the interplay between the specific provisions of the IT Act and the factual circumstances surrounding the interest on securities in question.