1984 (6) TMI 105 - AT - Income Tax

Summary

Issues:
- Interpretation of section 18(2) of the Income-tax Act, 1961 regarding taxation of interest on securities.
- Taxability of interest amounts accrued due to a Government company taking over business assets.
- Determining whether interest amounts can be taxed in the hands of the assessee on receipt basis.

Analysis:
The judgment by the Appellate Tribunal ITAT COCHIN pertained to the assessment year 1973-74, involving a Government company formed to take over business assets from a Government department. The dispute centered around the taxation of interest amounts accrued during the period when the assets were held by the Government. The Income Tax Officer (ITO) added a sum as interest on securities in a reassessment, relying on section 18(2) of the Income-tax Act, 1961. However, the Commissioner (Appeals) held that section 18(2) did not apply in this case and deleted the addition, leading to the department's appeal.

In the analysis, it was highlighted that section 18(2) allows taxing interest on securities received in the previous year if not taxed earlier. The section aims to tax interest on receipt basis when not taxed on accrual basis previously. However, it does not cover cases where interest was not chargeable when accrued and could be taxed in a subsequent year on receipt basis. The sub-section is designed to address omissions in taxing interest income on accrual basis, not changes in the assessee post-accrual but pre-receipt. As the interest amount was not taxable in the earlier year, the sub-section was deemed inapplicable in this scenario.

Moreover, the judgment emphasized that the interest amount formed part of the assets taken over by the assessee from the Government. It was not a case of the assessee earning income but a recovery of an asset accrued to the predecessor in interest. Therefore, the interest amount could not be taxed in the hands of the assessee. The Tribunal upheld the Commissioner (Appeals) decision to delete the additions, dismissing the department's appeal.

In conclusion, the judgment clarified the interpretation of section 18(2) regarding the taxation of interest on securities and established that interest amounts accrued to a Government company upon taking over business assets were not taxable in the hands of the assessee, given the specific circumstances outlined in the case.