1987 (7) TMI 193 - AT - Income Tax

Issues Involved:
1. Taxability of interest income from National Plan Savings Certificates (NPCs).
2. Accrual of interest income.
3. Entitlement to tax exemption under section 10(15) of the Income-tax Act.
4. Applicability of section 80L relief.
5. Application of the second proviso to rule 13 of the Post Office Savings Certificate Rules, 1960.

Detailed Analysis:

1. Taxability of Interest Income from NPCs:
The primary issue in this case was whether the interest income accrued to the assessee from the investments in 12-Year National Plan Savings Certificates (NPCs) was taxable. The Income-tax Officer (ITO) argued that the entire interest income accrued to the assessee by virtue of the Finance Ministry's order dated 5-4-1974, making it taxable in the assessment year 1975-76. The ITO relied on the Supreme Court decision in Sree Meenakshi Mills Ltd. v. CIT, which held that income accrues to an assessee as soon as it is due. The CIT (Appeals) disagreed, holding that the interest income should be assessed on an accrual basis for each respective year.

2. Accrual of Interest Income:
The CIT (Appeals) and the Tribunal concluded that the right to receive interest was inherent in the NPCs scheme and that the interest accrued on a per-diem basis over the years. The Tribunal referenced the Madras High Court's decision in T. N. K. Govindarajulu Chetty's case, which held that interest should be spread over the years from the date of acquisition to the date of actual payment. The Delhi High Court's decision in Om Prakash v. CIT, which supported the spreading of interest over several years, was also cited. The Tribunal rejected the ITO's view that the entire interest income accrued only on 5-4-1974.

3. Entitlement to Tax Exemption under Section 10(15):
The CIT (Appeals) held that the assessee was entitled to exemption under section 10(15)(ii) of the Income-tax Act on the portion of the interest related to Rs. 75,000. The CIT (Appeals) reasoned that once the ceiling on investment was relaxed and the investment regularized, the income arising from the larger quantum should also be eligible for relief under section 10(15). The Tribunal agreed with this interpretation, confirming that the assessee was entitled to tax exemption on the interest related to Rs. 75,000.

4. Applicability of Section 80L Relief:
The CIT (Appeals) held that the assessee was entitled to relief under section 80L of the Income-tax Act since the NPCs matured in 1973 and the interest was payable at rates applicable to Post Office Savings Bank accounts. The Tribunal upheld this view, confirming the assessee's entitlement to section 80L relief.

5. Application of the Second Proviso to Rule 13:
The learned departmental representative argued that the second proviso to rule 13 of the Post Office Savings Certificate Rules, 1960, which came into force on 19-7-1983, supported the ITO's position. However, the Tribunal found this proviso inapplicable to the present case, as it was introduced after the relevant period. The Tribunal noted that the proviso only gave statutory recognition to the principle contained in the Finance Ministry's letter dated 5-4-1974, which regularized the irregular issue of certificates and fixed a lower rate of interest.

Conclusion:
The Tribunal dismissed the revenue's appeals, confirming the CIT (Appeals)'s orders. The Tribunal held that the interest income should be assessed on an accrual basis for each respective year, the assessee was entitled to tax exemption under section 10(15) for interest related to Rs. 75,000, and the assessee was eligible for section 80L relief. The second proviso to rule 13 was deemed inapplicable to the facts of the case.

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