2006 (2) TMI 112 - HC - Income Tax

Accrual of Income - Whether Tribunal was justified in concluding that interest at 15 per cent was accruing on the amount of Rs. 1, 08, 50, 000 due to the assessee by one Sri K.L. Srihari despite the attachment of the loan under section 226(3) and despite the agreement between the assessee and the debtor that no interest shall be chargeable or payable on the loan from March 1, 1985 and that the same was assessable as the assessee s income according to the system of mercantile accounts followed by it? - Whether Tribunal was correct in holding that the return filed by the assessee in response to the notice u/s 142(1) was a return filed u/s 139(4) and therefore the provisions applicable for determining time limit for completion of assessment was section 153(1) (b) as amended from April 1 1989? - We answer both the questions of law referred to us against the assessee

Summary

Issues Involved:
1. Accrual of interest on a loan despite prohibitory orders and an agreement to not charge interest.
2. Determination of the time limit for completion of assessment under section 153(1)(b) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Accrual of Interest on Loan Despite Prohibitory Orders and Agreement:
The core issue was whether interest at 15% was accruing on a loan amount of Rs. 1,08,50,000 due to the assessee despite the attachment of the loan under section 226(3) of the Income-tax Act, 1961, and an agreement between the assessee and the debtor that no interest would be chargeable or payable from March 1, 1985.

Facts and Arguments:
- The assessee, engaged in the distribution of films, advanced a loan of Rs. 2,59,50,000 to a debtor, who repaid Rs. 1,51,00,000, leaving a balance of Rs. 1,08,50,000.
- The Income-tax Department issued a prohibitory order under section 281B, later substituted by an order under section 226(3), preventing the debtor from making payments to the assessee.
- Subsequently, the assessee and debtor agreed that no interest would be charged from March 1, 1985.
- The assessee did not receive any interest during the relevant assessment years and argued that no interest should be taxable due to the prohibitory order and the agreement.

Tribunal's Findings:
- The Tribunal held that the interest was includible in the assessable income of the assessee despite the prohibitory orders and the agreement.
- The Tribunal emphasized that under the mercantile system of accounting, income is taxable on the basis of accrual, not receipt.
- The Supreme Court's decision in Morvi Industries Ltd. v. CIT was cited, which held that interest accrues when it becomes due, and the fact that it is not received does not negate its accrual.

Court's Decision:
- The Court upheld the Tribunal's decision, stating that the attachment under section 226(3) did not prevent the accrual of interest.
- The Court emphasized that under the mercantile system, income accrues based on the right to receive it, independent of actual receipt.
- The Court concluded that interest on the loan to the debtor had accrued to the assessee and was taxable.

2. Determination of Time Limit for Completion of Assessment:
The second issue was whether the return filed by the assessee in response to a notice under section 142(1) should be considered under section 139(4) for determining the time limit for completion of assessment under section 153(1)(b).

Facts and Arguments:
- For the assessment year 1988-89, the assessee was served a notice under section 139(2) but did not file a return. A subsequent notice under section 142(1) led to the filing of a return on August 13, 1990.
- The assessee argued that the assessment should have been completed within one year from the date of filing the return, i.e., by August 13, 1991.
- The Commissioner of Income-tax (Appeals) and the Tribunal held that the time limit was one year from the end of the financial year in which the return was filed, as per the amended section 153(1)(b).

Court's Decision:
- The Court confirmed that the time limit for assessment was one year from the end of the financial year in which the return was filed, aligning with the amended section 153(1)(b).
- The Court noted that the return filed on August 13, 1990, fell under section 139(4), and the assessment completed on March 18, 1992, was within the permissible time limit.
- The Court reiterated that procedural laws apply to pending cases, referencing the Supreme Court's ruling in CWT v. Sharvan Kumar Swarup and Sons.

Conclusion:
The High Court answered both questions of law against the assessee and in favor of the Revenue, upholding the Tribunal's decisions on both the accrual of interest and the time limit for completing the assessment. No costs were awarded.