2006 (8) TMI 137 - HC - Income Tax

Accrual of income - bank interest on fixed deposits representing the particular amount received against the bank guarantee furnished by the assessee from the U. P. State Electricity Board - It is well-settled that where an assessee follows the mercantile system, the interest accrues in that year without waiting for the actual receipt - for claiming the liability as a deduction in a particular year, the liability should be an ascertained one and should not be dependent on any contingency in future, therefore, Tribunal has rightly held that the entire amount of interest, which had accrued to the applicant on the FDR is liable to be taxed Whether, Tribunal was justified in law in holding that the income from Nainital property and from furniture and fixtures therein as leased out to the State Bank of India for use of the training centre was income from house property and not income from business or income from other sources, as alleged by the assessee? this question is answered in affirmative, i.e., in favour of the assessee

Summary

Issues:
1. Taxability of bank interest on fixed deposits received against a bank guarantee.
2. Classification of income from Nainital property and furniture as income from house property or business.

Issue 1: Taxability of Bank Interest on Fixed Deposits:
The case involved questions of law under the Income-tax Act, 1961 regarding the taxability of bank interest on fixed deposits received against a bank guarantee furnished by the assessee from the U. P. State Electricity Board for the assessment years 1983-84, 1984-85, and 1985-86. The applicant received a sum after executing a bank guarantee as per the Supreme Court's order. The applicant argued that the interest should not be taxed as it represented 6% interest on the amount of compensation paid in case the Electricity Board won. However, the court found that the apex court's interim order did not mandate interest payment by the applicant. It was established that the liability for interest payment was not ascertained and depended on a future contingency. As per accounting principles, interest accrues in the year it is due, regardless of actual receipt. The court upheld that the entire interest accrued on the fixed deposit was taxable, ruling in favor of the Revenue.

Issue 2: Classification of Income from Nainital Property:
The second issue revolved around the classification of income from the Nainital property leased to the State Bank of India. The applicant sought to treat the income as business income due to efforts to convert the property into a hotel. However, the Assessing Officer and the Commissioner of Income-tax (Appeals) classified it as income from house property based on the lease deed with the bank. The Tribunal also upheld this classification. The court referred to a previous decision in a similar case involving the same applicant, where questions regarding the Nainital property were answered in favor of the assessee. Following this precedent, the court ruled in favor of the assessee, determining the income from the Nainital property and furniture as income from house property, not business income. No costs were awarded in this judgment.

---