2014 (8) TMI 36 - HC - Income Tax

Interest income allotted to be taxed on proportionate basis - Whether the Tribunal is right in holding that the interest income in the hands of the assessee allotted in the three years IDBI capital bonds is required to be taxed only on proportionate basis and that the CIT(A) was not justified in sustaining the addition made in the year in which it was received Held that - The entire interest received on Bonds is required to be included in the income for the Assessment Year in which the entire amount of interest was received - the upfront onetime payment of interest immediately on allotment is deferred revenue expenditure and the assessee creating asset on basis of interest for five years being paid in advance in first year and, the assets written off over period of debentures for five years continuing benefit to business of the assessee over the entire period, the liability is to be spread over period of debentures and, the entire amount of interest received as upfront one-time payment of interest immediately on allotment is included in the income for the first year in which the amount of interest is received - Following the decision in Rakesh Shantilal Mardia, Ahmedabad Versus Deputy Commissioner of Income Tax 2012 (9) TMI 521 - SUPREME COURT - Decided against Revenue.

Summary

Issues:
1. Taxation of interest income from IDBI capital bonds on a proportionate basis.

Analysis:
The judgment revolves around the dispute regarding the taxation of interest income from IDBI capital bonds on a proportionate basis. The revenue challenged the decision of the Income Tax Appellate Tribunal, which held that the interest income should be taxed proportionately over three years instead of in the year it was received. The assessee invested in the three-year IDBI Capital Bond Scheme and received interest during the assessment year. The assessee contended that the interest should be taxed in three installments over three years. However, the Assessing Officer added the entire interest amount to the income for the year under consideration, leading to an appeal by the assessee to the Commissioner of Income Tax (Appeals).

The Commissioner of Income Tax (Appeals) upheld the addition of the interest amount, prompting the assessee to appeal to the tribunal. The tribunal, relying on a previous decision, allowed the appeal and deleted the addition. The revenue then filed a Tax Appeal questioning the tribunal's decision. The main issue was whether the interest income from the IDBI bonds should be taxed proportionately over three years or entirely in the year of receipt.

The revenue argued that the entire interest amount received should be included in the income for the assessment year, emphasizing that the assessee received the full interest without any conditions. They cited decisions from the Madras High Court and the Kerala High Court to support their position. On the other hand, the assessee opposed the appeal, citing a Supreme Court decision in favor of the assessee in a similar case.

The High Court considered the precedents and legal arguments presented by both parties. It noted that the Supreme Court decision favored taxing the interest income proportionately over the years. The Court highlighted the decision of the Bombay High Court, which deemed the upfront one-time payment of interest on allotment as deferred revenue expenditure. Consequently, the Court ruled in favor of the assessee, concluding that the interest income should be taxed on a proportionate basis over the three years. The Court dismissed the appeal, upholding the tribunal's decision to delete the addition of the interest income in the year of receipt.