2015 (7) TMI 997 - HC - Income Tax

Interest income on securities - whether has to be taxed on the due basis only, instead of accrual basis as per the mercantile system of accounting followed by the assessee? - Tribunal accepting the plea of the assessee that the interest income on the securities has to be taxed on the due basis - Held that - Tribunal has allowed the assessee s appeal by placing reliance upon the decision of this Court in Commissioner of Income Tax v. Bank of Rajasthan Ltd., reported in (2010 (4) TMI 217 - BOMBAY HIGH COURT) as well as the Special Bench decision of the Tribunal in Deputy Commissioner of Income Tax v. Bank of Bahrain & Kuwait BSC 2011 (1) TMI 1206 - ITAT MUMBAI - Decided against revenue.

Summary

Issues: Appeal challenging an order of the Income Tax Appellate Tribunal regarding the taxation of interest income on securities on a due basis versus accrual basis under the mercantile system of accounting.

Analysis:
1. The appeal questioned whether the Tribunal was correct in accepting the assessee's plea to tax interest income on securities on a due basis only, contrary to the accrual basis as per the mercantile accounting system. The revenue argued that interest accrues automatically on a day-to-day basis under the mercantile system, creating a vested right even before payment becomes due. The revenue cited relevant case law to support their position.

2. The Tribunal's order favored the assessee on both issues, relying on a decision of the High Court and a Special Bench decision of the Tribunal in a similar case involving Bank of Bahrain & Kuwait BSC. The High Court had previously upheld the Tribunal's decision in the Bank of Bahrain case for earlier assessment years, and the Supreme Court had dismissed the revenue's appeal. Based on these precedents, the High Court concluded that the questions raised did not present any substantial question of law, leading to the dismissal of the appeal without costs.