2016 (12) TMI 417 - HC - Income Tax

Interest tax on interest receivable - non-taxable interest - accrual of interest - Held that - Admittedly, prior to 1.10.1991, the assessee was not liable to interest tax. The interest tax is also collectible from the clients. It is confirmed by the assessee that no interest tax has been collected by it for the period prior to 1.10.1991. We, therefore, hold that even if the interest for the earlier period was collected after 1.10.1991, no interest tax was liable on the interest pertaining to the period when the assessee was not liable to interest tax. The conclusion reached by the Tribunal as above is correct, regardless of what the accounting system of the assessee may have been. The language of the Statute cannot be stretched to mean that even amounts prior to the date in the amendment dated 01.10.1991 could have been taxed. - Decided in favour of assessee

Summary

Issues:
- Appeal filed by the department under Section 260-A of the Income Tax Act, 1961 for the assessment year 1992-93.
- Whether the Income Tax Appellate Tribunal was correct in law in not upholding the addition made by the Assessing Officer on account of alleged non-taxable interest.
- Justification of deleting the addition made by the Assessing Officer of interest in respect of Assessment Year 1992-93.
- Interpretation of the amendment brought by the Finance Act, 1991 regarding interest tax on State Financial Institutions.
- Definition of "chargeable interest" as per Section 5 of the Act.
- Decision on the liability of interest tax on amounts prior to the date of the amendment dated 01.10.1991.

Analysis:

The appeal before the Allahabad High Court involved the question of whether the Income Tax Appellate Tribunal was correct in law in not upholding the addition made by the Assessing Officer on account of alleged non-taxable interest. The Tribunal held that the assessee was not liable to interest tax before 1.10.1991, and therefore, no interest tax was payable on amounts collected for the period prior to this date. The Court concurred with the Tribunal's decision, emphasizing that the language of the Statute did not allow for the taxation of amounts prior to the effective date of the amendment dated 01.10.1991.

Furthermore, the Court analyzed the amendment introduced by the Finance Act, 1991, which made State Financial Institutions liable to interest tax on interest receivable from 01.10.1991. The term "chargeable interest" was defined in Section 5 of the Act, specifying the total amount of interest accruing to the credit institution in the previous year. The Court upheld the Tribunal's decision to delete the addition made by the Assessing Officer, affirming that the assessee was not liable to interest tax before the specified date, irrespective of the accounting system followed by the assessee.

In conclusion, the High Court ruled in favor of the assessee, holding that the order passed by the Tribunal was correct. The Court answered the substantial questions of law in favor of the assessee and against the department, disposing of the appeal with no costs incurred. The judgment highlighted the importance of adhering to statutory provisions and the effective date of amendments in determining tax liabilities, particularly in cases involving interest tax on State Financial Institutions.