2017 (2) TMI 228 - HC - Income Tax

Calculation of interest accrued - point of time of accrual - Held that - Tribunal was not justified in holding that interest accrued from day to day basis and not at the end of the year. Tribunal was not justified in holding that interest rate shall stand reduced only from March 17, 1989.

Summary

Issues:
Interpretation of agreements for interest on loans to sister subsidiary companies, Reduction of interest rate by board resolution, Accrual of interest on daily basis, Tax liability on interest income.

Analysis:
The case involved the interpretation of agreements and resolutions regarding interest on loans advanced by the assessee to sister subsidiary companies. The main issue was whether the interest accrued on a daily basis or at the end of the accounting year. The Tribunal had to determine if the reduction in interest rate by a board resolution could be applied retrospectively or only prospectively.

The assessee, a subsidiary of a company, had advanced loans to sister subsidiary companies at a 12% interest rate. The companies later requested a reduction to 6% in letters dated March 14, 1989. A board resolution was passed on March 17, 1989, accepting the request and reducing the interest rate from January 1, 1988. The Assessing Officer disputed this reduction, adding a significant amount to the income.

The Commissioner of Income-tax (Appeals) upheld the Assessing Officer's decision, alleging that the arrangement was a tax-saving device. The Commissioner enhanced the addition on interest income for March 1989. The Tribunal, however, ruled in favor of the assessee, stating that interest was charged on a daily or monthly basis and could only be reduced from the date of the board resolution.

The High Court analyzed the agreements and resolutions, emphasizing that the interest rate was on an annual basis and not daily or monthly. The Court noted that interest could only accrue at the end of the assessment year, allowing for a reduction in the interest rate before the year-end. Referring to previous judgments, the Court clarified that income tax liability is based on income accrual or receipt, and interest agreed at 12% per annum accrued yearly, not daily or monthly.

In conclusion, the High Court held that the Tribunal's decision on the accrual of interest and the reduction in interest rate was not justified. The Court ruled in favor of the assessee, emphasizing that interest accrued annually and the reduction in interest rate could be applied before the end of the assessment year. The reference was answered in favor of the assessee, disposing of the case accordingly.