2017 (12) TMI 1364 - HC - Income Tax

Interest income on Bank deposits - accrual of income - whether a hypothetical income and that the assessee is entitled to get the interest excluded from assessment? - Held that - The interest that accrued in the relevant year is for the amounts that already remained in deposit with the Bank and on the depositors asking, it is payable. As was observed the period of deposit being the option of the depositor the receipt stood deferred at the behest of the assessee. As a corollary there cannot be a claim made of hypothetical income or there being no corresponding liability to pay. If the assessee chose to close the deposit prematurely on any date, then the Bank is liable to pay whatever interest that is accrued till that date. Interest for the period, in which the amounts stood in deposit, accrues on the close of the previous year and if it so accrues, it becomes the income of that particular assessment year, liable to be taxed in that year. Yet another argument of the respondent that under Section 194A it is the obligation of the banker to pay tax on the interest due and failure on their part has now resulted in action against the assessee, the assessee had exercised the option to let the interest accummulate to the deposit and thereby earned compound interest by the end of the deposit term, it would not mulct any liability on the bank to pay tax on periodical accrual of interest to the income tax authorities. The Bank s liability to deduct tax at source arises only when it pays the interest. The amount that is to be recieved as interest, is known to the assessee and was accounted, as income accrued by way of interest in the account books of the assessee following the mercantile system. The interest income that accrued cannot, by any stretch of imagination, be termed as hypothetical income. The deposits in Bank for definite periods at definite interest rates generate interest at the agreed rates. In fact, income tax was also paid on the interest income, which was received subsequently, but not during the subject assessment year, when it accrued. Hence, we do not agree with the findings of the Income Tax Appellate Tribunal that the interest income on Bank deposits is hypothetical income and that the assessee is entitled to get the interest excluded from assessment. The question raised is thus answered in favour of the Revenue and against the assessee.

Summary

Issues:
Assessment of interest income from Bank deposits not credited to the assessee's account during the assessment year.

Analysis:
The High Court of Kerala heard an appeal by the Revenue against the Income Tax Appellate Tribunal's order regarding the assessment year 2009-10 for the Plantation Corporation of Kerala Ltd. The Tribunal had reversed the assessing officer's decision to tax an amount of ?3,23,91,555 claimed as interest receivable on fixed deposits. The Tribunal held that income accrues only when the right to receive is accrued, and since the Bank neither credited nor paid the interest, no tax was deducted, and the income cannot be taxed. The Court considered whether the interest income, not credited to the assessee's account during the assessment year, could be assessed to tax. The Revenue argued that under the mercantile system of accounting followed by the assessee, the entire interest accrued should have been offered for taxation in the year it accrued.

The Court referred to the Tuticorin Alkali Chemicals and Fertilizers Ltd. case, emphasizing that interest accrued is taxable income and attracts tax as soon as it accrues. The Court rejected the argument that interest does not accrue until credited to the account, stating that the mercantile system recognizes income as soon as it becomes legally due, even if not physically received. The Court distinguished the Excel Industries Ltd. case, where income accrued only upon imports, as the benefits under advance licenses did not represent real income until imports were made. In the present case, the Court found that the assessee had shown interest income as accrued in the books but excluded a portion from taxation, claiming it was not received. The Court held that interest accrued in the relevant year is taxable income, liable to be taxed in that year.

The Court dismissed the argument that the Bank's failure to deduct tax at source absolved the assessee from tax liability, stating that the Bank's obligation arises only upon payment of interest. The Court also rejected the assessee's reliance on a previous decision, emphasizing that interest income is taxable when it accrues, regardless of actual receipt. Ultimately, the Court sided with the Revenue, holding that the interest income on Bank deposits was not hypothetical income and should be included in the assessment. The appeal was allowed, the Tribunal's order was set aside, and the assessment was restored in favor of the Revenue.