2023 (7) TMI 135 - HC - Income Tax

Legality of the Settlement Commission's order - Accrual of interest income - interest accrued as due on Government securities and debentures held by petitioner - case of respondents that as the applicant was following mercantile system of accounting for interest paid on securities and deposits it could not follow the cash system of accounting for corresponding income - HELD THAT - We would agree with the CIT (D/R) s view. Income having accrued and corresponding expenditure having been reckoned on mercantile lasts, the interest income shall be taxed on accrual basis for both the years under consideration. In CREDIT SUISSE FIRST BOSTON (CYPRUS) LTD. 2012 (8) TMI 17 - BOMBAY HIGH COURT court after considering various judgments came to the conclusion that the right to receive the interest on the Government securities vested in the respondent only on the due date mentioned in the securities. Consequently, the interest accrued on the securities only on the due date and cannot be said to have accrued to assessee on any date other than the dates stipulated therein. The court also rejected the contention of revenue that interest accrues for broken period between two consecutive dates stipulated in the agreement/ instrument for payment of interest. The court went on to hold that if the assessee held the security upto 31st March and sold the same thereafter, but before the date on which interest was payable as stipulated in the security, interest cannot be said to have accrued to the assessee. The Commission has not articulated as to why it did not agree with the submissions made by the assessee s representative. The Hon ble Apex Court in Assistant Commissioner of Income Tax, Rajkot vs. Saurashtra Kutch Stock Exchange Ltd. 2008 (9) TMI 11 - SUPREME COURT has held that a judicial decision acts retrospectively. The Judges do not make law, they only discover or find the correct law. The law has always been the same and if a subsequent decision alters the earlier one, the later decision does not make a new law. It only discovers the correct principle of law which has to be applied retrospectively. The Hon ble Apex Court held that even an earlier decision of the court operated for quite sometime, the decision rendered later on would have retrospective effect, clarifying the legal position which was earlier not correctly understood. We should also note, in our view no reasons have been given by the Settlement Commission. In Jyotendrasinhji 1993 (4) TMI 1 - SUPREME COURT Revenue had argued that the Commission is not even required or obligated to pass a reasoned order. The Hon ble Apex Court held that the principle of natural justice (audi alteram partem) has been incorporated in Section 245 D itself which should mean, in our view, reasons have to be given. Reasons are live links between the mind of the decision taker to the controversy in question and the decision or conclusion arrived at. In the circumstances, on this issue we direct that the matter be sent to the Interim Board for Settlement constituted for the settlement of pending applications as contemplated under Section 245 AA of the Act. The Interim Board may pass such orders as it deems fit in accordance with law after hearing the parties.

Summary

Issues Involved:
1. Legality of the Settlement Commission's order regarding interest income.
2. Accrual of interest on Government securities.
3. Application of judicial precedents and principles of natural justice.

Summary:

Legality of the Settlement Commission's Order:
The petitioner, a private sector bank, challenged the Settlement Commission's order under Article 226 of the Constitution of India. The court emphasized that while reviewing such orders, it should focus on the legality of the procedure followed and whether the order conforms to the provisions of law. The court concluded that the Settlement Commission's order was contrary to the law, as it did not provide adequate reasoning and simply agreed with the CIT (D/R)'s view without proper justification.

Accrual of Interest on Government Securities:
The petitioner argued that interest on Government securities accrues only on the specified dates mentioned in the securities and not on a day-to-day basis. The court agreed, citing the judgment in Director of Income Tax (International Taxation) vs. Credit Suisse First Boston (Cyprus) Ltd. (2013) 351 ITR 323 (Bom), which held that interest accrues only on the due dates specified in the securities. The court also referred to E.D. Sassoon & Co. Ltd. & Ors. vs. CIT (1954) 26 ITR 27 (SC) and CIT vs. Shoorji Vallabhdas & Co. (1962) 46 ITR 144 (SC), reinforcing that income cannot be said to have accrued until the right to receive it crystallizes.

Application of Judicial Precedents and Principles of Natural Justice:
The court highlighted that judicial decisions act retrospectively, as established in Assistant Commissioner of Income Tax, Rajkot vs. Saurashtra Kutch Stock Exchange Ltd. (2008) 305 ITR 227 (SC). The court criticized the Settlement Commission for not providing reasons for its decision, which is a fundamental requirement of natural justice. The absence of reasons rendered the order unsustainable, as reasons are essential for clarity and transparency in judicial and quasi-judicial decisions.

Conclusion:
The court set aside the impugned order to the extent it pertained to the addition/adjustment of interest income and directed that the matter be sent to the Interim Board for Settlement for further proceedings in accordance with the law. The petition was disposed of accordingly.