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TMI Blog2017 (12) TMI 1364X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot acknowledged or which has not been acknowledged as payable to the assessee, cannot be taxed. Under the circumstances, it was observed that the Commissioner of Income Tax (Appeals) is not justified in confirming the action of the assessing officer in bringing to tax the amount of ₹ 3,23,91,555/-. Accordingly, the order was reversed and the appeal was allowed. It is in this order of the Income Tax Appellate Tribunal, which stands challenged before this Court. 2. We heard the learned Senior Counsel for the Government of India (Taxes) and the Counsel appearing for the respondent. 3. The brief question that arises for consideration before us is whether the interest income from Bank deposits of the assessee, amounting to ₹ 3,23,91,555/-, which was not credited to the assessee's account during the assessment year, could be assessed to tax or not. It is submitted by the learned Senior Counsel for Revenue that the tax audit report in Form No.3CD certified that the system of accounting followed by the assessee is mercantile. In such circumstances, the entire interest accrued should have been offered to tax for the assessment year in which it accrued. The assessee hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tages. They are book profits. Receipt being not the sole test of chargeability and profits and gains that have accrued or arisen or are deemed to have accrued or arisen being also liable to be charged for income-tax, the assessbility of these profits which are thus credited in the books of account arises not because they are received but because they have accrued or arisen. The argument of the learned Counsel for the respondent that the interest due on the deposits was not credited to their account till the end of the relevent assessment year, and therefore, the interest does not become accrued and due and hence liable to income tax for that assessment year, is not acceptable to us. 5. The learned Counsel for the assessee relies on the decision Commissioner of Income Tax v. Excel Industries Ltd., [(2013) 358 ITR 295 (SC)], where the question raised and the finding were succinctly stated so: The question for consideration in all these appeals is whether the benefit of an entitlement to make duty free imports of raw materials obtained by the assessee through advance licences and duty entitlement pass book issued against export obligations is income in the year in whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it being the option of the depositor the reciept stood defferred 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. 7. Yet another argument of the learned Counsel for the respondent is that under Section 194A of the Act, it is the obligation of the banker to pay tax on the interest due. The failure on their part has now resulted in action against the assessee. In view of the fact that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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