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TMI Blog2002 (8) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... egistry shall give separate reference numbers for different assessees that is to say that there shall be a separate reference number for each assessee. In this group of 80 references and 255 tax appeals, at the instance of the Revenue, the following questions have been referred by the Income-tax Appellate Tribunal, Ahmedabad, for the opinion of this court under section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"): "1. Whether, on the facts and circumstances of the case, the Appellate Tribunal is right in law that the interest on debentures issued by companies other than local authority, company or corporation established by a Central, State or Provincial Act is not liable to be computed as income under the head 'Interest on securities' ? 2. Whether interest on debentures in all circumstances is liable to be considered income only when received by the assessee and not when it becomes due?" The relevant assessment years are 1987-88 and 1988-89. Apart from the references, this group also consists of tax appeals filed by the Revenue under section 260A of the Act. The references as well as the tax appeals arise from the Tribunal's judgment and order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 61,589 1985-86 (31-3-1985) 61,589 The respondent-Upanishad was not carrying on any business in purchase and selling of bonds but it had purchased these bonds by way of investments and was maintaining accounts on the cash system of accounting for the income received on such investments. No interest was received by the respondents on the aforesaid bonds from the assessment year 1986-87 onwards. However, the Assessing Officer held in the assessment orders that the income by way of interest from securities had accrued to the respondent for the years under consideration, that is 1987-88 and 1988-89. The income by way of interest on those bonds/debentures was offered for taxation by the respondent on that basis and the same was also assessed by the Assessing Officer on that basis. There is no dispute about this fact as the assessment orders for the earlier years were also produced before the authorities in the present proceedings to show that the income from the bonds in the earlier years was declared and also assessed on the cash method of accounting. The bonds were to carry interest on July 1, of every calendar year but in June, 1985, the ASE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch was not established by a Central, State or a Provincial Act. (ii) Secondly, the Tribunal held that even if section 18(1)(ii) was applicable to non-Government or non-public companies, interest on the debentures of such companies is not necessarily to be taxed on accrual basis and that the assessees who were maintaining the cash system of accounting and who had offered such interest income for taxation on cash basis and were also so assessed for earlier years, would not be subjected to tax on accrual basis for the subsequent years, that is, assessment years 1987-88 and 1988-89, which are the years under consideration. For this purpose, the Tribunal also relied on the decision of the Supreme Court in Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746 holding that income-tax is a levy on income and that if income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a hypothetical income, which does not materialise. The Tribunal gave the finding that the assessees were not able to realise any interest out of these bonds and that ultimately if the assessees did not get any income, though technically they were entitled to, no tax would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .75 1-7-1983 to 31-12-1986 2000-2001 5.25 1-1-1987 to 30-6-1987 Total interest offered -------- for taxation 63.00 -------------------------------------------------------------------------- The assessees who are the bondholders of Repropack Ltd. contended that they have paid tax on interest on 10.5 per cent. bonds on receipt basis. Assessment of the said income in the respective assessment years on accrual basis under section 18(1) of the Act will amount to double taxation of the said income which is not permissible as per principles of double taxation accepted by the Indian Tax Laws. The Assessing Officer, however, took the view that interest on the bonds was required to be charged on accrual basis and not on receipt basis and, therefore, similar controversy arose between the bondholders of Repropack (P.) Ltd. and the Revenue following the same pattern ultimately culminating into the orders of the Tribunal following the aforesaid judgment in the case of Upanishad Investment (P.) Ltd. At the hearing of this reference, as far as question No. 1 is concerned, Mr. M.R. Bhatt, learned senior standing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r: "18. (1) The following amounts due to an assessee in the previous year shall be chargeable to income-tax under the head 'Interest on securities', (i) interest on any security of the Central or State Government; (ii) interest on debentures or other securities for money issued by or on behalf of a local authority or a company or a corporation established by a Central, State or Provincial Act." It is thus clear that section 8 of the 1922 Act covered the securities of a local authority and a company without any further reservation as far as the nature of the company or its incorporation was concerned. However, the 1961 Act added "public corporations established by a Central Act, State Act or Provincial Act". The Legislature, therefore, simply enlarged the class of the persons issuing the securities and did not, nor did it intend to, restrict the class of persons issuing the securities earlier provided in the 1922 Act. Hence, the words "established by a Central, State or Provincial Act" only qualify the word 'a corporation' and not "a local authority or a company" which were already there in section 8 of the 1922 Act. As regards reliance placed by learned counsel for the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs of the word "due" to show that a debt or other obligation is due when it is legally enforce able. Reliance is also placed on the decision in Sreemati Usharani Roy Choudhurani, In re [1942] 10 ITR 199 (Cal) wherein the word "due" in section 7(1) of the Act was interpreted as not limited to salary due in respect of the accounting year but including also unpaid salary due in respect of the previous years. Reliance is also placed on the decision of the Bombay High Court in Bharat Barrel and Drum Manufacturing Co. Pvt. Ltd. v. Municipal Corporation of Greater Bombay, AIR 1978 Bom 369, 375, holding that the word "due" means all monies, debt or payable even though their recovery may be barred by the law of limitation. It is vehemently submitted that the word "due" is in contradistinction to the word "received" which refers to "actually received". When the Legislature has made an express provision that when the "interest on securities" issued by the specified bodies is due, the same is to be charged as income, in view of this mandatory provision, there is no scope for inquiry whether the assessee is maintaining accounts on cash basis or on accrual basis. Reference is also made to vari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that date. It is submitted that in the facts of the present case as far as the debentures of ASE Ltd. are concerned, the same did not yield any income by way of interest or otherwise after the assessment year 1986-87 and, therefore, there was no question of section 18 being attracted. Without prejudice to the aforesaid submissions, it is submitted that whatever meaning may be attributed to the expression "due", as per the concept of real income adopted by the Supreme Court since the days of CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144 and recently confirmed in Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746 (SC), income-tax is a levy on income and if income does not result at all, there cannot be a tax even though the assessee is following the mercantile system of accounting, even though any book-keeping entry is made about hypothetical income, if such income does not materialise, there does not result any income at all and, therefore, there cannot be a tax. In Seth Lalbhai's case [1952] 22 ITR 13, the Bombay High Court relied on the observations made by the Privy Council in St. Lucia Usines and Estates Co. Ltd. v. Colonial Treasurer of St. Lucia [1924] AC 508, 512 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, with effect from April 1, 1989, the second proviso to section 145 was inserted with effect from April 1, 1989, to read as under: "Provided further that where no method of accounting is regularly employed by the assessee, any income by way of interest on securities shall be chargeable to tax as the income of the previous year in which such interest is due to the assessee." Although the amendment was with effect from April 1, 1989, it clearly provides that any income by way of interest on securities shall be chargeable to tax as the income of the previous year in which such interest is due to the assessee only where no method of accounting is regularly employed by the assessee. In other words, if the assessee is maintaining the cash system of accounting, the aforesaid proviso would not apply. This amendment appears to be more clarificatory in nature than making any departure from the previous law on the subject. Even the provisions of section 193 inserted with effect from April 1, 1989, require the company, making the payment of interest on securities, to deduct tax at source at the time of payment of interest, and not when the amount is due. If income by way of interest on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income by way of interest on securities attract section 18, only when the securities yield income by way of interest and not before that date. The expression "securities yielded income by way of interest" would not mean "income by way of interest accrues on securities". Hence, there appears to be substance in the submission of learned counsel for the assessee that section 18(1) did not contemplate charging tax on income by way of interest without any interest actually having been paid. In this connection, it is necessary to refer to the decisions of the Supreme Court on the concept of "real income". In Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746, the apex court has reiterated the principle laid down by it, as far back as in 1962 in CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144 (SC) as under: "Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a hypothetical income, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p accepted the above scheme. The other holders of bonds of Rs. 1.81 crores who did not accept the above scheme, did not get either interest or any amount on account of the principal from the ASE Ltd. Mr. Bhatt has submitted that the company had in the initial offer which was accepted by the bondholders stipulated that the shares of ASE Ltd. would be issued at a premium of Rs. 5 per share, but the Controller of Capital Issues did not permit charging such premium and, therefore, ASE Ltd. issued shares at par to the bondholders like the assessees. At the relevant time that is in December, 1990, the market price of shares of ASE Ltd. was ruling in the region of Rs. 14 to Rs. 15 per share and, therefore, when the assessee got such shares at par, the price difference of Rs. 4 to Rs. 5 per share was obtained by the assessees in lieu of interest on the bonds and that, therefore, it would not be entirely correct to say that the assessees did not receive any amount in lieu of interest. The submission made on behalf of the Revenue cannot be accepted for the simple reason that though the shares of the market price of Rs. 14 to Rs. 15 per share as against the face value of Rs. 10 were issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t passing of a resolution for waiver of interest on the last date of the accounting year was a device adopted by the holding company and the subsidiary company to avoid payment of tax which could not be accepted so as to retrospectively waive the income accrued to the assessees in that case, who were maintaining the mercantile system of accounting. In the instant case, the assessees are, admittedly, maintaining the cash system of accounting. (iii) In the instant case, the assessees were holding the bonds in ASE Ltd. as well as in Repropack (P.) Ltd. by way of investments and not by way of stock-in-trade. In Sarabhai Chemicals P. Ltd.'s case [2002] 257 ITR 355 (Guj), the subsidiary company was held to be engaged in the business and the assessee subsidiary company had sold its properties and the payment of sale price was deferred with liability to pay interest and after the interest had accrued to the assessee, on the last date of the accounting year, the assessee-company had passed a resolution for waiver of interest. The transaction in question was found to be a part of the business of the assessee unlike the facts of the instant case where the assessee was holding the bonds ..... X X X X Extracts X X X X X X X X Extracts X X X X
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