Commissioner of Income Tax vs Federal bank Ltd.

C.N. Ramachandran Nair, J.—The question raised in this appeal filed by the revenue is as to whether income shown by the assessee in the P&L a/c in the form of interest on Government securities, is assessable for the assessment year 1989-90. While the case of the department is that when the interest on Government securities is credited in the P&L a/c it is income under the mercantile system of accounting followed by the assessee, the assessee''s case is that interest on securities is payable only on maturity of Government security and all what the assessee has done, is only to show the interest attributable for the relevant previous year, though it was not received by the assessee. The assessee''s case is that so long as interest is not received or due, it cannot be assessed as income, no matter it is credited in P&L a/c or not. The amount involved, viz. Rs. 5,67,18,983 is admittedly the interest not received by the assessee during the previous year, and the deposit did not mature during the previous year to entitle the assessee for the interest The question, therefore, is whether such interest which is not due or received by the assessee, could be assessed for Income Tax, even though the assessee has shown it in the profit and loss account as interest receivable on the securities during the relevant previous year.

Learned senior counsel appearing for the revenue referred to the decision of this Court in Commissioner of Income Tax Vs. Podimattom Wines, and contended that even if interest was not received by the assessee on the Government securities, it could be assessed on accrual basis as the assessee was entitled for interest though on a later date, for the period ending the relevant previous year. Learned Counsel for the respondent has relied on the decisions of the Supreme court in Vijaya Bank Ltd. Vs. Additional Commissioner of Income Tax, Bangalore, and State Bank of Travancore Vs. Commissioner of Income Tax, Kerala, and the decision of the Karnataka High Court in Commissioner of Income Tax Vs. Canara Bank, and contended that actual income only can be assessed. Since the securities had not matured or payable during the previous year, the assessee was not entitled to interest and so much so, interest did not accrue during the previous year.

After the amendment of 1988, interest on securities is assessable as income from other sources u/s 56(2)(id) of the Act unless it is chargeable to Income Tax under the head "Profits and gains of business or profession". In this case, since the assessee is a banking company and money applied is stock-in-trade, interest on securities is assessable under the head "Profits and gains of business or profession". There is no dispute on this and the assessee has paid tax on the interest received from. Government securities. However, the question is whether interest shown in P&L a/c on securities matured in later years, could be assessed during the relevant assessment year. Section 145 of the Act states that income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall subject to the provisions of Sub-section (2) per cent be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Clause 3 [Sub-section (3)] of Section 145 states that where the assessing officer is not satisfied about the correctness or completeness of the accounts of the assessee, or whether the method of accounting provided in Sub-section (1) or accounting standards as notified under Sub-section (2) have not been regularly followed by the assessee, the assessing officer may make an assessment in the manner provided in Section 144 of the Act. Even though assessment is not completed u/s 144, but u/s 143(3) of the Act. the assessing officer took the view that income shown in the P&L a/c in the form of interest on Government securities, is to be treated as income accrued to the assessee and he accordingly made an addition of the same to the income returned by the assessee for assessment.

The question raised is whether the said income really accrued to the assessee by virtue of the assessee showing it in the P&L a/c. We are unable to accept the contention of the department based on the decision above referred, that once the assessee shows the amount in the P&L a/c as income, it is assessable under the Act. Income accrued obviously means income that has become due or receivable by the assessee. In this case the department has no case that the securities held by the assessee were matured during the relevant year or the assessee was entitled to receive the interest on such securities. Since the securities had not matured for payment, the assessee was obviously not entitled to interest, and the interest was really not due to them in the previous year. The assessee had shown it in the profit and loss account only to show what it is entitled in due course which statement may help better explanation of the financial position of the assessee. Merely because the assessee has declared it as amount receivable in the course of time, it does not mean that interest on income had in fact accrued to the assessee. As held by the Supreme Court in State Bank of Travancore''s case above referred, only real income is assessable under the Act. Though interest due or receivable is assessable under the mercantile system, since the interest on securities involved in this case, was neither received nor receivable during the previous year, such interest cannot be assessed and that the Tribunal rightly held so upholding the order of the Commissioner (Appeals).

We therefore dismiss the appeal filed by the revenue.