Commissioner of Income Tax vs Lucas Indian Services Ltd.

Prabha Sridevan, J.—In the tax case, though three questions were raised, the tax case was admitted only on the following question of law:

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that a sum of Rs. 7,93,423 being the interest accrued but not due should (not?) be included in the taxable income of the assessee, especially when it is following mercantile system of accounting?

The learned senior standing Counsel submitted that the claim of exclusion in respect of the interest accrued cannot be granted because, before the Assessing Officer, the assessee had claimed exclusion on the ground that it had accrued but not received and the assessee had been adopting mercantile system of accounting. However, the Commissioner of Income Tax (Appeals) had dealt with this issue as though the claim of the assessee was that the "interest had accrued but had not become due" for the relevant year.

The learned senior standing Counsel submitted that even assuming without admitting that this was a case where the interest had been calculated on an accrued but not received basis and the accounting had to be one on due basis, still if the interest had become due as on March 31, of the previous year, then it had to be treated as income of that year and merely because he gets the right to receive the interest on the following day, viz., 1st of April, it cannot be said that interest does not form part of the income of the previous year. The learned senior standing Counsel also submitted that though in Commissioner of Income Tax Vs. Tamilnadu Mercantile Bank Ltd., similar issue was raised, that case dealt with interest on securities and the same may be distinguished.

The learned Counsel for the assessee would, however, submit that there was no change in the stand of the assessee with regard to the interest received right from the beginning and even before the Assessing Officer, this had been treated as income accrued "but not due" and the learned Counsel referred to the relevant page in the typed set of papers. Therefore, the learned Counsel submitted that the previous order does not warrant interference especially because it has been decided in favour of the assessee in Commissioner of Income Tax Vs. Tamilnadu Mercantile Bank Ltd.,

We have gone through the materials on record. The Assessing Officer had rejected the claim for exclusion of interest accrued on the ground that though the interest had accrued in the earlier year, it was only received during the current year. The Assessing Officer also dealt with the interest income on the principle of accrual and confirmed the assessment order. The Tribunal, however, rightly held, in our opinion, that the opinion of the Commissioner of Income Tax (Appeals) that once it has accrued, it should be included as income is not correct since the very term "accrued but not due" would show that the right to receive the interest had not arisen to the assessee and the interest was receivable only from the 1st of April of the next year. In fact, an identical issue came up before this Court in Commissioner of Income Tax Vs. Tamilnadu Mercantile Bank Ltd., In that case also, the assessee had adopted mercantile system of accounting as in this case and it was contended before the Bench that "even u/s 145 of the Act, method of accounting on due basis is recognised. The assessee is following the mercantile system and so he is entitled to the benefit of Section 145 of the Act."

The Division Bench of this Court, after going through the relevant statutory provisions, viz., Sections 18 and 147 of the Income Tax Act, held as follows (pages 141, 143, 144):

In view of the deletion of Section 18 of the Act with effect from April 1, 1989, the third proviso to Section 145(1) was inserted with effect from April 1, 1989, which is a saving clause. 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 cash system of accounting, the aforesaid proviso would not apply. The legislative intent is that when the assessee is maintaining the cash system of accounting, income by way of interest on securities will have to be charged to tax only when the assessee actually receives the interest and not on the date on which interest on such securities might become due....

In the instant case, there is no change in the method of accounting by the assessee. The Assessing Officer accepted the method of accounting followed by the assessee during the earlier assessment years, but, without any change in circumstance, changed the method of assessment during the financial years in question, which, in our considered opinion, is unsustainable. As already observed, even though Section 18 of the Act was deleted, the assessee is taxable for interest on securities only on specified dates when it becomes due for payment, in view of third proviso to Section 145(1) of the Act, which was in force during the relevant assessment years, as well as in the light of the well settled principles laid down in the catena of decisions referred to above....

In the result, these appeals are dismissed answering the substantial question of law raised against the Revenue and in favour of the assessee. No costs.

This judgment squarely applies to the present case and, therefore, the tax case is dismissed. No costs.