Commissioner Of Income Taxmadurai v. Tamilnadu Mercantile Bank Ltd.,Tuticorin

THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 23.1.2007 CORAM THE HON'BLE MR.JUSTICE P.D.DINAKARANANDTHE HON'BLE MRS.JUSTICE CHITRA VENKATARAMAN T.C.(A).Nos.15 and 24 of 2003 Commissioner of Income TaxMadurai ...Appellant in both cases Vs. Tamilnadu Mercantile Bank Ltd.,Tuticorin...Respondent in both cases Appeals under Section 260A of the Income Tax Act, 1961against the order of the Income Tax Appellate Tribunal,Madras, 'B' Bench dated 26.9.2002 made in ITANo.2776/Mds/1992 for the assessment year 1989-90 and orderof the Income Tax Appellate Tribunal, Madras, 'C' Benchdated 30.9.2002 made in ITA No.2444/Mds/1993 for theassessment year 1990-91 (1) [ITA NO 32/92-93 dt.28.8.92 onthe file of the Commissioner of Income Tax, (Appeal),Madurai (TC (A) No. 15/2003)] (2) ITA NO. 304/93-94 (AY 90-91)dated 14.7.93 on the file of the Commissioner of IncomeTAx, (Appeals-I), Madrai [TC(A) No. 24/03]. [PAN 47-016-CV-9750 dt. 10.3.92 and dated 29.3.93 on thefile of the Deputy Commissioner (Special Range II), Madurai- 625 001] For Appellant :Mrs.Pushya SitaramanSenior Standing Counsel (IT)For Respondent :Mr.R.Vijayaraghavan (Delivered by P.D. DINAKARAN, J.) These tax case appeals are directed against the ordersof the Income-tax Appellate Tribunal dated 26.9.2002 madein ITA No.2776/Mds/1992 for the assessment year 1989-90 andorder dated 30.9.2002 made in ITA No.2444/Mds/1993 for theassessment year 1990-91 raising the following common https://hcservices.ecourts.gov.in/hcservices/ substantial question of law: "Whether on the facts and circumstances of the case, theTribunal was right in law in holding that interest onsecurities is taxable only on specified dates when itbecame due for payment and not on accrued basis?" 2.1. The brief facts of the case are that the assessee, whilefiling return of income for the assessment years 1989-90 and 1990-91, claimed exclusion of the sums representing the accruedinterest for the period till 31.3.1989 and till 31.3.1990 for therespective assessment years, in respect of the securities held bythem on the ground that it did not become due in the respectiveprevious years and that even after the omission of Section 18 ofthe Income Tax Act, the interest on securities should be chargedonly when it becomes due for payment as it does not accrue on dayto day basis. 2.2. The Assessing Officer, however, disallowed the claims ofthe assessee, holding that after the omission of Section 18 of theAct, i.e., after 8.7.1988, interest is to be assessed under thehead "business" or "other sources" as the case may be, andtherefore, the interest which accrues up to the end of theaccounting year becomes taxable as the income of the previousyear. 2.3. On appeals, at the instance of the assessee, theCommissioner of Income Tax (Appeals), held that the omission ofSection 18 did not make any difference, and since the interest onsecurities falls due only on certain specified dates, theassessing officer was not justified in holding that the interestaccrued up to the last day of the accounting year should besubjected to tax. 2.4. On appeals by the Revenue, the Tribunal following itsearlier order in the assessee's own case dated 12.12.1994 made inI.T.A.Nos.1459 to 1461 of 1989, held that the assessing officerfor earlier assessment years accepted the method of assessment ofthe assessee, viz., offering the interest for taxation on receiptof the same, but, without any change in circumstance, changed themethod of assessment during the financial years in question,which is unsustainable and accordingly dismissed the appeals.Hence, the present appeals raising the common substantial questionof law referred to above. 3. According to the learned Senior Standing Counsel for theRevenue, as Section 18 of the Income Tax Act has been removed fromthe statute from the assessment year 1989-90 onwards, the intereston securities has to be assessed under the head "Business" and 3. According to the learned Senior Standing Counsel for theRevenue, as Section 18 of the Income Tax Act has been removed fromthe statute from the assessment year 1989-90 onwards, the intereston securities has to be assessed under the head "Business" and https://hcservices.ecourts.gov.in/hcservices/ since the assessee was maintaining its accounts on mercantilebasis, the entire interest accrued has to be included in the totalincome. 4. Per contra, Mr.Vijayaraghavan, learned counsel for theassessee submits that the third proviso to Section 145(1) of theIncome Tax Act was introduced to get over the removal of Section18 of the Income Tax Act, and that even under Section 145 of theAct, method of accounting on due basis is recognised. Theassessee is following mercantile system and so he is entitled tothe benefit of Section 145 of the Act. In support of hiscontention, the learned counsel for the assessee relied on thedecision in Commissioner of Income-tax v. Canara Bank [1992] 195ITR 66 and Godhra Electricity Co. Ltd. v. Commissioner of Income-tax [1997] 225 ITR 746. 5. We have given careful consideration to the submissions ofboth sides. 6. Before going into the merits of the case, it is apt torefer the relevant statutory provisions, viz., Section 18 and 145of the Income Tax Act:"Section:18. Interest on securities.-- (1) The following amounts due to an assessee in theprevious year shall be chargeable to income-tax under thehead " Interest on securities ",-- (i) interest on any security of the Central or StateGovernment not being interest payable under section 280D inrespect of any annuity deposit made under Chapter XXIIA ; (ii) interest on debentures or other securities formoney issued by or on behalf of a local authority or acompany or a corporation established by a Central, State orProvincial Act. (2) Nothing contained in sub-section (1) shall beconstrued as precluding an assessee from being charged toincome-tax in respect of any interest on securitiesreceived by him in a previous year if such interest had notbeen charged to income-tax for any earlier previous year. 145. Method of accounting.-- (1) Income chargeable under the head "Profits andgains of business or profession" or "Income from othersources" shall be computed in accordance with the method of accounting regularly employed by the assessee: Provided that in any case where the accounts arecorrect and complete to the satisfaction of the AssessingOfficer but the method employed is such that, in theopinion of the Assessing Officer, the income cannotproperly be deduced therefrom, then the computation shallbe made upon such basis and in such manner as the AssessingOfficer may determine. Provided further that where no method of accounting isregularaly employed by the assessee, any income by way ofinterest on securities shall be chargeable to tax as theincome of the previous year in which such interest is dueto the assessee. Provided also that nothing contained in this sub-section shall preclude an assessee from being charged toincome-tax in respect of any interest on securitiesreceived by him in a previous year if such interest had notbeen charged to income-tax for any earlier previous year. (2) Where the Assessing Officer is not satisfied aboutthe correctness or the completeness of the accounts of theassessee, or where no method of accounting has beenregularly employed by the assessee, the Assessing Officermay make an assessment in the manner provided in section144. (emphasis supplied) Provided also that nothing contained in this sub-section shall preclude an assessee from being charged toincome-tax in respect of any interest on securitiesreceived by him in a previous year if such interest had notbeen charged to income-tax for any earlier previous year. (2) Where the Assessing Officer is not satisfied aboutthe correctness or the completeness of the accounts of theassessee, or where no method of accounting has beenregularly employed by the assessee, the Assessing Officermay make an assessment in the manner provided in section144. (emphasis supplied) 7. In view of the deletion of the Section 18 of the Act witheffect from April 1, 1989, the third proviso to section 145(1) wasinserted with effect from April 1, 1989, which is a saving clause.Although the amendment was with effect from April 1, 1989, itclearly provides that any income by way of interest on securitiesshall be chargeable to tax as the income of the previous year inwhich such interest is due to the assessee only where no method ofaccounting is regularly employed by the assessee. In other words,if the assessee is maintaining cash system of accounting, theaforesaid proviso would not apply. The legislative intent is thatwhen the assessee is maintaining the cash system of accounting,income by way of interest on securities will have to be charged totax only when the assessee actually receives the interest and noton the date on which interest on such securities might become due. 8. In Commissioner of Income-tax v. Canara Bank [1992] 195ITR 66, the Division Bench of the Karnataka High Court held thatin the case of interest on securities, the income fructifies to the assessee only when the securities yield interest and, only insuch a situation is section 18 attracted. 9.1. In CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144,the Apex Court held as under: “Income-tax is a levy on income. No doubt, the Income-taxAct takes into account two points of time at which theliability to tax is attracted, viz., the accrual of theincome or its receipt ; but the substance of the matter isthe income. If income does not result at all, there cannotbe a tax, even though in book-keeping, an entry is madeabout a hypothetical income, which does not materialise.” (emphasis supplied) 9.2. In H.M.Kashiparekh and Co. Ltd. v. CIT [1960] 39 ITR706, the Bombay High Court held as under: “Even so, (the failure to produce account books), we shallproceed on the footing that the assessee-company havingfollowed the mercantile system of accounting, there musthave been entries made in its books in the accounting yearin respect of the amount of the commission. In ourjudgment, we would not be justified in attaching anyparticular importance in this case to the fact that thecompany followed the mercantile system of accounting. Thatwould not have any particular bearing in applying theprinciple of real income to the facts of this case.”... “The principle of real income is not to be so subordinatedas to amount virtually to a negation of it when a surrenderor concession or rebate in respect of managing agencycommission is made, agreed to or given on grounds ofcommercial expediency, simply because it takes place sometime after the close of an accounting year. In examiningany transaction and situation of this nature the courtwould have more regard to the reality and speciality of thesituation rather than the purely theoretical or doctrinaireaspect of it. It will lay greater emphasis on the businessaspect of the matter viewed as a whole when that can bedone without disregarding statutory language.” (emphasis supplied) 9.3. In Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR521, the Apex Court held as under: “Income-tax is a tax on the real income, i.e., the profitsarrived at on commercial principles subject to the provisions of the Income-tax Act.” (emphasis supplied) (emphasis supplied) 9.3. In Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR521, the Apex Court held as under: “Income-tax is a tax on the real income, i.e., the profitsarrived at on commercial principles subject to the provisions of the Income-tax Act.” (emphasis supplied) 9.4. In Morvi Industries Ltd. v. CIT, [1971] 82 ITR 835, theApex court emphasised the fact that the real question for decisionwas whether the income had really accrued or not. It is not ahypothetical accrual of income that has got to be taken intoconsideration but the real accrual of the income. 9.5. In State Bank of Travancore v. CIT [1986] 158 ITR 102(SC), the Apex Court held as under: “An acceptable formula of co-relating the notion of realincome in conjunction with the method of accounting for thepurpose of the computation of income for the purpose oftaxation is difficult to evolve. Besides, any strait-jacketformula is bound to create problems in its application toevery situation, it must depend upon the facts andcircumstances of each case. When and how does an incomeaccrue and what are the consequences that follow fromaccrual of income are well-settled. The accrual must bereal taking into account the actuality of the situation.Whether an accrual has taken place or not must, inappropriate cases, be judged on the principles of the realincome theory. After accrual, non-charging of tax on thesame because of certain conduct based on the ipse dixit ofa particular assessee cannot be accepted. In determiningthe question whether it is hypothetical income or whetherreal income has materialised or not, various factors willhave to be taken into account. It would be difficult andimproper to extend the concept of real income to all casesdepending upon the ipse dixit of the assessee which wouldthen become a value judgment only. What has really accruedto the assessee has to be found out and what has accruedmust be considered from the point of view of real incometaking the probability or improbability of realisation in arealistic manner and dovetailing of these factors togetherbut once the accrual takes place, on the conduct of theparties subsequent to the year of closing, an income whichhas accrued cannot be made ‘no income’.” (emphasis supplied) 9.6. Applying the above principles, the Apex Court in GodhraElectricity Co. Ltd., v. Commissioner of Income-tax, [1997] 225ITR 746 held that: "The question whether there was real accrual of income tothe assessee-company in respect of the enhanced charges forsupply of electricity has to be considered by taking theprobability or improbability of realisation in a realistic manner. If the matter is considered in this light, it isnot possible to hold that there was real accrual of incometo the assessee-company in respect of the enhanced chargesfor supply of electricity which were added by the Income-tax Officer while passing the assessment orders in respectof the assessment years under consideration. The AppellateAssistant Commissioner was right in deleting the saidaddition made by the Income-tax Officer and the Tribunalhad rightly held that the claim at the increased rates asmade by the assessee-company on the basis of whichnecessary entries were made represented only hypotheticalincome and the impugned amounts as brought to tax by theIncome-tax Officer did not represent the income which hadreally accrued to the assessee-company during the relevantprevious years. The High Court, in our opinion, was inerror in upsetting the said view of the Tribunal." (emphasis supplied) (emphasis supplied) 10. In the instant case, there is no change in the method ofaccounting by the assessee. The assessing Officer accepted themethod of accounting followed by the assessee during the earlierassessment years, but, without any change in circumstance,changed the method of assessment during the financial years inquestion, which in our considered opinion, is unsustainable. Asalready observed, even though Section 18 of the Act was deleted,the assessee is taxable for interest on securities only onspecified dates when it becomes due for payment, in view of thirdproviso to Section 145(1) of the Act, which was in force duringthe relevant assessment years, as well as in the light of the wellsettled principles laid down in the catena of decisions referredto above. In the result, these appeals are dismissed answering thesubstantial question of law raised against the Revenue and infavour of the assessee. No costs. Sd/Asst. Registrar /true copy/Sub Asst.Registrar To: 1.The Assistant Registrar,Income Tax Appellate TribunalMadras Bench "B", Chennai. 2.The Assistant Registrar,Income Tax Appellate TribunalMadras Bench "C", Chennai. 3.The Asst. Registrar, ITAT, Rajaji Bhavan, Besant Nagar, III Floor, Chennai-90. 4.The Commissioner of IncomeTax (Appeals) I, Madurai.5.The Commissioner of Income Tax, Madurai.6.The Deputy Commissioner Special Range II, Madurai.2 CC TO M/S PUSHYA SITARAMAN (SR 4570, 4571) SSC IT1 CC TO MR.R. VIJAYARAGHAVAN, ADVOCATE SR NO 45891 CC TO MR.J. BALACHANDAR, ADVOCATE SR 4587T.C.(A).Nos.15 and 24 of 200323.1.2007 rs(co)bp/28.2