Ita/121/2016 Of The Principal Commissioner Of Income Tax v. M/S.plantation Corporation Of Kerala Ltd

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN &THE HONOURABLE MR. JUSTICE ASHOK MENON WEDNESDAY, THE 20TH DAY OF DECEMBER 2017/29TH AGRAHAYANA, 1939 ITA.No. 121 of 2016-------------------- AGAINST THE ORDER/JUDGMENT IN ITA 56/COCH/2016 ofI.T.A.TRIBUNAL,COCHIN BENCH DATED 13-05-2016 APPELLANT(S)/RESPONDENT/REVENUE: ------------------------------- THE PRINCIPAL COMMISSIONER OF INCOME TAX KOTTAYAM. BY ADVS.SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S)/APPELLANT/ASSESSEE:--------------------------------- M/S.PLANTATION CORPORATION OF KERALA LTD. MUTTAMBALAM P.O., KOTTAYAM-686 004. R1 BY ADV. SRI.RAMESH CHERIAN JOHN THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON05-12-2017, THE COURT ON 20-12-2017 DELIVERED THE FOLLOWING: ITA.No. 121 of 2016-------------------- APPENDIX--------- APPELLANT(S) ANNEXURES:---------------------- ANNEXURE A: COPY OF ASSESSMENT ORDER U/S 143(3) DATED 26-02-2015. ANNEXURE B: COPY OF ORDER OF THE HIGH COURT IN ITA NO.114, 173 & 244OF 2010 ANNEXURE C: COPY OF ORDER OF THE ITAT IN ITA NO.217,218,219/COCH/2009FOR ASST.YEARS 1999-2000 TO 2001-2002. ANNEXURE D: COPY OF CIT (APPEALS) ORDER NO.K57/KTM/CIT(A)/KTM/2014-15DATED 07-01-2016 ANNEXURE E: COPY OF ITAT'S ORDER NO.56/COCH/2016 DATED 13-05-2016. RESPONDENT(S) ANNEXURES: ----------------------- NIL //TRUE COPY// dkr PA TO JUDGE K.VINOD CHANDRAN & ASHOK MENON, JJ. ------------------------------------------- I.T.A. No. 121 of 2016------------------------------------------- Dated this the 20[th] day of December, 2017 J U D G M E N T Ashok Menon, J. The Revenue has come up on appeal aggrieved by the order of the Income Tax Appellate Tribunal in ITA 56/Coch/2016 dated13-05-2016 for the assessment year 2009-10 pertaining to theassessee, Plantation Corporation of Kerala Ltd., a public sectorundertaking of the Government of Kerala. The original assessmentunder Section 143(3) of the Income Tax Act (hereinafter referred toas 'the Act') was carried out on 21-12-2011. Thereafter, theassessment was reopened by issuing notice under Section 148 ofthe Act. The assessment was completed under Section 143(3) readwith Section 147 vide order dated 26-02-2015 by the DeputyCommissioner of Income Tax, Circle-I, Kottayam determining thetotal income of the assessee as Rs.7,61,10,190/-as against thereturned income of Rs.4,20,07,050/-. The assessee claimed a ITA.121/2016 difference of Rs. 3,23,91,555/- disclosed in the balance sheet asinterest receivable on fixed deposits claiming that it was only ahypothetical income and the right to receive it had not accrued. Theassessing officer did not accept this explanation and added thesame to the income of the assessee. The Commissioner of IncomeTax (Appeals) confirmed the action of the assessing officer. Onappeal before the Income Tax Appellate Tribunal, it was held thatincome accrues only when the right to receive is accrued and theright may be said to have accrued only when the enforceable debt iscredited in favour of the assessee. It was futher held that by virtueof Section 194A of the Act, the person responsible for paying anyincome by way of interest shall at the time of credit of such incometo the account of the payee, or at the time of payment thereof,whichever is earlier; deduct tax. In this case, the Bank has neithercredited nor paid the interest and accordingly, no tax was deductedand the question of accrual does not arise. Therefore, the income,which has been received and not acknowledged or which has notbeen acknowledged as payable to the assessee, cannot be taxed.Under the circumstances, it was observed that the Commissioner of ITA.121/2016 ITA.121/2016 Income Tax (Appeals) is not justified in confirming the action of theassessing officer in bringing to tax the amount of Rs.3,23,91,555/-.Accordingly, the order was reversed and the appeal was allowed. Itis in this order of the Income Tax Appellate Tribunal, which standschallenged before this Court. 2.We heard the learned Senior Counsel for theGovernment of India (Taxes) and the Counsel appearing for therespondent. We heard the learned Senior Counsel for the 3.The brief question that arises for consideration before usis whether the interest income from Bank deposits of the assessee,amounting to Rs.3,23,91,555/-, which was not credited to theassessee's account during the assessment year, could be assessedto tax or not. It is submitted by the learned Senior Counsel forRevenue that the tax audit report in Form No.3CD certified that thesystem of accounting followed by the assessee is mercantile. Insuch circumstances, the entire interest accrued should have beenoffered to tax for the assessment year in which it accrued. The ITA.121/2016 assessee having showed the amount as accrued, excluded it fromtaxation contending the same was not received. Since the assesseewas following the mercantile system of accounting, there was noreason to exclude the interest income on the ground of its non-receipt. Nor can it be argued that it was the responsibility of thebank under Section 194 A of the Act to deduct tax at source. 4.In the decision reported in (1997) 227 ITR 172, TuticorinAlkali Chemicals and Fertilizers Ltd. v. Commissiner of Income Tax,it is held thus: “Whether a particular receipt is of the nature of incomeand falls within the charge of Section 4 of the IncomeTax Act is a question of law which has to be decided bythe court on the basis of the provisions of the Act andthe interpretation of the term “income” given in a largenumber of decisions of the High Courts, the PrivyCouncil and also this court. It is well settled that incomeattracts tax as soon as it accrues. The application ordestination of the income has nothing to do with itsaccrual or taxability. It is also well settled that interestincome is always of a revenue nature unless it is receivedby way of damages or compensation.” This would settle the position that interest accrued is taxable income and attracts tax as soon as it accrues. The learned Counselfor the respondent has no dispute that tax is payable by the ITA.121/2016 Plantation Corporation on the interest receivable from the Bank deposits. There is also no dispute that the assessee here followsthe mercantile system of accounting. In Keshav Mills Ltd. v.Commissioner of Income Tax, [(1953) 23 ITR 230 (SC)]; it is heldthus: "The mercantile system of accounting or what is otherwise known as the double entry system is opposedto the cash system of book keeping under which arecord is kept of actual cash receipts and actual cashpayments, entries being made only when money isactually collected or disbursed. That system brings into credit what is due, immediately it becomes legally due and before it isactually received and it brings into debit expenditure theamount for which a legal liability has been incurredbefore it is actually disbursed. The profits or gains of the business which are thus credited are not realised but having been earned aretreated as received though in fact there is nothing morethan an accrual or arising of the profits at that stages.They are book profits. Receipt being not the sole test ofchargeability and profits and gains that have accrued orarisen or are deemed to have accrued or arisen beingalso liable to be charged for income-tax, the assessbilityof these profits which are thus credited in the books ofaccount arises not because they are received butbecause they have accrued or arisen.” ITA.121/2016 immediately it becomes legally due and before it isactually received and it brings into debit expenditure theamount for which a legal liability has been incurredbefore it is actually disbursed. The profits or gains of the business which are thus credited are not realised but having been earned aretreated as received though in fact there is nothing morethan an accrual or arising of the profits at that stages.They are book profits. Receipt being not the sole test ofchargeability and profits and gains that have accrued orarisen or are deemed to have accrued or arisen beingalso liable to be charged for income-tax, the assessbilityof these profits which are thus credited in the books ofaccount arises not because they are received butbecause they have accrued or arisen.” ITA.121/2016 The argument of the learned Counsel for the respondent that theinterest due on the deposits was not credited to their account till theend of the relevent assessment year, and therefore, the interestdoes not become accrued and due and hence liable to income taxfor that assessment year, is not acceptable to us. 5.The learned Counsel for the assessee relies on thedecision Commissioner of Income Tax v. Excel Industries Ltd.,[(2013) 358 ITR 295 (SC)], where the question raised and the findingwere succinctly stated so: The learned Counsel for the assessee relies on the "The question for consideration in all these appealsis whether the benefit of an entitlement to make dutyfree imports of raw materials obtained by the assesseethrough advance licences and duty entitlement pass bookissued against export obligations is income in the year inwhich the exports are made or in the year in which theduty free imports are made. In our opinion, the income does not accrue in theyear of export but in the year in which the imports aremade." The above cited decision of the Apex Court is clearly distinguishable on facts. In the above case, the assessee claimed deduction inrespect of duty entitlement benefits receivable, only as duty free ITA.121/2016 imports, in lieu of exports made, as per the export import policy.The assessee merely gets a duty entitlement on the export made,the extent of entitlement realisable only when the imports are made. There is also no corresponding liability on the customs authoritiesto pass on the benefit unless the goods are actually imported.According to the assesee in the said case, the amount wereexcluded from its total income since the benefit could not be said tohave accrued till imports are made. The benefits under the advancelicences or under the duty entitlement passbook do not representthe real income of the assessee. The income does not accrue onthe exports being made, or the issuance of duty entitlement passbooks; which remain as a hypothetical income, till the imports aremade, which alone can be brought to tax as income. 6.In the instant case, the assessee, in the books ofaccounts showed the interest income of Rs. 4,84,25,103/- asaccrued, but returned only Rs.1,60,33,548. The computation in thereturn excluded Rs.3,23,91,555/- on the ground that the same wasnot recieved. The depositor is entitled to get interest as and when it ITA.121/2016 6.In the instant case, the assessee, in the books ofaccounts showed the interest income of Rs. 4,84,25,103/- asaccrued, but returned only Rs.1,60,33,548. The computation in thereturn excluded Rs.3,23,91,555/- on the ground that the same wasnot recieved. The depositor is entitled to get interest as and when it ITA.121/2016 becomes due, which may be monthly, quarterly, half yearly, yearlyor at the end of the term of deposit, which is at the option of thedepositor. It is also trite that on the option being exercised, to sodeffer the reciept, the Bank pays cumulative interest. The assessee,as is seen from the assessment order; produced no evidence tosubstantiate the claim that the interest was not payable in theassessment year, but merely asserted that the interest accrued wasnot entirely recieved. If at all the maturity period or the expiry datedid not fall in the relevant assessment year, it cannot be said thatthe interest was not due. The interest that accrued in the relevantyear is for the amounts that already remained in deposit with theBank and on the depositors asking, it is payable. As was observedthe period of deposit being the option of the depositor the recieptstood defferred at the behest of the assessee. As a corollary therecannot be a claim made of hypothetical income or there being nocorresponding liability to pay. If the assessee chose to close thedeposit prematurely on any date, then the Bank is liable to paywhatever interest that is accrued till that date. Interest for theperiod, in which the amounts stood in deposit, accrues on the close ITA.121/2016 of the previous year and if it so accrues, it becomes the income ofthat particular assessment year, liable to be taxed in that year. 7.Yet another argument of the learned Counsel for therespondent is that under Section 194A of the Act, it is the obligationof the banker to pay tax on the interest due. The failure on theirpart has now resulted in action against the assessee. In view of thefact that the assessee had exercised the option to let the interestaccummulate to the deposit and thereby earned compound interestby the end of the deposit term, it would not mulct any liability onthe bank to pay tax on periodical accrual of interest to the incometax authorities. The Bank's liability to deduct tax at source arisesonly when it pays the interest. The amount that is to be recieved asinterest, is known to the assessee and was accounted, as incomeaccrued by way of interest in the account books of the assesseefollowing the mercantile system. The interest income that accruedcannot, by any stretch of imagination, be termed as hypotheticalincome. ITA.121/2016 8.The reliance placed by the assessee on an earlierdecision of this Court in ITA Nos.114, 173 and 244 of 2010 dated13-07-2010 will not in any way help the assessee. In that case,loans due to the assessee were treated as advance made forinvestments in equity ie., for purchase of shares. It was held that solong as the department had no case that any interest accrued to theassessee, there was no scope for asssessment. In that case, thePlantation Corporation gave some advances to two other companiesunder the Kerala Government pursuant to Government orders andno interest was received or agreed to be paid by the loaneecompanies. The Plantation Corporation went by the instructions ofthe Government and the Board of Directors of the PlantationCorporation took a decision to convert the loan into equity shares.The situation in this case is not similar. The deposits in Bank fordefinite periods at definite interest rates generate interest at theagreed rates. In fact, income tax was also paid on the interestincome, which was received subsequently, but not during thesubject assessment year, when it accrued. ITA.121/2016 ITA.121/2016 Hence, we do not agree with the findings of the Income TaxAppellate Tribunal that the interest income on Bank deposits ishypothetical income and that the assessee is entitled to get theinterest excluded from assessment. The question raised is thusanswered in favour of the Revenue and against the assessee. Theappeal is therefore, allowed and the order of the Income TaxAppellate Tribunal is set aside and the assessment is restored.Parties left to suffer their costs. Sd/- K.V INOD CHANDRAN Judge Sd/- ASHOK MENON Judge dkr True copy PA to Judge