Rc/53/2002 Of The Commissioner Of Income Tax v. M/S. A.p. State Financial Corp. Ltd

THE HON’BLE SRI JUSTICE L.NARASIMHA REDDYAND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAMR.C.No. 53 of 2002 ORDER:(per the Hon’ble Sri Justice L.Narasimha Reddy) The respondent is brought into existence under the StateFinance Corporations Act. As part of its activity, it lendsamounts to entrepreneurs in the State and earns interest. Apartfrom being under obligation to pay income tax, the respondentis also under obligation to pay interest tax. In the assessmentyear 1994-95, it has shown the interest that has accrued to itfrom its customers. The interest tax was paid on the interestso accrued. The Assessing Authority, however, took the viewthat the respondent is making an attempt to project as though itis following the mercantile system, but in fact, it is adopting thepractice of cash system and thereby, it is under obligation topay the tax not only on the interest that has accrued during theyear 1994-95, but also the interest which it received for theprevious assessment years. Aggrieved by the order of suchassessment, the respondent approached the Commissioner ofIncome Tax (Appeals), Andhra Pradesh- I, Hyderabad (for short‘the Commissioner’). The appeal was allowed through order,dated 31.07.1997, accepting the contention of the respondent. Thereupon, the appellant filed I.T.A.No.4/Hyd/97 before theIncome Tax Appellate Tribunal, Hyderabad Bench ‘A’ (for short‘the Tribunal’). The Tribunal dismissed the I.T.A through order,dated 16.07.1998. Thereupon, the appellant filed R.A.No.206/Hyd/98 with a prayer to refer the followingquestions to this Court for answer. (1)Whether on the facts and in the circumstances of thecase, the ITAT was correct in law in holding that theinterest income should be computed on accrual basisand interest accrued from 01.04.1993 to 31.03.1994alone has to be computed?case, the ITAT was correct in law in holding that theinterest income should be computed on accrual basisand interest accrued from 01.04.1993 to 31.03.1994alone has to be computed? (2)Whether on the facts and in the circumstances of thecase, the ITAT was correct in holding that the interestincome accrued prior to 01.10.1991 and realized in cashafter 01.04.1993 but before 31.03.1994 has not to beconsidered for computation of interest income forassessment year 1994-95 though the assessee isfollowing cash system for income tax purpose and inview of Section 5 read with Section 21 of the Interest TaxAct?case, the ITAT was correct in holding that the interestincome accrued prior to 01.10.1991 and realized in cashafter 01.04.1993 but before 31.03.1994 has not to beconsidered for computation of interest income forassessment year 1994-95 though the assessee isfollowing cash system for income tax purpose and inview of Section 5 read with Section 21 of the Interest TaxAct? (3)Whether on the facts and in the circumstances of thecase, the ITAT was correct in directing the AssessingOfficer that the commitment charges are to be computedonly on accrual basis?case, the ITAT was correct in directing the AssessingOfficer that the commitment charges are to be computedonly on accrual basis? (4)Whether on the facts and in the circumstances of thecase, the ITAT was correct in rejecting the claim that theA.O. should be directed to re-compute the chargeableinterest on accrual basis on the ground that the issuewas outside the scope of the appeal?case, the ITAT was correct in rejecting the claim that theA.O. should be directed to re-compute the chargeableinterest on accrual basis on the ground that the issuewas outside the scope of the appeal? Through its order, dated 16.08.2000, the Tribunal referred thosequestions. (4)Whether on the facts and in the circumstances of thecase, the ITAT was correct in rejecting the claim that theA.O. should be directed to re-compute the chargeableinterest on accrual basis on the ground that the issuewas outside the scope of the appeal?case, the ITAT was correct in rejecting the claim that theA.O. should be directed to re-compute the chargeableinterest on accrual basis on the ground that the issuewas outside the scope of the appeal? Through its order, dated 16.08.2000, the Tribunal referred thosequestions. Sri S.R.Ashok, learned Senior Standing Counsel for theappellant, submits that though the respondent pleaded that it isfollowing the cash system by maintaining the books of account,which are referred to the practice of mercantile system, it isexactly doing the latter and the view taken by the Tribunal is notcorrect. He further submits that whether one goes by thelanguage employed in Section 6 of the Interest Tax Act (forshort ‘the Act’) or Section 145 of the Income Tax Act, theinescapable conclusion is that the tax is liable to be levied by adopting the cash system and the respondent is liable to paytax for the interest that has accrued to it up to 01.10.1991irrespective of the factum of receipt thereof or the timing. Sri N.Vijay, learned counsel for the respondent, on theother hand, submits that the very levy of tax on the interest thathas accrued up to 01.10.1991 is opposed to sub-section (2) ofSection 6 of the Act and the Commissioner as well as theTribunal have taken the correct view of the matter. Question Nos.1, 2 and 4 are about the entitlement of theDepartment to levy interest tax on the interest that has accruedto the respondent up to 01.10.1991. Obviously not being awareof sub-section (2) of Section 6 of the Act, the AssessingAuthority made an attempt to levy tax upon that component ofinterest. In the process, he entered the field of discussionpertaining to the method of accounting, namely whether it wascash or mercantile system. Sub-section (2) of Section 6 of theAct reads as under: “In computing the chargeable interest of aprevious year, the amount of interest which accrues orarises to the assessee before the 1[st] day of August,1974 or during the period commencing on the 1[st] day ofApril, 1985 and ending with the 30[th] day of September,1991 shall not be taken into account.” From this, it is evident that irrespective of the systemadopted by as assessee, the interest accrued to it up to01.10.1991 is exempted from interest tax. Therefore, the wholeexercise undertaken by the Assessing Authority in this behalfwas not only futile, but was also opposed to the specific provisions of the Act. The Commissioner and the Tribunal tooknote of this important provision of law and have set aside theorder of assessment passed by the Assessing Authority. Therefore, Question Nos.1, 2 and 4 stand answered in negativein view of specific provisions of sub-section (2) of Section 6 ofthe Act. On Question No.3, we decline to answer, for the reasonthat the Tribunal itself has remanded the matter to theCommissioner for proper adjudication. The reference is answered accordingly. The miscellaneous petitions filed in this case shall alsostand disposed of. REDDY,J _____________________ L.NARASIMHA ________________________ CHALLA KODANDARAM,J Dt:30.07.2014 kdl