High Court Of Kerala
Kerala State Industrial Development Corporation Ltd. vs. CIT
Sections 5, 145, INT 4, INT 5, INT 21
Asst. Year 1993-94
Arijit Pasayat, C.J. & K.S. Radhakrishnan, J.
IT Ref. No. 250 of 1997
18th December, 1999
Vinod Chandran & George Mathan, for the Applicant : P.K.R. Menon & N.R.K. Nair, for the Respondent
Arijit Pasayat, C.J. :
Accepting prayer made in terms of s. 256(1) of the IT Act, 1961 (âthe Actâ), the Tribunal, Cochin Bench, has referred following questions for opinion of this Court : “1. Whether, on the facts and in the circumstances of the case, on account of incorporation of s. 145 of the IT Act, 1961 w.e.f. 1st Oct., 1991, in s. 21 of the Interest-tax Act, 1974 and the overriding effect of s. 21 over s. 5, by which the interest-tax has to be levied only on the interest income computed, based on the method of accounting regularly employed by the assessee, the Tribunal was correct in law in concluding that the AO has rightly made the computation of the interest on accrual basis, rejecting the cash system of accounting accepted for the assessment under the IT Act, 1961?
2. Whether, on the facts and in the circumstances of the case, on account of doctrine of incorporation, s. 145 of the IT Act, 1961 having been incorporated in s. 21 of the Interest-tax Act, 1974, when the assessee maintains books of account on cash system and being assessed under cash system under the IT Act, does not the chargeable interest deserve to be computed on cash method and if the intention of the legislature would have been to tax on mercantile system, the legislature in their wisdom would not have included s. 145 of the IT Act, 1961 in s. 21 of the Interest- tax Act?” A short but interesting question arises for consideration. Reference has its foundation on ss. 5 and 21 of the Interest-tax Act, 1974 (in short “Interest Act”) in the background of s. 145 of the IT Act. The assessee is a corporation controlled by the State Government. Its main object is to aid and finance industrial projects. A return for the year 1993-94 was filed on 16th Dec., 1993. Subsequently, a revised return was filed on 18th Aug., 1994 declaring total income as nil. In response to notice under s. 142(1) of the Act, the assessee produced records. It followed mercantile system of accounting for interest payments, and cash system of accounting for interestreceipts. The AO was of the view that such a procedure cannot be adopted. Referring to s. 145, it was observed that if the method employed by the assessee is such that income cannot properly be deduced therefrom, then the computation can be made upon such basis and in such manner as the AO may determine. Referring to the method of accounting adopted by the assessee, it was observed that a true and correct picture of the income earned cannot be found. Accordingly, on the basis of the accounts produced, taxable income was worked out and tax was levied. According to the AO, s. 5 of the Interest-tax Act made the position clear so far as chargeability of interest income isconcerned on accrual basis and, therefore, income was to be assessed accordingly. The matter was carried in appal by the assessee before the CIT(A). The assesseeâs stand was that under s. 21 of the Interest-tax Act, provisions of s. 145 of the Act shall apply in respect of proceedings under the Interest-tax Act, and, hence, the AO ought to have accepted the assesseeâs computation of chargeable interest in view of the fact that the assessee was accounting interest on cash basis. Though it granted relief on certain other aspects, the CIT(A) upheld the view of the AO about applicability of s. 5 of the Interest-tax Act. The Revenue as well as the assessee filed appeals before the Tribunal. While the assesseeâs appeal related to applicability of s. 5 of the Interest-tax Act, in the background of s. 145 of the IT Act, the Revenue filed appeal in respect of relief granted by the first appellate authority. The Tribunal upheld the conclusions of the AO and first appellate authority so far as the assesseeâs appeal is concerned. Accepting the assesseeâs prayer for reference, questions, as set out above, have been referred for opinion.
The learned counsel for the assessee submitted that s. 29 of the Interest-tax Act has great relevance and on account of inclusion of s. 145 of the Act w.e.f. 1st Oct., 1991 in the said section, interest-tax can be levied on the interest income as computed on the basis of method of computation and accounting regularly employed by the assessee. By way of elaboration, it is submitted that s. 145 of the Act has been incorporated in s. 21 of the Interest-tax Act and since the assessee maintains books of account on cash system and he has to be assessed under the said system, method adopted by the Revenue is erroneous. The learned counsel for the Revenue, on the other hand, submitted that scope of âchargeable interestâ is provided in s. 5, which clearly says that subject to the provisions of the Interest-tax Act, chargeable interest of any previous year of a credit institution shall be the total amount of interest other than interest on loans and advances made to other credit institutions or to any co-operative society engaged in carrying on the business of banking accruing or arising to the credit institution in that previous year. Therefore, there is a basic difference between s. 5 of the IT Act and s. 5 of the Interest-tax Act. The chargeable interest of any previous year under the Interest-tax Act shall be the total amount of interest which has accrued or arisen in the concerned previous year.
5. In order to appreciate the rival submissions, it is necessary to take note of s. 5 of the IT Act and ss. 4 and 5 of the Interest-tax Act, which read thus: “5. Scope of total income.â(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived whichâ (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year; or (c) accrues or arises to him outside India during such year: Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-s. (6) of s. 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India. (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived whichââ (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Explanation 1.â Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India. Explanation 2.â For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.” Secs. 4 and 5 of the Interest-tax Act read as follows: “4. Charge of tax.â(1) Subject to the provisions of this Act, there shall be charged on every scheduled bank for every assessment year commencing on or after the 1st day of April, 1975, a tax in this Act referred to as interest-tax in respect of its chargeable interest of the previous year at the rate of seven per cent of such chargeable interest: Provided that the rate at which interest-tax shall be charged in respect of any chargeable interest accruing or arising after the 31st March, 1983 shall be three and a half per cent of such chargeable interest. (2) Notwithstanding anything contained in sub-s. (1) but subject to the other provisions of this Act, there shall be charged on every credit institution for every assessment year commencing on and from the 1st day of April, 1992, interest-tax in respect of its chargeable interest of the previous year at the rate of three per cent of such chargeable interest.
5. Scope of chargeable interest.âSubject to the provisions of this Act, the chargeable interest of any previous year of a credit institution shall be the total amount of interest (other than interest on loans and advances made to other credit institutions or to any co-operative society engaged in carrying on the business of banking), accruing or arising to the credit institution in that previous year: Provided that any interest in relation to categories of bad or doubtful debts referred to in s. 43D of the IT Act shall be deemed to accrue or arise to the credit institution in the previous year in which it is credited by the credit institution to its P&L a/c for that year or, as the case may be, in which it is actually received by the credit institution, whichever is earlier.” Sec. 4 of the Interest-tax Act is the charging section providing for levy of tax on âchargeable interestâ. Sec. 5 of the said Act, as indicated above, relates to scope of chargeable interest. Levy of tax is on the chargeable interest and it refers to the expression “accruing or arising…..in that previous year”, s. 2(7) of the said Act defines âinterestâ. Sec. 5 of the IT Act, on the other hand, deals with âscope of total incomeâ. Clause (a) of sub-s. (1) of s. 5 refers to âincome received or deemed to be received in the previous yearâ. Clause (b) refers to âincome which accrues or arises or is deemed to accrue or arise during the previous yearâ. Clause (c) refers to “income which accrues or arises outside India”. The basic difference is that while s. 5 of the IT Act, specifically refers to income received or deemed to be received in one of the clauses of s. 5 of the Interest-tax Act, it does not refer to any receipt and it specifically refers to interestaccruing or arising. It is somewhat similar contextually to cl. (b) of s. 5 of the IT Act.
6. The difference was illuminatively stated by the apex Court in CIT vs. Ashok Bhai Chimanbhai (1965) 56 ITR 42 (SC) : TC 39R.904. It was observed that the two words âaccrueâ and âariseâ are not used to contradistinguish the word âreceiveâ. Income is said to be received when it reaches the assessee; when right to receive incomes vested in the assessee, it is said to accrue or arise. In CIT vs. Ahmedbhai Umarbhai & Co. (1950) 18 ITR 472 (SC) : TC 39R.463, it was observed by the apex Court that it can be said without hesitation that the words âaccrueâ and âariseâ though not defined in the Act are certainly synonymous and are used in the sense of bringing in as a natural result. Strictly speaking, the word âaccrueâ is not synonymous with âariseâ. The former connoting the idea of growth or accumulation and the latter of the growth or accumulation with a tangible shape so as to be receivable. There is a distinction in the dictionary meaning of these words, but throughout the Act, they seem to denote the same idea or ideas very similar and the difference only lies in this that one is more appropriate when applied to a particular case. Oxford English Dictionary defines âaccrueâ as “to fail as a natural growth or increment; to come….as an accession or advantage”. It defines âariseâ as âto spring up, come into existenceâ. In Rogers Pyatt Shellac vs. Secy. of State 1
ITC 363, it was observed that perhaps the two words seem to denote the same idea or ideas very similar, and the difference only lies in this that one is more appropriate than the other when applied to particular cases. It is clear, however, as pointed out by Fry LJ, in Colquhoan vs. Brooks (1888) 21 QBD 52 (CA), that both words are used in contra-distinction to the word âreceiveâ and indicate a right to receive. It may be taken that all the threeexpressions, i.e., âaccrueâ, âariseâ and âreceivedâ, would not have been used unless it was thought that they exhibited some variation in meaning and that a case might possibly arise which would come under only one of the three. If on a question as to the exact meaning of âaccruingâ, it were to be suggested that this only means âreceivedâ, this can hardly be accepted as correct, even though the difficulty of distinguishing between âaccruingâ and âarisingâ, as indicated above, may be great. In this sense, perhaps not a very important sense, expressions are anti-thetical. But it is very plain that there is here no question of a complete disjunction or of the presentation of three mutually exclusive qualifications. It is clear, therefore, that income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income, income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expressed debitum in praesenti, solvendum of futuro [Sec. W.S. Try Ltd. vs. Johnson (Inspector of Taxes) (1946) 1 All ER 532 (CA)] and Webb vs. Stenton (1883) 11 QBD 518 (CA). Legal position is that a liability depending upon a contingency is not a debt in praesenti or in futuro till the contingency happens. But if it is a debt, the fact that the amount has to be ascertained does not make it anytheless a debt if the liability is certain and what remains is only a quantification of the amount; debitum in praesenti, solvendum of futuro-CIT vs. Shri Goverdhan Ltd. (1968) 69 ITR 675 (SC) : TC 24R.733. Postponement of the date of payment does not affect the accrual of the income. The fact that the amount of the income is not subsequently received by the assessee would not also detract from or efface the accrual of the income, although non-receipt may, in appropriate cases, be a valid ground for claiming deductionâ Morvi Industries Ltd. vs. CIT 1974 CTR (SC) 149 : (1971) 82 ITR 835 (SC) : TC 39R.720.
7. Question is what would be the effect of s. 21 of the Interest-tax Act on ss. 4 and 5. Sec. 21 provides that certain sections and Schedules of the IT Act and the IT (Certificate Proceedings) Rules shall apply with necessary modifications to the Interest-tax Act. One of these sections is s. 145 of the IT Act. Earlier this section was not included. But, w.e.f. 1st Oct., 1991, it was included in s. 21 of the Interest-tax Act. Sub-s. (1) of s. 145 provides that income chargeable under the head âProfits and gains of business or professionâ or âIncome from other sourcesâ shall be computed in accordance with the method of accounting regularly employed by the assessee. Theassesseeâs emphasis is on the computation of income in accordance with the method of accounting regularly employed by it. This submission overlooks an important aspect which is laid down in the proviso to sub-s. (1) of s. 145 of the IT Act. It states that in any case, where the accounts are correct and complete but the method employed is such that in the opinion of the AO the income cannot properly be deduced therefrom, computation shall be made upon such basis and in such manner as the AO may determine. âChargeable interestâ is defined in s. 5 of the Interest-tax Act. As indicated and analysed above it refers to accruing and arising of interest. Therefore, the AO can, by applying s. 5 of the Interest-tax Act, in the background of proviso to sub-s. (1) of s. 145 of the IT Act, compute income on accrual basis. The statute must be read as a whole and one provision thereof should be construed with reference to another provision, so as to make a consistent enactment of the whole statute. It is a rule now firmly established that intention of the legislature must be found by reading the statute as a wholeâ[Sec. Philips India Ltd. vs. Labour Court (1985) 66 FJR 474 : AIR 1985 SC 1034]. This rule is referred to as an âelementary ruleâ by Viscount Simonds in AG vs. HRH Prince Earnest Augustus (1957) 1 All ER 49 (HL), a âcompelling ruleâ by LordSomervell of Harrow (in aforesaid case). The apex Court in Poppatlal Shah vs. State of Madras AIR 1953 SC 274 held it to be a âsettled ruleâ. Lord Halsbury in Charles Robert Leader vs. George F. Duffey (1888) 13 AC 294 observed that you must look at the whole instrument inasmuch as there may be inaccuracy and inconsistency, and one must, if it can be done, ascertain what is the meaning of the instrument taken as a whole in order to give effect, if possible to do so, to the intention of the framer of it. View of Lord Somervell in AGâs case (supra) has full application to the facts of the present case. It was observed that a question of construction arises when one side submits that a particular provision of the Act covers the facts of the case and other submits that it does not or it may be agreed it applies, but the difference arises in its application. The title and general scope of the Act constitute the background of the contest.
8. If the interpretation suggested by the learned counsel for the assessee is accepted, the very charging section would be rendered inoperative and ineffective, which is impossible to be done. The machinery provisions cannot be interpreted in such a way as to restrict the scope of the charging section. As a matter of fact, Courts are expected to construe the machinery provisions in such a manner that a charge to tax is not defeatedâAssociated Cement Co. Ltd. vs. CTO (1981) 48 STC 466 (SC). The conclusions of the Tribunal are in order. First question, therefore, is answered in the affirmative, in favour of the Revenue and against the assessee. In view of this answer, second question, which is really of academic interest, shall be treated to have been answered in favour of the Revenue and against the assessee.
[Citation : 246 ITR 330]