Kerala H.C : Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that ‘the entire interest cannot be assessed in the asst. yr. 1990-91 itself?

High Court Of Kerala

CIT vs. Varghese Mani

Sections 5, 145

Asst. Year 1990-91

P.K. Balasubramanyan & C.N. Ramachandran Nair, JJ.

IT Appeal No. 71 of 1999

3rd October, 2001

Counsel Appeared

P.K.R. Menon & George K. George, for the Appellant : P. Balakrishnan & K.S. Menon, for the Respondent

JUDGMENT

P.K. BALASUBRAMANYAN, J. :

This appeal at the instance of the CIT, Cochin, filed under s. 260A of the IT Act, 1961, was admitted by this Court on the following substantial questions of law :

“1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that ‘the entire interest cannot be assessed in the asst. yr. 1990-91 itself?

Whether, on the facts and in the circumstances of the case, and the assessee having specifically opted to receive the entire interest on the day the bonds were taken at a discounted rate, the Tribunal is right in law in affirming the order of the CIT(A) who had directed the AO to assess only a sum of Rs. 32,965? Whether, on the facts and in the circumstances of the case did the decision and circulars relied on by the Tribunal have application to the facts of the case?”

On receipt of notice the assessee appeared and the appeal was heard on the substantial questions of law formulated as above.

2. During the previous year relevant to the asst. yr. 1990-91, the assessee deposited a sum of Rs. 9 lakhs in the IDBI Capital Bonds. The scheme under which the bond was issued provided for two options in the matter of receipt of interest by the depositor. The provisions in that regard are as follows : “(a) Under half-yearly option, interest up to 31st March/30th September, will be paid in 31st March/30th Sept., every year, the last interest payment being made for a period from 1st April/1st October, to the date of maturity of the bonds. The interest will be paid by post-dated interest warrants encashable at par at all branches of the Canara Bank of India. (b) Under the discounted value option, interest for the entire three-year period will be discounted to the acceptance date at 9 per cent. per annum and paid soon after realisation of cheque/demand draft. For every Rs. 1,000 of face value Rs. 235 will be payable as discounted interest (As per clarification given by tax authorities, the interest in such cases is taxable in the year of receipt).”

The assessee opted for the discounted value option. Thus the discounted interest at Rs. 235 for every Rs. 1,000 accrued to the assessee during the relevant accounting year and it was also received in fact by the assessee during the year. The amount thus received was Rs. 2,11,500. However, the assessee admitted only Rs. 32,965 as interest attributable to the previous year ending on 31st March, 1990, on the ground that the discounted value of interest also included interest which would accrue over the future period of three years. The AO held that since the assessee had opted for the discounted value option, the entire interest received by the assessee had accrued to the assessee during the accounting year and he had also received the whole of the amount during the same accounting year in that situation, the entire income was liable to be assessed during the accounting year at the hands of the assessee. The assessee went up in appeal. The AAC, following the decision of the Tribunal, Bombay held that the entire amount received by the assessee as interest during the accounting year could not be taxed in that year and that the assessee was entitled to have interest income spread over for three years. Thus, the appeal by the assessee was allowed. The ITO went up in appeal before the Tribunal. The Tribunal also followed the decision of the Bombay Bench of the Tribunal and dismissed the appeal by the Revenue. It is challenging the decision thus rendered by the Tribunal that this appeal is filed by the CIT. There is no dispute about the fact that the assessee exercised an option to receive interest for the entire three year period of the bond at the discounted rate in a lump on the acceptance date by the IDBI. In other words, it was the option of the assessee to receive the entire interest at a discounted rate during the accounting year relevant to the assessment year. By the exercise of the option, the entire interest accrued to the assessee during the accounting year. It was also received by the assessee during the same accounting year. In this situation, we see no difficulty in principle to find that the entire income is liable to be assessed at the hands of the assessee during the accounting year. What is contended on behalf of the assessee is that, the discounted interest that was received by the assessee during the relevant accounting year, was in fact interest that was receivable in future also and hence the interest must be spread over for the three years and assessed on that basis. But once the whole of the interest has accrued to the assessee as has happened in this case by virtue of his exercise of an option in that behalf, it is not possible to postulate accrual of portions of that income for the future years. There can be only one accrual and that accrual in respect of the entire discounted interest took place in this case on exercise of option by the assessee and at his volition during the relevant accounting year. It is, therefore, not possible to accept the contention of the assessee that only such portion of the interest that is attributable to the relevant accounting year should be taken into account for the current assessment year. Moreover, in this case the income was also received in the same year and since the accrual and the receipt of the income were both in the same accounting year, it appears to us that the assessee is liable to be taxed on that income during the relevant assessment year.

Learned counsel for the assessee relied on the decision of the Madhya Pradesh High Court in M.P. Financial Corporation vs. CIT (1986) 51 CTR (MP) 249 : (1987) 165 ITR 765 (MP), which was affirmed by the Supreme Court in Madras Industrial Investment Corporation Ltd. vs. CIT (1997) 139 CTR (SC) 555 : (1997) 225 ITR 802 (SC). This is the decision that was relied on by the Bombay Bench of the Tribunal, the decision of which has been followed by the Tribunal in the order under appeal. The M.P. Financial Corporation’s case (supra), was a case where a financial corporation had issued bonds at a discount during the relevant accounting year. The financial corporation, as assessee, claimed that the entire amount of discount was liable to be deducted during the relevant accounting year itself. There the Court held that the assessee was not entitled to discount the entire amount during the accounting year since the amount of discount in effect represented deferred interest. Looked at as a loss, the proportionate amount of discount may be written off out of revenue every year during the period of the bonds would remain outstanding. Therefore, though an assessee would not be justified in claiming deduction of the entire amount of discount in the accounting year in question, it would be entitled to proportionate deduction spread over the period for which the bonds remain outstanding. In effect, that was a case where the assessee having discounted the bonds was claiming a deduction of the whole of the discounted amount as business expenditure during the relevant accounting year itself. We are of the view that the ratio of that decision cannot have application in the case on hand. Here, the assessee was receiving interest income and he had to exercise his option to receive the same, either spread over in three years or at a discounted rate in the accounting year itself. The assessee chose to exercise his option to receive the income during the relevant accounting year. By exercise of that option, the entire discounted interest income accrued to the assessee. This was also followed up by actual receipt of that income by the assessee. In that situation, we are of the view that the ratio of the decision of the Madhya Pradesh High Court as affirmed by the Supreme Court cannot have application. Under s. 145 of the IT Act the income has to be computed in accordance with, either cash or mercantile system of accounting, regularly employed by the assessee. Here, going by either system, it must be held that the entire interest income received by the assessee has become chargeable under the head “income from other sources” since the entire discounted interest income had accrued to the assessee going by the mercantile system and had also been received by the assessee going by the cash system.

In view of our conclusion as above, we answer the substantial questions of law formulated above in favour of the Revenue and against the assessee. We, therefore, set aside the decisions of the Tribunal and the CIT(A) and restore the decision of the ITO on this point. We make no order as to costs.

[Citation : 252 ITR 735]

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