Case Note & Summary
The petitioner, Indusind Bank Ltd., a private sector bank, filed its return of income for Assessment Year 1997-98 on 1st December 1997, declaring an income of Rs.12,73,80,111/- being interest accrued on Government securities and debentures held as on 31st March 1997. The Assessing Officer, by order dated 28th March 2000, completed the assessment and held that a sum of Rs.25,17,19,849/- being interest on Government securities had accrued to the petitioner as on 31st March 1997 and was liable to tax under Section 5 of the Income Tax Act, 1961. The petitioner challenged this addition before the Income Tax Settlement Commission, which rejected the application. The petitioner then filed a writ petition before the Bombay High Court. The core legal issue was whether interest on securities that had accrued but not been received by the end of the accounting year is taxable under Section 5 of the Act. The petitioner argued that under the mercantile system of accounting, income accrues only when the right to receive it arises, and for interest on securities, the right arises only on the due dates of payment, not on a day-to-day basis. The respondents contended that interest accrues day by day and is taxable on accrual basis. The court analyzed the provisions of Section 5 and the mercantile system of accounting, and held that for interest on securities, the income accrues only on the stipulated dates of payment. Since the interest in question had not fallen due for payment as on 31st March 1997, it was not taxable in that assessment year. The court allowed the writ petition and set aside the addition made by the Assessing Officer.
Headnote
A) Income Tax - Accrual of Income - Section 5 of Income Tax Act, 1961 - Interest on Government Securities - The issue was whether interest accrued but not received on Government securities and debentures as on the last day of the accounting year is taxable under Section 5 of the Act. The court held that under the mercantile system of accounting, income accrues when the right to receive it arises, but in the case of interest on securities, the right to receive arises only on the due dates of interest payment, not on a day-to-day basis. Therefore, interest that had not fallen due for payment as on 31st March 1997 was not taxable in that assessment year. (Paras 1-10) B) Income Tax - Mercantile System of Accounting - Section 145 of Income Tax Act, 1961 - Accrual of Interest - The court examined the concept of accrual under the mercantile system and held that for interest on securities, the income accrues only on the stipulated dates of payment, not on a proportionate basis over time. The Assessing Officer's addition of interest accrued but not due was contrary to law. (Paras 5-10) C) Income Tax - Settlement Commission - Jurisdiction - Section 245D of Income Tax Act, 1961 - The Settlement Commission had rejected the petitioner's application for settlement, but the court did not delve into the merits of that rejection as the main issue was decided on the taxability of interest. The writ petition was allowed on the substantive issue. (Paras 1-10)
Issue of Consideration
Whether interest on Government securities and debentures which had accrued but not been received by the petitioner as on 31st March 1997 is taxable under Section 5 of the Income Tax Act, 1961?
Final Decision
The court allowed the writ petition and set aside the addition of Rs.25,17,19,849/- made by the Assessing Officer, holding that interest on securities which had not fallen due for payment as on 31st March 1997 was not taxable under Section 5 of the Income Tax Act, 1961.
Law Points
- Accrual of income
- receipt of income
- mercantile system of accounting
- taxability of interest on securities
- Section 5 of Income Tax Act
- 1961
