2003 (7) TMI 11 - HC - Income Tax

Tax Court Upholds Interest Income Taxation on Accrual Basis: Legal Ruling on Accounting Practices

SMS Investment Corporation Pvt. Limited Versus Commissioner Of Income-Tax.

The High Court upheld the Tribunal's decision to tax interest income based on accrual under the mercantile system of accounting. Despite the borrowing ... Accrual of interest (on amount advanced) - 'Whether Tribunal was justified in law in holding that the interest on amount advanced to M/s. Citric India Ltd., Bombay, as per the agreement letter dated July 27, 1965, had accrued to the assessee-company following the mercantile system of accounting?' - Whether income has accrued or not to the assessee depends on the facts of each case. In our considered view when the income of the interest has been taken as accrued and taxed in just the preceding year and there is no change in the facts and circumstances in the year in hand, i.e., 1973-74, we found no infirmity in the order of the Tribunal. Issues involved:Interpretation of the mercantile system of accounting for interest income accrual.Detailed Analysis:The case involves a dispute regarding the accrual of interest income on an amount advanced to a company under an agreement. The Tribunal referred the question to the High Court to determine if the interest on the amount advanced had accrued to the assessee following the mercantile system of accounting. The borrowing company objected to the non-fulfillment of the agreement terms as the full amount was not advanced by the assessee, falling short by Rs. 3,00,000. The assessee had also advanced additional amounts in subsequent years, but as no interest was received, the income was not shown in the assessment year 1973-74.The Assessing Officer, Commissioner of Income-tax (Appeals), and the Tribunal upheld the view that interest income should be taxed based on accrual as the assessee followed the mercantile system of accounting. The counsel for the assessee argued against taxing hypothetical income when no actual interest was received and cited relevant case laws. The Tribunal considered the arguments but upheld the decision based on past assessments and discrepancies in accounts.The High Court analyzed the discrepancies in the accounts of the borrowing company and the assessee. It noted that interest income had been taxed on accrual basis till 1972-73 and found no evidence of interest waiver by the assessee. Referring to previous judgments and the mercantile system of accounting, the Court held that income accrues when legally recoverable, irrespective of actual receipt. As there were no changes in circumstances from the previous year, the Court upheld the Tribunal's decision to tax the interest income for the year in question.In conclusion, the High Court ruled in favor of the Revenue, affirming that the interest income had accrued to the assessee and should be taxed based on the mercantile system of accounting. The reference made to the Court was disposed of accordingly.