2005 (7) TMI 80 - HC - Income Tax

Interest in suspense accounts not taxable for 1980-81 assessment year. Mercantile accounting system applied.

The High Court held that interest credited to interest suspense accounts by a financial corporation was not taxable for the assessment year 1980-81. The ... Interest income – accrual/realisation of income – additions to total income - (1) Whether the Tribunal was justified in law in holding that interest of Rs. 1,16,96,604 credited to the interest suspense (suit filed) account and interest suspense (recalled) account had accrued to the assessee and was chargeable to tax for the assessment year 1980-81?' – taxability of the amount credited to (a) 'Interest suspense (suit filed) account' amounting to Rs. 59,57,822 and - (b) 'Interest suspense (recalled) account' amounting to Rs. 57,38,782 - in our view the amount of Rs. 59,57,822 could not have been added to the total income, as interest income - award of interest for the period subsequent to the filing of the suit till the date of decree, lies within the discretion of the court and as such the interest from the date of filing of the suit is not liable to tax each year, on the premise that the interest had continued to accrue from year to year – further, Tribunal was not justified in taxing the amount of Rs. 57,38,782. Issues:Taxability of interest credited to interest suspense accounts for assessment year 1980-81.Analysis:The case involved the question of whether interest credited to interest suspense accounts was taxable for the assessment year 1980-81. The assessee, a financial corporation, filed its return declaring income, which included amounts credited to 'Interest suspense (suit filed) account' and 'Interest suspense (recalled) account.' The Income-tax Officer considered these amounts taxable as the assessee maintained accounts on a mercantile basis. However, the Commissioner of Income-tax (Appeals) held that the amounts were not taxable on an accrual basis but on a realization basis, based on a previous Tribunal decision. The matter was appealed to the Tribunal by the Revenue, citing the Supreme Court's decision on the mercantile system of accounting. The Tribunal found that the assessee continued to follow the mercantile system, even after changes in the accounting method, and held the amounts in the interest suspense accounts as assessable income.The Tribunal relied on the Supreme Court's decision in State Bank of Travancore v. CIT [1986] 158 ITR 102, which emphasized that income accrued under the mercantile system is assessable regardless of whether it is credited to a suspense account. The Tribunal also referred to the Bombay High Court decision in CIT v. Confinance Ltd. [1973] 89 ITR 292, stating that income is assessable if it has arisen or accrued, regardless of actual receipt. The Tribunal found the interest amounts in the suspense accounts assessable, leading to the question raised by the assessee.Regarding the circular issued by the Central Board of Direct Taxes, the Tribunal considered the subsequent Supreme Court judgment in UCO Bank v. CIT [1999] 237 ITR 889, which clarified that interest in suspense accounts should not be taxed based on the circular. The Tribunal was deemed unjustified in taxing one of the interest amounts based on this clarification. The other interest amount was also found not liable for tax as it was within the court's discretion to award interest from the date of the suit till the decree, as determined by the Calcutta and Orissa High Courts. Consequently, the Tribunal's decision to tax both interest amounts was overturned, ruling in favor of the assessee against the Revenue.In conclusion, the High Court ruled in favor of the assessee, holding that the interest amounts in the interest suspense accounts were not taxable for the assessment year 1980-81. The judgment highlighted the application of the mercantile system of accounting and the discretion of the court in awarding interest, ultimately leading to the disposal of the reference with no costs awarded.