1996 (5) TMI 19 - HC - Income Tax

High Court Upholds Tribunal's Decision on Income Tax Deductions, Rules on Interest Accrual

The High Court upheld the Tribunal's decisions in favor of the assessee, ruling that the deduction under section 36(1)(viii) of the Income-tax Act should ... Deduction In Respect, Financial Corporation, Hybrid System, Special Reserve Issues:Interpretation of provisions of clause (viii) of sub-section (1) of section 36 of the Income-tax Act for computing income under 'Profits and gains of business and profession' and treatment of interest amount on cases in litigation as income.Analysis:1. The first issue revolves around the interpretation of clause (viii) of section 36(1) of the Income-tax Act regarding the computation of income for the purpose of creating a special reserve. The dispute arises from whether the deduction should be calculated before or after making deductions under Chapter VI-A. The Tribunal concluded that the deduction should be computed with reference to the gross total income, excluding deductions under Chapter VI-A, as per the provisions of the Act and relevant case law. This interpretation was upheld by various High Courts, emphasizing that the total income for this purpose is after allowing deductions under clause (viii).2. The second issue concerns the treatment of interest accrued on cases in litigation as income. The dispute arose when the Income-tax Officer included accrued interest in the assessee's income, based on the mercantile system of accounting. However, the Tribunal, supported by past decisions and the hybrid accounting system followed by the assessee, ruled that the interest on doubtful recoveries need not be recognized as income until it is realistic to do so, aligning with the principles of the mercantile system. The Tribunal's decision was further supported by a relevant case law, emphasizing the realistic approach in recognizing interest income.3. The judgment also references amendments made by the Finance Act, 1985, which clarified the computation of deductions under section 36(1)(viii) to be before making any deduction under this clause and Chapter VI-A. This amendment was applicable from the assessment year 1985-86 onwards, providing clarity on the calculation of deductions for financial corporations.4. Ultimately, the High Court upheld the Tribunal's decisions on both issues, ruling in favor of the assessee and against the Revenue. The Court agreed that the allowance under section 36(1)(viii) should be computed before making any deductions under Chapter VI-A, aligning with the statutory provisions and judicial interpretations. No costs were awarded in this matter.