Taxability of Government security interest turns on due date receipt, not embedded purchase-price interest, under section 8.

Interest on Government securities under section 8 of the Income-tax Act, 1922 was treated as becoming taxable only when it became due and receivable, not day by day. The Lahore HC reasoned that the purchaser became owner before the interest due date, and the statutory machinery tied deduction, credit, assessment and refund to payment and ownership at the time the interest became receivable. A computed interest element embedded in the purchase price did not create a separate deductible charge against the later interest receipt. The conclusion was that the computed interest was not deductible from the interest actually received.

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Issues: Whether computed interest included in the purchase price of Government securities could be deducted from the interest actually received by the assessee for purposes of assessment under section 8 of the Income-tax Act, 1922.

Analysis: Section 8 was treated as making tax payable on the interest receivable from Government by the holder of the security when it became due and receivable. Interest on Government securities was held not to accrue day by day, but only on the specified due dates, by which time the purchaser had become the owner and received the whole amount. The machinery provisions reinforced this view, because deduction and credit of tax were tied to payment, ownership, the prescribed certificate, and subsequent assessment or refund, all of which proceeded on the footing that the taxable person was the owner at the time the interest became receivable. The separation of a computed interest figure in the contract of purchase did not convert that amount into a distinct deductible charge against the later interest receipt.

Conclusion: The computed interest was not deductible from the interest received by the assessee, and the question was answered against the assessee and in favour of the Revenue.

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