Taxation of accrued interest: separately computed interest in a securities purchase cannot be deducted from taxable interest received.

An amount described as computed or quoted accrued interest in the purchase price of government securities does not reduce the purchaser's taxable interest under section 8; the statutory incidence attaches to the owner when interest becomes payable. The deduction-at-source, credit and refund mechanisms and certificate requirement operate so that tax consequences follow receipt by the owner, and a contractual or invoice notation of estimated accrued interest remains part of the purchase consideration rather than a separate deductible interest entitlement. The purchaser's claim to deduct computed interest is therefore rejected.

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Issues: Whether an amount representing computed interest expressed separately in the purchase price of government securities and paid to the vendor by the purchaser is deductible from the purchaser's gross interest for assessment under section 8 of the Income-tax Act.

Analysis: Section 8 charges income-tax on interest receivable by the holder of government securities; interest on such securities is payable on specified dates and is receivable by the owner at those dates. The machinery provisions governing deduction at source and credit on behalf of the owner (Sections 18(3), 18(5) and refund under Section 48(3)), and the certificate requirement under rule 38, operate so that tax consequences attach to the owner when interest becomes payable. The form of the purchase contract or the separate notation of an estimated accrued interest in the purchase invoice does not alter the statutory incidence; the vendor receives the purchase price for the expectancy of interest, not the interest itself for tax purposes. Authorities considering identical questions have held that quoted or estimated accrued interest in a bargain does not create a separate taxable interest entitlement for the vendor and that computed interest remains part of the purchase consideration rather than a deductible charge against subsequently received interest.

Conclusion: The computed interest paid to the vendors is not deductible from the interest assessable under section 8; the charge under section 8 applies to the owner who receives the interest and the assessee's contention to deduct the computed interest is rejected.

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