Tribunal rules interest on fixed deposits not taxable if not due yet

The Tribunal ruled in favor of the assessee, holding that under the mercantile system of accounting, interest accrued but not due on fixed deposits for a term exceeding one year should not be taxed in the impugned assessment year. The Tribunal emphasized the importance of aligning income declaration with actual receipt and acknowledged payable amounts, ultimately deleting the interest income in question from the assessment.

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Issues:
- Taxability of interest accrued but not due on fixed deposits under the mercantile system of accounting.

Analysis:
The judgment revolves around the issue of whether interest accrued but not due on fixed deposits for a term exceeding one year should be taxed in the impugned assessment year under the mercantile system of accounting. The assessee, a primary society engaged in milk procurement, filed a return declaring NIL income after adjusting brought forward losses. The Assessing Officer noted fixed deposits of Rs. 1.27 crores, with no interest income declared. The dispute arose when the Assessing Officer added an estimated 10% interest to the income, which was appealed before the CIT(A). The CIT(A) upheld the addition, stating that interest accrued but not due on fixed deposits for over a year should be taxed when the deposit matures, following the mercantile system of accounting.

The assessee argued that the bank credits the fixed deposit amount on maturity along with tax deducted at source (TDS) information, making it challenging for the assessee to compute accrued interest. The assessee contended that TDS should be considered for the entire term period, not just one year. Additionally, the assessee highlighted the CBDT's guidance on coordinating TDS with income generated, emphasizing the difficulty in taxing income not intimated by the bank. The assessee's policy aligned with the CBDT Circular to declare income when received and taxed at source, maintaining compliance with the mercantile system of accounting.

The Tribunal analyzed the situation, considering the CBDT's clarification on taxing term deposits exceeding one year or encashed mid-year based on TDS certificates. While agreeing that TDS does not impact income under the Income-tax Act, the Tribunal noted the discrepancy in how the total taxable amount upon maturity relates to the impugned assessment year's taxed income. Ultimately, the Tribunal ruled in favor of the assessee, emphasizing that under the mercantile system of accounting, income not received or acknowledged as payable should not be taxed. The Tribunal concluded that the interest income in question, confirmed by the CIT(A), should be deleted, thereby allowing the appeal of the assessee.

In conclusion, the judgment clarifies the tax treatment of interest accrued but not due on fixed deposits under the mercantile system of accounting, emphasizing the importance of aligning income declaration with actual receipt and acknowledging payable amounts.

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