Court rules interest on securities accrues only on due dates. Income accrues when right to receive it. India-Cyprus treaty exempts capital gains.

The court held that interest on securities accrues only on the specified due dates, not on prior dates. The court relied on precedents to determine that income accrues when there is a right to receive it. Regarding the taxation of gains from the sale of securities under the India-Cyprus tax treaty, the court concluded that the gains were capital gains exempt from tax in India, not interest income. The respondent/assessee prevailed, and the appeal was dismissed with no order as to costs.

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Issues Involved:
1. Accrual of interest on securities as of the last date of the financial year.
2. Taxation of gains from the sale of securities under the India-Cyprus tax treaty.

Issue-wise Detailed Analysis:

Issue I: Accrual of Interest on Securities as of the Last Date of the Financial Year

Summary:
The primary question was whether interest could be said to have accrued to the respondent/assessee on 31st March, 2001, for securities held on that date, even though the interest was not due or payable on that date.

Detailed Analysis:
- The respondent follows the mercantile system of accounting and had declared interest income from securities in its return for the assessment year 2001-2002.
- The Assessing Officer taxed Rs. 1,21,57,517/- as interest accrued though not due on securities held as of 31st March, 2001.
- The appellant's argument was that interest accrues from day to day and is included in the sale price of the securities.
- The court, however, concluded that interest accrues only on the date stipulated in the security for payment of interest, not on any prior date.
- The court relied on precedents, including the Supreme Court's decision in E.D. Sassoon & Co. Ltd., which emphasized that income accrues when there is a right to receive it.
- The court also referenced Wigmore v. Thomas Summerson & Sons and Vijaya Bank Limited v. Additional Commissioner of Income Tax, which supported the view that interest does not accrue daily but only on the specified due dates.
- Consequently, the appellate authorities rightly deleted the addition of Rs. 1,21,57,517/- by the Assessing Officer as interest income.

Issue II: Taxation of Gains from the Sale of Securities Under the India-Cyprus Tax Treaty

Summary:
The second issue was whether the sale of securities by the respondent was covered by Article 14 of the tax treaty between India and Cyprus, thereby making the gains exempt from tax in India.

Detailed Analysis:
- The respondent argued that the gains from the sale of securities constituted capital gains under Article 14(4) of the DTAA and were therefore exempt from tax in India.
- The Assessing Officer had treated the gains as interest under Article 11(4) of the DTAA, which includes income from Government securities and bonds.
- The court analyzed Article 11(4) and concluded that the term "interest" means income from debt-claims and does not include the sale proceeds of the debt-claim itself.
- The court emphasized that the sale price recovered in excess of the value of the security cannot be considered a premium "attaching to such securities" as per Article 11(4).
- The court referred to the Model Tax Convention on Income Tax & on Capital, which supports the view that profits from the sale of securities do not constitute interest.
- Consequently, the court held that the gains from the sale of securities are capital gains and fall under Article 14(4) of the DTAA.
- As a result, the respondent was entitled to the benefit of the exemption under Article 14 of the DTAA.

Conclusion:
The questions were answered in favor of the respondent/assessee, and the appeal was dismissed with no order as to costs.

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