Interest on Government securities accrues only on due dates; sale surplus is capital gains, not treaty interest.

Interest on Government securities accrues only on the contractual payment dates, because the holder has no enforceable right to receive interest earlier; no notional or broken-period accrual arises merely from year-end holding or sale before the next due date. The sale surplus on such securities is not "interest" under Article 11(4) of the India-Cyprus tax treaty, as it results from transfer of the asset rather than from the debt-claim itself; it is taxable, if at all, as capital gains under Article 14(4). Treaty protection therefore applied to the assessee, and the tax additions were unsustainable.

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Issues: (i) Whether interest on Government securities accrued to the holder before the contractual due date, including for a broken period, merely because the securities were held on the last day of the financial year or were sold before the next due date. (ii) Whether the surplus realised on sale of Government securities was "interest" under Article 11(4) of the India-Cyprus tax treaty or was taxable only as capital gains under Article 14(4).

Issue (i): Whether interest on Government securities accrued to the holder before the contractual due date, including for a broken period, merely because the securities were held on the last day of the financial year or were sold before the next due date.

Analysis: Income accrues when the assessee acquires a vested right to receive it. Where the security itself stipulates that interest is payable only on specified dates, no enforceable right to receive interest arises on any earlier date. The holder of such securities is therefore not chargeable on a notional or proportionate basis for a broken period between two due dates.

Conclusion: Interest did not accrue for the broken period and the addition made on that basis was rightly deleted.

Issue (ii): Whether the surplus realised on sale of Government securities was "interest" under Article 11(4) of the India-Cyprus tax treaty or was taxable only as capital gains under Article 14(4).

Analysis: Article 11(4) covers income from debt-claims, including interest from Government securities and the specified accretions attached to such instruments. The sale proceeds of the securities themselves do not constitute interest, because they arise from transfer of the asset and not from the debt-claim as such. Once the receipt is not interest under Article 11, it falls within the residuary capital gains article.

Conclusion: The sale proceeds were capital gains and fell under Article 14(4), with the result that the assessee was entitled to treaty protection.

Final Conclusion: The tax additions were unsustainable both on accrual principles and under the treaty, and the appeal failed.

Ratio Decidendi: Interest on securities accrues only on the date fixed for payment in the instrument, and the sale price of the securities is not "interest" under the treaty definition of income from debt-claims; it is capital gain from alienation of property.

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