Debenture interest taxation may follow the spread-over method where real income is better reflected over time.

Interest income embedded in the difference between debenture purchase price and redemption value may be taxed on a spread-over or amortization basis where that method better reflects real income and accords with the matching principle, rather than being taxed entirely on accrual in the year of allotment. On the peculiar facts, the Court held that recomputation would serve no practical purpose and restored the Tribunal's view, so the assessee succeeded and the High Court order was set aside.

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Issues: Whether the interest income arising from the difference between the purchase price and redemption price of debentures was taxable on accrual basis in the year of allotment or on spread-over basis.

Analysis: The dispute concerned the proper timing of taxation of debenture-related interest income. The Court treated taxation on amortization or spread-over basis as consistent with the matching principle and the concept of real income, and noted that recomputation would serve no practical purpose on the facts of the case.

Conclusion: The order of the High Court was set aside and the order of the Income Tax Appellate Tribunal was restored, with the result that the assessee succeeded.

Final Conclusion: The controversy on the mode of taxing the debenture-related interest income was resolved in favour of the assessee on the peculiar facts of the case.

Ratio Decidendi: Where debenture-related interest is intrinsically linked to the spread between purchase price and redemption value, taxation may properly follow the spread-over or amortization method rather than being confined to immediate accrual in the year of allotment, when that method better reflects real income.

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