Court rules accrued interest on advances not taxable

The High Court of Calcutta ruled in favor of the assessee, holding that the accrued interest on advances made to a company was not taxable under the Income-tax Act for the assessment years 1971-72 and 1972-73. The Court emphasized that for such interest to be assessed, the assessee's accounting method must also be on an accrual basis, which was not the case here. The Revenue's argument that even on a cash basis the assessee is liable for tax on accrued interest was rejected, and the Court directed the Revenue to bear the costs of the reference. Judge Bhagabati Prasad Banerjee concurred with the judgment.

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Issues:
1. Whether the accrued interest on advances to a company is the assessee's income liable to tax under the Income-tax Act, 1961 for the assessment years 1971-72 and 1972-73Rs.

Analysis:
The High Court of Calcutta addressed the issue of accrued interest on advances made by the assessee to a company, Brahmachari Research Institute (P.) Ltd., for the assessment years 1971-72 and 1972-73. The assessee contended that since no interest was received in those years, it was not shown as income in the returns, as per the cash basis of accounting. The Income-tax Officer assessed the interest due on accrual basis, relying on the company's accounts maintained on the mercantile system, showing the liability to pay interest. However, the Court emphasized that the assessee's accounting method must also be on accrual basis to warrant such assessment.

The Appellate Assistant Commissioner supported the assessee's stance, noting that interest had been included as income in past years when received, considering the financial state of the company. Conversely, the Tribunal disregarded past practices, emphasizing the need to assess the accrued interest independently. It was highlighted that further advances were made to the company in the relevant years, with accrued interest reflected in its accounts, but no evidence suggested the assessee maintained accounts on accrual basis.

The Court rejected the Revenue's argument that even on a cash basis, the assessee is liable for tax on accrued interest, citing a Supreme Court case where the assessment was based on the mercantile system. The Court found no relevance of that case to the present scenario and ruled in favor of the assessee, emphasizing the absence of evidence supporting accrual basis accounting by the assessee. Consequently, the question was answered in the negative, holding the accrued interest not taxable for the assessee. The Revenue was directed to bear the costs of the reference. Judge Bhagabati Prasad Banerjee concurred with the judgment.

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