1984 (10) TMI 33 - HC - Income Tax

Court rules interest in suspense account taxable on accrual basis for assessment years; rejects 'real income' concept.

The court ruled in favor of the Revenue, holding that interest credited to the 'interest suspense account' is taxable on an accrual basis for the ... Circulars, Income, Reference Issues Involved:1. Taxability of interest credited to the 'interest suspense account' for the assessment years 1973-74, 1976-77, and 1977-78.2. Method of accounting and its impact on taxability.3. Applicability of the concept of 'real income.'4. Validity and applicability of CBDT circulars.Summary:1. Taxability of Interest Credited to 'Interest Suspense Account':The primary issue was whether the amounts credited to the 'interest suspense account' for the years ending March 31, 1973, March 31, 1976, and March 31, 1977, should be brought to tax for the assessment years 1973-74, 1976-77, and 1977-78, respectively. The Tribunal had previously ruled that such interest is not includible in the total taxable income. However, following the judgment in CIT v. Kerala Financial Corporation, [1985] 155 ITR 228 (Ker), the court answered the questions in favor of the Revenue, holding that the disputed amounts are liable to be included in the chargeable total income of the assessee on an accrual basis, even if credited to a 'suspense account.'2. Method of Accounting:The assessee argued that u/s 145 of the I.T. Act, 1961, income should be computed according to the method of accounting regularly employed by the assessee. The assessee claimed a change in the method of accounting from March 31, 1972, crediting interest on loans in the 'interest suspense account' as directed by the Reserve Bank. However, the court found that the assessee continued to maintain the mercantile system of accounting and that the change was merely in the modality of accounting, not in the method itself. Therefore, the interest income was taxable on an accrual basis.3. Concept of 'Real Income':The assessee contended that the concept of 'real income' should apply, arguing that no real income had accrued or arisen. The court reviewed several Supreme Court decisions, including CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 and CIT v. Birla Gwalior (P.) Ltd. [1973] 89 ITR 266, which emphasized that hypothetical income is not taxable. However, the court concluded that the interest in dispute had accrued and was not hypothetical, thus it was includible in the taxable income.4. CBDT Circulars:The assessee also relied on a circular from the CBDT (annexure B) that purportedly exempted the interest on sticky loans from tax. The court, however, found that annexure B could not be treated as a circular because it appeared to be a letter addressed to the Haryana Government and not a formal circular issued u/s 119 of the I.T. Act. The court also noted that the assessee had not raised this point before the Tribunal, and therefore, it could not be considered for the first time in this court.Conclusion:The court answered the questions referred in favor of the Revenue and against the assessee, holding that the interest credited to the 'interest suspense account' is taxable on an accrual basis. The court also clarified that the method of accounting had not changed and that the concept of 'real income' did not apply to the facts of this case. The CBDT circular relied upon by the assessee was not considered a valid circular for the purposes of this case.