Interest income from Bank deposits not credited during assessment year taxable. Revenue wins.

The High Court of Kerala held that interest income from Bank deposits, not credited to the assessee's account during the assessment year, is taxable income and should be assessed for taxation in that year. The Court rejected the argument that income accrues only upon crediting, emphasizing that under the mercantile system, income is recognized when legally due. The Court ruled in favor of the Revenue, setting aside the Tribunal's decision and restoring the assessment to include the interest income in question.

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Issues:
Assessment of interest income from Bank deposits not credited to the assessee's account during the assessment year.

Analysis:
The High Court of Kerala heard an appeal by the Revenue against the Income Tax Appellate Tribunal's order regarding the assessment year 2009-10 for the Plantation Corporation of Kerala Ltd. The Tribunal had reversed the assessing officer's decision to tax an amount of Rs. 3,23,91,555 claimed as interest receivable on fixed deposits. The Tribunal held that income accrues only when the right to receive is accrued, and since the Bank neither credited nor paid the interest, no tax was deducted, and the income cannot be taxed. The Court considered whether the interest income, not credited to the assessee's account during the assessment year, could be assessed to tax. The Revenue argued that under the mercantile system of accounting followed by the assessee, the entire interest accrued should have been offered for taxation in the year it accrued.

The Court referred to the Tuticorin Alkali Chemicals and Fertilizers Ltd. case, emphasizing that interest accrued is taxable income and attracts tax as soon as it accrues. The Court rejected the argument that interest does not accrue until credited to the account, stating that the mercantile system recognizes income as soon as it becomes legally due, even if not physically received. The Court distinguished the Excel Industries Ltd. case, where income accrued only upon imports, as the benefits under advance licenses did not represent real income until imports were made. In the present case, the Court found that the assessee had shown interest income as accrued in the books but excluded a portion from taxation, claiming it was not received. The Court held that interest accrued in the relevant year is taxable income, liable to be taxed in that year.

The Court dismissed the argument that the Bank's failure to deduct tax at source absolved the assessee from tax liability, stating that the Bank's obligation arises only upon payment of interest. The Court also rejected the assessee's reliance on a previous decision, emphasizing that interest income is taxable when it accrues, regardless of actual receipt. Ultimately, the Court sided with the Revenue, holding that the interest income on Bank deposits was not hypothetical income and should be included in the assessment. The appeal was allowed, the Tribunal's order was set aside, and the assessment was restored in favor of the Revenue.

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