Fixed deposit interest taxed as revenue income on accrual; only interest accrued in the relevant year was assessable.

Interest on fixed deposits under a reinvestment plan was treated as revenue income, not capital gains, because the deposit terms showed annual accrual and reinvestment at the assessee's instance. The tax effect followed the accrual principle under sections 4 and 5 of the Income-tax Act: the income was taxable when accrued, subject to any permissible assessment on receipt basis. The assessee's alternative claim was accepted in light of CBDT circulars and Supreme Court support, so only the interest that accrued during the relevant previous year was liable to tax for that assessment year.

---

---

Issues: Whether the interest arising on fixed deposits under a reinvestment plan was assessable as capital gains or as revenue income, and whether only the interest that accrued in the relevant previous year could be brought to tax.

Analysis: The fixed deposit receipts showed that interest accrued annually and was reinvested at the assessee's instance, so the receipts could not be treated as capital gains. Once the interest was characterised as revenue receipt, the scheme of sections 4 and 5 of the Income-tax Act required taxation of income on accrual, unless the assessee was permitted to be assessed on receipt basis. The assessee was entitled to the benefit of the CBDT circulars recognising such option, and the Supreme Court decision in CIT v. T. N. K. Govindarajulu Chetty supported assessment only of income accrued in the relevant year.

Conclusion: The interest was not capital gains. The assessee succeeded on the alternative plea, and only the interest accrued during the previous year relevant to the assessment year was liable to be assessed.

Ratio Decidendi: Where fixed deposit interest accrues annually under the terms of the deposit, it is taxable as revenue income on accrual, and only the income accrued in the relevant previous year can be assessed for that year, subject to the assessee's permissible option under the tax administration circulars.

---