Section 5 read with Section 21 (incorporating Section 145): interest-tax on cash basis where taxpayer follows cash system

SC allowed the appeal and set aside the HC order, holding that section 5 of the Interest-tax Act must be read with section 21 which incorporates section 145 of the Income-tax Act; where a taxpayer regularly follows the cash system, chargeable interest under section 5 is to be computed on interest actually received. The court noted the 1991 amendment brought credit institutions within the Act and incorporated section 145, supporting computation on a cash basis.

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Issues:
Interpretation of section 5 of the Interest-tax Act, 1974 regarding chargeable interest calculation based on accounting method.

Analysis:
The High Court was asked to decide whether the Assessing Officer correctly computed interest on accrual basis instead of cash system, considering the incorporation of section 145 of the Income-tax Act into section 21 of the Interest-tax Act. The High Court ruled against the assessee, emphasizing that chargeable interest is the total interest accruing in the relevant year, not the amount received. However, the Supreme Court noted that section 5 of the Act is subject to its provisions and includes section 21, incorporating section 145 of the Income-tax Act. This section allows income computation based on cash or mercantile accounting. The assessee followed the cash system, leading to the argument that chargeable interest should be based on interest actually received.

The Supreme Court highlighted the importance of the Finance Minister's Budget Speech, stating that the new tax would be levied on the gross amount of interest received by financial institutions. Referring to the case law of K.P. Varghese v. ITO, the Court acknowledged the relevance of the Minister's speech in interpreting legislative provisions. The Court concluded that the provisions of the Act were amended to include credit institutions and section 145 of the Income-tax Act, supporting the assessee's argument for calculating chargeable interest based on actual interest received. Consequently, the Court allowed the appeal, set aside the High Court's order, and ruled in favor of the assessee against the Revenue. No costs were awarded in this matter.

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