2002 (11) TMI 8 - SC - Income Tax

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

Kerala State Industrial Development Corporation Ltd. Versus Commissioner of Income-Tax

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 ... Interpretation of section 5 of the Interest-tax Act, 1974 regarding chargeable interest calculation based on accounting method - HELD THAT:- The other provisions of the Act include section 21 whereunder provisions of certain specified sections and schedules of the Income-tax Act have been made applicable with necessary modifications as if the said provisions referred to the Interest-tax Act instead of the Income-tax Act. There is no dispute that at the material time section 145 of the Income-tax Act was incorporated in the Interest-tax Act by virtue of section 21 of that Act. Section 145 of the Income-tax Act permits income chargeable under the head 'Profits and gains of business or profession' or 'Income from other sources' to be computed in accordance with either the cash or mercantile system of accounting, as may be regularly employed by the assessee. The assessee, in the case before us, has followed the cash system of accounting in respect of the interest income. Learned counsel appearing on behalf of the assessee, therefore, has, in our opinion rightly, contended that section 5 of the Interest-tax Act would in the circumstances allow the calculation or computation of chargeable interest on the basis of the amount of interest actually received. It is of significance that the provisions of the Act were amended by the Finance Act (No. 2) of 1991, to include credit institutions such as the appellant and at the same time section 145 of the Income-tax Act was also incorporated in the Act. Appeal is allowed and the order of the High Court is set aside. 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.