TaxTMI 
TaxTMI 
2020 (10) TMI 459
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...." 3. We have heard Mr. R. Parthasarathy, learned counsel for the appellant - assessee and Mr. M. Swaminathan, learned Senior Standing Counsel assisted by Ms. V. Pushpa, learned Junior Standing Counsel appearing for the respondent - Revenue. 4. The assessee, which is a bank, filed its return of income for the assessment year under consideration namely AY 2003-04 on 27.11.2003 declaring a total income of Rs. 1,51,41,88,620/-. An order under Section 143(1) of the Act was passed by the Assessing Officer on 06.1.2004 determining a refund of Rs. 10,01,58,647/-. The assessee's case was selected for scrutiny and a notice under Section 143(2) of the Act dated 29.6.2004 was issued. Thereafter, the assessee approached the Additional Commissioner of Income Tax concerned by filing an application under Section 144A of the Act, in which, the Assessing Officer was directed to complete the assessment by issuing certain guidelines. Subsequently, the assessment was completed by order dated 27.3.2006. 5. As against the said order dated 27.3.2006, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), Tiruchirapalli [for brevity, the CIT(A)], who, by order dated 25.3.2013, dis....
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....cantile system of accounting as specified under the Companies Act and that the income was assessable in the year of receipt only when cash basis was followed. 11. The Tribunal proceeded solely on the basis that the receipt of income/interest on purchase and discount may not be required to be repaid by the assessee at any point of time and that in other words, there was no liability for the assessee for payment in the subsequent year or at any point of time. Further, going by the contentions raised by the Department, the Tribunal held that the assessee physically received the amount towards income in advance and there was no liability for repayment. The Tribunal was of the opinion that the same had to be treated as income of the assessee and that the matter would stand differently in case there was liability for repayment of money received in advance. 12. In our considered view, the observation made by theTribunal that the interest received on purchase and discount may not be required to be repaid by the assessee at any point of time is a finding, which is not borne out by facts. As argued before us by Mr.R.Parthasarathy, learned counsel for the assessee, if the bills are discount....
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.... basis. In other words, when the assessee finally acquires the right to receive such income, it is charged to tax. Actual receipt of such amount, whether before or after accrual, is of no consequence. The material thing is the time of its accrual. Once an income has accrued it is liable to be taxed, notwithstanding the fact that it was not received during the year. In the same manner, if some amount has been received, which does not represent the income accrued for the year, it shall not be charged to tax and will assume the character of liability till the time of its accrual. Only when such amount accrues as income, the hitherto liability will get converted into income. Till that time, it will continue as liability despite the fact that it was received. Thus what is relevant to magnetize tax under the mercantile system of accounting is the fact of accrual of income during the year and not the receipt of any amount or non receipt of income. It shows that receipt or non receipt of an amount during the year is an irrelevant consideration in determining whether the income has accrued or not." 17. In the same order, the Tribunal also explained about 'matching concept' on the following....
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....s to how it had to be taxed. The Tribunal rightly distinguished that decision and held in paragraph 12 as follows: "....But when it comes to the discounting charges, the period of the bill is relevant as it requires the divesting of funds by the lender for such period entailing the incurring of the interest expenditure for such period. The quantum of discounting charges has direct nexus with the due date of the bill, which, in turn, determines the period for which the bank is deprived of its funds in discounting the bill. If the due date of bill crosses the date of closure of the financial year, the bank discounting the bill will incur matching interest cost on its funds in the current year and also the later year. As the interest cost for the subsequent year shall not become deductible in the current year, naturally the corresponding income in the form of discounting charges for the next year shall also not accrue as income in the current year." 20. A similar issue arose for consideration before the Mumbai Tribunal in the case of DCIT Vs. Jetu J.T.Lalwani [reported in (2007) 15 SOT 322]. In this case also, the assessee was following the mercantile system of accounting and engag....
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....." 21. Furthermore, our attention has been drawn to the Foreign Exchange Association of India Rules and in particular, Rule 2.2.(c), which reads as follows : "2.2. Application of Interest a).... b).... c) In case of early realization, interest for the unexpired period shall be refunded to the customer. The bank shall also pay or recover notional swap cost as in the case of early delivery under a forward contract. Interest on outlay/inflow of funds for such SWAPS shall also be recovered/ paid as per Rule 6 para 6.6." 22. In terms of the above Rule, in case of early realization, interest for the unexpired period should be refunded to the customer. 23. A reference was also made to the Master Direction - Export of Goods and Services issued by the Reserve Bank of India in Master Direction No.17/2016-17 dated 01.1.2016, updated on 04.2.2016 and in paragraph C.2, the direction deals with interest of import bills and in Clause (ii), it has been stated as follows : "In case of pre-payment of usance import bills, remittances may be made only after reducing the proportionate interest for the unexpired portion of usance at the rate at which interest has been claimed or LIBOR of th....