Kerala High Court
Kerala State Industrial Development ... vs Commissioner Of Income Tax on 23 January, 2003
Author: P.R. Raman
Bench: G. Sivarajan, P.R. Raman
JUDGMENT P.R. Raman, J.
1. This is an appeal filed by the assessee - the Kerala State Industrial Development Corporation Ltd. - a Government concern, the entire shares having subscribed by the Government. The assessment relates to the year 1995-96. The object of the appellant-assessee is to render financial assistance by granting of loans to industries to carry out the object of industrial promotion in the State. For the year 1995-96, the appellant filed its return. The appellant has adopted cash system of accounting in respect of its income by way of interest and on the basis chargeable interest was computed while submitting the return. But the assessing officer computed the chargeable interest under Section 145 of the Income Tax Act on accrual basis and made certain additions and imposed tax on the enhanced chargeable interest. The assessee preferred an appeal before the Commissioner of Income Tax (Appeals), Trivandrum. The Commissioner dismissed the appeal on the point following the decision of the Income Tax Appellate Tribunal in the case of the appellant for the assessment year 1993-94 though, on other points the appeal was allowed. Thereafter, the appellant preferred a second appeal before the Income Tax Appellate Tribunal, Cochin Bench as Interest Tax Appeal 8 of 1998. The appellate tribunal by its common order dated 21.3.2002 dismissed the same on the issue of computation of chargeable profits and upheld the order of the assessing officer and that of the Commissioner (Appeals) holding that the chargeable interest shall be computed on accrual basis and not on cash basis. Impugning the said decisions, the appellant has preferred this appeal.
2. The short question that arises for consideration is as to whether on the facts and circumstances of the case and by virtue of the incorporation of Section 145 of the Income Tax Act in Section 21 of the Interest Tax Act the decision of the Appellate Tribunal that the chargeable interest under the Interest Tax Act should be computed on accrual basis instead of cash basis regularly employed by the assessee in respect of interest income and accepted and followed by the Income Tax authorities under the Income Tax Act, 1961 is correct in law?
3. Accordingly to the learned counsel appearing for the appellant the interest income from loans and advances should be treated on receipt basis and not on accrual basis as held by the authorities below. The assessee, for the assessment year 1995-96, filed the return on 27.11.1995 declaring chargeable interest of Rs. 13,07,93,320/- and the assessing officer computed the chargeable interest at Rs. 28,15,05,700/- while completing the assessment under Section 8(2) of the Interest Tax Act. Accordingly to the learned counsel. Section 5 of the Interest Tax Act which is subject to the other provisions of the Act must yield to Section 21 of the said Act and in view of the fact that Section 21 of the Interest Tax Act incorporates Section 145 of the Income-tax Act, the method of accounting accepted under the Income-tax Act should be accepted under Interest Tax Act also. According to him, Section 145 of the Income-Tax Act is introduced in Section 21 of the Interest Tax Act only with effect from 1.10.1991 and before 1.10.1991 the assessee had no option but to follow accrual system. But after the introduction of Section 145 as aforesaid the assessee had an option to follow the system of accounting followed under the Income Tax Act for Interest tax also.
4. The Tribunal, following the judgment of this Court in I.T.R. 250 of 1997 reported in Kerala State Industrial Development Corporation Ltd. v. Commissioner of Income Tax (246 ITR 330) in the case of the same assessee for the assessment year 1993-94 decided the issue in favour of the Revenue and accordingly, the Tribunal dismissed the appeal filed by the assessee. The assessee had raised another ground that from the chargeable interest taken on accrual basis, the assessing officer may be directed to exclude the interest in relation to categories of bad or doubtful debts referred to in Section 43D of the Income Tax Act as per proviso to Section 5 of the Interest Tax Act. Thus, except to exclude the interest accrued or deemed to be accrued on bad and doubtful debts, the Tribunal confirmed the order of the lower authorities holding that the interest income is chargeable on accrual basis under the Interest Tax Act.
5. The assessee followed the mercantile system of accounting for payment and cash system for interest receipts. According to the assessing officer such procedure cannot be adopted. Section 5 of the Income Tax Act reads as follows:
5.(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which--
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year; or
(c) accrues or arises to him outside India during such year:
Provided that, in the case of a person not ordinarily resident in India within the meaning of Sub-section (6) of Section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.
(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which--
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.
Explanation 1.--Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.
Explanation 2--For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India."
Sections 4 & 5 of the Interest Tax Act is also quoted hereunder for easy reference.
"4. Charge of tax (1) Subject to the provisions of this Act, there shall be charged on every scheduled bank for every assessment year commencing on or after the 1st day of April, 1975, a tax in this Act referred to as interest-tax in respect of its chargeable interest of the previous year at the rate of seven per cent of such chargeable interest:
[Provided that the rate at which interest-tax shall be charged in respect of any chargeable interest accruing or arising after the 31st day of March, 1983 shall be three and a half per cent of such chargeable interest.] (2) Notwithstanding anything contained in Sub-section (1) but subject to the other provisions of this Act, there shall be charged on every credit institution for every assessment year commencing on and from the 1st day of April, 1992, interest-tax in respect of its chargeable interest of the previous year at the rate of three per cent of such chargeable interest.]
5. Scope of chargeable interest:
"Subject to the provisions of this Act, the chargeable interest of any previous year of a credit institution shall be the total amount of interest (other than interest on loans and advances made to other credit institutions) accruing or arising to the credit institution in that previous year.
Provided that any interest in relation to categories of bad or doubtful debts referred to in Section 43D of the Income Tax Act shall be deemed to accrue or arise to the credit institution in the previous year in which it is credited by the credit institution to its profit and loss account for that year or, as the case may be, in which it is actually received by the credit institution, whichever is earlier."
6. Which Section 4 of the Interest Tax Act is the charging Section providing for levy of tax on chargeable interest, Section 5 relates to the scope of chargeable interest. This Court in Kerala State Industrial Development Corporation Ltd. v. Commissioner of Income Tax (246 ITR 330) took the view that there is a basic difference between Section 5 of the Income Tax Act and the provision in the Interest Tax Act. While Section 5 (SIC) Income Tax Act refers to income received or deemed to be received the Interest Tax Act does not refer to any receipt and it specifically refers to interest accruing or arising. The words "accrue" and "arise" though not defined in the Act are certainly synonymous and are used in the sense of bringing in as a natural result. Strictly speaking, the word "accrue" is not synonymous with "arise". After referring to some of the decisions on the point, it was finally held that if the assessee's interpretation is accepted, it would render the charging section inoperative and ineffective. Against the said decision, the assessee filed an appeal before the apex court as Civil Appeal No. 3189 of 2000. The apex court by its judgment dated 12th November, 2002 set aside the order of the High Court and the appeal was allowed.
7. As we have noticed, this Court held that the chargeable interest in terms of Section 5 of the Act was the total amount of interest accruing in the relevant previous year and, that there was no scope, in the section to read chargeable interest as meaning the amount actually received in the relevant previous year. The apex court held that the High Court while dealing with this question overlooked the opening words of Section 5 of the Act which make the provisions of the said section "subject to the provisions of the Act". The other provisions of the Act include Section 21 whereunder provision 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 Income Tax Act. It is also observed that 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 cash or mercantile system of accounting, as may be regularly employed by the assessee. The assessee followed the cash system of accounting in respect of the interest income. Hence the contention that Section 5 of the Interest Tax Act would, in the circumstances, allow the calculation or computation of chargeable interest on the basis of amount of interest actually received was upheld. The apex court also took notice of the significance that the provisions of the Act were amended by 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. The budget speech of the Finance Minister while introducing the Bill was also referred to in the judgment of the apex court wherein it is referred to the fact that the new tax will be levied on the gross amount of interest received by all banks, financial institutions etc. That the Finance Minister's speech can be relied on to throw light on the subject has been recognized by the apex court in K.P. Varghese v. Income Tax Officer, Ernakulam and Ors., (131 ITR 597). Thus, the apex court reversed the judgment of this Court and held that the appellant is entitled to follow the cash system of accounting in respect of interest income and that the chargeable interest and the computation of the amount on the basis of the interest actually received was allowed.
8. In the above facts and circumstances and in view of the decision of the apex court in the assessee's case in Civil Appeal No. 3189 of 2000 reversing the judgment of this Court reported in 246 ITR 330, we allow this appeal and set aside the judgment of the authorities below and answer the question in favour of the assessee and against the Revenue. We accordingly direct the assessing officer to complete the assessment afresh accepting the computation of chargeable interest made by the appellant on receipt basis in respect of interest income.