Income Tax Appellate Tribunal - Cochin
Deputy Cit vs Bharat Kumar Patel & Co. on 6 July, 2001
Equivalent citations: [2001]80ITD34(COCH)
ORDER
Dr. O.K. Narayanan, A.M. This appeal is filed by the revenue. The relevant assessment year is 1990-91. The ground raised by the revenue is as follows :
"The learned Commissioner (Appeals) erred in holding that the Income Tax Officer's action of assessing the entire interest of Rs. 92,120 received from IDBI in the assessment year 1990-91 is not in order and directing to assess only the amount pertaining to this year as interest income from IDBI. The appellate authority ought to have noticed that what the assessee had received was the discounted value of the interest for three years and that the right to receive the discounted amount had accrued to him during the current year. The Commissioner (Appeals) ought to have noticed that even though interest is receivable for three years what was received was a lower amount in respect of which the right accrued this year and so on that basis the assessment should have been confirmed.'
2. The assessee in this case had deposited an amount of Rs. 3,92,000 in IDBI Capital Investment Bond for a period of three years. The assessee was entitled for interest at 9 per cent per annum. As per the scheme formulated by IDBI, it was possible for the assessee to opt to receive the discounted value of interest of the entire period of three years in one lumpsum instalment. The assessee exercised this option, and received a sum of Rs. 92,120 during the relevant previous year. But the assessee offered only Rs. 30,707, one-third of the interest received, as the income pertaining to the impugned assessment year, holding that the balance amount of Rs. 61,413 would be assessable for the two subsequent assessment years. The assessing officer held that the assessee having received the entire interest at a discounted rate in advance during the relevant previous year itself, the entire interest has to be assessed as the income of the impugned assessment year.
3. In first appeal, the Commissioner (Appeals) held that the assessee was right in offering only 1/3rd of the interest for assessment and postponing 2/3rd of the interest for succeeding assessment years. For this direction, the Commissioner (Appeals) relied on a decision of the Income Tax Appellate Tribunal Bombay D Bench in the case of Anil I. Popat v. Dy. CIT (IT Appeal No. 2061 (Bom) of 1992 dated 18-12-1992). The Commissioner (Appeals) also found that the above Tribunal decision relied on a decision of the Madhya Pradesh High Court in the case of (1987) 165 ITR 765. It is against the above direction that the revenue has come in appeal before us.
4. Shri N.K. Vijayaraghavan, the learned Departmental Representative appearing for the revenue contended that the method followed by the assessee in offering one-third of the interest is not a correct method. In Income Tax Act, the income is assessable at the moment of its receipt or at the moment of its accrual. The receipt of the income might be simultaneous with, or subsequent to the accrual of income. But there cannot be a situation where the income received in a particular assessment year can be apportioned and a part of the income shown as income for subsequent assessment years. This is because as far as those subsequent assessment years are concerned, there is no accrual or receipt of any income. The basis for such apportionment of interest has not been clarified by the Commissioner (Appeals). There is no legal basis for assessing the discounting interest in different assessment years. The charging section 5(1) clearly lays down that income is assessable on receipt basis or on accrual basis.
5. Shri K.C. Joseph Varghese, the learned Chartered Accountant appearing for the respondent-assessee submitted that the assessee was following mercantile system of accounting and therefore the income attributable to a particular assessment year alone could be assessed to tax even though the assessee may receive the entire interest in advance. He submitted that the Bonds purchased by the assessee was for a period of three years and the assessee was entitled to receive the interest for those three years. Even though the assessee has discounted the interest during the first year itself and received such discounted interest during that year such interest actually related to the three years and not for the year of receipt alone and therefore it is a proper method of disclosure of income in three instalments for the respective three years. The learned Chartered Accountant specifically relied on the decision of the Supreme Court in Madras Industrial Development Corpn. Ltd. v. CIT (1997) 225 ITR 802. He submitted that in that case the discount incurred by the assessee-company in a particular assessment year, but pertaining to debentures refundable after 12 years, the discount has been allowed to be deducted proportionately for that period of 12 years. This principle upheld by the Supreme Court in the case of an expenditure, if applied in the present case, would justify the stand taken by the assessee that the interest received in a particular year, but attributable to three years, have to be considered for the said three years proportionately, instead of considering entirely for the year of receipt.
6. On this point, the learned Departmental Representative submitted that this case is not comparable to the case considered by the Supreme Court in Madras Industrial Development Corpn. Ltd. (supra). In the said case the liability of the refund of debentures was spread over a period of 12 years and it was in that context the Supreme Court held that the corresponding discount also may be spread over a period of 12 years for the purpose of claiming deduction in computing taxable income. The learned Departmental Representative submitted that, in contrast, in the present case the assessee had no right to receive any interest during the remaining two years. When he had no such right to receive any interest, it cannot be said that there was any accrual of interest during those two years. Therefore, in the present case as the assessee has received the entire interest during the relevant previous year, that entire amount has to be considered for assessment for the impugned assessment year.
7. We considered the issue carefully. The Hon'ble Supreme Court has in the decision cited by the assessee in Madras Industrial Development Corpn. Ltd.'s case (supra) upheld the principle of writing off of deferred revenue expenditure proportionately. As rightly pointed out by the learned Departmental Representative , in that case the liability of the company with reference to the debentures existed for a span of 12 years. It is in the light of the subsistence of the corresponding liability for the 12 year period that the Supreme Court has held that the discount paid for selling those debentures has to be divided proportionately for the entire span of 12 years and the per year deduction should be on that pro-rata basis. It is on the basis of the principle of "matching liability" that the Supreme Court has held in that case that the assessee was entitled to claim a pro-rata deduction of the discount element suffered by the company in issuing the debentures.
8. We are afraid that the above ratio declared by the Hon'ble Supreme Court will not help the case of the assessee here. In the present case the assessee could have received the interest for the three years differently or it could have received the interest at a discounted rate in the first year itself in a lumpsum. The assessee has chosen the second option, i.e., it discounted the interest and received the entire interest in the first year itself at a reduced rate. By exercising the option to receive the interest in lumpsum at a discounted rate, the assessee has foregone its right to receive the interest for the remaining two years. The assessee had no right at all for any interest for the remaining two years. When no such right to receive the interest existed for those two years, correspondingly there is no question of interest accruing or receiving for those two years. As far as the interest is concerned those remaining two years would draw a blank. When the assessee had no right of receipt of interest or in fact no interest accruing at all for those two years, it is very hard to argue that a portion of the interest received earlier should be kept pending for considering in the assessment of those subsequent years. Here, it is not a case of "interest received in advance". It is a case of interest received at discounted rate. The right of the assessee to receive the interest for the future years is liquidated. Therefore, the matching principle propounded by the Hon'ble Supreme Court in Madras Industrial Development Corpn. Ltd. case (supra) cannot be applied in this case. Therefore, we are of the opinion that it is not possible for the assessee to divide the interest in three parts and offer only one part for assessment in the first year. We disagree with the Commissioner (Appeals) on this point and reverse his findings, upholding the action of the assessing officer in assessing the entire interest of Rs. 92,120.
9. In the result, this appeal filed by the revenue is allowed.