Karnataka High Court
The Commissioner Of Income Tax vs The Karnataka Bank Ltd on 12 September, 2012
Bench: K.Sreedhar Rao, B.Manohar
1
IN THE HIGH COURT OF KARNATAKA, BANGALORE
DATED THIS THE 12H DAY OF SEPTEMBER, 2012
PRESENT
THE HON'BLE MR. JUSTICE K.SREEDHAR RAO
AND
THE HON'BLE MR. JUSTICE B.MANOHAR
I.T.A. No.433 OF 2006
C/W.
I.T.A. Nos.434/06, 147/08, 148/08 & 149/08
I.T.A. No.433 OF 2006:-
BETWEEN:-
1. The Commissioner of Income Tax,
C.R. Building,
Attavara,
Mangalore.
2. The Joint Commissioner of Income Tax,
Assessments, Special Range,
C.R. Building,
Attavara,
Mangalore.
Appellants
(By Sri E.R. Indrakumar, Sr. Standing Counsel)
AND:-
The Karnataka Bank Ltd.,
Head Office,
Kodialbail,
Mangalore - 575003.
Respondent
(By Sri Sarangan, Sr Counsel & Sri K.S.Ramabdran, Adv.)
2
This I.T.A. is filed U/s.260-A of I.T. Act, 1961 arising
out of order dated 26.08.2005 passed in
I.T.A.No.444/Bang/2003, for the Assessment Year 1998-99,
praying that this Hon'ble Court may be pleased to
(i) formulate the substantial questions of law stated therein
and (ii) allow the appeal and set-aside the order of the ITAT,
Bangalore in ITA No.444/Bang/2003 dated 26.08.2005 and
confirm the order of the Commissioner of Income Tax,
Mangalore, in the interest of justice and equity.
I.T.A. No.434 OF 2006:-
BETWEEN:-
1. The Commissioner of Income Tax,
C.R. Building,
Attavara,
Mangalore.
2. The Assistant Commissioner of Income Tax,
Circle-2(1),
C.R. Building,
Attavara,
Mangalore.
Appellants
(By Sri E.R. Indrakumar, Sr. Standing Counsel)
AND:-
The Karnataka Bank Ltd.,
Head Office,
Kodialbail,
Mangalore - 575003.
Respondent
(By Sri Sarangan, Sr Counsel & Sri K.S.Ramabadran, Adv)
This I.T.A. is filed U/s.260-A of I.T. Act, 1961 arising
out of order dated 26.08.2005 passed in
I.T.A.No.445/Bang/2003, for the Assessment Year 1999-
3
2000, praying that this Hon'ble Court may be pleased to
(i) formulate the substantial questions of law stated therein
and (ii) allow the appeal and set-aside the order of the ITAT,
Bangalore in ITA No.445/Bang/2003 dated 26.08.2005 and
confirm the order of the Commissioner of Income Tax,
Mangalore, in the interest of justice and equity.
I.T.A. No.147 OF 2008:-
BETWEEN:-
1. The Commissioner of Income Tax,
C.R. Building,
Attavara,
Mangalore.
2. The Assistant Commissioner of Income Tax,
Circle-1(1),
Mangalore.
Appellants
(By Sri E.R. Indrakumar, Sr. Standing Counsel)
AND:-
The Karnataka Bank Ltd.,
Head Office,
Mahaveera Circle,
Kankanadi,
Mangalore - 2.
Respondent
(By Sri Sarangan, Sr Counsel & Sri K.S.Ramabadran, Adv)
This I.T.A. is filed U/s.260-A of I.T. Act, 1961 arising
out of order dated 07.09.2007 passed in
I.T.A.No.469/BNG/2005 praying that this Hon'ble Court
may be pleased to (i) formulate the substantial questions of
law stated therein and (ii) allow the appeal and set-aside the
order of the ITAT, Bangalore in ITA No.469/BNG/2005 dated
07.09.2007 confirming the order passed by the Adjudicating
Officer, in the interest of justice and equity.
4
I.T.A. No.148 OF 2008:-
BETWEEN:-
1. The Commissioner of Income Tax,
C.R. Building,
Attavara,
Mangalore.
2. The Assistant Commissioner of Income Tax,
Circle-1(1),
Mangalore.
Appellants
(By Sri E.R. Indrakumar, Sr. Standing Counsel)
AND:-
The Karnataka Bank Ltd.,
Head Office,
Mahaveera Circle,
Kankanadi,
Mangalore - 2.
Respondent
(By Sri Sarangan, Sr Counsel & Sri K.S.Ramabadran, Adv)
This I.T.A. is filed U/s.260-A of I.T. Act, 1961 arising
out of order dated 07.09.2007 passed in
I.T.A.No.468/Bang/2005 for the Assessment Year 1997-
1998, praying that this Hon'ble Court may be pleased to
(i) formulate the substantial questions of law stated therein
and (ii) allow the appeal and set-aside the order of the ITAT,
Bangalore in ITA No.468/Bang/2005 dated 07.09.2007
relating to Assessment Year 1997-1998, in the interest of
justice and equity.
I.T.A. No.149 OF 2008:-
BETWEEN:-
1. The Commissioner of Income Tax,
C.R. Building,
5
Attavara,
Mangalore.
2. The Assistant Commissioner of Income Tax,
Circle-1(1),
Mangalore.
Appellants
(By Sri E.R. Indrakumar, Sr. Standing Counsel)
AND:-
The Karnataka Bank Ltd.,
Head Office,
Mahaveera Circle,
Kankanadi,
Mangalore - 2.
Respondent
(By Sri Sarangan, Sr Counsel & Sri K.S.Ramabadran, Adv)
This I.T.A. is filed U/s.260-A of I.T. Act, 1961 arising
out of order dated 07.09.2007 passed in
I.T.A.No.470/BNG/2005 praying that this Hon'ble Court
may be pleased to (i) formulate the substantial questions of
law stated therein and (ii) allow the appeal and set-aside the
order of the ITAT, Bangalore in ITA No.470/BNG/2005 dated
07.09.2007 confirming the orders of the Adjudicating Officer,
in the interest of justice and equity.
These appeals are coming on for hearing this day,
SREEDHAR RAO, J., delivered the following:
JUDGMENT
For the year 1997-98, the A.O. has assessed the interest accrued as per the account of the assessee. The Commissioner of Income Tax (Appeals) set aside the order of the A.O in so far as interest for the broken period is 6 concerned as interest not accrued. The Appellate Tribunal confirmed the order of the Commissioner of Income Tax (appeals). The Revenue aggrieved by the said order has filed ITA No.148/05.
2. For the assessment year 1998-99 and 1999- 2000, the A.O. did not assess the interest on Government securities for Tax. The Commissioner of Income Tax in Revision U/s.263 of the I.T. Act, set aside the order of the A.O. for the said assessment years and held that interest accrued on Government securities whether actually received or not in view of the amended provisions of Section 145, the interest accrued is to be offered as income and liable to be taxed.
3. The orders passed in revision were challenged before the Tribunal. The Tribunal set aside the revision order of the Commissioner. As against the said orders, the revenue is in appeal in ITA Nos.433-434/06.
4. The A.O. immediately after the orders passed by the Commissioner of Income Tax in revision, took up the re- 7 assessment and computed the income earned on Government securities and assessed the same to tax. The assessee aggrieved by the said order, filed the appeal. The appeals of the assessee were allowed. The Appellate Tribunal also confirmed the orders of the Commissioner of Income Tax (Appeals). The Revenue aggrieved by the said orders, filed ITA 149 and ITA 147/08.
5. In ITA No.433/06, the following questions of law were raised:
a) Whether the Tribunal was correct in applying the legal position as it existed after the amendment to Section 145 of the Act by the Finance Act of 1995, with effect from 1.4.1997, by taking into account the law which existed prior to the amendment?
b) Whether the Assessee is entitled to follow dual system of accounting by offering interest income to tax on cash basis of accounting, when following the mercantile system of accounting for all other purposes including finalisation of accounts and submitting the same before the share holders?
6. In ITA No.434/06, the questions of law as framed in the memorandum of appeal at paras 8 and 9 in 8 ITA No.433/06 are taken up for consideration while admitting the appeal which reads as follows:
a) Whether the Tribunal was correct in applying the legal position as it existed after the amendment to Section 145 of the Act by the Finance Act of 1995, with effect from 1.4.1997, by taking into account the law which existed prior to the amendment?
b) Whether the Assessee is entitled to follow dual system of accounting by offering interest income to tax on cash basis of accounting, when following the mercantile system of accounting for all other purposes including finalisation of accounts and submitting the same before the share holders?
7. In ITA No.147/2008, this Court admitted the appeal and has framed the following substantial questions of law:-
Whether the Tribunal as well as the first Appellate Authority were justified in deleting the interest earned by the respondent-assessee on the securities and further holding the same as not taxable?
8. In ITA No.148/08, this Court admitted the appeal and framed the following substantial questions of law:-
9
Whether the Tribunal as well as the first Appellate Authority were justified in deleting the interest earned by the respondent-assessee on the securities and further holding the same as not taxable?
9. In ITA No.149/08, this Court admitted the appeal and framed the following substantial questions of law.
Whether the Tribunal as well as the first Appellate Authority were justified in deleting the interest earned by the respondent-assessee on the securities and further holding the same as not taxable?
10. Sri E.K. Indra Kumar, Senior Standing Counsel for the revenue submits that position of law prior to Finance Act, 1995, the provisions of Section 145 of the I.T. Act as it stood then, permitted the assessee to follow the cash system or mercantile system or mixed system for the purpose of accounting. However, with effect from 01.04.1997, Section 145 came to be amended wherein the assessee has been given an option to follow either cash system or mercantile system. The Finance Act, 1995 makes it amply clear that the amended provisions of Section 145 does not permit the 10 assessee to adopt hybrid system either to cash system or mercantile system. In the mercantile system whether the assessee receives the interest on the Government securities or not, if interest is accrued, he should offer the same as taxable income in his returns and the same should be subjected to tax. The Assessing Officer in the assessment order has found that the books of accounts and the balance sheet of the assessee would disclose that the interest accrued for the broken period, has been shown as the income from the interest on the Government securities. Therefore, the A.O. was justified in considering the said amount as the income from interest and on Government securities and accordingly, tax the same as interest accrued to the benefit of the assessee.
11. The Tribunal has failed to properly appreciate the implication of the effect of the amendment to Section
145. When the assessee has shown the interest for the broken period in the balance sheet, the said amount should be considered as a income accrued according to the statement of account of assessee and liable to tax. The 11 assessee in the course of scrutiny assessment, had submitted recast statement wherein the interest on government securities for the broken period, was deleted. The said deletion was impermissible and A.O. correctly assessed the said income.
12. Sri Sarangan, learned counsel for the assessee relied upon the decision of the COMMISSIONER OF INCOME TAX vs CANARA BANK reported in 195 ITR P 66 to bring home the point that the question of proportionate interest cannot be taken as having accrued to the assessee at all and "the interest on securities does not arise day today but would arise only on the date prescribed or agreed upon while issuing the securities.
13. The decision of the Bombay High Court in the case of COMMISSIONER OF INCOME TAX VS. BANK OF RAJASTHAN LTD reported in (2010) 326 ITR 526 (Bom) in para 4 the following observations are made:-
"In so far as the third question is concerned, it is brought to our notice that in the assessment years 1991-92 and 1992-93, this issue was considered by the Jodhpur Bench of 12 the Tribunal. The Jodhpur Bench held that interest on Government securities can be said to accrue only when it becomes due and, therefore, cannot be a charge to such income until such time that it becomes due. Counsel appearing on behalf of the Revenue has stated before the court that he has written instructions to the effect that an appeal against the order of Jodhpur Bench of the Tribunal was dismissed by the High Court of Rajasthan on January 23, 2008. In that view of the matter and particularly, since the finding of the Tribunal has not been shown to suffer from any perversity, no substantial question of law would arise."
14. On the basis of the above decisions, it was argued that in so far as Government securities are concerned, the interest is paid once in six months from the date of issue. In the middle of the year, if the securities is issued, the liability to pay interest on the security does not arise. Within a period of assessment year although the assessee is entitled to compute the proportionate interest liable to be payable on such securities in his accounts, he need not disclose the same for the purpose of tax unless the said income is accrued or deemed to have been accrued. In the instant case, the assessee in the recast statement had deleted the proportionate interest on Government securities 13 for the broken period as not having been accrued during the relevant assessment period. Therefore, the Assessing Officer was wrong in considering such income for tax when the interest has not really accrued within the meaning of Section 5 of the I.T. Act.
15. The provisions of Section 5 of the I.T. Act are extracted hereunder for convenient reference:-
5. Scope of total income:-
(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 14 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.
16. It is declared U/s.5 of the Act that when interest is accrued or deemed to have been accrued, it is liable to tax. The word 'accrued' has defined the legal connotation. The interest that becomes due or liable to be payable whether or not it is paid, the interest is accrued or deemed to have been accrued. If the interest does not become due and not liable to pay such part of the interest arise, it cannot be said that the interest has become accrued. It appears from the facts of the case that the assessee is a bank. For its accounting purpose, it has shown the proportionate interest entitled to receive on the Government securities. But for the assessment year, although it is not accrued, in the legal sense and in terms of 15 Sections 5 and 145 of the I.T. Act. The contention of the Revenue that in the books of accounts, the proportionate interest shown for the broken period in the balance sheet, should be construed as the income accrued, is not tenable. In other words, the income which has become due and payable should alone be considered as income accrued and that should be offered as tax. The contention that Assessing Officer is entitled to tax on the interest income although not due and payable as accrued, is untenable. The fact that the assessee in its internal books of accounting mentions the proportionate interest, which is entitled to receive, in its balance sheet for the purpose of profit and loss cannot be deemed as income accrued, unless such income has become due and payable. On the basis of such amount, the A.O. has no right to charge the interest, which has not become due and payable.
17. In fact, we find no inconsistency between the amended provisions of Sections 145 and 5 of the I.T. Act. It may be that the amended provisions of Section 145 now insists mercantile system of accounting where on the income 16 accrued the tax can be levied whether or not received unlike in cash system. Merely because in the books of accounts, the interest income, which is not due and payable is shown in the account of the assessee. That itself will not give right to A.O to tax unless it has become due and payable as per provisions of Section 5 of the I.T. Act.
In that view, the questions of law are answered against the revenue. Insofar as the factual situation is concerned, the A.O. has to redo the assessment regarding interest on the Government securities in light of the observations made above. Accordingly, the appeals are disposed of. The Assessing Authority while re-doing, shall give opportunity to the assessee by issuance of notice and giving opportunity of hearing.
Sd/-
JUDGE Sd/-
JUDGE NM*