COMMISSIONER OF INCOME TAX Vs. FEDERAL BANK LIMITED

JUDGEMENT

(1.) The question raised in this appeal filed by the Revenue is as to whether income shown by the assessee in the profit and loss account in the form of interest on Government securities, is assessable for the assessment year 1989-90. While the case of the Department is that when the interest on Government securities is credited in the profit and loss account, it is income under the mercantile system of accounting followed by the assessee, the assessee s case is that interest on securities is payable only on maturity of Government security and all what the assessee has done, is only to show the interest attributable for the relevant previous year, though it was not received by the assessee. The assessee s case is that so long as interest is not received or due, it cannot be assessed as income, no matter it is credited in the profit and loss account or not. The amount involved, viz., Rs. 5,67,18,983, is admittedly the interest not received by the assessee during the previous year, and the deposit did not mature during the previous year to entitle the assessee for the interest. The question, therefore, is whether such interest which is not due or received by the assessee, could be assessed for income-tax, even though the assessee has shown it in the profit and loss account as interest receivable on the securities during the relevant previous year.

(2.) Learned senior Counsel appearing for the Revenue referred to the decision of this Court reported in CIT v. Podimattom Wines, and contended that even if interest was not received by the assessee on the Government securities, it could be assessed on accrual basis, as the assessee was entitled to interest though on a later date, for the period ending the relevant previous year. Learned Counsel for the respondent has relied on the decisions of the Supreme Court in Vijaya Bank Ltd. v. Addl. CIT, and State Bank of Travancore v. CIT, and the decision of the Karnataka High Court in CIT v. Canara Bank, and contended that actual income only can be assessed. Since the securities had not matured or payable during the previous year, the assessee was not entitled to interest and so much so, interest did not accrue during the previous year.

(3.) After the amendment of 1988, interest on securities is assessable as income from other sources under Section 56(2)(id) of the Act unless it is chargeable to income-tax under the head "Profits and gains of business or profession". In this case, since the assessee is a banking company and money applied is stock-in-trade, interest on securities is assessable under the head "Profits and gains of business or profession". There is no dispute on this and the assessee has paid tax on the interest received from the Government securities.