STATE BANK OF HYDERABAD V. THE DY COMMISSIONER OF INCOME TAX [ASSESSMENTS]

ITTA/7/2006

AI Insights

The case revolves around the dispute concerning the method of accounting for interest income on securities held by the State Bank of India for the assessment year 1995-96. The Income Tax Department contended that the interest should be computed on an 'accrual basis', meaning it should be recognized as income when it accrues, regardless of when it is actually received. The State Bank of India argued for a 'due basis', where interest income is recognized only when it is actually received on the specified dates. The Income Tax Appellate Tribunal upheld the Department's view, leading to the appeal in the High Court. The High Court's decision aligned with the precedent set by the Bombay High Court, which had ruled in favor of the 'due basis' method in similar circumstances.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 753104 (HC-TELANGANA)
• Appeal Type: Others
• Pronouncement Date: 04-01-2023
• Assessment Year: misc
• Other Referred Cases: State Bank of Travancore v. CIT, UCO Bank v. CIT, United Commercial Bank v. CIT, DCIT, Special Range-IV, Hyderabad v. Nagarjuna Investment Trust Ltd., Hyderabad
• Laws Referred To: Income Tax Act, 1961, Banking Regulation Act, Reserve Bank of India guidelines
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: J V PRASAD
• Assessee Lawyers: KARTHIK PUTTAMREDDY
• Keywords: Accrual basis; Due Basis; Income Tax; Interest on securities; Taxable income
• Section: 145; 260-A

Judgement Text

"IN THE HIGH COURT FOR THE STATE OF TELANGANA AT HYDERABAD WEDNESDAY, THE FOURTH DAY OF JANUARY TWO THOUSAND AND TWENTY THREE PRESENT THE HONOURABLE THE CHIEF JUSTICE UJJAL BHUYAN AND THE HONOURABLE SRI JUSTICE N.TUKARAMJI Appeal under section 260-A of the lncome Tax Act, 1961 aggrieved by the order dated 20.04.2005 made in lTA.No.601/HydeGbadt2OOl on the file of the lncome Tax Appellate Tribunal, Hyderabad Bench-A, Hyderabad, preferred agarnst the order dated 27 .04.2O01 made in l.T.A.No.982/SR-3/C|T (A)V(Cent.y1999-2000 on the file of the Commissioner of lncome Tax (Appeals) V (Central), Hyderabad, against the order dated 28.11.1997 made n PAN/GlR No.S-74 on the file of the of the Deputy Commissioner of lncome Tax (Assts) Spl. Range-3, Hyderabad. Between: State Bank of lndia, Gunfoundry, Hyderabad - 500 001. (Cause Title is amended as per Court Order dated 02.01.201a in ITTAMP.No.800 ot 2017) AND ..,Appellant. The Deputy Commissioner of lncome Tax [Assessments], Special Range - lll, Basheerbagh, Hyderabad - 500 001 . ...Respondent. Counsel for the Appellant: Sri Karthik Ramana Puttamreddy, Advocate Counsel for the Respondent: Sri J.V.Prasad (SC for lncome Tax) The Court made the following: ORDER I lncome Tax Tribunal Apoeal No. 7 of 2006 I C<>unscl, TTIt' TIOI 'BLE THE CTIIEF IUSTICE UIIAL DHIIYAN AND TFIE HON'BLE SRI IUSTICE N.TUKAXAMII I.T.T.A.No.7 of 2006 JUDGMENI. ?et the Hon'b/e rhe Chitl]urne ttljat Bhayr) [ [card Mr. I(arthik l{amana Puttamreddy, learncd counsel frrr the appellant and Mr. J.V.Prasad, learned Standing I ncome -l'ar l)cpartment representing the rcspontlcnr 2. -l'his appeal has becn filcd by the assessec 2.e., State Bank of lndirr (as rnrended fu rb.c c()urt order dated 02.01.2018 in I'I\"I'ANIP.NI,.800 of 2017) under Section 2604 of the Income Tax Acr, 19{r1 (bdefly 'the Act' hereinafter) against the order dated 20.04.2()05 passed by the Income Tax Appellate f'ribunel, Hyderabad Bench 'A', Hyderabad (Iribunal) 1n I.T.A.No.60 1 /Hyd/2001 ftrr the assessment year 1995-96. 3. Wc nray mention that the appeal was admitted on 27.02.20A6 without frarrring any subsantial question of law. I I I I I I r-__ 2 Horvevcr, the substantial questions o[ law proposecl in thc memo o[ appeal rcad as undcr: 18.1. Whether on thc facts and in the circumstances of this case, the 'I'ribunai is justiEed in upholding the lncome Tax Department's view that interest on securities should necessarily be computed on \"accrual basis\" (as if interest accrued to the bank on a day-to-day basis) and not on \"due basis\" (i.e., on the basis that interest incomc is claimable only on specified datcs) assessment year 1995-96 ? 18.2. Whether on the facts and in tl-re cfucumstances of this case, the Tribunal is justified in holding that taxable income undcr the Income Tax Act should be computed in accordance with the Banking Regulation Act and Reserve Bank of India guidelines (and not in accordance with the system of accounting permitted undet the Income Tax Act) ? 18.3. Whethet on the facts and in the ciicurnstances of this case, the Tribunal is justiEed in holding that under Section 145 of the Act (as it stood at the relevant time) income from interest on securities should necessarily be I / 3 c()rnputcd on accrual basis ard not on clue basis tirr this particulat assessmcnt ycar 1995 96 ? 18.4 'hetl'rcr ()r the facts and in the circumstanccs oi this case, the T'ribunal is justified in ignoring the letter dated 02.0i.1995 addressctl bv thc Ccntral Board of Dircct Taxes to rhc Chief Commissioner of Income Tax, Ilanqalotc. in rt'spcct of the assessment of (-tnarir Bank, whilc deciding the prescnt appeal o[ Statc Bank of I lr,derabad ? i8.:. Whcther or-r the facts and in the circrrnrstanccs oI this case, the Tribunal is justrfied in rclyinu on thc earlier decision of the Strprernc Court ,rf State Bank of Travancore v. CI'f, 1996 158 - ITR - 102 (SC), when that dccrsion does not deal with the subject of interest on securities, and rvhen the Supreme Corrrt itsclf disagreed even with thc above judgment in its later decisions in the cases of UCO Bank v. CIT, 1.999 - 237 ITR - 889 (SC) anrl Llnited Commercial Bank v. CIl', 1999 - 24() _ rTR 3ss (Sq ? 18.(r. X/hether on the facts and in the cirt urnstances oI tlis case, the 'fribunal is jusrified in relying on its own earlier judgment in thc case of DCIT, Special Range -IV, I I I Hyderabad v. Nagarjuna Investment Trust Ltd., Hyderabad in ITA No.954/Hydl1991 for A.Y.1987-88 rcported in 67 - ITD - 17 (SB- Hyderabad) in which case the Tribunal was conccrncd with assessment of income from hire purchase financing and riot income from securities ? 18.7 . NThether on the facts and in the circumstances of this case, the Tribunal was justifled in upholding the enhancement of the taxable income of this particular year, bv changing the basis of computation of incornc without giving consequential relief for ail the earl.ier assessment yean ? 4. Basic issue as is discernable from thc substaotial questions o[ lau, formulated above is whether income frttm interest on securities should bc computed on accrual basis or on due basis. 5. Issuc raised in this appeal has been gone into by the / Bombay High Court in Director of Income Tax M/s. Credit Suisse First - .l (International Taxation) a : Boston (Cvprus) Limitcdr. Bombay Ftrgh Crurt has held as follows: \"The appellant's submission is entirely unfounded and is based on the erroneous premise that the rmount received upon the sale of a securiry in excess of the face value thereof incltdes the interest for the proportionate period upto the date of the sale. The erroneots presumption is that interest accrues de die in dtem even when the agreement between the parties stipulates interest to be papble only on a specified date. If the appellant's argument is well founded, it makes no difference as to the brolen period for which interest is deemed to have accrued. If, on the other hand and as we have helil, rt is not well founded, the interest cannot be said to have accrued for any part of the brolre n period. In other wonCs, interest can be said to have accrued only on the date on vrhich it sas due as per the terms and conditions of the securiry. X/hen an instrument oi - ,g...-.., stipulates interest to be payable at a specified date, interest does not accnre to the holder t lzor; :lsr rrn :z.r - 6 thereof on any date prior thereto. Interest would accrue or arise only on the date specified in the instrument. That a creditor has a vested right to receive interest on a stated date in future does not corstitute an accnral of the interest to him on any prior date. tff{here an irstrument provides for the payment of interest only on a pa-rticular date, an action filed prior to such date would be dismissed as prefivrture and not disclosing a cause of action. Subject to a contract to the contmry a debtor is not bound to pay interest on a date earlier to the one stipulated in the agreement/instmment. In the present case, it is admhed that interest was not papble on any date other than that mentioned in the securiry. The assignee or purchaser of such a security does not sund on a different footing. FIe has, by vitue of the assignment or purchase, the righr vested in him to receive the interest but only on the terms of the securiry and subject to all the incidents thereof as were applicable o t.he original owner. 6. Thw, it has been held that interest can be said to have / ,, accrued only on the date on which it was due as per the terrns I I I 7 and conditions of the secr\"rriry. Vhen an instrument or an agreement stipulates interest to be papble at specified date, interest does n,rt accrue to the holder thereof on any date prior thereto. Interest would accrue or arte only on the date specified in the instrument. This decision of the Bombay Flgh C-ourt was followed by the same Ftrgh C.ourt 1n Commissioner of Income Tax v. State Bank of India2. One of the subs,tantial questions of law which vras considered by the Bomba.y Ftrgh Coun was whether Tribunal was right in law in accepting the plea of the assessee that the interest income of Rs.38.24 crores on the securities had to be taxed on due basis only :nstead of accrual basis as per the mercantile s)6tem of accotrnting followed by the assessee. Insofar this question is c,xcemed, Bombay Ftrgh Court referred to its previous decisic,n in Credit Suisse First Boston (Cyprus) Limited (1 supra) and held that issue stands concluded against the revenue and in favour of the assessee. 2 2016 SCC Online Bombar, 9749 I , , ' I I I : tt 7. Learned counsel for the appellant submits that against the aforesaid decision of the Bombay Flgh C-oun h State Bank of India (2 supra), revenue prefened SLP(Q.No.2a250 of 2017, which was subsequently registered as Gvil Appeal No.435Z of 2018. The said appeal was heard and decided by the Supreme C-oun along with other civil appeals which have since been reponed in Deputy Commissioner of Income Tax v. T.Jayrrchirndr:tn t. 8. Leamed counsel for the appellant fairly submits that though in the body of the judgment there is no discussion on the issue as to the finding of the Bombay F[gh Coun that the interest income on securities has to be taxed on due basis, nonetheless, by the aforesaid decision, the appeals preferred bythe revenue were dismissed. 9. Be that as it may, we concur with the view expressed by the BombayF[gh C-ourt in M/s. Credit Suisse First Boston 3 izott; e scc rss / 9 (Cyprus) Ltd (1 supra) lollowed by the decision in State Bank of India (2 supra). 10. C-onsequently, the substantial questions of law are answered in favour of the assessee and against the revenue. 1,1. Appeal is accordingly,rllowed. No cosrs. As a sequel, miscellaneous peririons, pending lf any., stand closed. Sd/. K. SRINIVASA RAO JOINT RE ISTRAR C //TRUE COPY// SECTION OFFICER 1. The lncome Tax Appellate Tribunal, Hyderabad Bench-A, Hyderabad. 2. The Commissioner of lncome Tax (Appeals) V (Central), Hyderabad. 3. The Deputy Conrmissioner of Income Tax (Assts) Spl. Range-3, Hyderabad. 4. One CC to Sr-i Karthik Ramana Puttamreddy, Advocate [OPUC] 5. One CC to Sri J.V.Prasad (SC for Income Tax) [OPUC] 6. Two CD Copies JCI(DL To, },\" HIGH COURT DATED:0410112023 ORDER Allowing the l.T.T.A. vithout costs [iE o,r'{l( ( 2!n ['1 ITTA.No.7 of 2006 ) "