The Commissioner of Income Tax V. M/s. A.P. State Financial Corp. Ltd.

RC/53/2002

AI Insights

The case revolves around the dispute concerning the method of accounting for interest income by the respondent, a finance corporation, and the consequent tax implications under the Interest Tax Act. The respondent had been following the cash system for tax purposes but maintained books that appeared to follow the mercantile system. The Assessing Authority contended that the respondent should be taxed on an accrual basis for interest received in previous years, which was contested by the respondent and led to appeals. The Tribunal and the Commissioner of Income Tax (Appeals) sided with the respondent, leading to the current appeal by the tax department.

• Counselvise Citation: [2000] 140 COUNSELVISE.COM (IT) 728060 (HC-ANDHRA_PRADESH)
• Appeal Type: Others
• Pronouncement Date: 16-08-2000
• Assessment Year: misc
• Laws Referred To: State Finance Corporations Act, Income Tax Act, Interest Tax Act
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: S R ASHOK; N VIJAY
• Keywords: Accrual basis; Cash system; Interest Tax; Interest Tax Act; Mercantile system
• Section: 145; 6

Judgement Text

"THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM R.C.No. 53 of 2002 ORDER: (per the Hon’ble Sri Justice L.Narasimha Reddy) The respondent is brought into existence under the State Finance Corporations Act. As part of its activity, it lends amounts to entrepreneurs in the State and earns interest. Apart from being under obligation to pay income tax, the respondent is also under obligation to pay interest tax. In the assessment year 1994-95, it has shown the interest that has accrued to it from its customers. The interest tax was paid on the interest so accrued. The Assessing Authority, however, took the view that the respondent is making an attempt to project as though it is following the mercantile system, but in fact, it is adopting the practice of cash system and thereby, it is under obligation to pay the tax not only on the interest that has accrued during the year 1994-95, but also the interest which it received for the previous assessment years. Aggrieved by the order of such assessment, the respondent approached the Commissioner of Income Tax (Appeals), Andhra Pradesh- I, Hyderabad (for short ‘the Commissioner’). The appeal was allowed through order, dated 31.07.1997, accepting the contention of the respondent. Thereupon, the appellant filed I.T.A.No.4/Hyd/97 before the Income Tax Appellate Tribunal, Hyderabad Bench ‘A’ (for short ‘the Tribunal’). The Tribunal dismissed the I.T.A through order, dated 16.07.1998. Thereupon, the appellant filed R.A.No.206/Hyd/98 with a prayer to refer the following questions to this Court for answer. (1) Whether on the facts and in the circumstances of the case, the ITAT was correct in law in holding that the interest income should be computed on accrual basis and interest accrued from 01.04.1993 to 31.03.1994 alone has to be computed? (2) Whether on the facts and in the circumstances of the case, the ITAT was correct in holding that the interest income accrued prior to 01.10.1991 and realized in cash after 01.04.1993 but before 31.03.1994 has not to be considered for computation of interest income for assessment year 1994-95 though the assessee is following cash system for income tax purpose and in view of Section 5 read with Section 21 of the Interest Tax Act? (3) Whether on the facts and in the circumstances of the case, the ITAT was correct in directing the Assessing Officer that the commitment charges are to be computed only on accrual basis? (4) Whether on the facts and in the circumstances of the case, the ITAT was correct in rejecting the claim that the A.O. should be directed to re-compute the chargeable interest on accrual basis on the ground that the issue was outside the scope of the appeal? Through its order, dated 16.08.2000, the Tribunal referred those questions. Sri S.R.Ashok, learned Senior Standing Counsel for the appellant, submits that though the respondent pleaded that it is following the cash system by maintaining the books of account, which are referred to the practice of mercantile system, it is exactly doing the latter and the view taken by the Tribunal is not correct. He further submits that whether one goes by the language employed in Section 6 of the Interest Tax Act (for short ‘the Act’) or Section 145 of the Income Tax Act, the inescapable conclusion is that the tax is liable to be levied by adopting the cash system and the respondent is liable to pay tax for the interest that has accrued to it up to 01.10.1991 irrespective of the factum of receipt thereof or the timing. Sri N.Vijay, learned counsel for the respondent, on the other hand, submits that the very levy of tax on the interest that has accrued up to 01.10.1991 is opposed to sub-section (2) of Section 6 of the Act and the Commissioner as well as the Tribunal have taken the correct view of the matter. Question Nos.1, 2 and 4 are about the entitlement of the Department to levy interest tax on the interest that has accrued to the respondent up to 01.10.1991. Obviously not being aware of sub-section (2) of Section 6 of the Act, the Assessing Authority made an attempt to levy tax upon that component of interest. In the process, he entered the field of discussion pertaining to the method of accounting, namely whether it was cash or mercantile system. Sub-section (2) of Section 6 of the Act reads as under: “In computing the chargeable interest of a previous year, the amount of interest which accrues or arises to the assessee before the 1st day of August, 1974 or during the period commencing on the 1st day of April, 1985 and ending with the 30th day of September, 1991 shall not be taken into account.” From this, it is evident that irrespective of the system adopted by as assessee, the interest accrued to it up to 01.10.1991 is exempted from interest tax. Therefore, the whole exercise undertaken by the Assessing Authority in this behalf was not only futile, but was also opposed to the specific provisions of the Act. The Commissioner and the Tribunal took note of this important provision of law and have set aside the order of assessment passed by the Assessing Authority. Therefore, Question Nos.1, 2 and 4 stand answered in negative in view of specific provisions of sub-section (2) of Section 6 of the Act. On Question No.3, we decline to answer, for the reason that the Tribunal itself has remanded the matter to the Commissioner for proper adjudication. The reference is answered accordingly. The miscellaneous petitions filed in this case shall also stand disposed of. _____________________ L.NARASIMHA REDDY,J ________________________ CHALLA KODANDA RAM,J Dt:30.07.2014 kdl "