THE ISSUE IS - Whether interest income which has already accrued on the deposits with the bank, should not be constued as "hypothetical income", simply because the receipt was deferred on the dictate of the depositor. YES IS THE VERDICT.
Facts of the case:
The assessee, a largest Plantation company in public sector, had filed its return for the relevant AY following the mercantile system of accounting. In its return, the assessee had claimed difference of interest of Rs.3,23,91,555/- disclosed in the balance sheet as interest receivable on fixed deposits. It was claimed that it was only a hypothetical income and there was no right to receive. The AO however did not accept the explanation of the assessee and accordingly, treated the said amount of Rs.3,23,91,555/- as interest income and added the same to the income of assessee. When the matter reached before ITAT, it was held that income accrues only when the right to receive was accrued and the right may be said to have accrued only when the enforceable debt was credited in favour of assessee. It was futher held that by virtue of Section 194A, the person responsible for paying any income by way of interest shall at the time of credit of such income to the account of the payee, or at the time of payment thereof, whichever was earlier; deduct tax. In this case, the Bank had neither credited nor paid the interest and accordingly, no tax was deducted and the question of accrual did not arise. Therefore, the income, which had been received but not acknowledged as payable to the assessee, could not be taxed.
High Court held that,
++ the brief question that arises for consideration, is whether the interest income from Bank deposits of the assessee, amounting to Rs.3,23,91,555/-, which was not credited to the assessee's account during the assessment year, could be assessed to tax or not. In the present case, the assessee, in the books of accounts showed the interest income of Rs. 4,84,25,103/- as accrued, but returned only Rs.1,60,33,548. The computation in the return excluded Rs.3,23,91,555/- on the ground that the same was not recieved. The depositor is entitled to get interest as and when it becomes due, which may be monthly, quarterly, half yearly, yearly or at the end of the term of deposit, which is at the option of the depositor. It is also trite that on the option being exercised, to so deffer the reciept, the Bank pays cumulative interest. The assessee, as is seen from the assessment order; produced no evidence to substantiate the claim that the interest was not payable in the assessment year, but merely asserted that the interest accrued was not entirely recieved. If at all the maturity period or the expiry date did not fall in the relevant assessment year, it cannot be said that the interest was not due. The interest that accrued in the relevant year is for the amounts that already remained in deposit with the Bank and on the depositors asking, it is payable. As observed, the period of deposit being the option of the depositor, the reciept stood defferred at the behest of the assessee. As a corollary, there cannot be a claim made of hypothetical income or there being no corresponding liability to pay. If the assessee chose to close the deposit prematurely on any date, then the Bank is liable to pay whatever interest that is accrued till that date. Interest for the period, in which the amounts stood in deposit, accrues on the close of the previous year and if it so accrues, it becomes the income of that particular assessment year, liable to be taxed in that year;
++ in view of the fact that the assessee had exercised the option to let the interest accummulate to the deposit and thereby earned compound interest by the end of the deposit term, it would not mulct any liability on the bank to pay tax on periodical accrual of interest to the income tax authorities. The Bank's liability to deduct tax at source arises only when it pays the interest. The amount that is to be recieved as interest, is known to the assessee and was accounted, as income accrued by way of interest in the account books of the assessee following the mercantile system. The interest income that accrued cannot, by any stretch of imagination, be termed as hypothetical income. Hence, this Court does not agrees with the findings of the ITAT that the interest income on Bank deposits is hypothetical income and that the assessee is entitled to get the interest excluded from assessment.
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