Justice T.S. Sivanganam and Justice V. Bhawani Subbaroyan viewed that the observation made by the Tribunal that the interest received on purchase and discount may not be required to be repaid by the assessee at any point of time is a finding, which is not borne out by facts.

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Advance Income received as interest income on bills discounting is subjected to taxation on accrual basis: Madras HC grants relief to Karur Vysya Bank [Read Judgment]

October 8, 2020 5:44 pm| By : Taxscan Team
ITAT – interest income – bills discounting – Advance Income – taxation – Karur Vysya Bank – Taxscan

The Madras High Court quashed the ITAT order wherein it was held that the income received in advance in the nature of interest income on discounting of bills against the letter of credit is to be subjected to taxation on a receipt basis and not on an accrual basis.

The assessee, which is a bank, filed its return of income for the assessment year under consideration declaring a total income. An order under Section 143(1) of the Act was passed by the Assessing Officer determining a refund.

The assessee’s case was selected for scrutiny and a notice under Section 143(2) of the Act was issued. Thereafter, the assessee approached the Additional Commissioner of Income Tax concerned by filing an application under Section 144A of the Act, in which, the Assessing Officer was directed to complete the assessment by issuing certain guidelines.

As against the said order, the assessee filed an appeal before the CIT(A), who, by order dismissed the appeal filed by the assessee. Challenging the same, the assessee filed further appeal before the Tribunal and it was dismissed by the impugned order.

The issue raised in this case was whether, on facts and in circumstances of the case, the Tribunal was right in holding that the income received in advance in the nature of interest income on discounting of bills against letter of credit is to be subjected to taxation on receipt basis and not on an accrual basis.

The assessee contended that there was no escapement of income, that the assessee was following the mercantile system of accounting as specified under the Companies Act, and that the income was assessable in the year of receipt only when cash basis was followed.

The Tribunal proceeded solely on the basis that the receipt of income/interest on purchase and discount may not be required to be repaid by the assessee at any point of time and that in other words, there was no liability for the assessee for payment in the subsequent year or at any point of time.

The division bench of Justice T.S. Sivanganam and Justice V. Bhawani Subbaroyan viewed that the observation made by the Tribunal that the interest received on purchase and discount may not be required to be repaid by the assessee at any point of time is a finding, which is not borne out by facts.

The court held that the Tribunal is not justified in coming to the conclusion that the interest on purchase and discount of bills may not be required to be repaid by the assessee at any point in time.

“The assessee was following the mercantile system of accounting and engaged in bill discounting transaction, which used to be a period of 90 to 180 days and the income, in respect of the entire bill discounting period, was accounted in the beginning itself when the transaction was entered into without really considering as to what was the income accrued or became due and which related to the year,” the court observed.

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