453. Interest on cumulative deposit scheme of Government undertakings – Whether should be taxed on accrual basis annually21/11/1983

1. The issue regarding taxability of interest on cumulative deposit scheme announced by Government undertakings has been considered by the Board.  The point for consideration is whether interest on cumulative deposit scheme would be taxable on accrual basis for each year during which the deposit is made or on receipt basis in the year of receiving the total interest.

2. The Central Government has decided that the interest on cumulative deposit schemes of Government undertakings should be taxed on accrual basis annually.

3. The Government undertakings will intimate the accrued interest to the depositors so as to enable them to disclose it in their returns of income filed before the income-tax authorities.

Circular : No. 371 [F. No. 178/44/80-IT(A-I)], dated 21-11-1983.

JUDICIAL ANALYSIS

REFERRED TO IN – The above circular was referred to in Mrs. Ira Nemazie v. Fifth ITO [1993] 46 ITD 1 (Bom.), with the following observations :

“. . . . . the assessee’s case is supported not only by the terms of the fixed deposit receipt but also the decision of the Supreme Court in the case CIT v. T.N.K. Govindarajulu Chetty [1987] 165 ITR 231 as well as the CBDT Circular No. 371, dated 21-11-1983 and No. 406F, dated 15-1-1985. Moreover, under section 4 of the Income-tax Act, total income of the previous year is assessable to tax and section 5 defines “total income” to include income which accrues or is received. Obviously, it has to be taxed at the earliest point of time, namely, accrual, unless the assessee chooses to offer it on receipt basis by maintaining the cash system of accounting. In the present case, the assessee had, no doubt, offered the entire receipt originally but on the foot­ing that it was a capital receipt. Once it is held that it is a revenue receipt, the assessee has to be given the option as indicated in the circulars of the CBDT and consequently the assessee is entitled to succeed in the claim that only the inter­est which accrued in the previous year should be assessed to tax in this previous year. . . . ”  (p. 3)

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