Advocate Akhilesh Kumar Sah
Credit Suisse Finance (India) P. Ltd. Appeal: When An Instrument Or An Agreement Stipulates That Interest Shall Be Payable At A Specified Date, Interest Does Not Accrue To Holder Thereof On Any Date Prior Thereto
Recently, in Credit Suisse Finance (India) P. Ltd. vs. DCIT & vice-versa [ITA No. 1435/M/2016 AY: 2011-12, ITA No.1436/M/2016 AY: 2010-11 with ITA Nos.1415 & 1416/M/2016 AYs: 2010-11 & 2011-12, decided on 21.12.2018], the cross appeals were directed against the orders passed by CIT(A)-12, Mumbai which related to Assessment Years 2010-11 & 2011-12. Since identical issues were contested in these appeals, they were heard together and were disposed of by the common order, for the sake of convenience. Apart from other issues decided in the appeal, in both the years the Revenue was aggrieved by the decision of the CIT(A) in holding that the interest accrued but not due on current investment was not taxable under accrual system of accounting.
The assessee company was a non banking financial company, the Revenue challenged the decision of CIT(A) in holding that the interest accrued but not due was not taxable.
The Assessing Officer (AO) had noticed that, in the year relevant to AY 2010-11, the assessee had paid broken period interest while purchasing the securities that had accrued upto the date of purchase of securities to the tune of Rs.75.14 lakhs. The AO had also noticed that the assessee had credited its profit and loss account with Rs.1010.10 lakhs, being the interest accrued but not due. Thus, the net interest income was Rs. 934.96 lakhs for AY 2010-11. In respect of securities, the interest was payable only on coupon date. Hence, at the time of purchase/sale of securities, the interest accrued from the previous coupon date to the date of purchase/sale was deducted/collected from the sale consideration. Since the interest was payable only on coupon date, the assessee was following the system of offering interest income on coupon date, even though it accounted broken period interest paid on purchase of securities and also recognised interest accrued but not due on securities held by it, as its income. Hence, for the purpose of income tax, the assessee excluded both the items, i.e., both claim of broken period interest debited to P & L account and the “interest accrued but not due” credited to Profit and Loss account while computing total income, i.e., in effect, the net interest of Rs.934.96 lakhs was excluded from the profit and consequently not offered as income,. The AO took the view that the interest accrues on time basis and accordingly took the view that the assessee should have offered the above said amount as its income. The assessee had placed its reliance on the decision rendered by ITAT Special bench in the case of DCIT vs. Bank of Bahrain (ITA No.4404 & 1883/Mum/2004). The AO, however, took the view that the provisions of Section 145 of the Income Tax Act, 1961 had been amended with effect from 1.4.1997 and the assessees can no longer follow Hybrid system of accounting and hence the assessee is mandatorily required to follow mercantile system of accounting. The AO accordingly expressed the view that the Tribunal, in the above said case, did not take note of amendment brought into sec. 145 of the Act. Accordingly he assessed the “interest accrued but not due” amounting to Rs.934.96 lakhs as income of the assessee for AY 2010-11. On identical reasoning, the AO assessed Rs.273.00 lakhs as income of the assessee in AY 2011-12.
In first appeal, CIT(A) noticed that an identical issue had been considered by the Hon’ble Bombay High Court in the case of DIT (International Taxation) vs. Credit Suisse First Boston (Cyprus) Ltd (23taxmann.com 424), wherein it was held that when an instrument or an agreement stipulates that interest shall be payable at a specified date, interest does not accrue to holder thereof on any date prior thereto. Accordingly, following the above said binding decision of jurisdictional High Court, the CIT(A) deleted the addition made by the AO in both the years on account of interest accrued but not due. The Revenue, therefore, was aggrieved.
The Learned members of the Mumbai ITAT heard the parties on the above issue and perused the record. It was noticed that the CIT(A) had followed the binding decision rendered by Hon’ble Bombay High Court in the case of Credit Suisse First Boston (Cyprus) Limited (supra). The Learned members of the Mumbai ITAT held that we have no other option but to uphold the order passed by CIT(A) on this issue.