2002 (10) TMI 30 - HC - Income Tax

Whether on the facts and in the circumstances of the case and on a correct reading of section 34 of the Civil Procedure Code read with section 31 of the Orissa State Financial Corporations Act 1951 the Tribunal was legally correct in coming to the conclusion that no interest accrued to the assessee corporation till the decision of the civil court and that no such interest amount would be chargeable to tax in the hands of the assessee for the assessment year 1983-84? - we have no hesitation to hold that the Appellate Tribunal rightly held that no interest accrued legally to the assessee till the decision of the court is arrived at and no such interest amount would be chargeable to tax in the hands of the assessee. In the premises we answer the question in the affirmative and against the Revenue.

Summary

Issues:
Interpretation of section 34 of the Civil Procedure Code with section 31 of the Orissa State Financial Corporations Act, 1951 for tax assessment on interest accrued to the assessee corporation for the assessment year 1983-84.

Detailed Analysis:

1. Facts and Background:
The case involves a reference under section 256(1) of the Income-tax Act, 1961, where the Income-tax Appellate Tribunal referred a question regarding the taxability of interest accrued to the assessee corporation. The respondent-assessee, a financial corporation, credited a substantial amount to an "interest suspense account" instead of the "interest account" due to doubts regarding the realization of interest on loans during the assessment year 1983-84.

2. Legal Principles on Taxability of Accrued Income:
The judgment emphasizes the principles established by the Supreme Court regarding the taxability of income. Income accrues when it becomes legally recoverable, irrespective of actual receipt. The Income-tax Act considers tax liability at the accrual or receipt of income, with the essence being the actual income earned by the assessee.

3. Precedent and Interpretation of Section 34 of the Civil Procedure Code:
The judgment refers to a similar case involving the Uttar Pradesh Financial Corporation where the court held that interest accrues to the assessee only upon the court's decision on the rate of interest, as per section 34 of the Civil Procedure Code. The discretion of the court in awarding interest post-suit is crucial, and the assessee cannot claim interest accrual until the court determines the rate.

4. Discretion of Court in Awarding Interest:
The discretion of the court under section 34 of the Civil Procedure Code regarding the award of interest post-suit is highlighted. Even if there is an agreement on a specific interest rate, the court retains full discretion. Therefore, it is concluded that interest does not accrue on suit-filed loans until the court decides the rate.

5. Judgment and Conclusion:
The High Court upheld the decision of the Income-tax Appellate Tribunal that no interest legally accrued to the assessee until the court's decision. Consequently, the interest amount would not be chargeable to tax in the hands of the assessee. The court answered the question in the affirmative, ruling in favor of the assessee. The judgment was delivered by R.K. Patra J., with agreement from Ch. P. K. Misra J.

In conclusion, the judgment clarifies the tax treatment of interest accrued to a financial corporation pending court decisions, emphasizing the legal principles of income accrual and the discretion of the court in awarding interest.