TMI Blog2006 (2) TMI 112X X X X Extracts X X X X X X X X Extracts X X X X ..... aja J.-The Income-tax Appellate Tribunal, Madras, "A" Bench, referred the matter under section 256(1) of the Income-tax Act, 1961, at the instance of the assessee, for the opinion of this court, raising the following questions of law: 1. For the assessment years 1986-87 to 1989-90: "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in coming to the conclusion that interest at 15 per cent, was accruing on the amount of Rs. 1,08,50,000 due to the assessee by one Sri K.L. Srihari, despite the attachment of the loan under section 226(3) of the Income-tax Act, 1961 and despite the agreement between the assessee and the debtor that no interest shall be chargeable or payable on the loan from March 1,1985 and that the same was assessable as the assessee's income according to the system of mercantile accounts followed by it?" 2. For the assessment year 1988-89 only: "Whether, on the facts and circumstances of the case, the Tribunal was correct in law in holding that the return filed by the assessee in response to the notice under section 142(1) was a return filed under section 139(4) and therefore the provisions applicable for determining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioner of Income-tax (Appeals) rejected the appeal and confirmed the order of the Assessing Officer. Aggrieved by the order, the assessee filed an appeal to the Income-tax Appellate Tribunal. The Income-tax Appellate Tribunal held that, interest in question was includible in the assessable income of the assessee notwithstanding the prohibitory orders and notwithstanding the decision of the assessee and the debtor that no interest would be payable or charged after March 1, 1985. Counsel appearing for the assessee submitted that the Income-tax Department had served a prohibitory order under section 281B and subsequently notice under section 226(3) prohibiting Sri K.L. Srihari from paying the principal as well as the interest to the assessee. In view of this, Sri K.L. Srihari had written a letter dated March 1, 1985, to the assessee staring that no interest would be paid to the assessee till such time the prohibitory orders were in force. As a result, the assessee had not received any interest from Sri K.L. Srihari till date and hence it was not taxable. Learned counsel for the Revenue submitted that the attachment did not make any difference in respect of accrual of interest. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of its accruing or arising to the assessee. In the mercantile system of accounting, accrual of income is independent of its receipt. So long as the amount is due to the assessee, the system of accounting would envisage the amount being treated as having accrued to the assessee. The profit or loss at the end of the accounting year is based not on the difference between what was actually paid out, but on the difference between the right to receive and the liability to pay. If the income has accrued earlier and the assessee treats it as taxable during the year of accrual, it is not open to the Revenue to treat it as an income in the year of receipt in a case where the assessee follows the mercantile basis of accounts. In the case of Morvi Industries Ltd. v. CIT reported in [1971] 82 ITR 835, the Supreme Court held that the interest accrues when it becomes due. The moment the interest accrues, the assessee gets a vested right with the right to claim that amount even though it may not have been immediately received. The fact that the amount is not subsequently received would also not depart from the fact of accrual. Once the assessee follows the mercantile system of accounting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. Learned counsel for the assessee submitted that notice under section 139(2) was served on the assessee on October 7, 1988, but no return was filed by the assessee. Subsequently, notice under section 142(1) was served on the assessee on July 12, 1990, for which he filed a return of income on August 13, 1990. Learned counsel for the assessee further submitted that the assessment should have been completed by August 13, 1991, i.e., within one year from the date of filing the return, whereas the assessment was completed on March 18, 1992, which was barred by limitation. Learned counsel for the Revenue submitted that under the amended provisions of section 153(1)(b), the time limit is one year from the end of the financial year in which a return or a revised return relating to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year is filed under sub-section (4) or sub-section (5) of section 139, whichever is later. The provisions of section 153 have been amended by the Finance Act, 1989 and as per the amended provision, the time limit is one year from the end of the financial year in which the return of income or a revised return of income is f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In this case the return of income filed by the assessee on August 13,1990, falls under section 139(4) and the provisions of section 153(1) (b) which were substituted by the Finance Act, 1989 came into operation. The assessment order passed by the Assessing Officer was not barred by limitation because one year was to be counted not from the date of filing the return but from the end of the financial year in which the return relating to the assessment year 1988-89 or earlier assessment year was filed under sub-section (4) or sub-section (5) of section 139. The time available with the Assessing Officer for completion of the assessment was up to March 31, 1992, because the assessee had filed the return of income on August 13, 1990, during the financial year April 1, 1990 to March 31, 1991, for the assessment year 1988-89 and one year was available to the Assessing Officer from the end of March 31, 1991, for completing the assessment under section 153(1)(b). The assessment for the assessment year 1988-89 was completed on March 18, 1992, before the limitation date of March 31, 1992. So, the assessment completed by the Assessing Officer was not barred by limitation. In this case, the retu ..... 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